Inventory management may be a basic function for supply chain professionals, but it always helps to learn new tricks to perform better. Healthcare Purchasing News asked a variety of experts for sure-fire best practices – beyond the obvious – for successfully managing inventory. Here’s what they shared.

Create a mindset that inventory is a hidden cash reserve that should be in your hospital’s bank account if it isn’t needed to support your operational requirements. A typical 400-bed hospital has $6.5 million, or 7 percent of their total supply spend, tied up in hidden cash reserves in its official inventories at any given time. This money can’t be used for any other purpose if it is on your hospital’s shelves or in your cabinets. Consequently, we need to educate our department heads and managers that their inventory assets need to be thought of as cash on their shelves and cabinets. If stock isn’t needed or can be reduced, then let’s return this cash to our bank account where it can be readily used to pay salaries, benefits or other hospital operating expenses.

Remember that inventory expands as the space to hold it is made available to store it. I know this truism is accurate since I have successfully managed a 168-bed hospital’s storeroom inventory out of three very small storage closets. I’ve also visited a client’s 350-bed hospital where their warehouse was the size of a football field, enabling them to store one-year’s worth of inventory on almost everything they bought. As counterintuitive as this might seem, your goal shouldn’t be to have more storage space at your hospital, but just the precise amount of space to enable you to be operationally efficient with your time, labor and resources – no more or no less!

Inventory turns shouldn’t be the only measurement you use to lock down your inventory cost. Traditionally, healthcare organizations only use one measure for their inventory performance – inventory turns. While this metric is a good rule of thumb to measure your inventory efficiency, it can be misleading. Our clients have found that it is helpful to have more than one measurement to help them triangulate their ideal inventory levels. The second inventory measurement they employ is percentage of official inventory/total supply spend. This gives them another ratio to measure against peer hospitals to ensure that they are pushing the envelope on their inventory turns. Lastly, they use an activity-based measurement – patient days, procedures, cases, tests, etc. – to measure the uniqueness of their hospital with others in order to weed out anomalies in their inventory practices. You might think that this is just more work for you, but the savings in inventory dollars is 10-fold more by doing so.

All departmental inventories over $250,000 should be considered official hospital inventories. We are observing too many hospitals that are only counting and controlling a few of their hospitals’ official inventories, such as warehouse, operating room and pharmacy. At the same time these hospitals are ignoring millions of dollars of unofficial inventories in a half a dozen of their other departments, such as cardiology, laboratory, food service, etc., whose value is equal to or greater than their hospitals’ official inventories. If we are to become truly serious about lowering all of our hospital-wide inventories to acceptable levels, then as inventory managers we need to manage and control all of our hospital inventories over $250,000.

A simple inventory scorecard is the easiest way to manage and control your hospital-wide inventories. We are observing that more and more supply chain managers are utilizing simple inventory scorecards on a monthly basis, to report and then compare their inventory efficiency against target values, thus ensuring that they keep these important assets at the top of their mind. It’s the simplest and easiest way I know of to keep these assets from becoming bloated, distressed or unsalable. What is measured and visualized happens!

Inventory cannot be managed from a distance. If you want to control inventories in non-traditional materials departments, such as Cath Lab, you have to be willing to work with and involve their clinical staff and physicians in the process until they are comfortable and gain confidence in your ability.

When working on controlling departmental inventory it is best to reduce by incremental change rather than all at once. Departments get used to seeing shelves or cabinets full and tend to overreact if you make drastic changes. Making gradual changes has the same overall effect and avoids potential mistakes. 

Base inventory levels on data, not emotion. All too often we increase inventory levels based on perception – we always run out – or an unusual occurrence. Always review actual usage, order-ship time and the need for safety stock before making any changes

Optimize turnover, don’t just go for more. With the cost of money near zero there is very little actual cost to keeping inventory other than obsolescence. Too often the quest for high turnover numbers results in higher costs elsewhere, like overnight shipments and overtime on the receiving dock. If carrying costs are only 5 percent, reducing inventory by $100,000 only saves $5,000. It doesn’t take too many overnight shipments to offset this.

Use ABC analysis to set levels. Not all items are created equal. Based on the ABC theory, approximately 10 percent of your items make up 70 percent of your inventory throughput. By selectively concentrating on higher turnover of your A items, you can virtually ignore your C items and still maintain an exceptional turnover rate.

Use cycle counting to keep things accurate. For a perpetual inventory there is no better method to maintain the accuracy of an inventory than cycle counting. With cycle counting you are continuously counting small parts of the inventory. It allows you to discover errors before they become problems and discover trends. By recording results you can track accuracy over time and find ways to improve it.

