What is the Cost of Logistics Activities in Healthcare Businesses? A Case Study of a Medical Centre in Türkiye *

Abstract

Logistics holds an important role in healthcare provision. One of the significant dimensions of logistics is the cost incurred for these activities. However, the cost of logistics is an overlooked issue in most healthcare organisations. The purpose of this study is to provide an insight into the cost of logistic activities in healthcare businesses. A case study was conducted in a medical centre in Istanbul. Historical data (second half of 2021) were used for the analysis. Activity-based costing method was adopted for cost calculation. In line with this approach, logistic activities of the medical centre were examined, and logistic activity centres were determined. Resource consumption of each centre was determined based on interviews with staff and records of the accounting department. Consequently, the costs of all logistic activities of the medical centre were calculated, and their share in the total cost of service production was determined. The total logistical cost of the healthcare centre was calculated to be ₺689,983. The cost of patient services and transporting activity centres accounted for 49% of total logistical costs. The costs of logistic activities accounted for 15.42% of the total cost of service. The results of the study show that logistic activities have a significant share of the total cost of service production in the medical centre. Activity-based costing is an effective way of calculating costs of logistic activities in healthcare services. Managers can use cost data to improve logistic processes.

Keywords

Logistics cost analysis healthcare activity-based costing hospital management private hospitals

Background

Logistics essentially aims to manage the framework that seeks the flow of materials and information through a business to satisfy customers. From this point of view, logistics involve procurement, transportation, distribution, inventory management, management of the warehouses and delivery in businesses (Christopher, 2011). Logistics is considered as a part of primary activities in the value chain, which is the key source of competitive advantage (Porter, 1998). It can thereby be stated that logistic management can lead to better processes and support the competitive position of businesses. Logistic activities are also vital considering their indispensable role in healthcare service production. Literature provides a wide array of logistic activities in hospitals. Transporting of patients, samples/blood or materials (Volland et al., 2017), purchasing and inventory management (Çakıcı et al., 2011), cleaning services, laundry services, catering (Jawab et al., 2018), waste management (Nikzamir et al., 2020), sterilisation (van de Klundert et al., 2008), information management (Pan & Pokharel, 2007), etc. can be expressed as significant logistic activities in hospitals. These activities are the prominent determinants of sufficient and quality of healthcare services (Kriegel et al., 2013). It is worth noting that logistics-related activities have a significant share in healthcare production processes. For instance, evidence verify that nurses spend nearly 10% of their daily efforts on logistics-related activities (Dobrzańska et al., 2013).

Another important aspect of logistics in healthcare is their cost. Some studies have stated that logistics-related activities absorb more than 20% of the total expenditures of healthcare businesses (Aptel et al., 2009; Koushki et al., 2020). Cost control recently is a priority for healthcare systems. There has been a constant effort to control costs and improve healthcare provision in all health businesses. Appropriate cost data is significant to evaluate potential saving areas regarding the scarcity of resources. Numerous studies examined the cost structure of hospitals (Koushki et al., 2020) or calculated unit cost in hospitals (Chatterjee et al., 2013; Than et al., 2017). However, to the best of our knowledge, there are limited studies on calculating the cost of logistics-related activities in hospitals. Most of the literature on logistic management in healthcare is focused on material management techniques, just-in-time (JIT) or stockless systems (Volland et al., 2017), usage of technology (Chircu et al., 2014) and performance measurement (Kritchanchai et al., 2018; Moons et al., 2019). There are also some significant studies that compared logistic activities of different hospitals to determine potential improvements and cost containment opportunities (Aptel & Pourjalali, 2001; van Lent et al., 2012).

Due to its significant role in providing quality healthcare, logistic activities need to be properly examined in terms of costs and performance. Managers need cost visibility along with the logistic activities to be able to evaluate their decisions on whether to make a positive contribution to the whole process (Themido et al., 2000). Therefore, it is not reasonable for healthcare businesses in today’s markets to make arbitrary cost calculations of logistics activities or turn a blind eye to the cost of logistics. Accordingly, healthcare businesses should benefit from analysing logistic activities to reduce costs and improve the quality of healthcare services.

In that regard, this article addresses the costs of logistic activities in healthcare. The objective of the study is to examine the logistic activities of healthcare businesses in terms of activity-based cost management. The study aims to calculate the cost of logistic activities and determine the share of total logistics cost from the total cost of service production.

Methods

Context of the Study

The research aim of this study was formulated as ‘to provide evidence on the costs of logistic activities of healthcare businesses for better managerial processes’. Accordingly, the study aims to answer the following research questions (RQs):

RQ 1: Which logistic activities are carried out in healthcare services?

