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Impact of a logistic improvement in an hospital pharmacy: Effects on the

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DOI: 10.4314/ijest.v6i3.7S

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 INTERNATIONAL
JOURNAL OF
International Journal of Engineering, Science and Technology ENGINEERING,
MultiCraft Vol. 6, No. 3, 2014, pp. 85-95 SCIENCE AND
TECHNOLOGY
www.ijest-ng.com
www.ajol.info/index.php/ijest
 2014 MultiCraft Limited. All rights reserved

Impact of a logistic improvement in an hospital pharmacy: effects on the

economics of a healthcare organization

M. Ferretti1,*, F. Favalli2, A. Zangrandi3

1*,2,3
Department of Economics, University of Parma, ITALY
*
Corresponding Author: e-mail: marco.ferretti@unipr.it, Tel +39-0521-032334, Fax.+39-0521-032353

Abstract

Health logistics are traditionally overlooked in Italy as scarcely strategic. More recently, Italian Central Government and
Region have reviewed costs only in the direction of a curtailing of the pro-patient cost. Today we know that a more cost-
effective organization can be obtained also increasing the productivity of administration and services. More and more
literature is produced about Supply Chain and Logistics for healthcare services, emphasizing the growing attention on the
subject. This paper analyzes a real case study from an Italian public healthcare organization, to verify the impact, in terms of
efficiency and cost-effectiveness, of a logistic improvement, particularly in pharmaceutics area.

Keywords: Supply chains, logistics, productivity improvement, healthcare services

DOI: http://dx.doi.org/10.4314/ijest.v6i3.7S

1. Introduction

Pharmacy service is, for sure, one of the more complex ones in an hospital (Nielsen et al, 2013; Jonny, Nasution, 2013).
Drugs and medical devices are in close connection with healthcare functions and, in teaching hospitals, also with teaching and
research activities. A modern Hospital Pharmacy service can’t only comply to its “traditional” functions as managing the drug
formulary, supplying, stocking and restoring cabinets, but must also develop new competencies in planning and controlling
drug supply, budget, pharma-economy and quality control, in order to manage resources and optimize processes. Scholars and
technicians in healthcare sector are acknowledging - even being some year late - that a correct Supply Chain (SC) management
can have a strong impact on efficiency and effectiveness of services (Golicic and Smith, 2013;.Doerner e Reiman, 2007; Jarret,
2006; Radnor et al., 2006). An integrated approach to SC is far from being the most widespread (Nachtmann e Pohl, 2009), but
innovative solutions of SC management are more and more experienced, focusing on its two main phases: supply and logistics.
These initiatives unfortunately don’t find a corresponding advancement in the preparation and application of performance
evaluation models, that remain sporadic (Doerner e Reiman, 2007; Nachtmann e Pohl 2009).
As far as logistics are concerned, some studies (Nicholson et al., 2004; Moschuri e Kondylis, 2006) have focused on
advantages of externalization projects, while others (Balakrishnan et al. 1996; Jarret 1998) have evaluated the introduction of
“just-in-time” model in healthcare supply management. The lack of a critical reflection on advantages and problems of these
innovations and of a long run perspective increases the risk of punctual, single solutions, out of the hospital’s general strategic
perspective. This research aims to describe the performance assessment (in terms of costs and advantages) of an innovative
solution in SC, with particular reference to logistics in pharmaceutical supply chain in an hospital. After the literature review
and the analysis of some best practices, we explain the methodology and expose the assessment results.

