Experts spotlight success strategies

Unfortunately, healthcare organizations on the provider side today have yet to embrace and incorporate such a philosophy already in place among healthcare product manufacturers and distributors. From using a variety of data management tools to organizing supply storage areas as efficiently as possible, inventory management within the supply chain profession is vital to hospital operations and patient care quality.

Among providers, there’s plenty of room for improvement and for consulting firms, group purchasing organizations and vendors, insatiable business prospects. Some providers acknowledge that inventory management represents the lifeblood of the supply chain. To continue the clinical metaphor, when those veins get clogged stenting may be necessary, if not bypass surgery to a consulting firm stocked with former healthcare supply chain managers, GPOs and vendors.

As a result, Healthcare Purchasing News Senior Editor Rick Dana Barlow tapped a variety of experts from providers and suppliers for anecdotes, innovations, success stories and useful tips on best practices in managing inventory – on paper and in practice – from shelving to software to storage products to simple elbow grease.

What they had to say may be old hat for some, or helpful reminders for others, but at the very least their words of wisdom should be educational and enlightening, highlighting that some great work is being done in the trenches.

Consignment is a great solution for hospitals. The vendor brings in a large amount of supplies to store at a hospital. A hospital is only billed for the supplies at the time of use. The problem with consignment is that many times, there is no paper trail or record of the consignment inventory at the hospital, and it may rely on supplier’s records. Hospitals could have as many as 32 different consignment vendors. Each department (e.g., OR, Cath Lab) is responsible for the consignment inventory, which makes management of the inventory difficult. Oftentimes, the hospital is used as a regional storeroom for suppliers. This becomes a huge liability for the hospital when it comes to theft or a possible fire.

For example, one Broadlane client hospital, part of a large integrated delivery network, ran into a situation where more than $1 million of consignment supplies were stolen. A hospital employee and a supplier representative were both involved in the deception, which led to a large hospital liability and prompted all consignment goods to flow through the central materials department. It also prompted implementation of a consignment form, which is set up much like a no-charge purchase order and is altered when supplies or equipment are used or removed. The consignment goods are also placed behind in a secure location. Like many forms of controls, segregation of duties by involving materials management would not allow this to happen.

Another problem with consignment is the liability for supplies and equipment a vendor might remove from the premises and forget to inform the hospital if there are no controls. This causes problems when items are needed and they have not been replaced or the paperwork on the vendor side does not properly account for the items being removed. Many times suppliers say they have no consignment inventory, but when a hospital locates inventory, the suppliers produce signed paperwork showing ownership that the hospital is unable to verify.

For example, two hospitals in an IDN are located across town from each other. A supplier removes stents and pacemakers from Hospital A because they are needed at Hospital B. Hospital A would never have known, except a hospital employee noticed the supplier removing the cardiac supplies. The employee was told the supplies would be replaced at Hospital A in good time. The problem presented: What if the supplies were not replaced, and Hospital A needed them? The consignment form process was also implemented at this system, funneling all consignment inventory through the materials management department, to track consignment supplies. Also, all supplies and equipment were kept in a secure location where only a hospital employee could allow entry and exit of consignment supplies and equipment by the supplier.

• Identify all parties involved in the daily supply chain process from decision making to purchasing, including all departments, people involved, value analysis teams.

• Evaluate all parts of the materials process, including consignment.

• Ensure measures are in place to track all supply and material entry and exit from the materials management department, cardiac cath lab department and surgery departments, including consignment products.

• Communicate with all stakeholders in the hospital supply chain on a regular basis.

• Design a consignment process that all parties buy into and manage to that process.

• Develop a contract document that incorporates all the features to protect the hospital and supplier that is generic in format, and standardize across your system wherever possible.

• Assume nothing.

I am working on a project in Boston at a major hospital, which needs to remain nameless, with Appleseed Healthcare Resources. The project is centered around reducing expenses in their cardiology area, and we are doing inventory cost reduction through both PAR optimization and strategic sourcing.

We expect to save them a minimum of $1 million. While I firmly believe that materials [management] must be proactively involved in gaining control over the inventory process throughout the hospital, it has been very gratifying to involve the department clinicians and their business manager in the process. What we have learned is that they were only monitoring expenses from month to month and watching their budget numbers, which had been increasing steadily but at a rate they thought was acceptable.

