How costly is the consignment convenience?

by Fred W. Crans

At the time I wrote that article, there was a great deal of misunderstanding of the concept of inventory management. After a quarter century, it seems little has changed. Today, consignment is looked at as a way of reducing high-dollar inventories while maintaining instant access to needed supplies.

When the article appeared, I received an angry telephone call from the company’s CEO. He thought I was knocking the concept that his company was trying to implement. After I explained to him that the point of my article was not that his company’s offering was suspect, but rather that regardless of where the products reside in the accounting "books," their use still has to be prudently managed, his criticism and anger abated.

There is nothing wrong with the thought process behind wanting to
increase cash on hand and maintain critical supply access, but the problem is not that simple. Before trying to place everything in the house on consignment, let’s take a look at some key considerations.

How often does the product "turn?" If a significant amount of the product or products you are considering placing on consignment are used within an accounting period (month), it is probably wiser to calculate appropriate on-hand levels and manage the product as either a direct expense item or an asset inventory item. That is why commodity items, such as medical/surgical supplies available via normal distribution and "stock" linen items, are better managed via traditional methodologies. Having easy access to a potentially infinite supply of these items might very quickly cause expenses to rise — especially when linens are involved. My experience with easy access to linen is simple — if it’s there, it will be used. Thus, consignment as it relates to linen does bring with it an accompanying cost for the convenience of "having it there." For commodity items I would recommend improving processes, not on-hand quantities.

For physician preference items and key surgical items, the water becomes more muddied. Many times manufacturers will use consignment as an introductory strategy, most especially with product lines where another, more reticent supplier may not be offering consignment as a management strategy. An example of this can be found in the orthopedic screws and plates arena where a hospital might have to lay out $300,000 or more to have all that is needed on hand. Traditionally the market leader has not wanted to spot the hospitals that much money for products that turn less than once per year. Now vendors trying to enter that product line have begun to offer that as an option. The caveat here is that no matter how attractive the financial offer is, the products themselves must always meet the clinical needs of the customer first and foremost.

Most consignment currently revolves around implantable devices. The key to managing what and how many devices should be kept on-hand resides with the healthcare organization. Ultimately, consignment agreements place the healthcare organization at risk for "truing-up" shortfalls, so great care must be given to writing clear policies and procedures for managing items selected for consignment. Those policies should include:

1. What items will be consigned

2. How frequently those items will be counted, and by whom

3. Who will be responsible for monitoring out-dates (if applicable)

4. How the vendor can gain access to consigned items. ("Borrowing" items from consigned supplies for use at other healthcare systems by vendors who have carte blanche access to storage areas can be very problematic)

5. How utilization and re-order will be managed

Another concern associated with consignment items, such as implants, relates to the introduction of new technology. A healthcare organization should not fall prey to believing that just because a particular product line is consigned those consigned products will be the "product of choice" for the vendors who have consigned them. Most implant vendors are incented to push new technology, and most often that technology is not consignable. Therefore, "bait and switch" becomes a threat — exacerbated by the ubiquitous presence of the helpful sales rep in the surgical suite. Perhaps more than anything related to consignment, managing access of the vendor to the surgical suite and managing the introduction of new technologies can have a favorable impact on the cost of care.

Finally, inventory in and of itself is not a bad thing. When inventory is managed as a perpetual asset, replete with cycle counts and regular adjustments, operating costs can be readily controlled. It is when inventory is managed as a periodic asset or not as an asset at all that the groundwork has been laid for financial disaster.

Consignment is one tool in the armamentarium of inventory management. Its use should be carefully considered and all the implications considered before its implementation.

It is a way, not the way.