Perspectives on Various Issues of Interest

Taming the Counterfeiting Epidemic

In a recently published article, we present the findings of our research that suggests that successfully combating counterfeits requires the attention of a broad collection of organizational functions. It works best with a multilayered strategy encompassing diverse methods and engaging the entire organization and its partners. We recommend that organizations tackle counterfeiting with a cohesive plan for identifying, containing, and preventing it. This comprehensive process means routinely keeping tabs on contract manufacturers and charting how products move through the supply chain. It includes scoping out what is for sale in consumer markets, deploying covert markings, reviewing warranty claims, educating customers, and partnering with key agencies and competitors.

While companies may never completely eliminate bad actors from copying products or diverting goods from authorized channels, they can significantly reduce counterfeiters’ market penetration and restore lost revenue. Successful approaches may involve cutting off counterfeiters’ access to markets, eliminating their supply of unauthorized goods, or making a product more difficult to copy. Building on insights from our case studies and discussions with practitioners, we provide details on the three activities that together help in developing a robust action plan comprises: identification, containment, and prevention. Identification helps in gaining Insight Into the extent and nature of the counterfeiting problem. Containment helps in limiting the problem’s spread. And prevention helps in stopping future counterfeit operations before they start

Source: Taming the Counterfeiting Epidemic - A multilayered approach is essential to effectively combat counterfeiting and unauthorized sales. MIT Sloan Management Review, Forthcoming (Fall 2023).

 

The mutual causality between supply chain disruption and innovation in low-income markets

In a recently published article, my co-author and I argue that low-income markets have unique constraints that trigger the co-evolution of innovation and disruption in such markets. When disruptions occur in global supply chains, and in particular, in low-income markets, they spur innovations that may be necessary to address both existing and potential future disruptions. However, such innovations in turn create disruptions to existing supply chains, and they may also create new supply chains. We highlight the unique opportunities and constraints that exist in the low-income market contexts that result in interesting and unique dynamics between innovation and disruption. Further, we identify the mechanisms through which innovation-disruption mutual causality occurs—as well as the boundary conditions for these mechanisms.

Using several case examples including Chotukool, Lagos, Nigeria Apapa port, MPesa, Momo, E-Choupal, Zipline drone technology, Dabbawallah, Danone South Africa, Kobo 360, Nestlé’s miniaturized “pure water” sachets, Barefoot College, Diagnostics for all, and Haul247 we discuss how disruption and innovation reinforce each other. Our study presents an integrated framework that considers the underlying characteristics of supply chain disruption and innovation. Supply chain disruption is characterized by impact (which can be low or high), probability (which is high), and level of control (which is low). We characterize innovation by considering whether it is affordable, available, accessible, has high level of awareness/relevance, and has low resource requirement. The mutual causality between supply chain disruption and innovation is strengthened by human and social capital that organizations in low-income markets are able to develop and creative resourcing that needs to move from autonomous to directed over time. Our study also emphasizes that weak institutions can paradoxically strengthen the force with which disruption and innovation reinforce each other. In addition to these moderating factors that strengthen the relationship between disruption and innovation, we also discuss the motivations, cognitive and social mechanisms that link supply chain disruptions to innovation, as well as information availability, structural changes and social equity that link innovation to supply chain disruption. The integrated framework presented in the paper is as follows:

This study offers directions for policy makers and managers regarding the macro-level and micro-level factors that influence innovation and disruption, as well as how to navigate the interplay between disruption and innovation in LIMs. It is noteworthy that this interplay can act as both a deterrent and an opportunity. An understanding of how LIM micro-level and macro-level factors influence disruption and innovation should help in decision-making and policy formulation. In addition, this study provides guidance to policy makers to work closely with organizations, as new innovations within these companies help to manage disruptions emanating from LIM constraints, thereby requiring innovative thinking on the policy front as well. Public-private partnerships can ensure that resource-constrained innovations at the organizational level are optimized and strengthened through policy innovations at the macro level.

Source: Goke, A., Nair, A. 2023. From Chaos to Creation: The mutual causality between supply chain disruption and innovation in low-income markets. Journal of Supply Chain Management, Vol. 59, Iss. 3, 20-41.

 

The Impacts of digital technologies on coping with the COVID-19 pandemic in the manufacturing industry

The COVID-19 pandemic’s impacts have been devastating for the global economy, and particularly for manufacturing companies. Many firms were unprepared for a crisis of this magnitude and adapted their operations in an ad-hoc manner. Some of these adaptations were facilitated by digital technologies (DTs). In a recently accepted article, my co-authors and I examine extant literature using a systematic review methodology in order to extend our understanding of what DTs have been used in manufacturing companies during the pandemic, how DTs have helped manufacturing companies cope with the pandemic, and how these innovations can be used in the post-pandemic world. The major outcome of our study is a novel classification of DT applications in the pandemic setting in the manufacturing industry. In addition, we propose an agenda for future research.