Reducing inventory by discarding obsolete items has little to no value. Especially with departmental inventories like the OR, I have found that the most common way to reduce the inventory is to go through and finally discard all the junk that has accumulated and serves no purpose. In fact, if it is an asset inventory, this has a negative effect on the bottom line. Don’t get me wrong, you do need to take out items that are no longer being used. But the key is to identify items as they become obsolete so you can attempt to get some value for them by returning to suppliers, using us, or selling to someone else.

Simultaneously employ zero on-hand and ABC cycle counting methods. Cycle counting is a process where a small number of items is counted on a daily basis to maintain the accuracy of the recorded amounts on hand in the inventory system. This inventory record accuracy (IRA) is crucial to reduce inventory costs and cycle counting paired with effective reorder points and reorder quantities ensures that needed products are available when the clinicians need them. Using these two cycle counting methods allows you to have a highly accurate inventory with minimal daily effort.

Increase upstream visibility. At a time where credit is tightening, many suppliers may encounter liquidity problems that could cause you stockouts if you are not prepared. Through some basic techniques, you can improve your visibility upstream in your supply chain to give yourself time to prepare if a stockout is about to happen.

Account for variability of demand and delivery lead time in order points. It is important to stress that the accounting for variabilities of demand and lead time are extremely important. The higher the variability, the more inventory you will need to keep on-hand to ensure a high availability of product. If you only use averages, your inventory service level is 50 percent by definition. It is important to include the statistical function ‘standard deviation’ in your order points to appropriately account for variability in both demand and lead time.

Tune-up preference lists. Preference lists drive issues history in your MMIS. This can create a large amount of false demand if there are many items on preference lists that you do not use during most procedures. By establishing a methodical review and update program for your preference lists, you can ensure that you minimize efforts to re-shelve unused products and reduce the amount of purchases for items that you do not need.

Reduce tidal volume of just-in-case items. When preference lists include many just-in-case items, it creates a large volume of products – which I compare to ocean tides – that leave the perpetual inventory and return to it in a cyclic manner. This tidal volume of items requires that more supplies need to be carried to ensure that every case cart has the item, even if only one case – or no case – for that day actually uses it. Additionally, this back-and-forth product flow represents sizeable opportunities for the sterile products to become shopworn, damaged or lost.

Consider automation wherever possible to manage inventory. It reduces the dependency on human resources and in doing so increases service level stability. When calculating the return on investment for automation, consider the cost-to-impact ratio, and ensure that you take into account the overall impact and not only the data collection processes that are eliminated or reduced. Also consider the impact on supplies, inventory and shrinkage, as well as back-office processes, such as a reduction in lines and orders generated at the warehouse.

Along with appropriate automation, I would suggest that attention be given to the overall internal supply chain material flows. Materials management departments tend to focus their attention on primary storage locations. These locations are defined as a central area in user departments where materials management staff go to determine supply needs and deliver products. From this point, user department personnel often redistribute products to locations closer to the point of use, which we refer to as secondary storage locations. Typically, these storage locations are handled without any supporting technology or processes, and inventory levels are intuitive. In fact, it is not unusual to find more supplies in the combined secondary storage locations than in the primary location supporting them.

When inventory management solutions are put in place, I suggest that they be considered as corporate rather than materials management projects. While the objective of materials management should be to make needed supplies available at the right place and time with minimal involvement from user department personnel, inventory management issues cannot be seen as ‘owned’ by materials management, as no system can resist careless actions by users. Cross-department support will ensure that the initial set-up takes into consideration the needs and constraints of all parties involved. It will also foster compliance with processes and facilitate adjustments as needed.

Physical considerations should also be a priority in inventory management. Indeed, there is no point ensuring that the right supplies are available at the point of use if they are difficult for users to find when needed. The storage areas for supplies at the point of use are often cluttered, which further complicates the finding and retrieval of products. Often presented as a physical constraint issue, this can usually be resolved by storing only the most commonly used supplies in the appropriate quantity at the point of use. The use of adapted high-density storage equipment and visual references, such as color coding, will also facilitate this effort. I suggest that the Lean 5S approach be used to maximize the outcome when arranging physical layouts.

Ensuring that the right inventory levels are kept on hand is key, but this does not necessarily mean reducing supply levels. We often find that inventory levels are maintained too low on fast movers and much too high on slow movers. In setting optimal PAR levels, take into consideration the total inventory carrying costs, which include the cost of replenishment processes. Many supplies consumed in hospitals are of low value; in these cases, higher inventory levels should be kept on hand as long as they are supported by proper physical organization and processes, such as the Lean two-bin system, to assure stock rotation and consumption prior to the expiry date.

First, you need to have perpetual inventories in as many locations a feasible. If you are not taking advantage of automation, you can’t control the process. We do a very good job of managing about 25 percent of a hospital’s inventory in the general stores. However, most don’t do a very good job managing the clinical or end user inventories. This takes the dedication of resources, but the benefits will be well worth it.