2. Literature review and best practices

Literature offers many studies about logistics in healthcare, referring to various cases (Bensa et al., 2009). You can find
studies about “logistics strictly speaking”, a series of actions taken inside the hospital, from buying goods to its delivery to the
productive system (Mazzocato et al., 2010; Villa et al., 2007). Other studies focus on “transportation logistics” (how the
hospital is linked to providers of productive factors) (Makni et al., 2012; Nollet and Beaulieu, 2003), or on “patient logistics”
(the management of transport of patients in the hospital organization from one to another care center) (Bensa et al., 2008;
Vissers and Beech, 2005). There are also more overall studies about “supply chain management”, giving account of all
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external and internal actions, relationships with the productive chain (research of productive factors and operations) and
distribution channels (selling goods and/or providing services) (Green, 2012; Del Vecchio and Roma, 2012; Kumar et al.,
2008). From and integrated-analysis point of view, it is interesting to study contibutions about SC performance assessment and
its complexity. The majority of these studies are about assessment systems applied in sectors other than healthcare (Hashemi et
al., 2013; Gu et al., 2013; Behrouzi et al., 2011; Zanjirani et el., 2009). An interesting approach in healthcare perspective is
provided by a CERGAS Bocconi research, which stated that a SC evaluation system must give account of three factors: i)
organization advantages; ii) financial advantages; iii) operating costs (Boscolo et al., 2011).
Literature provide for many experiences in the field of medication logistics. Many of the experience that can be analyzed
here are linked to one single specific logistics concept of the above mentioned, even if we think in an integrated medication
management perspective. As far as procurements are concerned, the most widespread approach is “centered management”,
either at hospital level or at local/regional organization level, as is being proved by national (Brusoni e Marsilio, 2007, Brusoni
et al., 2008) and international (Marsilio e Mele, 2010, Nollet e Beaulieu, 2003) experiences.
About internal logistics, the CERGAS Bocconi research has led a comparison between various innovation projects, finding
different typologies (Boscolo et al., 2011): i) outsourcing projects and experiences of centralization in logistics; ii) storage
management re-engineering with the adoption of innovative industrial perspectives (e.g. Just in Time); iii) adoption of new
technologies and informative systems reinforcing control and management of logistics; iv) layout makeup and reorganization
of spaces; v) adoption of customized treatment, of single-dose medications and computerized prescription in pharmaceutical
logistics. Some of the experiences reported in literature are very interesting for this paper.
As far as centered management of SC (purchases and logistics), a good example is ESTAV logistic center (Ente per i Servizi
Tecnico-amministrativi di Area Vasta) in Toscana region (Italy). It is a public institution working as a procurement centre and
centre for medication, medical and diagnostic devices retailing for 6 hospitals. Centralization has brought the transition from
18 warehouses in single hospitals to a single central warehouse in Florence. A paper published in 2010 by Fiaso (Fabbri e
Marinai, 2010) shows a cost reduction of 46%, and remarkable organization improvements: reduction of Full Time Equivalent
(FTE) personnel for 6,5 million euros; reduction of warehouse costs (lease and energy) of 500.000 euros; 50% reduction of
call for tenders costs; 7,8% reduction of purchase prices; 50% stock reduction, 57% increase of turnover index and 30%
reduction of coverage index.
As an example in automated medication management in the storehouse and in the ward we propose Vall d’Hebron Hospital
in Barcelona. This hospital has reorganized its logistics in a twofold perspective: warehouse centralization through information
technologies, and pharmacy management at department level, implementing an information system warehouse-integrated
(automated prescription and automated medicine cabinets). These are the advantages: better space organization; 50% reduction
of nurse FTE for logistics; 35% stock reduction (about 2 million euros); no more expired drugs, with a 200.000 euros saving
pro year; 2% reduction of pharmaceutic expenses; safety improvement with 50% reduction in administration errors, single-
dose drugs, no more transcription errors and relationship improvement with the providers.
Literature provides for many other studies and experiences on savings on stock reductions (Kumar et al., 2008; Joyce, 2000),
savings on drug consumption (Øvretveit, 2009; Stroup and Dinel, 1985), reduction on man-time in departments (Escobar et al.,
2013; Perricone and Hughes, 1984), reduction of medical risk (Rozenbaum et al, 2013; Dexheimer and Kennebeck, 2013;
Baldo et al., 2007) and quality improvement (Lee et al., 2011; Øvretveit and Tolf, 2009).

3. Methodology research

In the frame of the vast scholarly literature and of best practices, a model for analysis has been designed and applied to
assess logistic implementation in an hospital. Structure, activity and cost data have been provided by the Hospital itself, whose
managers have been very collaborative and have made themselves available for interviews and meetings. The model, in its
initial phase, envisages the creation of a complete framework of pharmaceutics logistics in the hospital “as is”, in the
perspective of a project for the situation “to be”, and of a complete reading of consequences in efficiency and cost-
effectiveness for the Hospital. To assess the logistics performance in the Hospital we focused on 3 macro-areas:

AREA 1. Financial advantages

In order to evaluate financial advantages we took into consideration costs that will be ceased thanks to logistics improvement.
In particular we observed effects of warehouses centralization, automation of central warehouse and departments warehouses,
rationalization of human resources employed in logistics and of transports.
We conducted the following analysis:

