Why? Because something so esoteric and fundamental may not pass muster as even a minor item on the agenda. After all, clinicians and administrators expect products to be where they need them at any given time. If they’re not they’ll just order more and worry about the costs later, which ultimately contributes to the need for healthcare reform, let alone for more effective and efficient inventory management practices.

Therein lies the rub. Like anything else, you may not know how important or valuable something is until it’s gone. Clinicians and patients, however, can’t afford that. Neither can the Byzantine healthcare system.

What to do? Healthcare Purchasing News Senior Editor Rick Dana Barlow queried a variety of healthcare supply chain experts from providers and suppliers for anecdotes, innovations, success stories and useful tips on best practices in managing inventory – on paper and in practice – that could include shelving, software, storage products or even simple customer service.

Their recollections and recommendations represented key insights on what’s being done and perhaps what needs to be done to shore up the foundation of supply chain operations.

During my career as a consultant in the healthcare logistics field, I have had the opportunity to observe many supply chains and have seen countless inefficiencies that lead to reduced productivity and increased costs. On the other hand, I have also had the pleasure of participating in the implementation of innovative material management systems that optimize the supply chain value stream and maximize the supply budget, while reducing the overall time spent on material management activities. A characteristic often shared by these highly productive systems is that they leverage best practices and leading-edge technology drawn from the industrial sector. These practices, adapted to streamline the processes involved in the delivery of care, provide considerable payoffs to a healthcare system in dire need of cost efficiencies.

One such practice involves the adoption of lean manufacturing concepts, which emphasize customer needs, improve quality, and reduce delays and costs through continuous improvement. A few years ago, a major Canadian hospital turned to Logi-D to reduce the time spent by its clinical personnel on logistics activities, streamline its supply chain processes, and eliminate non-value-added activities.

Following an exhaustive study of the hospital’s existing processes and after building a solid business case, Logi-D implemented 2BIN-iD, its lean kanban/two-bin practice enhanced with proven RFID technology, in all of the hospital’s inpatient wards. This approach eliminates time-consuming (and often erroneous) demand-capture activities common to the PAR-level system. Needs assessment rounds are now a thing of the past, as replenishment is automatic and RFID-driven, and since demand capture is more accurate, so is demand response, as it is now based on actual consumption. In fact, this hospital has seen a drastic reduction in workflow-disruptive stockouts as well as urgent orders. It also enjoys reduced inventory levels and higher inventory turns, as the kanban/two-bin practice has a built-in stock rotation feature. Stock wastage due to expired supplies has significantly declined, which in turn has positively impacted patient safety.

The hospital has recorded impressive financial and productivity gains through more efficient control of its inventory and improved work methods. It has realized a one-time inventory reduction of 34 percent and a 50 percent decrease in recurring shrinkage costs. Other positive impacts have also been achieved, the most noteworthy being a 60 percent drop in the time clinical staff spend on material-related tasks — time that has been re-channeled towards patient care.

It has been said that the industrialization of healthcare is the only way to humanize the sector. This may seem paradoxical, but today it has been proven that by adopting industrial practices, hospitals can reduce labor costs and maximize efficiency and effectiveness, which ultimately leads to enhanced patient care.

One of the best, most practical inventory programs I’ve seen in recent years is the one operated by Bryan Buckridge, director of materials management, at Benefits Health System, Great Falls, MT. The storeroom inventory of $534,000 turns over more than 19 times annually, or approximately 14 days of inventory on hand.

How are they able to accomplish this? Benefits Health System makes full use of the Meditech reporting system and has coupled that with more than 100 PAR Excellence locations, insuring consistent demand information. The storeroom itself is extremely clean and well organized. Most of the bulk items are managed on gravity-fed shelving and purchased at a significant savings when a distribution center shut down. Bryan’s next step is to expand this level of efficiency to clinical inventory locations.

South Georgia Medical Center, a 335-bed non-profit hospital located in Valdosta, GA, needed to drastically improve the supply management process in their operating room. Seeking to establish a perpetual inventory management system that mirrored the success they had in the ER, the senior staff approached CareFusion with their supply management challenges in the OR. The objectives of the project were to demonstrate measurable financial savings and operational efficiencies such as improving clinician satisfaction, expediting and increasing workflow efficiency, reducing inventory spend and enhancing net revenue.