Use consignment or vendor owned inventories, wherever possible. Not only does this free up the hospital’s cash, but it helps to control the introduction of new products. We won’t be stuck with obsolete product when new technology is introduced. You still have some level of responsibility so make sure you have an agreement in writing. Those vendors that say they never consign…Guess what? They do consign. They just keep it quiet.

Run those basic reports. Know your turns. Be able to justify inventory growth as a result of a new program or service. Know what product is moving and what is not and take action to return or use the items. Conduct an ABC analysis to know where to focus your inventory reduction efforts.

Don’t be afraid to look at JIT and stockless activities to reduce the hospital’s reliance on inventory. This does not mean you can completely eliminate your storeroom inventory, but you can certainly reduce it to just safety stock and those items not stocked by your distribution agent. Make sure you do the ROI assessment to insure there is a payback.

This is pretty obvious, but remember materials management is a customer service-oriented business. Work with your end users. Make sure you are stocking those items that make sense to the end user and provide the most convenience or bang for the buck.

Make inventory management a team effort. Every person in a department is impacted by supply chain’s activities. An understanding of the impacts help drive results.

Most supply chain organizations already know that the lowest-cost item is not always the most cost efficient. Analyze data to determine if low-cost and low-quality products are negatively impacting patient care and care outcomes.

There must be an understanding on how the physical layout and product proximity impact perceptions of supply chain effectiveness. Important questions to consider are as follows: If products are stored in a centralized area, would that reduce the number of places patient care staff must check for items? Or does a particular area need fewer supplies but in more locations to meet their patient care demands?

Have a holistic approach to supply management in a department. Does it make sense from the caregiver’s viewpoint to have one location for bulk supplies and another location for a lower unit of measure? Do they see the items differently? How can supply chain meet different distribution needs of the two management models while providing the final product users a single view of having product when and where they need it?

Focus attention on areas where supply chain can have the most impact, like physician-preference items. Place the same rigor around managing those products that is placed on lower value but frequently used items. Working with the clinicians to streamline management in those areas is challenging but can provide significant rewards.

These apply to inventory management issues in the specialty procedure departments, particularly the OR:

Garbage in/garbage out. Make sure that you have accurate utilization data, which is used to calculate your PAR levels and therefore reorders. It is all too common for products to be documented incorrectly or not at all during procedures due to a number of system and process failures. These include: Confusing or inadequate product descriptions, lack of product information in the available documentation system, debiting all items from a case cart when only some were used, etc. This results in inaccurate clinical documentation, billing record and wrong inventory composition.

Don’t recount for the sake of recount. It’s a fairly common practice to conduct inventory recounts of all or select products in the inventory. What’s not common is learning from discrepancies in order to minimize or prevent the recounts in the future, which is the ultimate purpose of a recount. Find the root causes of discrepancies and address them. It is especially critical to do so because the discrepancies in the inventory likely mean discrepancies in the clinical documentation, leading to erroneous patient charts and billing records.

Beware of consignment. Consigned inventory can become not only clinical but a financial liability to the hospital if not properly managed and tracked. If your agreement calls for 10 consigned products on the shelves and a rep finds eight, you will be responsible for paying for the missing two if you can’t account for them – even if you didn’t use them in a case. By the same token, when multiple sizes are stocked for consigned inventory and only some are used regularly, the unused inventory is at a high risk of expiring, which eventually leads to less favorable pricing terms with the manufacturer, and ultimately the hospital becoming financially responsible for the waste of these items. Not to mention a risk of potentially using an expired product in a patient.

Document and measure waste. Are you aware of how much expired inventory you have on a monthly basis? Typically 5 percent to 10 percent of the inventory by value expires each month. How much inventory has been sitting on the shelves in the past six months or a year unused? It is not uncommon for up to 30 percent of the inventory to sit on the shelves unused for many months. Make sure to document the products you’re pulling off the shelves due to expiration each month. Take a look at your utilization and compare it to your inventory. Do that over a period of time to see where and how much you’re wasting and where you’re tying too many dollars in the unnecessary products. This should begin to inform your reordering practices and help you reduce and consolidate your inventory.

Revisit your data and optimize your time. As an inventory manager, your primary objectives are likely to ensure that the clinical products get reordered on time, and that they’re purchased at the most favorable price. Have you given much thought to revisiting the established PAR levels or frequency of orders? It’s important to revisit par levels frequently to ensure the product is still viable and its utilization hasn’t changed. This is also an opportunity for potential consolidation if another similar product is available and its utilization is increasing or decreasing. Do you know which products account for your largest consumption dollars and why? It may not surprise you that a small percentage of products account for 50 percent+ of all spending. What may surprise you is that the most consumed items by value are not your most expensive items. This means that finding a lower-priced alternative for a more widely available product option can yield tens of thousands of dollars in savings, when the item is used a few thousand times per year.