They had never taken a physical inventory and really had no concept of how much product and dollars they had on the shelf. They simply reordered whenever they used something and also ordered new items as they came on the market without eliminating older products – anything to keep the physicians happy. As a result, they had significant issues with products expiring and having to be tossed and also with space issues. They were spending about $7 million a year, and we determined that they had four months of supply, on average, available. When this information was shared with them and the physicians, we were able to set some reasonable PAR levels, use up product ‘from the pantry’ and not reorder right away, which had a major impact on their expenses and returned their inventory to a more realistic level.

I suppose the moral of the story is that materials [management] needs to be proactive and manage inventory wherever it is in the hospital and especially work with the clinical departments to control the areas where the significant inventory dollars are being spent. The results will be much higher and have a longer lasting effect when materials [management] takes the time to educate the clinical department in basic principles of inventory management and directly involve them in the process.    

Although hospitals do have patient outcomes and safety considerations, you should not believe those who say that these particularities and others of hospitals result in supply chain issues and sound supply chain practices differing substantially from those in many industries. Industry sectors may themselves differ from one to the next, but recognized practices and the use of enabling technologies can be adapted to the specifics of these varying sectors. Therefore, leading edge technology and practices applied to manage inventory in the industrial world should also be considered as potential solutions to hospital supply chain issues.

I would further suggest that you not accept being told that your hospital, city or region is different from others. Basic issues pertaining to supply chain practices in hospitals are largely the same from one hospital to another in industrialized countries around the world, and leading practices working elsewhere should therefore work in your organization.

Another piece of advice would be to get back to basics. One of the basics that we learn when studying inventory management is the concept of EOQ (economic order quantity). The formula for EOQ is the following:

The formula being what it is, we tend to forget it quickly. However, the basis of the formula is to consider the balance between inventory and process costs when managing inventory. This notion is often forgotten, with inventory reduction achieved to the detriment of inventory management process costs.

Rather than applying the formula per se, simply keep its concept in mind. In certain cases, inventory levels are kept too low; instead, optimal levels that take into consideration inventory management process costs should be strived for, provided they are supported by proper mechanisms to ensure stock rotation and consumption prior to the expiry date. Adapted storage and replenishment systems help achieve this objective.

In addition, you should consider that not all products are alike, nor are all user departments. Appropriate inventory management solutions can therefore also vary from one product and department to another. As in the industrial world, the value of an item should influence the systems and processes put in place to control it. For example, gauze sponges and implantable defibrillators should not be managed in the same way.

However, service considerations for users must not be affected by these decisions, as certain low-value items with high-frequency usage can have a major impact on users if inventory is not managed properly. This also holds true for user departments — their issues and dynamics are not all the same. I would suggest that particular attention should be paid to clinical specialty areas, such as the operating room and the cath lab. Beyond the fact that these units usually represent high-volume users and consume the most expensive products, the role that supplies play in the daily operations of these areas is also more important than in other clinical areas. No one inventory management system or approach is a panacea for all products and departments.

Attention should also be paid specifically to the ‘non-stock item’ category. These items, which are purchased directly from an external source, typically represent one of the areas of greatest opportunity in supply chain improvement. In most hospitals, the guiding principle behind the categorization of these products is based on the number of departments that use them. When a product is required by multiple users it is kept in a central location, such as general stores or the distribution center. Therefore, many products used in high-consumption specialty areas end up as non-stock items.

What tends to happen with non-stock items is that their management is left to clinical users without the tools and support normally provided by materials management for stock items. It is not that the decision to manage certain supplies as non-stock is wrong — in fact, managing products in this way can be quite cost efficient with the right process — but rather that most processes and tools put in place to manage these products are lacking. The replenishment processes supporting product categories should be transparent and seamless to clinical users regardless of whether they are stock or non-stock items.

I would also recommend that a focus be placed on slow-moving items. In most cases, inventory management attention is paid to high movers. We typically hear about these due to stockouts, and therefore strive to ensure that there is sufficient inventory on hand to avoid running short. In the meantime, slow-moving items can have inventory levels that are too high, thus freezing capital needlessly, using valuable space inappropriately, and increasing the risk of shrinkage — or worse — the use of expired products on patients. Material management applications providing inventory optimization tools should be used on an ongoing basis to address this situation.         

Finally, I would suggest that attention be given to the overall internal supply chain. Material management departments tend to focus their attention on primary storage locations. These locations are defined as a central area in user departments where material management staff go to determine needs and deliver products. From this point, products are often redistributed by user department personnel to bring them to locations closer to the point of use, which we refer to as secondary storage locations. Typically, this link in the supply chain is handled without supply chain practice considerations or appropriate management tools. In fact, it is not unusual to find more inventory in the combined secondary storage locations than in the primary location supporting them.

