The Diffusion of Operations Management Concepts

into the Health Care Sector

Victoria Hanna and Kannan Sethuraman

a
Department of Management, University Of Melbourne, Parkville, Victoria, 3010, Australia
b
Melbourne Business School, University of Melbourne, Carlton, Victoria 3053, Australia.

Submitted for ANZAM Conference 2005

Abstract

This paper presents a preliminary review of the literature on the application of

operations management concepts in the health care sector. The work is part of a
larger study focusing on improving operational efficiency and effectiveness in the
health care value chain. The review critically examines the current state of research
in this field and speculates on potential areas hospitals could exploit to improve their
ability to meet the needs of their diverse stakeholders.

Introduction

The health care industry today is a complex industry with ever changing
relationships between patients, physicians, hospitals, insurers, employers,
communities, and government. A combination of factors – including the
emergence of intense, dynamic competition and consolidation, increasing
expectations of demanding, sophisticated consumers, and decreasing funding
and utilization – have generated an increasingly challenging environment for
hospitals and the health care value chain. With the health care costs
continuing to escalate more quickly than general inflation1, a theme that
resonates throughout the health care field today and receives increasing
attention of policy makers, academia and industry is the necessity to control
costs: cost containment2. The health care sector all over the world is
experiencing tremendous pressure to not only control the escalating costs but
also improve the quality of care it provides to its consumers (Gaucher &
Coffey, 1993, p.4)

Hospitals present an interesting improvement challenge. The clinical methods

used in health care and disease cure are easily understood. Yet when
combined into institutions and broadened into social systems, the
management of them becomes surprisingly convoluted (Glouberman and
Mintzberg 2001). From the view point of operations management (OM)
academics there is a strong resonance between the need for dealing with the
issue of sustainability in hospitals (even not-for-profit organizations must be
able to manage their cash flow and deliver funds for reinvestment), the glut
of resources required to run an inefficient system and the ability of core OM
concepts to alleviate the situation.

1
The cost of providing health care in the OECD countries range from 7 to 9 percent of GDP (Folland et
al. 1997) and is expected to rise due to the ageing population and costs of new technology.
2
Cost containment is defined as the attainment of optimal operating efficiency within the constraints of
providing a high standard of service to patients – i.e., effectiveness. (Smith et al. 1981)
The significance of OM principles to organizations outside the manufacturing
sector is a conviction shared by both OM researchers and practitioners. Levitt
(1972, 1976) was an early advocate who warned that service industries, in
comparison with manufacturing industries were primitive, sluggish and
inefficient and strongly suggested: “The managerial rationality embodied in
the practical imagination we see exercised so effectively everywhere in
manufacturing can, given the effort, be applied with similarly munificent
results in the service industries.” This belief in the value of OM concepts and
techniques has not been fully translated into activity though, at least as
evidenced by the lack of publications. Pannirselvam et al. (1999) and Zamora
et al. (2003) estimate that only a very small proportion of the papers in the
leading operations management journals were devoted to applications in
service sector. Lane (2004), however, suggests that there is a significant
literature on the application of operations management principles in the
health care sector. He cites the reason for this work not showing up in earlier
surveys to the lack of cross-referencing between the health care management
journals and operations management journals. Our initial search on the topic
of OM and selected OR applications in health care sector yielded more than 56
journals publishing articles. This diversity means that while a broad range of
professionals are potentially reading about these issues, there is little critical
mass being created and knowledge is predominantly residing in individual
silos.

Operations Management

At the core of operations management are the topics of process flow and
capacity management, process design and layout, technology choice and
management, quality management, lean manufacturing, supply chain
management and operations strategy. How far has this knowledge diffused
into the health care setting? In the sections below, we discuss each of these
topics and how they have been applied in the health care sector.