1. Analysis of central warehouse stock dimensions to verify the feasibility of centralization, included technical and
economical feasibly. In collaboration with technical office, extension, height and volume of warehouses spaces have been
ascertained to assess capacity, fullness percentages, unused spaces and residual volumes.
2. Distribution volumes (in terms of quantity and money value). Warehouses data have been analyzed in terms of goods
management, load/unload operations, warehouse rotation indexes.
3. Analysis of personnel employed in pharmacy, global number and calculation of FTE.
4. Analysis of personnel employed in department pharmacy management and calculation of FTE.
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AREA 2 – Operative costs

For the assessment of costs we took account of lesser costs thanks to logistics improvement. In particular, transports and
technologic purchases have been considered.
We conducted the following analysis:
1. Transport analysis. Analysis of the situation “as is” of transport services for the hospital. Definition of better itineraries.
Analysis of make scenario (purchase of vehicles for pharmacy transportation – also radioactive ones) and buy scenario
(services bought from a business in logistics and hospital pharmacy transport).
2. Purchase of technologies. Through benchmarking market researches and information provided to leader businesses in the
sector, standard costs for implementation of an integrated logistic system have been formulated. These are our hypotheses:
a. Automation of central warehouse. Analysis of the quantity of entrance and exit of goods, to define the correct number
of automated cabinets;
b. Creation of an integrated warehouse-department system with department cabinets. Coverage of department cabinets
has been calculated for 3 hospitals. It must be taken into account that some particular areas (surgical areas) need their
own cabinets, while some areas (general medicine) can share their cabinets with other departments (locating the
proper place in technical plans obtained from the offices);
c. Costs for software licences, start-up costs (staff’s training, follow-up and support) and assistance and upkeep services
(call center, software and cabinets upkeeping) have been estimated.

AREA 3 – Organizational advantages

This area of analysis gathered its information mainly in literature review. As a consequence, some qualitative hypotheses (e.g.:
quality of services, its appropriateness) haven’t been calculated but we address the reader to reference bibliography. On safety
improvement and reduction of clinical risks, we conducted analysis through international literature, about the possibility of
reduction of costs thanks to the reduction of clinical risks. We also analyzed standardization of processes and optimization of
human resources in this area.

From the overall result from the 3 areas of analysis, we drew an hypothesis of income statement (classified on ceasing costs
and emerging costs) to define:

1. ceasing costs thanks to logistic implementation;

2. emerging costs derived from logistic implementation;
3. related cash flows;
4. cost-effectiveness of the project.

4. Results from a case study: the “Key” Hospital

K (we adopt a fictitious name in order to preserve anonymity as required by the Hospital’s Management), the Public
Hospital in which the study was developed, is located in Italy and specifically in the Lombardy region. The Hospital is
composed by 3 hospital centers, Alpha, Beta and Gamma. In its three centers the hospital provides its services of ER, ordinary
admissions, day hospital, outpatients department activity and diagnostics. It has 3,300 employees and in 2012 it has made use
of 878 beds for ordinary admissions (alpha: 434; beta: 299; gamma: 145) and 94 beds for day hospital (alpha: 35; beta: 33 and
gamma: 26). In the year 2012 the hospital has authorized 41,380 admissions, of which 37,620 ordinary admissions and 3,760
as day hospital. The hospital has provided 4,169,470 care services on outpatients; of which over 2,702,930 are laboratory tests
and over 183,020 are radiologic tests. 22,000 surgeries have been performed. Patients examined in three ERs have been
166,000, and 915,000 care service have been provided. There are other hospital activities in the area, performed through
external centers: 3 C.P.S. (Centro Psico Sociale – Psycho-Sociale Care Center), 1 C.R.A. (Centro Riabilitativo ad Alta
Assistenza – High Level Rehabilitation Center), 2 C.D. (Centro Diurno – Daycare Center), 1 C.P.M. (Comunità Protetta a
Media Assistenza – Assisted Community), 2 Centri N.P.I. (Neuropsichiatria Infantile – Children Neuropsychiatry) e 5
Outpatients Care Centers (3 in hospitals and 2 external) providing this specialty care services: ginaecology, ophthalmology,
dentistry, and ENT.
Pharmaceutical distribution (situation “as is”) is performed by three pharmacy warehouses located in the three hospital centers.
In our methodology, the first activity we should envisage is the centralization of warehouses and its automation. Centralization
implies relocating all stocks in the Alpha center warehouse. So, the first assessment focuses on the capacity of this warehouse.