RQ 2: What resources are absorbed by logistic activity centres?

RQ 3: What are the costs of logistic activity centres?

RQ 4: What is the share of the total logistic cost in the total cost of service?

A case study took place in a private medical centre operating in Istanbul to answer RQs. The medical centre performs in several medical departments such as secondary care units, emergency care units, inpatient services, operating room, laboratory and radiological imaging units. The case study is based on mixed-method research. For a deeper understanding of the phenomenon of logistics in healthcare, both qualitative and quantitative approaches are adopted. The study started with obtaining qualitative data to examine logistical activities and determine activity centres and moves on to quantitative data for cost calculation of logistic activity centres. The qualitative phase was carried out through interviews. The head of the medical centre and staff involved in logistic activities were interviewed. Cost data were obtained from the accounting department.

Costing Methodology

In line with the RQs, an activity-based analysis and costing were carried out. Activity-based costing (ABC) differs from traditional cost accounting and management implications. ABC is based on the understanding that activities consume resources while products or services consume activities. Therefore, resources are assigned to activities, then activities are assigned to products/services based on their use (Baker, 1998). ABC solves the allocation of overheads by tracing all costs to the related activities and providing process improvement opportunities (Kaplan & Anderson, 2003).

The current study has followed several steps following the ABC methodology. To begin with, the logistic activities of the medical centre were determined by conducting interviews. In this phase, logistic activity centres were determined by aggregating different logistic actions. The workflow of each activity centre has been developed. For instance, the different activities associated with patient admissions such as scheduling, insurance inquiry, billing and guiding are aggregated into the ‘patient services’ activity centre. Consequently, the cost centres of the study were determined. In the second phase, the types of resources consumed by activity centres were determined. The labour force, materials and other expenses of each centre were determined based on the information obtained from both staff involved in activities and accounting departments. Table 1 presents the steps and data sources in the workflow determination and cost calculation process.

Table 1.

Steps of the Case Study.

Steps	Data Source
Identification of logistic activities	Interviews with the general manager of the centre and head of related departments
Determination of logistic activity centres	Interviews with the general manager and head nurse, aggregating listed logistic activities based on analysis of the first interview
Determination of resources consumed by each activity centre	Interviews with experts who are responsible for each logistic activity, records of the warehouse and accounting department
Determination of cost drivers to allocate overheads	Interviews with key actors and head of the accounting department
Cost calculation for logistic activity centres	Cost accounting records

The cost of the logistics activities was calculated using historical data and the absorption costing method in the third phase. The cost data were obtained for the second half of 2021 (01 July–31 December). Labour costs and material costs are directly assigned to activity centres using accounting records. General costs (overheads of the medical centre) are assigned using cost drivers. In conclusion, the share of total logistical cost in total service cost was calculated.

Sensitivity Analysis

A sensitivity analysis was undertaken to determine the influence of parameters on the total costs of the medical centre. The discount rate for the analysis was varied between –5% + 5%. Labour cost, material cost, overheads and cost of logistic activities are included in the sensitivity analysis as parameters. The labour costs of medical units are separated as direct and indirect. The underlying reason for this is that the indirect labour costs incurred in the medical units mainly belong to the employees who carry out the logistics activities in the medical units. Medical secretaries or assistants in medical units are part of the patient services process. While calculating the cost of logistic activities, the patient services activity centre only included the staff who work in central management. Therefore, in the sensitivity analysis, it was concluded that it would be appropriate to include the indirect labour costs of medical units separately in the model in order to make the influence of the cost of logistics on total costs more evident.

Results

It was aimed to have a wide perspective that includes all directly related activities with medical care and indirect activities that support medical services via interviewing. A patient pathway begins with the patient admission step followed by policlinic (outpatient) service. These two very beginning services are strongly related and have significant effects on the posterior process. The patient admission step which is a part of the ‘patient services department’ collects all necessary information about patients and guides the way for patients. This department is similar to the ‘order fulfilment’ function of logistics in industrial organisations. All future steps for patient care (such as radiological and laboratory activities, the process for surgical operations, invoicing) depend on the capacity and success of the patient services department in data processing. The care pathway gets complicated if inpatient services are needed. At this point, the phase of operating room, inpatient care centre and interaction with these services with laboratory and radiological examination become apparent. Numerous supportive activities are carried out to ensure continuity and quality of care pathway (Figure 1).

Figure 1.

Basic Care Pathway in the Medical Centre.