1 Process Flow and Capacity Management

The achievement of improved process flow and the associated planning of

capacity is one of most fundamental OM preoccupations. Relatively simple
techniques, such as capacity and demand management, have been shown to
be useful in the health care environment. For instance, hospitals can achieve
substantial improvement in patient flow and hospital throughput and
reduction in unit costs through the application of techniques such as process
mapping and simulation modeling. Henderson et al (2004) report a successful
implementation of a patient flow improvement project at St. John’s Hospital,
located in Springfield, Missouri. An important point for understanding and
improving patient flow is to look at the whole system of care, rather than the
individual units in isolation. Coffey et al. (2005) investigate the use of critical
paths to minimize delays and resource utilization and to maximize quality of
care. They document and show how critical paths, developed through
collaborative efforts of physicians, nurses, pharmacists, and others, help
lower variation in the care provided, facilitate expected outcomes, reduce
delays, reduce length of stay, and improve cost effectiveness.

2
Forecasted demand begins with admissions planning. Admissions planning
decides on the number of patients admitted for surgery each day, and the mix
of patients admitted. The various types of patients can be differentiated by
their resource requirements. The type of resources required for an admission
are beds, operating theatre, surgical team, nursing care and potentially an
intensive care bed. The mix of patients is, as a consequence, an important
factor for the hospital to manage. The choice of patient has a significant
impact on the burden of the hospital. However the need to co-ordinate
resources to manage capacity is not adequately understood in the decision
making process of allocating resources to specialties. The result is peaks and
troughs in the workloads of departments that are difficult to manage. Adan
and Vissers (2002) describe the situation as an operational planning problem:
how can a hospital generate an admission profile for a specialty, given a
target patient throughput and utilization of resources, while satisfying given
restrictions? They develop an integer linear programming model, and pilot it
in a hospital. However their model does not incorporate emergency flow, so it
is limited to hospital units that specialise in elective surgery or that have zero
or minimal emergency service needs. Vissers (1995) view the hospital as a
production system and examine dependencies between resources, resulting in
a number of capacity coordination requirements that need to be fulfilled for
optimized resource utilization. They also develop a set of computer models to
support hospital managerial decision making on resource allocation issues in
various parts of the hospital, and an implementation strategy for the
application of the models to concrete hospital settings.

Proactive thinking on admissions planning has been introduced via the

proposal of various control systems specifically developed for hospitals. de
Vries et al (1999) characterize the hospital as a virtual organization,
consisting of a number of relatively independent businesses in a common
framework. Each business unit functions as a focused factory3 for a range of
relatively homogeneous products. Production control principles can be applied
to each of these businesses, but not to the system as a whole. A number of
elements from classical production control theory have also been applied to
health care, i.e. the use of decoupling points, the bottleneck-oriented
approach, and the operational control between production and market.
Vissers (2001) produce design requirements translated into different levels of
planning required for hospital production control. They strive to maintain the
balance between service and efficiency, at all levels of planning and control.
The decisions are elaborated in terms of patient flows and resources, and the
co-ordination of the different planning levels.

Capacity has also been analysed from a micro perspective. When does a
hospital appear in the news? When it cannot take admissions due to lack of
adequate number of beds or when the waiting period for its services is too
long. The topic of bed management has been tackled in several ways, but
typically as an operations research (OR) problem dealing with methods to
allocate a scarce resource. For example Vissers (1998) takes patient flows as

3
Focussed factory is a concept introduced by Skinner in 1974.

3
its starting point and enables an evaluation of combined impact on the
different resources involved. Boaden et al (1999) have analysed the role of
bed managers and the processes involved in admission, stay, transfer and
discharge of patients in the hospital setting. This qualitative examination of
the situation dwelt very much on the experience of the bed managers and
how they and the hospitals cope. Further research is suggested in the area of
policy development for the management of constrained resources such as
beds and systematic consideration of the factors leading to uneven demand
for and supply of beds.

Whether you are disposed to quantitative or qualitative analysis, the studies

still lead to the same conclusion, the root cause of many capacity issues lies
not in the available capacity but in the uneven demand and inadequate
provision of buffers. More recently, Jack and Powers (2004) develop a
framework that addresses this problem. They propose volume flexibility as a
means to improve service delivery and allow organizations to leverage their
scarce resources for optimal utilization in responses to fluctuations in patient
demand.