Source: Ardolino, M., Bacchetti, A., Dolgui, A., Franchini, G., Ivanov, D., & Nair, A. (2022). The Impacts of digital technologies on coping with the COVID-19 pandemic in the manufacturing industry: a systematic literature review. International Journal of Production Research, 1-24.

Adapting supply chain operations in anticipation of and during the COVID-19 pandemic

In a recently accepted article, my co-authors and I investigate the impacts of the COVID-19 pandemic and their proactive mediation by adaptive operational decisions in different network design structures in anticipation of and during the pandemic. In generalized terms, we contribute to the understanding of the effect of preparedness and recovery decisions in a pandemic setting on supply chain operations and performance. In particular, we examine the impact of inventory pre-positioning in anticipation of a pandemic and the adaptation of production-ordering policy during the pandemic. Our model combines three levels, which is not often seen jointly in operations management literature, i.e., pandemic dynamics, supply chain design, and operational production-inventory control policies.

The analysis is performed for both two- and three-stage supply chains and different scenarios for pandemic dynamics (i.e., uncontrolled propagation or controlled dispersal with lockdowns). Our findings suggest that two-stage supply chains exhibit a higher vulnerability in disruption cases. However, they are exposed to a lower system inertia and show positive effects at the recovery stage. Supply chain adaptation ahead of a pandemic is more advantageous than during the pandemic when specific operational recovery policies are deployed. We show that it is instructive to avoid simultaneous changes in structural network design and operational policies since that can destabilize the production-inventory system and result in higher product shortages. 

Source: Rozhkov, M., Ivanov, D., Blackhurst, J., & Nair, A. (2022). Adapting supply chain operations in anticipation of and during the COVID-19 pandemic. Omega, 110, 102635.

Quality penalties and continuity of health care

In a study my co-authors and I examine whether quality penalties aimed at reducing readmissions improve continuity of health care. We investigate if the quality penalty policy impacts continuity of care for services that were targeted by the policy through what we refer to as primary spillover effects. We also investigate the secondary spillover effects of the quality penalty policy on continuity of care for related ailments that were not targeted by the policy. The findings of this study show that externalities from quality penalties for readmission not only benefit continuity of care for the regulated ailments, but also allow health care organizations to adapt their existing routines and unlock continuity of care improvements for related, but non-targeted ailments. The finding that continuity of care does not diminish for unrelated services assuages concerns that hospitals respond strategically by neglecting or redirecting resources away from unrelated services. We provide novel insights as to how organizations respond to regulation by actively re-configuring their care patterns and coordinating service provision with attendant spillover effects on a variety of patients. Processual mechanisms such as the source of patient admissions and length of stay, and structural mechanisms such as system size and investments in continuity of care facilitate the spillover effects. 

Source: Ananthakrishnan, R., Deore, A., Nair, A. Virtuous Spillover Effects of Quality Penalties on the Continuity of Health Care. Working paper.

 

The Role of Social Media in Linking Corporate Social Irresponsibility with Abnormal Returns

Interest in the topic of corporate social irresponsibility (CSI) has burgeoned in recent years. CSI covers organizational activities that have an adverse impact on investors, employees, customers, suppliers, or the local communities. This set of organizations and individuals represent the stakeholders of a firm whose expectations of a certain behavioral standard are not met when firms cause harm through their actions and do not take steps to rectify the situation. Information about firm actions that may have compromised sustainability objectives can have a multifaceted outcome. Given that negative news receives more attention and deliberation, CSI can not only shape the sentiments of customers and media but also affect firm performance from the reaction of customers and stakeholders. At the same time, as stakeholders may be more focused on other performance measures such as cost and quality, instances of CSI may also end up receiving low to moderate attention, thereby reducing their negative effects. If this is indeed the case, firms can misbehave on the sustainability front with little consequences. As such, undertaking further research investigation is important to discern the impact of CSI on sentiment formation and financial outcome. Drawing on stakeholder theory and attribution theory, in this study we investigate the association of firms’ environmentally irresponsible actions with social media sentiments and abnormal stock returns.