4.1 Warehouses analysis

Alpha center, as far as warehouses are concerned (Pharmaceutics and Consumption goods), has a capacity of 8,000 m3. The
occupancy volume is (year 2011) 5,254 m3, so 2,750 m3 are empty. In Beta center, warehouse capacity is 235 m3, the
occupancy is 212 m3, so 24 m3 are empty. In Gamma center, warehouse capacity is 722 m3, occupancy is 650 m3, 71 m3 are
empty. Beta and Gamma warehouses have a whole occupancy of 1,700 m3 , while in Alpha 2.750 m3 are empty. If we
88 Ferretti et al. / International Journal of Engineering, Science and Technology, Vol. 6, No. 3, 2014, pp. 85-95
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centralize the Beta and Gamma warehouses within Alpha warehouse, 1,000 m3 are empty, as a safety margin in order to avoid
shortening of space for stockage. In an interwiew, Technical Office personnel of K hospital has expressed its concern about
the necessities of refurbishing and reworking the warehouse, to contain cabinets and goods of the two old warehouses. This
costs are around 15,000/20,000 €.

4.2 Goods volume

The volume of entering and exiting goods (in terms of money value) from hospital K in its three warehouses (year 2011),
amounts 58,571,643 euro. Drugs are 56,8%, medical-surgical devices 19,7%, prosthesis are 16,6%, the remaining percentage
are dialysis tools, chemicals, contrast agents, vaccines, etc. Alpha warehouse has handled 65% of the value, Beta 22% and
Gamma 13%.

4.3 Pharmacy personnel

Hospital K has 42 physical persons employed in the Pharmacy (Alpha, 20 workers; Beta, 15; Gamma, 7). FTE have been
calculated, dividing the actual work hours of all employees for “Full Time” hours fixed on the contract for every job profile:
1,660 hours for Healthcare management and 1,550 hours for all other roles. K hospital has 37.6 FTE employed in Pharmacy
(Alpha 16.39; Beta 9.39; Gamma 6.81). The overall cost of pharmacy personnel is 1,661,426 euros. For every personnel unit
percentages of each activity has been calculated, focusing on the percentages of work in logistics. The hospital pays 52% of
the overall cost of pharmacy personnel (865.483 euros) for logistics purposes.
In the view of warehouses centralization, some of these costs will be ceasing, as the need for logistics personnel would
decrease. In a view of moderate reduction of personnel, these are our hypotheses:
- personnel in Beta and Gamma warehouses will be a ceasing cost, with exception of healthcare managers that will go on
coordinating the activities in the whole hospital;
- Alpha warehouse will have a slight reduction in costs (the half of costs of its services) as warehouse centralization will cause
an increase in volumes.

4.4 Transport logistics

Transport between the three warehouses (situation “as is”) is performed by hospital employees. Transports between
warehouses and departments are performed in accordance with the following scheme:
- from warehouse Alpha to Alpha departments: contract personnel in charge of the service;
- from warehouse Beta to Beta departments: contract personnel in charge of the service;
- from warehouse Gamma to Gamma departments: hospital employees;
- from each warehouse to other departments: hospital employees.

In 2011, 1,496 transports have been performed. The closing of Beta and Gamma warehouses will allow to cease some
transport costs. These savings will come from the ending of transports between Beta and Gamma, and from Beta and Gamma
to Alpha. Logistics reorganization will also bring some new costs, because of the increase of transport from Alpha to Beta and
Gamma departments, personnel contract upgrading and purchase of new vehicles. Benchmark analysis performed on leader
businesses in transport logistics allows to envisage a 150,000 euro/year contract.