Prior to implementation, the OR was managing supplies on their own, outside of materials management. The OR had well over $2.8 million of inventory on-hand and they were spending more than $65,000 annually on dedicated personnel to perform annual inventory. There were numerous examples of inefficient manual inventory processes such as expiration date management to using notebooks for writing down information to keep track of tissues.

South Georgia partnered with CareFusion to implement Pyxis supply technologies, an automated perpetual inventory management system, throughout the OR, including the PACU, OR suites and sub-sterile supply and mobile specialty carts. Moving the supply inventory into the system was just one component of the implementation. The key to a successful implementation was a true partnership between South Georgia and CareFusion.

Since implementation, the system has provided the OR and materials management staff with valuable insight into the supply chain in order to optimize inventory and processes in the OR. In addition to improved inventory control, South Georgia was able to reduce on-hand inventory, promote product standardization and prevent duplicate orders. The system has helped improve workflow processes in the OR.

South Georgia’s ROI came to fruition quickly. In the first 12 months, South Georgia experienced a 208 percent net return on investment, including a $1 million reduction.

[Editor’s Note: South Georgia earned Healthcare Purchasing News’ inaugural SPD Department of the Year Award in 1993.]

When budgets are tight, it’s important to have a thorough understanding of your costs, including the cost of maintenance for surgical instruments. This could be daunting when you’re dealing with thousands of instruments, but technology can be a help. For example, our customers have online access to serialized tray tracking, as well as billing histories that are itemized by specialty. This data enables them to determine their average cost per set for each specialty – information that can be incredibly useful in developing a service plan for next fiscal year.

Regular maintenance is the key to ensuring surgical instruments are ready when the patient is on the table. But scheduled maintenance can be a challenge when instruments migrate from one tray to another. If you can’t count on finding the same instruments consistently in the same set, then you’re going to lose track of when each instrument was serviced. Some of our customers now use a simple tagging system to help keep sets together through reprocessing. Each time a set is sent from the OR for reprocessing, a distinctively colored tag is placed with that set. If any instruments have been removed from that tray for processing, the same color tag is used to mark the container in which those instruments are sent to the washer. On the clean side, the original tray can be reassembled, without any doubt that it contains the exact same instruments each time. 

The manufacturers aren’t giving surgical instruments away, so keeping your inventory in good working condition is important. Regular proactive maintenance inspections are key. It’s like getting an oil change for your car. It may be annoying to have to interrupt your routine and take your car in, but you know it will keep your car running. Proactive maintenance inspections help you understand what condition your equipment is in. Repetitive damage patterns can be identified and corrected. Also a proactive maintenance inspection helps you determine what equipment you have. If you identify excess equipment, it can be traded for equipment where the inventory levels are too low.  

The organization established the position of inventory manager for the OR department to focus on supply expenditures, inventory control and participation in the advancement of value analysis principles. One of the primary areas of focus was the establishment of PAR levels for all items maintained in the OR – both stock and non-stock items. This initiative also included the recalculation of the required PAR level for each item, and the depletion of excess and obsolete inventory based on the newly calculated PAR levels. The same process was completed for consigned inventory items, in addition to a more organized approach to the reconciliation of consigned inventory items.

During the course of an eight-month period, quarterly medical supply expenditures have been reduced by approximately 22 percent. The next annual physical inventory will quantify the dollar reduction in inventory, with an expectation that such reduction will equal approximately 29 percent. A similar reduction is anticipated within consigned inventory, although this value obviously does not directly impact the hospital inventory investment.

Not surprisingly, our helpful tip is work smarter not harder. Even in the materials management area, there are hundreds of tasks involving manual data entry that could be automated.

For instance, one of our customers examined the manual process surrounding check requisitions and employee expense reimbursements. In the past, folks would send forms in by e-mail, and these would be duplicate data entered into McKesson Pathways Materials Management. For an organization providing supply chain services for six hospitals, the volume of requests was not insignificant, as was the amount of follow-up required if a form contained errors. Now, by automating the job, the requests are processed as they come in, and requests to fix errors are handled automatically.