2 Process design

Michael Hammer defines business process reengineering in his book

Reengineering the Corporation as:

Fundamental rethinking and radical redesign of business processes

to bring about dramatic improvements in performance.

The technique while much maligned has been deployed successfully in the
manufacturing sector. Fundamental and radical change is not a concept that
appeals in the health care environment though. Continuous process
improvement, which emphasizes small and measurable refinements to an
organization's current processes and systems (sometime but not always linked
to quality initiatives) has been more widely adopted. Process analysis has
been a useful technique for pulling apart the relationships between clinical
and managerial tasks. It is also one of the few techniques to be applied across
the whole of the health sector (general medical practice, hospices, aged care
provision, infrastructure etc) and not just in hospitals.

Process analysis has been applied in UK General Practice (Boaden et al, 1998)
where a model of primary care was proposed, that takes into account
management issues and separates out non-patient contact activities. In a
longitudinal study focusing on the design of the accident and emergency unit
in a hospital, Walley (2003) identifies patient flows that could be used to
design treatment processes around the needs of the patient. He reviews the
core theories of manufacturing process design and the transfer of those
theories into the health care sector. Formal improvement methodologies,
such as business process reengineering (BPR), have been tried extensively
within UK Health Trusts, but research now indicates some of the limitations of
this type of change initiative (Buchanan, 1998; Leverment et al., 1998).
Mintzberg (1997) considers 12 issues common to many hospitals. These

4
include, among others, the fragmentation of efforts, confusion in mission (and
in mission statements), the problems of bundling research with clinical work,
selectivity in informing board members, the dangers of professional
management, and the difficulties of combining external advocacy with
internal reconciliation in the senior manager's job. It concludes that hospitals
could better learn how to solve systemic problems systematically, and that to
do so will require not the wish lists of strategic planning and structural
reorganising, but tangible changes in their collective behaviour. This perhaps
explains why less formal methods of process mapping that engage a full range
of process participants are more successful, as they create a mandate for
change.

3 Technology Management

The clinical aspects of technology management are within the remit of

clinicians, as they should be. However information technology (IT) as a
supporting infrastructure is incredibly important. An effective IT
infrastructure supporting key operational processes and management
reporting is now seen as essential. Despite physician reluctance to embrace
the IT revolution, hospitals around the world are embracing internet and
information technology to improve their client interface, as well as to reduce
the overall cost of providing quality care (Coile 2001). Bodenheimer and
Grumbach (2003) propose that IT has great potential to improve primary care
in many areas such as: (a) medical records, (b) communication between
physicians and patients, (c) information sharing among health care providers,
and (d) rapid access to reliable information for both physicians and patients.
A detailed discussion is possible of IT implementations but is beyond the scope
of this paper. Suffice to say the literature already acknowledges the difficult
environment that health care IT projects operate within, and successful
implementation requires both effective project management and process
change. For example, Walley and Davies (2002) examine the presence or
absence of critical success factors in an NHS Hospital, for both the
implementation and operationalization of technology. The findings suggest
that external factors are not the only reason for the slow introduction and
limited impact of new technology. Internal barriers that significantly limit the
implementation process include an unsupportive organisation structure,
irreconcilable differences in stakeholder requirements, the low status of the
project team, a poor understanding of process management issues and
organisation politics. Waring and Wainwright (2002) have deployed a socially
driven process modelling technique to define the requirements of an IT
system and facilitate its deployment with success.

4 Total Quality Management (TQM) and Six Sigma in Health Care

The significance of the quality literature to operations management is

immense. The quality gurus have transformed the way manufacturing is
organized and the way products are created. It has been established within
the literature that the successful implementation of quality relies heavily
upon the human factor. Most firms now believe that higher quality service and
improved competitiveness will result from increased attention to people

5
issues within the organization. It is understood that the implementation of
any quality initiative should embrace a participatory management style,
address the issue of changing attitudes and culture, employee involvement
and empowerment together with investment in training, development and
learning. These characteristics have not been evident though, in the quality
improvement programmes implemented in the health care environment.