In our research we examine how corporations’ environmental impact influences social media sentiment and firm value. To address this important question, we analyze a large-scale dataset collected from five sources (Trucost, Infegy Atlas, Center for Research in Security Prices, COMPUSTAT, and Harris Interactive). We find that environmental impact results in less favorable social media sentiment toward the firm. Natural resource usage and land, water, and air pollution have the most profound effect on social media sentiment of the various types of environmental impacts. However, brand equity helps insulate the negative effect of environmental impact and simultaneously strengthens the positive relationship between social media sentiment and the firm’s long-term abnormal returns; by contrast, market competition weakens this relationship. The results further show that social media sentiment mediates the link between environmental impact and firm value.

The research findings provide useful implications to aid firms in managing their environmental impact so as to avoid negative social media response and, in turn, enhance firm value. Ultimately, this study calls for the careful management of investments in activities detrimental to the environment, because consequent negative comments on social media can negatively affect firm value. Furthermore, firms lacking brand equity and facing intense market competition need to be especially vigilant with their activities that can be construed as socially irresponsible.

Source: Nair, A., Nguyen, H. Environmental Impact, Social Media, and Abnormal Returns: The Moderating Role of Brand Equity and Competition. Working paper.

Federal Government Contracting for Disaster Management

About 500 disasters occur every year, affecting more than 200 million people and killing around 75,000. Moreover, the number and severity of disasters are increasing.  To cope with these challenges, governments spend vast amounts of money in acquiring products and services. For example, the US Federal government spent over $20 billion for supplies needed for Hurricane Katrina, and so far, it has committed over $245 billion in acquisitions related to the Covid-19 pandemic.

During disaster relief operations, procurement can be a complex and uncertain activity, and there is ample reporting of failures.  A report by the US Senate Committee on Homeland Security and Governmental Affairs examined contracts awarded by Federal Emergency Management Agency (FEMA) during the response to the 2017 hurricane season.  The report reveals major shortcomings, such as the failure to adequately use pre-positioned contracts, the award of contracts without adequate vetting, inadequacies of the bidding process, and failures of suppliers to deliver.  

While disaster relief operations have similarities with commercial operations, there are notable differences concerning speed of response, uncertainty of supply and demand, and stakeholder’s goals.  These differences call for unique capabilities in terms of logistics – to ensure timely delivery – and procurement – to ensure efficient and effective contracting.  Despite the importance of both logistics and procurement in this context, research has tended to focus on logistical challenges. Much less attention has been placed on procurement, with some notable exceptions.  A review of the disaster management literature shows that out of 268 papers, only nine dealt with procurement, emphasizing the paucity of research into procurement in disaster relief. In the public administration literature, researchers have also noted that emergency procurement has been neglected and that more research is needed.  To frame our research, we take a multidisciplinary perspective drawing from the fields of operations management, disaster management, and public administration.

This research focuses on procurement during relief operations by investigating the use of contracts by US federal agencies during national emergencies.  The research focuses on the choice of contract type, which is an established dilemma in procurement.  Different contract types offer buyers and sellers a different balance of risks and rewards, and debate continues about their effectiveness under varying circumstances.  Thus, it is important to investigate the factors that influence the choice by federal agencies between cost-reimbursement contracts and fixed-price contracts as disaster relief operations unfold. 

Three key stages characterize disaster relief operations: preparation, response, and recovery. Each stage presents vastly different operational conditions. The response stage, in the immediate aftermath of a disaster, is particularly distinctive due to increased uncertainty, market disequilibrium, pronounced information asymmetries, and extreme time pressure; differences that increase the government’s risk exposure. For instance, the CARES Act, launched in response to the Covid-19 Pandemic, immediately attracted the attention of unscrupulous suppliers. Despite the differences across disaster stages, the dearth of research spanning across all stages has thus far prevented the evaluation of the factors influencing contracting practices. This study addresses this research gap by investigating how the type of acquisition and the amount of spend affect the choice of contract type. Furthermore, we examine how the disaster stage moderates these relationships, with a particular focus on the response stage, which presents the most extreme conditions.

Drawing from agency theory and the theory of regulatory capture, we investigate the choice of contract type in a setting that combines high uncertainty (which creates information asymmetries, adverse selection, moral hazard, and opportunism), and the need for speed and flexibility (which exacerbates problems of bounded rationality, supplier availability, and adverse selection).  Agency theory brings an economic perspective to the choice of contract type dilemma, as it seeks to determine the most efficient contract, given conditions of goal conflict, opportunism, information asymmetry, bounded rationality, risk aversion, and self-interest.  The theory of regulatory capture brings a public-private relationship perspective, arguing that private organizations can advance their interests by gaining influence over government agencies, often at the expense of the public interest.  It has been noted that in the aftermath of disasters, it is not uncommon to find corrupt suppliers exploiting the situation. 