According to the information provided above and considering interviews with staff, logistic activities of the case were determined and nine logistic activity centres were constructed for cost analysis. Before cost calculation, all logistical processes were mapped. All the steps related to activity centres were determined. Process maps were used to identify the types of resources consumed by each activity. Information about each centre was briefly provided in Table 2.

Table 2.

Logistic Activities and Centres.

Logistic Activity Centres	Basic Activities
Patient services	Scheduling, patient admission, insurance inquiry, billing, documentary, guiding patients
Purchasing	Periodical stock control, contracts, supplier relations, ordering, delivery control
Medical invoicing	Checking patients’ medical records and files, invoicing in line with social insurance regulations, archiving
Warehouse	Periodical controls, demand processing and covering, labelling–packing, recording
Transport	Medical consumable and drug distribution, recording, transfer of patients within the healthcare centre by beds and out of the centre by ambulance
Medical waste management	Collecting medical wastes, temporary storage, managing the disposal process
Sterilisation	Classifying unsterilised reusable devices, sterilisation process, packing sterilised devices, transporting sterilised devices
Laundry	Classifying, washing, drying, ironing, storage and transferring
Maintenance services	Caring and maintaining patients’ lift, medical devices or any technological equipment within the medical centre

Logistic activity centres are accepted as cost centres for the next step. The labour and material costs were assigned according to the records of the health information system. Labour costs include salaries and all benefits provided to staff who work for each cost centre. Material costs include non-medical supplies consumed by each centre. In order to allocate overhead costs, cost drivers were determined (Table 3). For instance, the rent expense of the building, heating, cleaning and insurance expenses were allocated using the ‘area’ cost driver. To calculate the share of each cost that would be allocated to the cost centre, the formula of ‘ $\frac{area of each cost centre}{total area of the healthcare centre}$ ’ was used. Catering and communication expenses were allocated based on the formula of ‘ $\frac{number of staff of each cost centre}{total staff of the healthcare centre}$ ’. Cost of an activity centre is hereby = labour cost + material cost + allocated overhead costs.

Table 3.

Overhead Costs and Cost Drivers.

Overhead	Cost Driver
Building rent	Area (m²)
Electricity	Number of power inlets
Water consumption	Number of faucets
Heating	Area (m²)
Food/catering	Number of staff
Communication	Number of staff
Cleaning	Area (m²)
Insurance on buildings	Area (m²)

Total costs of activity centres by cost items are presented in Table 4. The total logistical cost of the healthcare centre was calculated to be ₺689,983. Patient services accounted for the highest total cost among other logistic activity centres. Transporting activities are the second in terms of the share in total logistical costs. The costs of patient services and transporting activity centres accounted for 49% of total logistic costs. Labour cost accounted for the highest share in the total cost of all activity centres.

Table 4.

Cost Structure of Logistic Activity Centres.

Activity Centres	Labour Cost	Material Cost	Overheads	Total Cost
Patient services	₺150,097	₺7,182	₺57,253	₺214,532
Purchasing	₺33,950	₺4,400	₺7,234	₺45,584
Medical invoicing	₺25,200	₺1,250	₺4,707	₺31,157
Warehousing	₺22,532	₺850	₺7,409	₺30,791
Transporting	₺90,852	₺16,250	₺15,996	₺123,098
Medical wasting	₺22,532	₺4,580	₺12,180	₺39,292
Sterilisation	₺25,200	₺3,200	₺5,558	₺33,958
Laundry	₺21,352	₺3,400	₺7,800	₺32,552
Maintenance services	₺25,460	₺85,654	₺27,905	₺139,019
Total costs of logistic activities				₺689,983

The share of the total logistic costs in the total cost of service was calculated to unveil the burden of logistic activities in terms of their costs. The total cost of service of the healthcare centre during the study period was ₺4,472,790 (Table 5). Costs of logistic activities accounted for 15.42% of the total cost of service.

Table 5.

Total Cost of the Medical Centre.

Direct labour cost	₺2,263,048
Indirect labour cost	₺287,020
Direct and indirect material cost	₺369,070
Overheads	₺863,669
Total logistical cost	₺689,983
Total cost	₺4,472,790

Sensitivity analysis revealed that the total cost of the medical centre was respectively most sensitive to direct labour cost, overheads and total logistical cost (Figure 2).

Figure 2.

Tornado Sensitivity Diagram.