TQM was the first quality philosophy to transition into health care. However
to date, limited research attention has been given to the challenges involved
in adopting such practices to health care. Despite the enthusiasm raised by
the potential benefits of TQM, many initiatives have not fully delivered the
promised results. The reasons for failure can be traced to the “top down”
implementation approach adopted (Bate et al 2004), the insufficient support
of health professionals, the lack of leadership commitment and the tendency
to look at TQM in isolation rather than putting it at the core of the
institution's strategy (Downey-Ennis et al 2004). The lack of a context-
specific model has also been mooted as a cause for the high failure rate of
TQM, particularly in the public sector (Nwabueze and Kanji 1997).

Zababa et al (1998) have investigated in detail the difficulties health care

organizations face when they undertake a TQM implementation. They note
the assertion made by TQM experts that TQM can be successfully applied in
every organization is based on two implicit but important assumptions (Arndt
& Bigelow, 1995): (i) hierarchical control dominance of management over the
technical core and (ii) dominance of rational decision-making processes. Most
health care organizations depart largely from those two assumptions. First,
there exist various powerful subcultures (e.g. physicians' subculture). Each
has its own perspective of what quality should be, and how the work should
be done, and this has created a situation where management has little control
over the most strategic areas where TQM could yield greater results. Second,
the heroism (of physicians) and human (life) factors involved in health care
services have put rational decision-making in jeopardy. The existence of many
participants with different or even opposing interests in the health care
delivery system makes it difficult to define healthcare quality. Shortell et al.
(1995) suggests one noticeable difference between TQM applications in health
care and other fields. The vast majority of applications in other fields of
endeavour have been directed at the core processes of the firm in areas of
greatest strategic priority. In contrast, in health care, the vast majority of
applications to date have been in functions providing administrative support
to patient care activities rather than directly addressing clinical processes
themselves. This finding is to be correlated with the belief among the health
care organizations that TQM is used for the sole purpose of cost containment;
therefore the most evident area where it can be applied is administrative and
other support functions.

Kanji and Sa (2003) present a performance measurement system to overcome

some of these deficiencies, contributing to sustaining the TQM efforts and,
thus, to achieving organizational excellence. The system requires the explicit
and active involvement of all stakeholders and to certain extent it forces a
holistic and integrated approach. Nwabueze (2001) through the use of a case

6
study, suggests a common sense, practical systems management approach to
the implementation of TQM in health care. An alternative strategy for
engaging the various stakeholders in TQM is to use clinical performance
measures to drive quality improvement. A scientific basis for measurement of
clinical performance linked to quality improvement has emerged from the
discipline of epidemiology and although there are limitations to its scope, this
measurement approach is now widely used in the US in promoting quality
improvement (Palmer, 1997).

5. Lean Production or The Toyota Production System (TPS)

Toyota Productions System forms the basis for much of the “lean production4”
movement that has revolutionized the manufacturing sector since the early
90s. Taiichi Ohno, who has been hailed as the founder of TPS, describes
succinctly the goal of TPS: “All we are doing is looking at the time line from
the moment the customer gives us an order to the point when we collect the
cash. And we are reducing that time line by removing the non-value-added
wastes” (Ohno, 1988). A key feature of TPS is the emphasis it places on
employee empowerment, teamwork, and other supportive personnel
practices. Using the Toyota approach, for instance, the hospitals can deliver
to patients exactly what they need when they need it, every time, error-free,
in a safe environment at the lowest cost without waste. The most widely
cited application of lean principles in a hospital setting is at the Canadian
hernia repair center, Shouldice Hospital (Heskett, 1993, Gunmesson, 2001).
The hospital has designed its service around the needs of a single type of
patient and makes its services available at a fraction of the total cost of
alternative care facilities available to its patients. Through standardization of
its operating procedures and effective integration of strategy and systems, it
has been able to offer exceptional care and value to its customers.