The research relies on data made available by the US government, including all contracts deployed by federal agencies to support disaster-relief operations between 2005 and 2016, including 47,560 contracts across 14 disasters.  We evaluate the role of two key factors underpinning the choice of contract type during disasters, namely the type of acquisition and the amount of spend.

Our results indicate a positive association between contract spend and the likelihood of choosing a cost-reimbursement contract, which has significant implications for policymakers and practitioners because it indicates a higher risk exposure for government agencies in larger contracts.  Spend thresholds stipulated within FAR are intended to mitigate this type of risk, but since these thresholds are relaxed during disasters, government agencies become more exposed by accepting risk for the sake of expediency. However, federal agencies continue to have a fiduciary responsibility, which falls into the hands of contracting officers. Thus, both capacity (i.e., availability) and capability (i.e., knowledge and skills) of contracting officers are central to effective disaster response.  This emphasizes the importance of human resource aspects of public procurement. 

For contracting officers, the positive relationship between contract spend and cost-reimbursement contracts emphasizes the importance of contracting efforts in advance of a disaster, when they have more time to evaluate suppliers and negotiate contracts.  Pre-arrangements could thus help mitigate opportunistic behavior. Policy guidelines under FAR make pre-established arrangements available to government officials, and researchers have reported on their effectiveness. For example, in 2019, the Army Corp of Engineers established a $999 million advance joint venture agreement with six contractors to provide time-sensitive disaster support to repair critical infrastructure such as roads, bridges, electric distribution systems.

Our finding that cost-reimbursement arrangements are more prevalent in services contracting, particularly during the response stage, appears to be generally beneficial to suppliers, as they assume less risk and can concentrate on delivering the expected outputs from the contract without particular concern for costs.  For the government, this represents an increased risk, and contracting offices must remain vigilant and act when suppliers fail to fulfill their duties.  Potential suppliers should be mindful that cost-reimbursement contracts can involve additional monitoring costs. For federal agencies, this stresses the importance of having quick and easy onboarding as well as monitoring processes for suppliers of services in disaster situations.  Furthermore, it is important that contracting officers maintain open communications channels with suppliers and use supplier forums to allow suppliers to provide feedback on the suitability of contract types and other aspects of relief operations.

The negative moderation of response stage as spend increases means that there is a preference for fixed-price contracts involving large monetary value during the response stage when compared to other stages.  This appears to be positive news for the government, as it allows prioritizing speed over the fear of opportunism when dealing with large contracts.  However, this result does not imply that contracting officers can let down their guard against opportunistic suppliers.  While fixed-price contracts might help mitigate some risks for government agencies, it is still possible for opportunistic suppliers to take advantage of disaster situations. Therefore, government agencies should continue to maintain transparency and fairness of the procurement process before, during, and after the award. Moreover, drawbacks associated with fixed-price contracts, such as limited flexibility, potentially poor quality, and the possibility of supplier opportunism, should be taken into consideration.  For example, in 2009, FEMA reached a $4 million settlement with a supplier who failed to deliver on a contract to build and operate a base camp for first responders during Hurricane Katrina.  It is also important to consider efforts during the preparation stage to maintain the supply base for categories involving large acquisitions to preserve competition among prospective suppliers.

Source: Mena, C., Nair, A. U.S. Federal Government Contracting for Disaster Management. Working paper.

Risk Management Infrastructure and Information Exchange for Managing Disruptions During Surgeries

 

In a research study we examine the impact of magnitude and likelihood of disruptions on surgical procedure performance. More importantly, we investigate the moderating role played by information exchange and risk management infrastructure in mitigating the negative effect of disruption on performance.

A nationwide multi-respondent survey was administered to operating room personnel to collect information on their experiences with disruptions experienced in surgeries. The survey data is analyzed to examine the relationship between operational disruptions and procedure performance. Additionally, the moderating roles of risk management infrastructure and information exchange on the relationship between disruptions and performance are investigated. The results obtained from the empirical analysis are validated using data from an ethnographic investigation of surgeries at a major hospital.

The results show that both the magnitude and the likelihood of a disruption adversely impacts procedure performance. Interestingly, we find that risk management infrastructure and information exchange play different roles in mitigating the effect of disruptions on performance. We find that while risk management infrastructure helps mitigate the effect of magnitude of service disruptions, information exchange helps reduce the effects of likelihood of disruptions. The findings lend strong support to our theoretical assertions. By means of the participant-observer data collected from over 100 surgeries as part of the ethnographic investigation, we validate our key findings. Our findings suggest that disruptions are common occurrences in surgical settings, but their performance impact may be lessened or altogether avoided with the proper information and risk management mechanisms in place.

