Outsourcing inventory management decisions in healthcare: Models and applications

Traditionally healthcare systems have paid little attention to the management of inventories. However, with the implementation of diagnostic related groups by the United States government (which resulted in a pre-fixed level of compensation for specific medical services), these systems have turned their attention to cost containment as a means of increased profitability. This research addresses the issue of managing inventory costs in a healthcare setting. The specific problem addressed in this paper is a comparison of inventory costs and service levels of an in-house three-echelon distribution network vs. an outsourced two-echelon distribution network. In comparing inventory policies in both networks, we focus on non-critical inventory items. Based on our analysis, we find that the recent trend of outsourcing to distribute non-critical medical supplies directly to the hospital departments using them (i.e., the two-echelon network) results not only in inventory cost savings but also does not compromise the quality of care as reflected in service levels.