The Emergence of Consolidated Service Centers in Health Care

• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/jbl.12107
• Date: 01 December 2015

The Emergence of Consolidated Service Centers in Health Care

Yousef Abdulsalam, Mohan Gopalakrishnan, Arnold Maltz, and Eugene Schneller

Arizona State University

Hospital supply chains can be conceptualized as complex systems with a large number of players and a high degree of interrelatedness

among them, creating an environment that is difficult to optimize and manage. In recent years, a consolidated service center (CSC) strat-

egy (sometimes also referred to as “self-distribution”strategy), has emerged in some healthcare systems, showing a strong potential for reducing

the complexity in a hospital’s supply chain to achieve high levels of performance and innovation. We examine three CSCs using a qualitative

case method to understand the unique characteristics of this supply chain strategy, and how CSCs move hospital supply chains toward a less

complex state. We find that CSCs demonstrate characteristics that distinguish them from other supply chain strategies. These characteristics

enable the CSC to orchestrate supply base rationalization and disintermediation initiatives in the hospital’s supply chain to effectively reduce

the number of components and interrelatedness in this complex system.

Keywords: health care; complexity; supply chain strategy; consolidated service centers; self-distribution

INTRODUCTION

Healthcare supply chains have been described as highly frag-

mented and complex, showing limited improvements in cost and

quality over the years (McKone-Sweet et al. 2005; Schneller and

Smeltzer 2006; Nachtmann and Pohl 2009). Supply chain

expenses include medical supplies, pharmaceuticals, equipment,

distribution, and warehousing. This expense category is the sec-

ond largest category after labor expense, and accounts for up to

one-third of the total annual expenses incurred by hospitals

(Nachtmann and Pohl 2009).

The Efficient Healthcare Supply Chain Response Report of

1996 identified large opportunities for supply chain savings

available through addressing redundancies among stakeholders,

lack of transparency, and ongoing issues with service levels

(Consulting CSC 1996; Landry and Beaulieu 2013). Although

the report motivated many players in the healthcare supply chain

to act, an update to the report 15 years later found little evidence

of improvements in cost and quality. The follow-up report con-

cluded that: “We do not know where the fundamental inefficien-

cies and associated costs subsist within this complex supply

chain. We also do not know where the opportunities for the

greatest increases in quality exist within the healthcare supply

chain”(Nachtmann and Pohl 2009, 2).

These challenges have persisted in healthcare supply chains

for decades, and one of the responses in the 1970s was to cen-

tralize purchasing and materials management across the enter-

prise through shared service organizations (SSOs) (Mason 1979;

Griffin and Adams 1981). However, many of the challenges

faced by SSOs in that period (as identified by Griffin and Adams

1981), such as difficulty in quantitating cost savings, issues with

supplier selection, and inability to standardize products, are still

considered top priorities in the industry. It appeared that SSOs

tackled symptoms of supply chain complexity, rather than resolv-

ing the complexity itself. SSO performance has also been con-

strained by its lack of influence on major policy decisions and

the historically limited attention senior management has given to

supply chain (purchasing in particular) in many industries,

including health care (Bales and Fearson 1993; Markham and

Lomas 1995; Landry and Beaulieu 2013).

A new type of centralized distribution organization, the con-

solidated service center (CSC), has since emerged to address the

complexity in healthcare supply chains. CSCs borrow elements

from shared services and third-party logistics (3PLs) to serve

multiple entities within a given region (Landry and Beaulieu

2013, 471). Unlike many other centralization strategies, CSCs do

not heavily concern themselves with achieving significant econo-

mies of scale to drive higher performance. Instead, they have the

potential to drive performance by way of supply chain complex-

ity reduction, through supply base rationalization and disinterme-

diation.

The specific form of the CSC can be characterized as both emer-

gent and contingent, since an organization’s history and setting

influence the specific structure of the CSC. For example, some

CSCs emerged as departments within individual healthcare sys-

tems, while others were formed as joint ventures between indepen-

dent systems. A Gartner report identified various structures of

CSCs, and predicted that such organizations will only grow in

numbers to represent 15% to 20% of the total healthcare supply

market from a revenue perspective (O’Daffer and Mooraj 2011).

This research attempts to explore how CSCs improve the man-

agement of complex hospital-based supply chains. To frame this

research, we conceptualize hospital supply chains as complex

systems. A complex system, as defined by the complexity science

discipline, is a system having numerous components that are

interrelated (Simon 1962). Both healthcare systems and supply

chains have been conceptualized using this framework (Choi

et al. 2001; Begun et al. 2003; McDaniel et al. 2009; Kannam-

pallil et al. 2011). Building upon this stream of work, we exam-

ine the role of CSCs from the perspective of a hospital’s

complex supply chain, and how it impacts the components and

interrelatedness in that system. Our research questions address

the future research calls laid out in Landry and Beaulieu (2013),

which seek to understand the role of CSCs in improving health-

care supply chain performance in health care:

Corresponding author:

Yousef J. Abdulsalam, Department of Supply Chain Management,

W.P. Carey School of Business, Arizona State University, 300 E Lemon

St. BA 451, Tempe, AZ 85281, USA; E-mail: y.abdulsalam@asu.edu

Journal of Business Logistics, 2015, 36(4): 321–334 doi: 10.1111/jbl.12107

© Council of Supply Chain Management Professionals