In 1958, Jay Forrester, a professor who went on to become renowned for his supply chain management theories, simulated distribution network response to demand fluctuation and found that an increase in sales of 10 percent at the retail level translated into a 40 percent production increase six months later, thus amplifying variations and time lags. He named this phenomenon the bullwhip effect.

The bullwhip effect also applies to the internal hospital supply chain because of the many touch points and storage locations between the receiving dock and the point of consumption, which in turn, due to the amplification of variations and relative time lag, creates internal backorders and unnecessarily high inventory levels to offset them. To avoid this situation, material management should assume responsibility for inventory management throughout the supply chain and put in place the necessary tools to manage this inventory.

I worked with a hospital that heavily used Multistix, a urine analysis product, and while the item was not expensive or vital, inaccurate inventory counts still impacted patient care and quality.

Here was the problem. Better than half the time the staff tried to pull the product, it wasn’t available on the shelf. We later found out that one of the distribution staff members didn’t pay enough attention to the units of measure (UOM) while issuing Multistix. Every time the issue was generated, one strip was issued and a complete box of 100 strips was distributed. The system recorded 99 strips on hand, reporting an inaccurate inventory count. To compound the problem, the materials management information system (MMIS) never hit its reorder point because, by its count, the hospital had sufficient on-hand quantity.

It didn’t take long before the hospital recognized the issue and implemented several initiatives to correct the problem and improve inventory accuracy.

First, the materials management team implemented education sessions. If it found inaccurate item counts, the team discussed the problem in its weekly meetings. When warranted, the materials manager scheduled a training session with the issuing department to review the most efficient ways to use the product in delivering high-quality patient care. And the team used the opportunity to provide refresher courses so requisitioners remained up to speed on using the MMIS.

Next, they trained the distribution staff to make immediate adjustments when it found on-hand quantity (OHQ) issues. Because the MMIS was fully automated this immediately impacted the purchasing process, enabling quicker reorders for items that had less than the minimum reorder quantity on-hand.

The ‘A’ cycle count list was changed to focus on the items with on-hand inaccuracy issues and the team generated reports at the beginning of each week instead of once a month. This helped find and fix items to prevent any potential patient care issues. It also helped decrease on-hand discrepancies. 

The hospital also modified the stock-out report. Initially, they set it up to list items once they reached zero counts, but they changed the report to highlight the products with OHQ at or below the minimum stock quantity. This allowed the distribution staff to manage items before they became a stock-out problem and to notify the purchasing staff, in advance, of any critical items needed for purchase.

Finally the department implemented an incentive program. The distribution staff member with the fewest number of incorrect stock picks was given an award and dinner paid for by the materials management department. In order to be eligible for a wage increase, employees had to keep their picking errors below 3 for the year.

The hospital was quick to realize benefits from the new process. It reduced the amount of time used to resolve OHQ issues. It dramatically curbed expenses from shipping products overnight. Staff morale improved because they felt more directly involved in patient care. Ancillary departments came to trust and rely on the materials management department. And most importantly, patients benefited from the higher quality of care clinicians can provide when the materials management department helps departments maintain optimal inventory levels. 

• Offer education sessions to reinforce the impact inaccurate inventory counts have on patient care and customer confidence. Refresh employees on how to fully use the MMIS tools available.

• Require your distribution team to make MMIS count changes when found during the day, not at the end of the day or week.

• Add problem products to your ‘A’ cycle count and make the ‘A’ group small enough to be able to count it on a weekly basis.

• Change your stock out report definition. Instead of looking for products that are at zero, look for products that are at the reorder point.

• Create a program, both formal and informal, to recognize your team members for accuracy.

• Make the clinical staff your partners and help them understand the impacts that supply chain management can have within the hospital. Be sure to engage staff at the point of use of supplies across all locations and listen to their needs. It is also important be able to report information to clinical management. While it is not the most important thing you do, reporting can lead to insights on potential areas for improvement and influence the overall supply chain philosophy of the hospital.

• When managing inventory, it is important to keep in mind that the most used items are not always the most critical items to the supply areas. Items may not be in high demand, but they are necessary to keep on hand.

• Surgical supply items often appear to be very similar, but they can each have very discrete nuances that are relative to the clinical needs of any given patient. To cover the spectrum, it is considered best practice to keep an appropriate range of items in stock such as surgical stents, balloons and guides.  

• Product availability is critical and can be a life or death matter. In areas such as the ICU, there are items that simply cannot be out of stock. It is important to identify these items and set up alerts for reaching low threshold stock levels.