Discussion and Conclusions

Logistics is one of the prominent activities of healthcare services and should be examined in terms of cost management. Logistic activities have critical roles in healthcare service production. Numerous studies indicated the importance of logistic activities in achieving quality of healthcare and better outcomes (Feibert et al., 2019; Landry & Philippe, 2004; Pan & Pokharel, 2007). Logistics are also responsible for many economic inefficiencies in healthcare services (Duque-Uribe et al., 2019). Human resources in healthcare, including medical staff, spend a significant portion of their daily efforts on logistics-related activities (Dobrzańska et al., 2013).

Logistic activities consume significantly high resources in healthcare. Cost is expressed as one of the significant challenges for logistic management in healthcare (Feibert, 2017). Cost control in healthcare services and a diverse array of approaches to reduce healthcare costs have been prior subjects of many studies. Literature verifies that the costs of healthcare services can be controlled and reduced by evaluating logistic activities in terms of resource consumption and non-value-adding steps (Aptel & Pourjalali, 2001; Deran & Beller, 2014). To ensure service continuity and quality of service, logistics should be observingly planned concerning cost data. However, cost allocation for logistical activities is carried out arbitrarily by many healthcare centres. Hence, this study aimed to explore the logistical costs of healthcare services using an activity-based approach to address this problem.

The results of the study showed that logistic activities absorbed significant costs of the medical centre. Activities related to information processing have the highest proportion of total logistical costs. Patient services and invoicing account for nearly 35% of total logistical costs. Considering their significant role in income collection, it is important to control the efficiency and quality of these activities. The results also showed that costs of transporting have a significantly higher share. Hospitals and medical centres may benefit from considering the transportation cost to adopt new technological ways for transportation. Another important cost centre is maintenance services. These services consume a high proportion of resources. Activities related to cleaning such as laundry, medical waste and sterilisation are accounted for 15% of the total logistic costs of medical centres. Costs of purchasing and warehousing were accounted for 12% of total logistical costs. Hence, the distribution of logistical costs can be expressed as 35% for dissemination of information, 20% for maintenance services, 17% for transporting, 15% for cleaning services, 5% for warehousing and 7% for purchasing.

Another important result of the study is that ABC is an effective way to examine logistic activities of healthcare services. This approach provides a wide array of significant evidence on activities in terms of their mission, relationship with other activities and resource consumption. Managers can benefit from the ABC approach to have a better understanding of the business processes and cost management issues. ABC produces more useful cost information that helps managers to be able to make more accurate decisions. Thanks to its methodology, it enables managers to evaluate activity centres in terms of their contribution to the profitability of healthcare businesses. It is also possible to examine non-value-adding steps of each activity centre by combining the ABC method with business process and lean management tools. Managerial implications can benefit from the cost data provided by the ABC method to evaluate existing practices and patient profitability or to make efficient decisions on new investments.

This study contributes to the literature on healthcare logistic management in several ways. First, the study provides important insights into the logistic activities in healthcare services by examining a wide array of activities. Logistics is mainly considered as the flow of medical materials within the health business or the management of inventories. By examining the whole medical care process, this study unveils the relationship between different logistic activities and their importance in the care process. For instance, patient services and invoicing activity centres are defined as indispensable parts of medical care because of their critical role in data processing and income generation. With the ABC approach, these activities become more apparent in terms of their role and importance in the medical care process by examining workflow and actors pertaining to activity centres. The study also provides significant information on other logistic activities by dividing them into specific centres. For instance, it is possible to examine cleaning, waste and sterilisation management activities separately and determine dependencies between them. Consequently, managers can benefit from the concept of the study to determine and evaluate logistic activities in their hospitals/medical centres.

Second, the current study highlights the costs of logistic activities, which are mostly oversight by the managers. Cost data are important to evaluate the efficiency of activities. While considering material cost in service production, it is also important to calculate the cost of the activities that are carried out to transport those materials, and information processing and disseminating within the process. The results of the study elucidate those logistic activities absorb significant resources in quantity and monetary value. The cost information provided by the study can be used as a tool to prioritise logistic activities. Consequently, the study provides information on the share of the cost of logistic activities in the total cost of service in the healthcare centre. The study showed that logistical costs have a share of approximately 15% of the total cost of the medical centre. This information highlights that managers should consider the costs of logistic activities when the profitability of services is evaluated. Pricing decisions on services can be more accurate if the burden of logistical costs is considered as well.

The study is not without limitations. The scope of the study is limited to calculating the costs of logistic activities. Even though the study examined the role of logistic activities in healthcare service production, it was not possible to allocate logistical costs to patients. Future research may consider determining the share of logistical costs in a specific treatment or by medical departments by using time-driven activity-based costing (TDABC). Such consideration can provide significant managerial implications to the literature. Future studies also may consider using cost data as a performance measurement indicator for logistic activities.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Notes

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