• Review and reset minimum and maximum reorder points semi-annually to ensure proper levels.

• Review quarterly usage data – generate reports showing items that have no or little movement over the past six-to-nine months.

• Follow up with end users to determine why items are no longer being utilized.

• Do not allow the general storeroom to be a dumping area so a department is not responsible for using the item. 

• Establish a benchmark of 15-to-18 turns per year for items that are being maintained in the general storeroom area.  

• Think innovatively – even if an item is used in only one department that does not mean the general storeroom cannot stock and order those items.  The critical factor would be number of turns and the items’ availability.

A consistent process is as important as the product itself. Consistency inherently improves any process and eases the identification of otherwise hard-to-find flaws within the inventory control process.

Everything goes in a bin. Defining a location and fixed amount of space forces organization!

Let nursing staff participate. Obtaining buy-in by allowing floor staff to help organize product and ‘recommend’ inventory levels promotes ongoing communication and cooperation.

It’s not always ‘best practice’ to set PAR levels based on usage. Fill the bin with high-volume, low-cost, non-expiring items so that staff always have what they need. Don’t waste valuable time on counting 10-cent items.

Monitor and address compliance. Tie staffs’ ability to record the stocking and use of inventory items to an incentive, such as pay, bonus, performance appraisal, etc.

• Implement annual and semi-annual physical inventories of all supply items. Reconcile to book balances, and adjust systems. Set targets for the organization.

• Cycle count supplies and reconcile weekly, based on supply velocity and value.

• When adding new items to inventory, assure that there is an item to be deleted and dispositioned to cash.

• Utilize supplies in a rotation fashion, first-in first-out.

• Utilize electronic barcoding or assistance to manage Periodic Automatic Replenishment (PAR) of supplies.

– Mickey Pettus, CMRP, vice president, Performance Services, VHA Inc.　

Look for ways to reduce the number of touches. Inventory turn rates are not as important as the number of times the supply chain has to touch the product. Many materials managers shoot for 24 turns per year. They’re fixated on the turn rate because they think it means they’re utilizing the product effectively. Unfortunately, it’s not always a good utilization of the human. You must be careful not to increase labor costs in your effort to reduce the supply costs. Reducing the number of touches streamlines the number of people involved.

Automate and use the data you capture to analyze utilization. Utilization data can help you decide which items should be kept in inventory, which should be kept on the unit and which should be ordered on an ‘as-needed’ basis. There is no shortage of good reasons for materials managers to automate and get information from their inventories. They also need to analyze the utilization data to determine, for example, if the lab is the only department that uses a certain supply. Perhaps that supply doesn’t need to be stocked in inventory; it needs to be stocked right in the lab. This reduces the touch points so the item goes from the supplier to the consumer in one step. On the other hand, if an item is consumed by everyone in the organization, then it needs to be in the warehouse. From there, you can control the touch points. This helps the materials manager right-size the inventory.

It also helps to right-size the PAR areas. Managers can analyze how much goes into each PAR area and how often so they can get it to where it needs to go when it’s needed. Do I want a delivery once a week? Once a month? The utilization analysis helps materials managers determine what it will take to satisfy a department’s needs for a given time period.

Control who has access to the inventory. The more you automate inventory replenishment, the more control you need over who can access that inventory and how. With all the talk being about automation, materials managers can lose sight of the fact that they have a wide-open warehouse or PAR area that anyone can access to remove stock without documenting the pick. No amount of automation can tell you who took the stock, how many and when. Instead, think about using a materials person to control the ins and outs of the physical inventory and data in these areas.

Involve the clinicians in making the decisions about how and where the inventory is stored. Before you can right-size PAR and warehouse inventory, materials managers need to involve the clinicians to understand what supplies are being used, who’s using them and where. The materials managers must build the clinicians’ trust by demonstrating that the supply chain has the accurate data and understands how supply utilization impacts patient care. Once this is accomplished, materials managers can engage with clinicians to right-size an inventory and decrease the number of touches. It’s a cultural change that enables both clinicians and materials managers to be well informed.

Cycle counting keeps you ahead of the curve. Annual inventory indicates whether the value of the physical inventory matches the book value of the inventory. The finance department needs to know this at least once per year. Unfortunately, the two numbers can become estranged in the full year between inventories. Cycle counting means doing 12 counts per year to replace your annual inventory, which results in a higher degree of accuracy throughout the year. It allows materials managers to capture product outages before it’s a problem for patient care. It tells the finance department if the value of the inventory is going up or down on a more frequent basis. Before committing to cycle counting, you first have to check with your internal auditors to determine if it’s allowable.