This survey research extends our understanding of risk management by considering a context that is highly prone to disruptions. We adopt existing constructs pertaining to supply chain disruptions within this context and find new insights. The findings of our study show differential roles played by information exchange and risk management infrastructure in mitigating disruptions. This nuanced understanding provides directions for aligning efforts towards risk mitigation in surgical settings in a more focused way. This study supplements findings from survey data analysis with an examination of data collected by means of ethnographic investigation.

Our study provides insights to practitioners to lower the number of disruptions, thus improving quality and lowering costs. Managers in other industries that often work in IATs may find the results applicable to their context. Many organizations are looking to lower their risk of disruption, and this research can help them better understand how their organization may be responding to disruptions. From the controls, we learn that operating room (OR) location influences performance. Inpatient rooms are typically larger, and more comfortable for everyone present. Hospitals may explore investments in adopting more flexible outpatient rooms or different layouts, such that the space the equipment utilizes in the room is minimized. OR personnel should be made aware that the disruptions increase the length of episodes of care and in-turn impact performance. This knowledge may help guide healthcare workers actions to better ensure a smooth experience by thinking ahead and anticipating the needs of others in the room. Additionally, experience matter. Thus, educating those in the OR department concerning the behaviors that lower or increase the risk of disruptions in acute episodes of care, a hospital may experience lower costs and less waste while saving time. In turn, this could increase the quality of results and the satisfaction of patients and team members.

To begin, a hospital's OR department or risk management department may want to develop business continuity plans by exploring the Disruption in Surgery Index  and map their disruption items. This will begin to help one understand the consequences of an episode of care disruption and provide the means to focus on the most detrimental disruptions first. This exercise will allow resources to be used efficiently to begin mitigating and building resilience for future disruptions. This awareness could lead to policies that attempt to sequester an OR team so they are not interrupted by outsiders during an episode of care. These efforts, along with the suggestions in this research, should be part of a broader conversation around business continuity planning within the OR.

Hospitals and their OR departments should look to increase their levels of information exchange to help maintain a high level of procedure performance. This could be done through training, promoting psychological safety within teams, and building long-standing relationships to create stronger bonds among team members. Additionally, formalized information sharing processes could be introduced throughout a procedure, like the pre-procedure "time-out" discussion where a surgical team ensures one more time that the right patient is receiving the correct procedure on the proper part of their body. These formalized processes ensure that different members of the team are heard, thus increasing informational independence and information distribution. Furthermore, as mentioned in the previous section, awareness by personnel of when it is appropriate to communicate is critical. Through education and experience, healthcare personnel can learn to minimize discussions during routine work, so that disruption risk remains low. Alternatively, they should learn to increase communication during higher disruption risk moments in an episode of care.

Investments in risk management infrastructure will benefit hospitals struggling with high magnitude disruptions, such as COVID-19. Risk management infrastructure further creates a more open environment by offering information to team members that may help prevent a disruption. However, this infrastructure should not solely rely on technological solutions, as "technology overload" may occur. These early warning systems may stem from pre-defined processes such as the pre-procedure "time-out", hardware or software installed in the surgical suite that alerts personnel to a potential issue, or training that discusses methods of analyzing risks and managing them, possibly through what-if scenarios. As mentioned in the previous section, low-cost solutions that provide signals to others, such as notes on doors, can have positive impacts on procedure performance. Additionally, inside the surgical suite, a better design which builds risk management infrastructure into each element will help promote a disruption-free area. These design elements may include basic signage to alert others to important matters. It may also include audible alarms, fire suppression, air filtration systems, and tools adapted to reduce user fatigue and errors. In summary, efforts to promote information exchange and resilience through risk management infrastructure will yield positive procedural outcomes.

Finally, norms of information exchange and risk management infrastructure touch upon the strategies identified from eight HRO frameworks currently being used by healthcare entities. These strategies include developing leadership, data systems, implementing interventions, training and learning, and a safety culture. As healthcare leaders continue to work towards becoming HROs, they should focus on these two constructs to help get them there. Beyond healthcare, consulting firms experience similar challenges using interdisciplinary teams, which quickly form to achieve a task for a customer. They may benefit from enacting these strategies to ensure better outcomes for their customers. It cannot be understated how difficult it may be to change the norms of information exchange. This takes time. In contrast, the implementation of some risk management infrastructure may cost more upfront, but the benefits may occur more quickly.