We’ve seen this scenario play out in other forms as well. Chargemaster items are constantly being updated. And while some applications have mass import routines, these are often not suited for day-to-day updates – and invariably these become a manual process. Mergers or becoming an accountable care organization (ACO) can cause this trickle of change requests to become a significant time drain. Automating these types of requests can be done in a short amount of time with no change required to the target application.

While supply chain and inventory management automation in the modern healthcare organization represents a huge target for cost savings, the industry as a whole, however, has been slow to adopt many proven best practices. 

Too many processes remain paper-based and non-integrated. Many integrated delivery systems are still challenged by the lack of a truly unified item master, making it difficult to maximize orders with preferred suppliers and take advantage of discount and rebate opportunities. A lack of modern e-requisitioning and rules-based order-processing tools leaves purchasing managers unable to optimally control expenditures, and forces excessive processing labor. Poor utilization of electronic order communications across the industry also dramatically drive up processing costs. Ultimately, these supply chain inefficiencies don’t only raise costs, but can directly impact quality of care if the right supplies are not in the right place at the right time. 

Common in many hospitals, nurses at Truman Medical Centers (TMC) were voicing concerns about the hospital’s inventory. Hoarding and large floor stock of medical surgical supplies was one of TMC’s main problems, so the team didn’t hesitate to take action. They looked to Cardinal Health, their longstanding vendor partner, to help with solutions to address supply chain issues.

Cardinal Health first suggested a logical-unit-of-measure solution. Though TMC had its own off-site warehouse of owned inventory to help manage minimum order quantities efficiently, there was room to improve the process. To prepare for implementing the logical-unit-of-measure system, Cardinal Health bought back some of TMC’s warehouse inventory, which allowed TMC to close their warehouse economically and increase cash flow.

The team combined the logical-unit-of-measure program with a PAR optimization program that helped TMC get a better handle on product utilization. This way, TMC didn’t have to keep as much inventory on hand but could still have the right product in the right place at the right time.

Cardinal Health also helped improve product standardization across medical campuses and between departments. This resulted in nurses being able to feel more comfortable moving from one area to another, knowing they would find the same products.

Finally, the team analyzed roles in the hospital system’s purchasing department, redefining some as well as reassigning responsibilities. The changes helped make operations more efficient, with the team working to control miscellaneous product use charges by adding more items to the item master and chargemaster – reducing the time spent coding these items for reimbursement and making the coding on the bill more accurate.

Initial savings amounted to $354,796 from closing the central distribution center, $52,687 from decreasing the Lakewood campus’ central service inventory and $24,193 from decreasing the Hospital Hill campus inventory.

Currently, they continually meet or exceed their fill rate goal of 98 percent, have increased staff satisfaction and booked overall savings to date of $2,840,386.

A 1,000-bed acute care facility in the Midwest knew it was investing far too much labor in moving medications from its central pharmacy out to patient care areas, where its automated dispensing machines (ADM) were located. The hospital wanted to address this issue so it could reallocate valuable staff time – which was in short supply – to clinical initiatives.

So Cardinal Health helped the facility deploy its CardinalASSIST automated tool that replenishes drugs in efficient units of measure, directly to the pharmacy for ADM use.

To assess clear return-on-investment for this initiative, Cardinal Health sent a team to the facility to physically track and identify the current state of internal medication distribution: How many staff members were spending time stocking ADMs; how much time they were spending on related tasks each day; and other issues – like how many days’ worth of medications the hospital’s central pharmacy had to keep on hand to avoid stock-outs. The facility experienced both a hard-dollar/financial ROI and a number of additional benefits.

They included:

Improved workflow and reduced staff time: The hospital significantly improved its medication distribution workflow and reduced the number of touch points between the time a medication reached the central pharmacy to when it was loaded into the ADM. The hospital realized a 41 percent reduction in labor associated with medication distribution within the hospital.  