4.5 Operating costs: automation of central and department warehouses

Centralization will be followed by automation, the installation of a robot system for pharmacy warehouse management and
preparation of drug baskets for the departments. Automation allows to set some personnel unit free from logistics activity, as
this technology doesn’t need drug knowledge and can be operated by technicians, leaving nurses free to work in care
departments. Technical personnel will not be curtailed for this reason.
On warehouse data provided by Hospital K we propose the installation of automate repositories (3 cabinets with a maximum
capacity of 130.000 drug boxes), with a robot system of basket filling, inner refrigeration, automated charge module, and
emergency module with integrated warehouse. The overall cost amounts to 1,573,000 euro VAT included (State hospital
should take account of VAT as cost): 147,000 for software licenses, 1,095,000 for the automated cabinets and 58,000 for start-
up (training, follow-up and support). The system has an annual maintenance and working cost (call center, assistance and
software-hardware upkeeping) of 125,000 euros.
Another improving of logistics can be obtained automating also pharmacy logistics inside the departments. Benchmark
analysis on leader businesses of the sector in Italy (and Europe) provides the following data. A department medicine cabinet
should be installed every 40 beds. As Hospital K has 3 centers the one far from the another and with some subdivisions and
critical nodes, a cabinet every 25 beds has been considered necessary. So 40 cabinets should be purchased. The process will
start with 10 cabinets in the first 2 years and later the other 30 cabinets will be implemented. The overall cost will be (table 1)
4.3 million euros.
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Table 1. Investments for Hardware & Software

Cost €
Software licenses 210,000
Third-part SW 60,000
Virtual warehouse SW license 24,000
Total licenses 294,000

Automated warehouse (3 cabinets) 950,000

emergency module 145,000
Total automated warehouse 1,095,000

Department cabinets (40) 1,600,000

Transport and installation 60,000
Total dept. cabinets 1,660,000

Start-up (ECM training, support and follow-up) 580,000

TOTAL (excl. VAT) 3,629,000

VAT 21% 762,090

Total (incl. VAT) 4,391,090

License costs are for software system able to integrate warehouses and departments, and so refers to both investment sides.
The purchase of 40 dpt. cabinets (including all accessories, transport and installation) has an estimated cost of 1,660,000 euros.
Project & Change management, Training and Support will cost 500,000-600,000 euros.
Moreover, annual costs will cover warehouse and department cabinets maintenance costs (table 2).

Table 2. Costs/year for assistance and maintenance (HW & SW)

Cost €
Call Center service 8.000
SW assistance and maintenance 30.000
Warehouse cabinets assistance and maintenance 65.000
Pharmacy cabinets assistance and maintenance 85.000
Costs for year without VAT 188.000
VAT 39.480
Costs/Year including VAT 227.480

Instead of buying technology, it is possible to contract a multi-year service ad a fixed rate, including financial costs, full risk
assistance and project management for all the contract duration. Costs are detailed in table 3.

Table 3. cost/year for global services (HW & SW)

Cost €
Contract at a fixed rate for several years 800.000
VAT 21% 168.000
Total Rate/year 968.000

5.6 Ceasing costs thanks to stock reductions

Automation of Central Pharmacy warehouse as detailed, makes possible to assess the available stocks in real time.
Moreover, the system lets the pharmacist know critical situations in stocks (scarcity of drugs for departments demand),
rotation (drugs idle for a long time), expired drugs or needing control. Optimization of stocks allows a 30% stock reduction.
Data from literature and from experiences estimate an over 50% reduction of stocks (a stock reduction of 30% on Central
Pharmacies and 60% in department warehouses). Average cost of idle stocks is 10-15% of overall value (many Italian and
international studies confirm that idle goods have an annual cost of 13% of the overall value of the same goods, for financial
costs, possibility of expired drugs, use of tools, improper use, occupancy, etc.), as in the following table:
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Table 4. Ceasing costs thanks to stock reductions

Cost €
Estimated value of stocks in pharmacies and departments, calculated on overall year expenses, with an
1.500.000
average rotation index of 6 (2008)
Average value of idle stocks (-50%) 750.000
General cost/year of stock management, expected to be reduced by this system 97.500

5.7 Ceasing costs thanks to reduction of drugs consumption

International literature reports data coming from studies on advantages of implementation of an automated prescription and
administration service. These data show savings on pharmacy expenses from 5% to 20%. If we take 9,438,650 euros as the
overall value of goods unloaded from the warehouse (2008), with an average 7% reduction of drug consumption, the annual
savings will be of 660,700 euro. Since the pharmacy expenses are increasing, we consider 2008 expenses in order not to
overestimate the savings. In this research phase, it is interesting to find the departments that have registered the higher drug
consumption and by consequence the higher expenses, to choose the better ones to test pharmacy automation in departments.
Operative Units (in Alpha center) where drug consumption is higher are: Oncology, Anesthesia and Resuscitation, Nephrology
and Dialysis, Infectious diseases.

