No matter how you slice and dice it inventory control represents the guts of effective materials management.

All the charisma, communication skills and confidence won’t cut it if you can’t get the fundamentals right so that doctors, nurses and administrators have what they need when they need it.

Smart inventory control is as simple as the acronym IOU – identify your needs and opportunities, optimize your data and information management tools and understand the nuances of the supply and demand chains.

"Inventory control is about product availability and balancing the costs of ownership with the costs of procuring, which includes purchasing, receiving and paying," said Dave Kaczmarek, vice president, The McFaul & Lyons Group LLC, Horsham, PA.

"Hospitals need to actively manage what is bought, when it is bought, how much, as well as for what price, including discounts and rebates," noted Chris Holt, vice president, UPS Supply Chain Solutions – Consulting Services, which concentrates its coverage in the vendor community and does not work directly with hospitals.

Although it sounds pretty basic on paper it can be just as elusive in practice.

Supply chain ownership
One way to effectively maintain control over your facility’s inventory is to make sure you own your internal supply and demand chain process and not cede that control to a GPO or supplier.

"The supply chain is a series of steps," Kaczmarek said. "The hospital can only control those steps it performs. Likewise the suppliers and GPOs cannot actually control the hospital portion. Each participant can – and usually tries to – influence the actions of the others. Hospitals must resist undo influence by any partner that might result in a negative outcome."

Conversely, for a hospital to use a GPO effectively and control its supply chain it must maintain complete control over inventory levels, product substitutions, identification of fast moving inventory and obsolescence/innovation, according to Perry Kjargaard, program director of Information Control’s DynaMed Materials Management System, Gaithersburg, MD. In essence, you can’t have one without the other, which is why sharing ownership can be reasonable.

"Hospitals are in the business of saving lives, not managing inventory," Kjargaard said. "Outsourcing this function – when it is under control – can provide huge benefits. Vendors can be compensated through cost-savings and both parties can develop a very productive and trusting relationship. It should be noted however, that this may not be the answer when inventory issues are serious. The vendor should only assume responsibility for this function when the hospital is realizing efficiency. Contracts can be executed with vendors where operational goals are achieved before the function is outsourced."

But the extent to which suppliers and GPOs control a facility’s supply chain may be somewhat overstated.

"While suppliers and group purchasing organizations (GPOs) want to ‘control’ the supply chain, it is important for hospitals to understand that they don’t," Holt said. "While the suppliers and GPOs can push, prod and establish incentives for hospitals to make certain decisions, only hospitals can make the final decision about their supply chain."

Obtaining data can impede that progress, according to Holt. "Hospitals fail to understand that they usually don’t have quick and easy access to data needed to make informed decisions," Holt said. "They usually need to go to the owner of the data which often is their supplier or their GPO. Once the hospital goes this route, the hospital’s ability to ‘control’ the supply chain becomes extremely difficult."

Holt argued that true control, stemming from relevant data mined from the system and presented in a useful format, "belongs to the group that understands what is bought, when it is bought, how much and for what price."

Certainly, suppliers that offer just-in-time, stockless, modified stockless and vendor-managed inventory programs (where the vendor makes deliveries directly to the end user’s storage location) can be a tempting alternative to those who drop teeming pallets off at the loading dock.

"The first question that needs to be understood is – why does the hospital need to control its own inventory management operation?" Holt asked. JIT deliveries can result in decreased inventory, purchase orders and invoicing, allowing the facility "to have ‘control’ of the inventory process while ceding many of the activities that are not core to the mission of the hospital."

Such strategies can make a lot of sense, Kaczmarek concurred. "They can also be a disaster," he countered. So many questions must be answered. "An organization needs to ask and find answers to so many questions. "Is the relationship strategic or business? What is the true cost and what benefits can be reasonably expected? Are goals truly aligned? The biggest disaster comes when a valid cost analysis is not completed.

"Any of these options mean that the organization will pay the vendor more," he continued. "They must be assured that internal costs will actually be decreased more than the additional vendor fee. This means that FTE reductions must actually take place. The other disaster comes when the organization does not manage the relationship. You can cede the function, but you cannot cede the responsibility or accountability."

Capability vs. performance
Healthcare facilities can improve their inventory control efforts by either focusing on their capabilities or their performance. Certainly, by concentrating on the former you can more easily accomplish the latter.

Kjargaard calls for hospitals to simply understand their inventory and how the process really works via item standardization and data cleansing services. "When this function is successfully completed, the client will know what they have and where it is," Kjargaard noted. "They will know what is redundant and what their true usage is. This inventory is then matched up to the requirements. At this point, an organization should be able to determine how effective their inventory management efforts have been and where the weaknesses are."

Because each situation is different, there’s no silver bullet solution, Holt said. But hospitals can locate "opportunities for implementing ‘quick hit’ savings by understanding the process of how and when products are purchased, as well as the product purchase history for both expense and non-physician preference items, and use that available consumption (demand) data to recalculate the required level of inventory that is needed by the customer."