Although the application of lean principles in hospitals is not that common, it

is gaining greater acceptance from many chief executives of hospitals in U.S.
who are under pressure to improve efficiency (Wysocki, 2004). Thompson et
al. (2003) report different initiatives based on the TPS principles that have
been undertaken at the University of Pittsburgh Medical Center (UPMC) health
system for reducing error rates, improving quality, and raising staff morale.
The only other research work that we are aware of in this area is by Sobek
and Jimmerson (2003) who report early results from an action research
project in applying TPM principles to a hospital pharmacy.

6. Supply Chain Management

More and more companies are recognizing that managing a supply chain can
pay big dividends in achieving cost containment and operational efficiency.
Although supply chain management has been extensively studied and
researched in the manufacturing sector, significant research into the service

4
Although Toyota invented the concepts behind lean production, it was popularized by Womack and his
colleagues at M.I.T. through their best sellers: The Machine that Changed the World: The Story of Lean
Production (Womack, Jones, Roos, 1991) and Lean Thinking (Womack, Jones, 1996).

7
sector is yet to come. In particular, research on how supply chain
management concepts can be adopted to benefit health care sector is still in
its infancy stage. The internal supply chain of many hospitals rivals the global
supply chains of some Fortune 500 companies in its complexity and the
number of times a product is touched on its way to its ultimate consumption.
Efficient management of supply chain costs can be a critical factor in ensuring
a hospital’s financial security. Tremendous opportunities exist for delivering
significant improvements in the ability of hospital facilities, networks and
other health care organizations to optimize the processes and work flows
associated with materials management, and reduce the costs related to
inventory and supply chain management (SCM). The health care value chain is
plagued with many problems, including outdated and inaccurate data,
laborious manual processes, lack of visibility into important order
information, in addition to disparate IT investments levels among providers
and suppliers, to name a few.

Burns (2002) and his colleagues at Wharton thoroughly examine the trading
relationships among the manufacturers of health care products, the
distributors, the group purchasing organizations, and the hospital customers
and end users of those products and show how health care professionals and
manufacturers can work together to form beneficial strategic alliances. They
investigate whether “extended enterprise” models of supply chain
collaboration found in other industries can be applied in health care.

Because supply spending represents up to 30% of a hospital’s operating costs,

second only to labour, many hospitals are striving to improve their materials
management. Medical and surgical supplies present a huge target for cost
savings. Rundle (1997) reports that of an estimated $83 billion spent annually
on such items, $11 billion could be eliminated through the use of electronic
data interchange (EDI) links with supply chain partners for an array of
purchasing activities such as: (i) checking product availability, (ii) sending
purchase orders, (iii) receiving invoices, and (iv) processing payments.
Through appropriate adoption of technology, materials managers in many
hospitals are trying to get the right product in the right unit of measure at the
right price to the right place at the right time from the right source using the
right resources. For instance, Falkowski (2004) provides details of the supply
chain resource management initiatives undertaken at the Children’s Hospital
of Philadelphia that led to a cost competitive market position and enhanced
patient experience. The end result was that they were able to save more than
$15 million within a 3-year period.

In the business of inventory management, it is acknowledged that

centralization (the process sharing risk between several units) helps reduce
the inventory required to provide a certain level of service. In practice,
centralization can be difficult to achieve, because improvements to the
system's overall performance may be attained at the expense of some of the
parties involved. Inventory pooling has been studied via simulation, with the
goal of identifying conditions that would ensure fairness (Pasin et al 2002).