Inventory reduction: CardinalASSIST also provides the hospital with reports that identify point-of-use product usage data and makes recommendations for appropriate PAR-levels. This functionality has also helped the hospital reduce its inventory holding costs in ADMs, enabling the facility to now carry less "days on hand" inventory and to now only store "safety stock" for CardinalASSIST items in its central pharmacy, which frees up valuable shelf space within the central pharmacy.

Reduced stock outs: The customer also experienced a 15 percent reduction in stock outs, thanks in large part to the ADM prioritization and PAR level reports generated by CardinalASSIST.

Patient safety: The hospital’s medication safety efforts have also been strengthened, because CardinalASSIST facilitates the bar-code scanning process and provides reports that help it measure and track barcode scanning compliance.

Grainger’s research suggests that a majority of U.S. hospitals are not effectively managing their facilities and operations inventory. Simply stated, the amount of items going into inventory is far greater than the amount coming out. Poor inventory management practices are causing hospitals to accumulate dead, obsolete materials and more importantly, incur unnecessary costs.

Nearly 60 percent of a hospital’s operating budget is allocated to labor. Given the expansive footprint of many hospital campuses, excessive time is invested into inventory management activities. A strong inventory management program can save hospitals significant labor time and allow space to be repurposed to more critical areas such as clinical care and other revenue generating activities. A more aggressive approach to inventory management can drive cost out of hospital operations and allow more time to focus on the core mission – providing a safe, clean, efficient and attractive patient care environment.

Identify current state. To get where you want to go, you must first identify where you are right now. Based on observations from more than 500 organizations, Grainger has identified three primary approaches: Stocked, Managed and Leveraged.

A "Stocked" approach is the most basic option, emphasizing increasing material availability and preventing stockouts. Materials are stored wherever space allows and items can be taken from inventory whenever needed and with no requirement to record any information. Replenishment occurs when on-hand levels are low or a stockout occurs. Lack of visibility to historical usage makes it hard to differentiate between demand and consumption. Additionally, theft or inventory "walk-offs" are common. As a result, facilities and operations inventory continues to grow unnecessarily.

A "Managed" approach attempts to control costs through increased utilization of process and inventory data. You become more proactive and establish processes for stocking, issuing and evaluating items. Organization is structured, approval is required for the addition of new items, and you are expected to keep track of when and how much an item is used. This infrastructure increases awareness of dead and obsolete inventory, which in turn slows growth. Sometimes these controls are put aside due to larger facility concerns or might be seen as slowing the supply of materials, which leads to employees creating their own "private" inventory. Over time, tension can build among purchasing personnel, with processes and data seen as broken and unreliable.

A "Leveraged" approach is the most evolved option as it considers MRO inventory an investment with recoverable value. Because facilities and operations inventory is viewed as a strategic component of the hospital, you become disciplined in the organization and issuance of materials. To get a better return on investment, you pursue improvements to more efficiently provide materials to personnel. Inventory levels and usage data are analyzed to identify opportunities for reduction and recovery, such as returns to suppliers and liquidation of obsolete items. Investment recovery efforts such as these return value back to your organization and help minimize the need for further investments in inventory.

Establish processes. Processes define how you manage facilities and operations materials, and there are four key groups of activities required for effective inventory management: Stock, consume, analyze and recover. The challenge is to standardize these processes and ensure they are consistently performed. Connecting these activities enables efficient execution and creates quality inventory data.

Gather accurate and timely data. Data is what makes inventory manageable, providing visibility and knowledge of demand and usage patterns, which helps reduce and optimize inventory levels. To test the quality of your data, pick an item and see if it can provide answers to basic questions, such as: What is it and where can you find it? When is it used and how much of it is needed? Why is it in stock and who supplies it? The inability to answer questions such as these for any given item will challenge the effectiveness of your inventory management.

Establish accountability. To ensure maximum return on its investment, a hospital must establish accountability for managing inventory. Accountability provides a reason to take actions and is created when three things converge:

Relevance: Is there a correlation between effective inventory management and your job performance?

Influence: Are you able to initiate changes to your approach in order to improve performance?

Incentive: Are there clear consequences — either positive or negative — for how inventory performs over time?