Source: Dreyfus, D., Nair, A. Impact of Disruptions on Performance in Acute Episodes of Care: Moderating Role of Information Exchange and Risk Management Infrastructure. Working paper.

External auditors and certification bodies of ISO 9001

 

In a research study my co-authors and I seek to advance the knowledge on ISO 9001 implementation by examining two research issues. First, we investigate the relationship between external auditors, certification bodies, and the operational and market-oriented outcomes from the ISO 9001 certification. Second, we study the different roles played by external auditors and certification bodies in affecting the outcomes achieved from the quality of implementation of the standard. Using a dataset comprising of 537 firms from Australia and New Zealand that are ISO 9001 certified, our findings show that the quality of external auditors enhances operational outcomes as well as strengthens the relationship between ISO 9001 implementation and operational outcomes. This affirms the role of external auditors in the implementation of the standard. On the other hand, the reputation of certification bodies has a positive direct effect on market-oriented outcome, and its effect is strengthened by the quality of ISO 9001 implementation. The findings, therefore, show the contrasting roles between external auditors and certification bodies in enhancing different outcomes of ISO 9001 adoption in terms of operational and market-oriented ones.

There are a number of practical implications drawn from the findings. First, our study confirms once again that quality implementation is the key determinant of the operational outcomes of ISO 9001 adoption. At the same time, however, the findings also confirm the important role of external auditors in enhancing the effect of implementation on the operational outcome from ISO 9001 standard. This result is instructive in that it is the quality of auditors rather than the reputation of certification bodies that help firms in gaining the operational outcomes. For many firms, however, this finding could raise a practical problem: how to find good auditors? The answer to this question is not straightforward because, unlike certification bodies who have certain brand equity, auditors are employed by certification bodies and their quality is somewhat hidden from the customers and is only revealed after they are engaged after the ISO 9001 certification is over. Indeed, this problem is exacerbated by the fact that firms cannot simply resort to reputable certification bodies in order to find good auditors. The positive correlations between quality of auditors and reputable certification bodies only show a medium strength and, hence, this does not provide a strong assurance that reputable certification bodies will always send quality auditors. Therefore, while engaging reputable certification bodies is recommended, firms should request that they are served by experienced and quality external auditors whose characteristics are partly captured in this study. At the same time, however, the findings also infer that high quality auditors are not necessarily always employed by reputable certification bodies; they could also be part of less reputable certification bodies. In this regard, our findings also provide a ray of hope for firms who cannot afford to engage reputable certification bodies that normally charge higher costs than their counterparts. In particular, smaller firms with limited resources still have a chance to engage high quality auditors and to benefit from their services.

Our findings show that the reputation of certification bodies (rather than the quality of external auditors) helps firms improve their market-oriented outcome, including broadening their market scope and winning more customers. This finding suggests that customers still rely on “brand image” of reputable certification bodies. Customers perceive ISO 9001 certifications issued by reputable certification bodies to be of higher value than others. While this may be true to a certain extent, it is important to balance this notion with our finding, which shows that certification bodies do not have a direct positive effect on operational outcomes. Instead, firms ought to seek high quality ISO 9001 implementations that are then vetted by high quality auditors so as to obtain operational outcomes. The operational outcomes in turn exert a positive effect on market performance. This result therefore sends a strong message to firms that are trying to attain market-oriented outcomes solely from compliance to the standard’s requirements without internalizing the implementation process. More importantly, since it is operational outcomes that are mainly desired by customers (rather than the certification), simply signaling high quality ISO 9001 implementation by tapping into the reputation of certification bodies could be a misleading strategy to gain market-oriented outcome.

Source: Prajogo, D., Nair, A., Castka, P. 2022. The effects of external auditors and certification bodies on the operational and market oriented outcomes of ISO 9001 implementation. IEEE Transactions on Engineering Management. (Forthcoming).

Consignment Inventory Management for General and Physician Preference Medical Supplies

In healthcare, the largest cost after labor is represented by medical devices and materials. Recent estimates indicate that medical supplies will outpace labor as the largest expense for hospitals and health systems. The number and criticality of healthcare medical supplies can vary greatly, and factors such as physician involvement in supply selections adds complexity to the supply chain. In general, we can categorize hospital supplies as general medical supplies (GEN) and what are called physician preference (PP) items. Most items purchased by a hospital are typically GEN items, and include items such as syringes, gloves, or IV solutions to name a few. In contrast, PP items are supplies which physicians believe will have a signi􏰂cant impact on patient care or quality of life. Supplies such as orthopaedic implants and pacemakers are examples of PP items. Physician preference items are some of the most expensive items in hospitals. Studies have noted that PPIs can represent up to 61% of total cost of purchases.

