It is well known that slow turning inventory has a negative affect on an organization. While not common, you can still find general storeroom inventories turning at less than 10 and operating room inventories turning less than 2. Slow turning inventories have high carrying costs which directly affect the organization’s bottom line.

Much of industry has resolved the problem of excessive inventory by adopting a just-in-time (JIT) program. This works in industry due to their ability to forecast, schedule production, standardize product and practice and electronically communicate with their suppliers. Some may dispute, but I contend that there is no such thing as JIT in healthcare. The closest we have come is stockless programs that move some of the inventory back to the distributor and some of the inventory closer to the user.

Because of the unpredictable nature of providing healthcare there will be inventory – probably substantial inventory – in hospitals either in storerooms or in department locations. Given this fact does our goal change from eliminating inventories to making them as small as possible? Many have adopted this strategy. It makes sense, doesn’t it? If turning your inventory 12 times instead of 6 is good, then turning it 18 times must be better and 26 better still. If one could get to 52 turns, would that be best?

What we often forget is that optimal inventory levels come from balancing the cost of ordering with the cost of holding inventory. Most inventory control practitioners have seen the economic order quantity (EOQ) formula at some point. Inventory managers use this formula [EOQ = the square root of two times the annual usage times the cost to issue a purchase order divided by the unit cost times the inventory carrying cost] to determine the optimal reorder quantity for items ready for reorder. While applying this formula does not work well in most healthcare inventories, the theory behind the formula is sound. The more often you order an item in small quantities, the more costly it is in terms of purchasing, receiving and accounts payable resources. But if you order an item less frequently in larger quantities the inventory carrying costs escalate.

Turnovers overturned?

So an optimal inventory level is not the same as the lowest possible inventory. The optimal level is one where the combination of total ordering costs and total inventory carrying costs are the lowest. Order more frequently and the increased ordering costs are higher than the decreased inventory carrying costs. Order less frequently and the increased inventory carrying costs are higher than the decreased ordering costs.

Once this concept is accepted then the next step is to determine the desired turnover rate for each inventory. Each inventory may have different ordering costs and carrying costs. Ordering costs are influenced by the level of automation used and the salaries of the individuals ordering, receiving and paying. Carrying costs within an entity will change primarily due to obsolescence and, to a lesser degree, the value of space. One other factor that can significantly affect turnover rate is the need for safety stock. This is the extra stock that is kept in inventory to cover variations in demand and delivery delays. It also includes those low use products that have to be on hand for emergencies and/or infrequently performed procedures.

Two other things that can result from higher turnover rates are increased costs due to the need for emergency orders and possible negative outcomes due to lack of product. When turnover rates are too high, the incidence of stockouts increases. This causes higher freight costs as items must be overnighted and extra labor to process the order and deliver the goods. As stockouts increase, staff can become dissatisfied. Worst of all, patient care can suffer.

There is no magic turnover number that represents an optimal turnover rate. The optimal rate depends on the circumstances of the individual organization and the individual inventory. An organization that is heavily automated – using EDI for purchasing, confirmation, advance ship notice, and invoices – will have lower ordering costs and can turn inventory more at less cost. An organization that closely monitors usage can reduce obsolescence which reduces carrying costs so a lower turnover is more acceptable. The O.R. inventory needs more safety stock then the storeroom so its turnover is expected to be lower.

As a general rule of thumb, the following turnover rates can be viewed as targets:

• Storeroom 15 – 18

• Pharmacy 18 – 24

• Food Service 20 – 26

• O.R. 6 – 12

• Cath Lab 12 – 15

If you are turning an inventory at rates lower than these you should dedicate some resources to better manage the inventories and increase the rates into the target range. If you are in the target range you should not expend any efforts to turn more frequently. Finally, if you are turning at rates significantly higher than the target you should look at the actual costs you are incurring to maintain that turn level versus the increase in carrying cost you would incur by increasing your stock levels and turning at a lower, optimal rate. Your customers, staff and CFO will thank you. HPN