5.8 Better distribution of direct administration drugs to outpatients

These are new and very expensive drugs, used for pathologies in which the patient is often examined: interpheron, growth
factors, transplant therapy, drugs not authorized in Italy, untested drugs, etc.). Hospital K has spent 17 million euros for these
drugs in 2008. With logistics improvement, we have no savings on the cost of drug itself (who is paid by Regional Health
System) but we can envisage an improvement in distribution, more patients accessing the drugs and a saving in hours/year of
the pharmacist in service. With an average of 740 boxes a day prepared manually and an average of time needed (4,198
hours/year with integrated system, 2,520 hours/year without integrated system), the hours/year for the pharmacist will be 1,678
less, saving 60,000 euros/year.

5.9 Reduction of expired drugs

The percentage of expired drugs in an hospital pharmacy (the average is 0.5% of total drug storage) is reduced almost to
half thanks to automation as described. With reference to an overall drug value of 9,438,000 euros (2008), the percentage of
expired drugs (0.50%, 41,190 euros) could be reduced to 0.30% (28,314 euros) with a saving of 18,876 euros. In the final
report of savings and in the projected income statement, this value isn’t reported as it is included in savings derived from
reduction and optimization of stocks.

5.10 Reduction of man-time in departments, thanks to department cabinets

It is possible to give account of the time saving in every department of the Hospital, thanks to integrated logistics
(considering an average of 20-30 beds for every cabinet). Time saved is about 10h 30’ of work pro week in every “virtual
department”, i.e. one or more Unities serviced by a single cabinet:

Table 5. Man-time in departments before and after the introduction of automated department cabinets
Before After
Ordinary upkeeping of cabinets: uploading, stock control, expiry dates control, cleaning. 1h 30’ 1h 00’
Calculation of needs 1h 30’ 00h 00’
Writing and sending regular orders 2h 00’ 00h 15’
Writing and sending emergency orders 00h 30’ 00h 15’
Control of received wares, rewriting and resending requests because of errors 00h 30’ 00h 00’
Interpretation of medical records and updating of therapy records 04h 30’ 00h 00’
Supplementary time for therapy preparation (drugs lacking, prescription unreadable, etc). 01h 30’ 00h 00’
Total 12h 00’ 01h 30’

In the following table the money saving for this time saving is shown. With an annual salary of 35,000 euros and a contract for
1,500 hours/year, the average hourly cost is 23.33 euros.
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Table 6. Ceasing cost for personnel in departments, thanks to automated department cabinets
Average hour cost (€) 23.33
Hours saved every year for every cabinet 546
Hours saved every year for 40 “virtual” Operative Units (pharmacy cabinets) 21,840
Savings (€) 509,600

5.11 Reduction of Clinical Risk

International literature on the subject (as a reference for Ministero della Salute [Italian Health Ministry] 2004 Report on
Clinical Risk Management, and transcribed in tabel 7) says that 3.7 to 16.6 every 100 treatments in an hospital are a cause of
adverse events for inpatients, and that half of them (35% to 58%) can be avoided with the implementation of a clinical risk
management system.

Table 7. Adverse events for 100 inpatients

Usa Usa Australia New Zealand UK
Event Average
1991 1999 1995 2001 2001
Adverse Events (AE) 3.7% 4% 16.6% 12.9% 10.8% 9.6%
Avoidable Adverse Events (on AE total) 58% 53% 53% 35% 47% 49%

It is noteworthy that almost 2 AE pro cent (1.92%) are caused by errors of prescription and administration of drugs. Literature
shows that for 100 mistakes (prescriptions, transcriptions, preparations/distributions and administrations) 65 are avoidable
with an automated system. According to several studies, most of all in the anglosaxon area, the average money loss for every
AE is over 8,700 $ (including “additional” costs, as the increase of insurance rates). Table 8 shows, in a prudential estimate,
economic advantages of the adoption of an integrated system Warehouse-Departments.

Table 8. Hypoteses of ceasing costs thanks to reduction of clinical risk.