In the case of GEN items, hospital purchasing groups can easily consolidate volume for these items to negotiate pricing from a particular vendor. In contrast, PP items are marketed directly to physicians who make the final purchasing regarding device and therefore vendor to adopt. As a result, it is common for hospitals to source the same PP from several different vendors in order to satisfy the preferences of the different physicians practicing in the hospital. This practice hinders the ability to consolidate volume in order to negotiate better pricing for PP items. Given the limited options purchasing groups have in order to reduce the cost burden of PP items, hospitals have increasingly looked for other ways to reduce the cost of carrying PP items in their facilities. One of the ways in which hospitals seek to reduce inventory cost of PP items is by the use of consignment agreements.

Under a consignment agreement the hospital physically stores inventory while the vendor keeps ownership of the inventory stored at the hospital. Once the inventory is used, the vendor receives payment for the units consumed, typically one or two months after product consumption. 

The use of consignment agreements allows hospitals to reduce inventory costs without sacrificing product availability and quality. Hospitals benefit from consignment agreements due to decreased capital tied up to inventory as well as delayed payment. As a result, under consignment hospitals do not carry any cost of capital, but still incur the cost of inventory storage as well as costs related to damaged, missing, and in some cases obsolete items.

Under consignment the vendor is typically responsible for delivering inventory to the hospital according to pre-specified order amounts set by hospital management. The vendor is typically also responsible to respond to any surges in demand in order to avoid product stockouts incurring any resulting costs. Since the vendor keeps ownership of the inventory while it is stored at the hospital, the vendor carries the cost of capital associated with holding inventory at the hospital warehouse. As a result, the vendor experiences an increase in inventory costs as well as a delay in payment making the use of consignment less attractive. The vendor will not agree to such agreement unless a profit sharing contract is in place. Typically vendors will be motivated to enter into a consignment agreement under one of two conditions, increased product per unit cost or increased purchase volume. By either increasing the unit cost or capturing a higher share of hospital demand, the vendor can increase its profits in order to mitigate the increased costs of having a product under consignment.

While consignment agreements can provide significant benefits to the hospital, not all products can be managed using consignment. Consignment agreements need to be carefully negotiated such that both partners may obtain financial benefits. Items under consignment need to be carefully monitored to capture usage that triggers payments to the vendor. Lack of proper oversight of consignment stock in hospitals may result in higher rates of product shrinkage and obsolescence. In some cases vendors do not offer the option to use consignment or the added complexity doesn't justify the use of consignment for a particular item. As a result, hospital management is typically interested in using consignment agreements for items that represent a significant amount of spending. Items that fall into this category are typically PP items or high volume GEN items. %PP items tend to be expensive items with relatively low demand volume and high demand fluctuations. In contrast GEN items tend to be more generic, less expensive, required in higher amounts and exhibit less variability in demand as compared to PP items.

In a study we collaborated with a large teaching and research hospital located in the midwestern United States. The hospital is a level 2 trauma center with over 600 beds and an average annual spending of over $17 million dollars in medical supplies. We obtained detailed monthly spending data for the top 3000 items purchased for a span of six years. Hospital management was interested in understanding the relative cost of managing inventories of GEN and PP items in-house as compared to the consignment option offered by vendors. Furthermore, guidance on the type of item that could benefit the most from the use of a consignment agreement was of interest. We present mathematical models that capture the comparative cost of using in-house and consignment inventory for GEN and PP items. To understand the implications of different consignment agreements, we consider the cases when the vendor charges higher per unit price as well as when the vendor expects higher purchase volume. Based on information provided by hospital personnel as well as current literature we study the financial effect of disregarding the increased complexity of managing consignment stock that may result in unforeseen inventory costs, and analyze its impact on GEN and PP items.

We find that although hospitals will enter into a consignment agreement mostly for financial reasons, disregarding a potential increase in inventory costs will affect GEN and PP items differently. Furthermore, the effect of increased inventory costs will affect GEN and PP items in different ways depending on the type of contract used, price increase or volume increase. This allows us to gain insights into the type of consignment contract that is most beneficial to the hospital depending on whether GEN or PP items are considered. We validate our findings using hospital data and provide practical insights for hospital management to aid in the selection of medical supplies that should be managed under consignment to maximize financial benefits.