8
In industry the concept of just-in-time (JIT) replenishment gained momentum
in the early eighties and it is still an important part of an organization’s
supply chain management strategy today. The technique was also applied
widely in the U.S. health care sector. The distributor would pick and pack
products according to the needs of each patient care unit and deliver the
stock directly to them. The tool was never without its detractors though and
both Jarrett (1998) and Pettus (1990) question whether hospitals understand
the technique well enough to be able to attain the proposed benefits. In less
than 10 years the dominant rhetoric was one of cynicism and while some still
valued the technique (Nathan, 1996), overall the arrangements were in
decline (Anonymous 1996, Rosenbaaum 1991, Marino, 1998). More recently, a
hybrid version of the stockless system, under which the distributor supplied
high-volume products for the patient care unit in case quantities, leaving the
institution's central stores to break down bulk purchases of low-volume
products, has been tested. The study reveals marginal benefits from the
hybrid method for both the institution and the distributor. However, it also
shows the importance of the manufacturer's role with respect to packing
formats, and demonstrates that the rearrangement of storage areas can
generate substantial savings Rivard-Royer et al (2002). More and more
hospitals today are using vendor-managed inventory (VMI) software that has a
capability to forecast a hospital’s demand for supplies based on past usage
and this capability allows the supplier to respond to hospital’s immediate
supply needs (Haavik, 2000).

7. Operations Strategy in Health Care

There has been significant research in operations strategy in the

manufacturing field during the last fifteen years (Adam and Swamidass, 1989;
Anderson et al., 1989, Miller and Roth, 1994). However, the same can’t be
said about the level of research on operations strategy in the health care
sector.

Shortell et al. (1985) defines hospital business strategy as the selection of

external markets and the services that the hospital would provide them with
and the dimensions on which it would compete. Zelman and Parham (1990)
characterizes four strategies for hospitals in defining what business they are
in: (i) a generalist strategy (ii) market specialist strategy where the hospital
caters a wide range of services to specific markets, (iii) service specialist
strategy which relates to a hospital providing specific services to a wide range
of target groups, and (iv) super specialist strategy that refers to hospitals
providing narrow range of services to a limited market. Hospitals would
require different operational capabilities to support their mission and
positioning in the market. It is important for hospitals to procure and allocate
resources for the development of those operational capabilities which are
aligned with the corporate mission. For example, a market specialist like the
Royal Children’s Hospital in Melbourne would need to invest in very different
set of operational capabilities in comparison to a service specialist such as the
Aravind Eye Hospital in India.

9
The hospital operations strategy should be developed to support the hospital
mission and business strategy, and help the hospital to gain competitive
advantage in the market place. Operations strategy in the context of a
hospital can be defined as a plan that configures and develops business
processes which enable a hospital to serve and deliver quality care to their
patients as specified by its business strategy. Butler et al (1996) emphasize
the need for aligning the operational capabilities with the overall corporate
objectives. They develop a research agenda that stresses the need to
improve the fit between hospital’s mission and its operational policies.
Currently, in health care research, there is a lack of empirical work testing if,
when and how operational capabilities are consistently implemented with the
corporate mission.

Agenda for Future Research

Hospitals do not appear to strategically develop their operational

competencies in a manner that fits with their mission. Resource allocation in
hospitals tends to occur in an ad hoc fashion without significant thought given
to their wider repercussions. Successful improvement of health care
operations has been localised. The large scale implementations have been
notable for their failure to achieve sustainable benefits. The approaches have
been fragmented, reflecting the lack of an over arching objective and
appropriate measures and incentives to align the various parties involved.

Improvement programmes are perceived as cost containment exercises rather

than relating to improvement of the quality of care. They rarely have the
buy-in of the various stakeholders, in particular they lack full faith and
support of physicians. The most significant results have been achieved when
efforts are led by a team of individuals representing all the stakeholders.

Research needs to be pursued in investigating how functional strategies

interact with each other. An integrated perspective needs to be aimed for in
order to leverage the abilities of the individual elements. It would be
worthwhile to empirically investigate whether superior performance results in
hospitals that link operations strategy to business strategy. Also, another
interesting issue that is yet to be studied in detail is whether hospitals can
effectively implement varying operational strategies in different departments
which are positioned differently in the market place.

There is no doubt that the health care sector offers a rich set of issues to
investigate and hopefully the researchers in operations management, can
contribute significantly to advance the application of operations management
concepts within the health care sector to improve the overall effectiveness
and efficiency of the quality of care.

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