Total admissions in the year (Alpha center) 34,500
% of patients who suffered mistakes every year 1.92%
Inpatients who suffered mistakes/year 662
Average single mistake cost (prudential approach) 1,000
Additional cost pro year because of mistakes in the year 662,400
Percentage avoidable mistakes 65%
Avoidable costs (future savings) 430,560

5.12 Final summary of envisaged savings

Table 9 reports a synthesis of savings analyzed in the previous paragraphs. Income Statement in 5.13 proposes in the short
run the sole reduction of drug consumption, as stated in the reference bibliography, in consequence of implementation of
automated cabinets in departments. The value of this reduction is 660,000 euros. In a prudential perspective, this saving is
considered fully acquired in the third year, as it comes from the full implementation of pharmacy department cabinets (40
cabinets).

Table 9. Summary of the main savings

Savings thanks to: €
Stock reduction 97,500
Consumption reduction 660,700
Time saved in OO. UU. 509,600
Reduction of clinical risk 430,560
Better distribution of drugs to outpatients 60,000
Total savings/year 1,758,360

From the fourth year of implementation savings should increase of 3% thanks to consolidation of new technologies. The
progression of savings is made clear in Table 10.

Table 10. Projection over 9 years of ceasing costs thanks to reduction of drug consumption
Year 1 2 3 4 5 6 7 8 9
Reduction of drug
528,560 634,272 660,700 680,521 700,937 721,965 743,624 765,932 788,910
consumption (€)
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Special Issue: Supply Chains and Logistics: Management, Modelling and Applications

5.13 The analysis: Income Statement and Cash Flow

This analysis includes:
- centralization of Beta and Gamma warehouses in Alpha center;
- implementation of automated warehouses for stocks and distribution of drug boxes in the hospital pharmacy (3 automated
cabinets for central warehouse);
- externalization of transports and logistics;
- test implementation of 10 department cabinets for automated drug distribution in the wards for 2 years;
- implementation of the remaining 30 department cabinets from the 3rd year, to reach the total of 40.
We propose a global service contract for:
- the integrated system (warehouses + departments) service;
- the transport and logistics services.
On this basis, we performed the analysis of Income Statement and connected Cash Flow. Collections and payments are
calculated on the basis of Italian law, which decrees that:
- payments within 30 days for goods and services (D. Lgs. 192/2012);
- payments at the end of the month for salaries.
Furthermore, an organizational condition for the fulfillment of the investment is that all the physicians prescribe medications
electronically.
We did not take into account the following variables:
- increase of costs due to ISTAT (Istituto Nazionale di Statistica) inflation index;
- increase of employees’ salaries as stated in the Collective Labour Agreement.
On the other side, we took into account the Net Present Value (NPV) actualization, using the simple rate formula:

The scenario is envisaged over 9 years (time in which the hardware becomes obsolete); for the cash flow description the
scenario is 10 years long, due to the payments deferment, as described above.

Table 11. Analysis of ceasing costs and emerging costs for logistics improvement
INCOME STATEMENT PER
1 2 3 4 5 6 7 8 9 TOTAL
YEAR (€/000)
Personnel 131 242 459 459 459 459 459 459 459 3.586
Purchase of non-healthcare
38 38 38 38 38 38 38 38 38 342
goods and services
Energy, phone services, etc... 21 21 21 21 21 21 21 21 21 189
Ceasing costs thanks to system
132 159 661 681 701 722 744 766 789 5.355
implementation
TOTAL CEASING COSTS 322 460 1.179 1.199 1.219 1.240 1.262 1.284 1.307 9.472
Personnel - - - - - - - - - 0
Purchase of healthcare goods
529 529 968 968 968 968 968 968 968 7.834
and services
Purchase of non-healthcare
150 150 150 150 150 150 150 150 150 1.350
goods and services
Energy, phone services, etc.. 17 17 17 17 17 17 17 17 17 153
TOTAL EMERGING COSTS 696 696 1.135 1.135 1.135 1.135 1.135 1.135 1.135 9.337