Kaczmarek asserts that materials management directors should look beyond what’s merely within their purview. "Remember that inventory is ‘anything that is bought and held prior to use,’" he said. "If you limit any discussion on inventory control to that inventory under the direct control of materials management, you are missing a significant portion of the dollars.

"You improve your capability by having better trained staff, better understanding of the strengths and weaknesses of your current system, and good collaborative relationships between the materials department and the other departments that hold (and sometimes even manage) inventory," he continued. Specifically target and seek the cooperation of those departments that hold the most inventory, especially unofficial inventory, he advised. Unofficial inventory, which is ordered by and expensed to administrative and clinical departments directly, can make or break a budget so it’s important for the materials manager to reach out to those areas, he added.

Process first, software second
Software products from companies like Information Control and Minneapolis-based Lawson Software can serve as useful tools to track purchasing, consumption, replenishment, substitutions, replacements and a host of other departmental key performance indicators. These products help hospitals automate many of the manual steps in what Dan Sougstad, Lawson’s director of healthcare market development, calls the "order-to-pay and replenish-to-use business cycles."

In fact, Lawson’s vision is to eliminate all human intervention starting once the time an item is consumed by the patient, to an automated requisition (once inventory falls below re-order point), to an automated PO, to an automated invoice, to an automated match and pay, according to Sougstad. "This allows time for hospitals to focus on the high-value-added activities of demand management (e.g., value analysis, contract purchasing, contract pricing) and supplier management (e.g., service level negotiation, strategic sourcing)," he said. "Supplies are a significant expense for hospitals – and efficiently getting the right supplies to the right place at the right time is a critical part of the healthcare value chain." 

While it may seem intuitive, however, many, if not most, fundamental inventory control hurdles can best be solved with brains and not bits and bytes.

Believe it or not, when faced with an inventory challenge some facilities throw their professional ingenuity out the window and their operational muscle squarely behind a software vendor, online electronic commerce exchange or consultant to magically save the day.

"Software is never a solution to poor processes," Kaczmarek said. "Software can be invaluable in optimizing your inventory and simplifying the processes. But you cannot optimize an inventory that is not accurate. And maintaining inventory accuracy generally is a function of good performance – i.e., the basics. This means maintaining accurate data, completing transactions in a timely manner and being accurate in the physical processes such as counting, recording, etc."

Sometimes all it takes is a simple telephone call or e-mail to a colleague, peer or even a vendor. "Many issues that hospitals face are not unique to just one institution," Sougstad said. "Customers do reach out to peers and information management providers to understand the problem and results of previous efforts to address the issue. At the end of the day, the hospital, with a good understanding of the problem and symptoms, will have a clear picture of their path forward."

An organization has to clean up its act first and master the basics before it should implement any automated assistance. "The first thing that needs to happen is to determine where the problem is," Kjargaard said. "Is it the software? The policies and procedures, the manual intervention, etc.?" Not surprisingly, Kjargaard favors relying on an outside source. "Making this determination will most likely be done more efficiently with the use of an independent source. These specialists have the advantage of having exposure to inventory practices of many different organizations. They can bring this experience into any type of review."

Hence, automation before preparation is a recipe for disaster. "Once the basics and the direction the process needs to be headed are determined, that is when a hospital should consider using technology to improve the efficiency of the process," Holt noted. "If the process is automated too soon, automating a broken process will allow for wrong decisions to be made quicker resulting in a less efficient operation."

Maximize your computing power
Solving that pesky inventory control challenge may not require a major software or systems upgrade either. That’s because many facilities don’t even use all of the capabilities of their current packages. In fact, they may not even know everything that their systems can do for them.

"From my experience most current software provides adequate programs and access to the information that allows users to manage inventories well," Kaczmarek observed. "More often that not, users do not take full advantage of the programs and/or information. Admittedly, some systems make it difficult to get the information in a format that is conducive to good analysis."

Kjargaard agrees to an extent. While Information Control encourages customers to use what they already have purchased and implemented, it’s not always so absolute because expansion may be needed. "Many organizations only use part of the software that is installed," Kjargaard said. "Good inventory management is realized by having complete functionality and access to critical information. An essential ingredient of a successful supply chain operation is a robust and fully functional material management application. Without access to all critical information, it is virtually impossible for management to make an educated decision."

Simply stated, a facility can’t – and shouldn’t – separate the process from the tools. "The key is to have the software both support and direct the right process," Sougstad said. "For instance, if the process is fragmented before software is deployed, the process will be fragmented after software is deployed. To be effective, software needs to be deployed to support a good process. At the same time, software can present actionable information to the right person at the right time, to enable appropriate action to be taken."

Holt argues that any decision depends on myriad factors, including how effective the current process for inventory management is, what software is currently in place and its capabilities, how knowledgeable the staff is in using the software and how much of the software capabilities are being used.

The same holds true for choosing which inventory control techniques and tools to apply, be they exchange carts or PAR levels, bar code scanners or radiofrequency identification tags, Internet-enabled materials management information systems or enterprise resource planning systems, automated supply cabinets or open systems.