1 Chapter I Introduction I.1 Background Hospital is a service sector that becomes the attention of many researchers since it is the biggest service in the healthcare sector with the most room for development. In the healthcare sector, hospitals are now the unit of analysis because hospitals take the most significant account for giving medical facilities and services to patients. The World Health Organization (WHO) states that hospitals are essential components of social and health organizations that serve the community by offering complete services, curing illnesses, and preventing disease. However, in carrying out hospital services, some problems arise. Based on the literature review, the problems that arise and exist in hospitals around the world can be grouped into several parts. The first is related to hospital care's high cost (Kwon et al., 2016; Bvuchette et al., 2020). The high cost of hospital care is related to inefficient business processes, including the hospital's inventory system (Budhiarta et al., 2019) and high logistic costs (Kwon et al., 2016). Second, the quality of health services is low. Quality includes health workers and medicines services accompanied by a hospital environment for both inpatients and outpatients (Rachmania et al., 2015). This can lead to a drug shortage with or without disruption. Third, technology adaptation becomes another issue in the hospital supply chain (Kritchanchai et al., 2019). Fourth, maintaining compliance with government regulations regarding the upper limit price policy for all patients' medicines and health services (Deloitte, 2019). The newest statement from Deloitte (2020) agreed that the problem of hospitals around the world includes rising healthcare expenses, shifting patient demographics, shifting consumer demands, new competitors, and intricate health system. Based on those problems, the need for efficiency for hospitals is critical because the health sector's cost continues to increase from time to time. Mckinsey (2019) stated the most challenging part is that healthcare costs are escalating. In Organization for Economic Co-operation and Development (OECD) countries, according to OECD Health Statistics (2020), health spending increased by 2.5 2 percent in 2018 and by about 2.4 percent in 2019. Since 2017, OECD health spending as a percentage of GDP has averaged around 8.8%. Hospitals account for 29% of overall health care expenditure. Therefore, OECD represents that developed countries are facing the problem related to increasing the healthcare cost. Those problems in hospitals have also emerged in an emerging country, specifically in Indonesia.