BALANCE -374 -236 44 64 84 105 127 149 172 135

Table 12. Analysis of cash flows for logistics improvement

CASH FLOW PER YEAR
1 2 3 4 5 6 7 8 9 10 TOTAL
(€/000)
Personnel 131 242 459 459 459 459 459 459 459 3.586
Purchase of non-healthcare
35 38 38 38 38 38 38 38 38 3 342
goods and services
Energy, phone services, etc... 19 21 21 21 21 21 21 21 21 2 189
Ceasing costs thanks to system
121 157 619 679 699 720 742 764 787 66 5.355
implementation
TOTAL CASH INFLOW 306 458 1.137 1.197 1.217 1.238 1.260 1.282 1.305 71 9.472
Personnel - - - - - - - - - 0 0
Purchase of healthcare goods
-485 -529 -931 -968 -968 -968 -968 -968 -968 -81 -7.834
and services
Purchase of non-healthcare
-138 -150 -150 -150 -150 -150 -150 -150 -150 -13 -1.350
goods and services
Energy, phone services, etc.. -16 -17 -17 -17 -17 -17 -17 -17 -17 -1 -153
TOTAL CASH OUTFLOW -638 -696 -1.098 -1.135 -1.135 -1.135 -1.135 -1.135 -1.135 -95 -9.337

BALANCE -332 -238 39 62 82 103 125 147 170 -24 135

93 Ferretti et al. / International Journal of Engineering, Science and Technology, Vol. 6, No. 3, 2014, pp. 85-95
Special Issue: Supply Chains and Logistics: Management, Modelling and Applications

The NPV of the investment is € 32.000 with an actualization rate of 3%; the result shows that the investment is substantially
indifferent for the Hospital K’s financial management.

7. Conclusions

Warehouse centralization, their automation and the implementation of department cabinets could be advantageous in terms
of cost reduction, organization improvement in drug handling and also in terms of quality of service provided. The case study
emphasizes how the reorganization of process and drug handling can benefit from automation. It is worthy noticing that
hospital typical processes need special attention. Automated prescription is the key automation element and determines the
overall reorganization process, on which are based the positive results here envisaged. The effectiveness of the automated
solution in medication management is supported by further advantages from elements which have been described, but not
assessed economically:
- reduction of time nurses spend in administering medication. This elements, that cannot be easily described in financial
flows, can be used through a wise staffing management in order to spend more resources in caring patients;
- clinical risk reduction is supported by the literature (as cited above) and this element can lead to the opportunity of
reducing insurance fees and healthcare quality over the time.
Even though the analysis is perspective, it gives us enough elements to suggest tools for automation and standardization of
hospital medication management.

A second feature to be considered is the public property of the hospital. In Italian healthcare services the benefits here
explained not always can be appreciated at a financial level in single hospitals. The public hospital not always is able to take
profit of these positive consequences. In detail:
- advantages in personnel productivity are often cancelled by the difficulties and struggles around the work contract
changes (the cost reduction will be effective only in the long run);
- reduction of logistics cost suffer a limitation, as public tender purchase systems, prescribed by Italian law, make
renegotiation of years-long contracts very difficult. The purchase tenders not always allow to prefer the more advanced
solutions;
- advantages in stock reduction and need of working capital are often reduced by the public healthcare system, as the
hospital depends from Regional payments for its money flows;
- the investment financing is sometimes too difficult to plan, as hospital haven’t the necessary autonomy and decisions on
investments are taken at regional level.

Inversely, risk reduction benefit and better effectiveness in drug consumption are strongly related to the political role of
public hospital. In Italian context these re-organization processes are often implemented at a regional level, as is it easier to
assess the advantages. Today’s bad economical conjuncture - with the reduction of public expenses (“spending review”)
operated by the Italian Government - resulted in linear cut of healthcare costs. Therefore, actions of logistics improvement
could rationalize resources and improve the Health organization effectiveness, respecting the overall hospital cost-
effectiveness.

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Biographical notes

Marco FERRETTI, Researcher in Business Administration at University of Parma, Department of Economics. PhD in Public Administration and Professor
of “Planning, Budget and Control in Public Administration”. Marco Ferretti’s primary research interests focus on the methods of financing public
administration and control and programming in public organizations. He has authored or co-authored many publications, on the range of research topics listed
above.

Federica FAVALLI, is research and teaching fellow at University of Parma, Department of Economics. PhD in Public Administration and Professor of
Business Administration and Organization at Medicine Department for healthcare professionals degrees and master degrees.

Antonello ZANGRANDI, Full Professor of “Management and Accounting of public and non-profit organization” at University of Parma, Department of
Economics. Senior Professor of Public Management and Policy at SDA Bocconi in Milan. His research interests focus on the performance of public
management and in recent years has carried out research in relation to many aspects of change management with particular reference to public health.

Received June 2013

Accepted November 2013
Final acceptance in revised form November 2013

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