Implications:

CS agreements are used by hospitals seeking to reduce the cost of keeping and managing medical supplies. The use of CS is typically seen as a way to reduce overall inventory costs for items such as high-cost physician preferred items or high-volume general medical supplies. The use of CS can bring financial benefits when its overall impact is properly understood and accounted for. On the contrary, when hospital management disregards the potential impact of the use of CS on factors such as obsolescence, lost or damaged goods, as well as maintenance costs, savings may not be perceived. Empirical data obtained for this study corroborates the fact that contrary to what hospital management may expect, hospitals may not experience a decrease in overall inventory costs as a result of the use of consignment particularly for PP items. Hospitals manage a wide range of products, which necessitate a careful consideration of inventory management policies based on their underlying characteristics. Contrary to the expectation that CS will result in lower expenses for PP items than if these items are maintained in inventory, the results from the analyses of empirical data suggest that healthcare organizations are not obtaining cost savings for PP items maintained as CS. On the other hand, GEN items benefit from the use of consignment based inventory policies. These preliminary findings formed the basis for a closer examination of the underlying mechanisms at work.

Extant literature in healthcare has indicated that PP items hold the greatest potential for savings in hospitals by involving physicians and surgeons in standardization and utilization management decisions such that they take into consideration the cost of the supplies along with their experience with the product, quality of the item, and their relationship with manufacturer representative. We agree with this direction but also recognize some of the structural issues that limit the ability of supply chain managers to get physicians and surgeons on board with regards to product standardization and utilization management. Many of these reasons, such as whether the physician/surgeon is an employee of the hospital system, are beyond the control of supply chain managers in a healthcare organization. Our study focuses on aspects that are within the purview of healthcare supply chain managers and offer directions to strengthen their ability to structure favorable CS agreements with vendors for PP and GEN items.

The mathematical models developed and analyzed in this paper capture typical CS contract conditions, increased per-unit price and increased purchase volume. Using our models we study the effect of increased shrinkage rates on overall inventory costs as a result of the use of consignment. We show that each type of contract, increased per-unit price or increased purchase volume, will affect overall inventory costs differently depending on whether general medical supplies or physician preferred items are stored. In the absence of data to determine the impact of the use of consignment on shrinkage and maintenance costs, we prove that independent of the inventory policy used, an increased volume contract can lessen the negative effects of an unforeseen increase in consignment costs.

Our theoretical results highlight the implications of disregarding additional shrinkage and maintenance inventory costs associated with CS and show that the implications will differ based on the underlying demand pattern of the product under consideration. The lack of information pertaining to higher inventory shrinkage and maintenance levels can still enable hospitals to gain the advantages commonly attributed to the consignment agreement for GEN items. However, ignoring these costs for PP items can result in unfavorable contract conditions that could result in higher costs. Since hospitals typically do not have a good understanding of these hidden costs associated with consignment agreements, we assert that hospitals might be encountering higher costs for PP items that are being managed as CS therefore reducing the financial benefit they could obtain from CS. Future studies that consider data from multiple hospital systems could build on this preliminary insight.

Our results also point to conditions when supply chain managers might enter into a CS contractual agreement that involves unfavorable demand allocation. For products characterized by high variability and high per unit cost, the demand allocations under CS contractual agreements tend to be unfavorable and can therefore result in higher costs. PP items typically have high variability and high per unit cost, which necessitate greater care in determining appropriate demand allocations when a hospital is consolidating across multiple items and negotiation contracts with vendors. Demand allocations can also be unfavorable for products that have high variability and high demand, irrespective of their cost. Once again, these are also more likely to be PP items but some GEN items can also have these characteristics. Future empirical studies that classify healthcare supplies in terms of their average demand, variability of demand and per unit cost could shed further light into our theoretical prediction.

Our study has few limitations that are worth noting. The empirical data was obtained from one hospital; hence, we do not claim the generalizability of the empirical findings. Additional research is needed, however, our empirical results coupled with the analytical models provide a good foundation for future research studies to build on. The analytical models are constrained in terms of its focus on only hospital's decisions. Future studies should consider a game-theoretic framework to obtain equilibrium conditions for the hospital and the vendor when they are engaged in negotiations for CS contracts for PP items and GEN items. Finally, in our analytical model we assume that a hospital will be able to allocate demand between two vendors such that they can increase their purchase volume from the vendor with lower per unit cost. Future studies can account for potential objection for this reallocation by physicians/surgeons by considering an additional cost parameter.

Source: Rosales, C., Nair, A., Pal, S. "Managing General and Physician Preference Medical Supplies with In-stock versus Consignment-Stock Inventory Policies: An Empirically-Grounded Analytical Investigation. Working paper.