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KSR Publishing, Inc.
Copyright © 2016

         Clinical intelligence for supply chain leadership



June 2010



Managing inventory in sight, onsite, off-site and out-of-sight

Best practices don’t always involve thinking outside the box

by Rick Dana Barlow

Call it the bedrock for and key benchmark of effective and efficient supply chain management.

Clinicians rely on it to care for patients, administrators bank on it to keep hospital or clinic doors open for clinicians to care for patients.

It’s inventory, a discussion topic that might elicit yawns from the start because it’s so basic but it shouldn’t be dismissed because the fundamental function remains integral to a clinician’s and healthcare facility’s success.

From using data management tools to organizing supply storage areas, inventory management within the supply chain profession is vital to hospital operations and patient care quality.

As a result, Healthcare Purchasing News Senior Editor Rick Dana Barlow reached out to 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 reflected on some of the most effective foundational work being accomplished in the trenches.

Bob Yokl, president and Chief Value Strategist, Strategic Value Analysis in Healthcare

If there is ever an area of supply chain management in which numbers really matter, I have found it to be in inventory management. A case in point, a 168-bed client of ours who had been managing all of their hospital’s official inventories (with the exception of radiology) with great success was receiving pushback by their radiology department on managing their inventory assets. The client then asked my firm to perform an inventory analysis of their radiology department’s inventory. What we found was an eye opener! The result of our study was that our client’s radiology department’s inventory was 50 percent over our benchmarks; meaning $750,000 of their hospital’s cash reserves were being tied up unnecessarily in just one department.

With this study in hand our client’s supply chain manager brought this fact to the attention of their CFO who then directed the supply chain department to immediately take over their radiology department’s inventory assets. In short, within six-months of taking over the inventory and ordering functions for their radiology department our client’s supply chain department reduced this inventory by $380,000 as a starting point. That’s why numbers matter!

Mike Neely, president and managing principal, Perimeter Solutions Group LLC

I was the project leader for Appleseed Healthcare Resources for an engagement in the cardiology department at Children’s Hospital, Boston, where we were able to reduce their inventory on hand by over $600,000, a 50 percent reduction. The initial goal of the project was to assist the cardiology department to better identify and manage the supplies in their department as they were experiencing multiple stockouts and also a large amount of expiring products. The department traditionally had little faith and trust in the Materials area because of past relationships.

Due to a change in senior leadership in the Materials area there was a renewed focus on reaching out to the areas within the hospital with significant purchases and held inventory. The project became a joint effort between Materials and the cardiology staff. We were able to accomplish our objectives of rebuilding relationships with this key department by working in a ‘hands-on’ manner to identify all locations where inventory was kept and jointly agree on appropriate PAR levels by reviewing historical usage information with the staff and physicians. We were very conservative in our calculations for PAR levels because of their past stockout problems. However, by raising PAR levels on fast moving and critical items and lowering levels on slow movers, we were able to significantly reduce the overall inventory investment.     

Richard Philippe, president, Logi-D, New York, and Laval, Quebec, Canada

One of the most interesting inventory management projects I have had an opportunity to contribute to involved the emergency department of Hôpital du Sacré-Coeur de Montréal, a major trauma center in Montreal, Canada. It was an interesting project for a number of reasons – one notably being that we, together with the hospital’s materials management team, were given the opportunity to participate in the design stage of a brand new emergency department. Our involvement at this early stage meant that supply chain management would contribute to improving the clinical outcome by ensuring that the required supplies would be available when and where they were needed, a rare initiative in hospital construction and renovation projects. In my experience, in most cases supply management considerations in such projects at best consist of space needs being challenged and at worst of being a mere afterthought once plans are already finalized.

This project began with a logistics study, which simulated staff movements and replenishment time in the existing ER. We soon realized that unlike general inpatient nursing units, there was really no value in having a centralized primary storage location other than to simplify inventory management for the materials management team. Indeed, nursing aides were redistributing all of the supplies to secondary storage locations closer to the point of use. Clinical staff would only come to the central storage location if they ran out of inventory at the point of use. Also, the processes to replenish these secondary storage locations were manual and therefore more costly than even basic PAR level systems supported by PDAs.

Once we had realized that it would be more cost-effective for materials management to replenish directly at the point of use, we were challenged by the physical considerations of managing inventory in multiple locations, some of which were difficult to access, such as treatment rooms often occupied by patients. This is when the idea of using RFID technology to automate data collection in an existing two-bin replenishment system first surfaced, spurring the research and development needed to create such an application. Logi-D’s RFID-enabled two-bin replenishment system resulted from this exercise. The main advantage of this solution for the ER project at Hôpital du Sacré Coeur de Montréal was that it would simplify inventory management at remote locations with very limited involvement from users. In fact, because the system would require no counting or data entry in the user department, approximately half of the replenishment activities at the point of use would be eliminated.

Inaugurated in March 2008, the HSCM emergency department stands today among the most advanced in North America from an architectural, technological and operational viewpoint. But beyond its clinical achievements, the department is trend-setting from an inventory management point of view. The previous approach had been to limit the involvement of materials management staff to replenishing a central storage location that fed secondary locations managed by HSCM clinical support staff. This has now been replaced by 35 RFID-enabled storage locations replenished by materials management personnel directly at the point of use, with secondary locations all but eliminated.

 A few key measurable paybacks of this project:

• Nursing staff travel and time to find and collect supplies has been reduced by 67 percent. The measured time allotted to this activity in the old environment was 25 to 30 minutes per nurse per shift per day.

• Approximately 1,200 hours annually have been recuperated by clinical staff aides who previously restocked secondary locations.

• Urgent daily supply needs caused by stockouts have been virtually eliminated.

• Space savings of approximately 25 percent in medical supply storage allotments have been generated.

• We estimate that shrinkage has been reduced by approximately 50 percent or $30,000 per year through better data management.

• The total payback period for the project was approximately 18 months.

David Hermann, vice president, Aspen Healthcare Metrics, a MedAssets Inc.

Most hospital administrators are startled by the effort and commitment associated with improving their inventories’ operations. When I describe the effort to set up a perpetual inventory in the OR, I often use the analogy of President Kennedy pointing at the moon and stating that we will travel there before the end of the decade. It requires strong commitment on the part of administration and the change management to execute will take anywhere from 12 to 18 months. This is made even more challenging by the fact that it seldom has hard-dollar savings for a direct ROI.

John Parker, CMRP, implementation manager, VHA Inc.

To make sure you are efficiently managing your inventory, it is important to match up issue history data to each item in your storeroom. It is vital that you use this data to determine the minimum and maximum reorder points within your system. 

This data will reveal changes in utilization that have occurred over a period of time. Supply chain product utilization constantly changes, and unless an organization is extremely efficient in communicating these changes, your inventory may end up with an outdated and/or an obsolete item. This often happens in areas where physician preference items are maintained (and often change), such as in the operating room. Physicians constantly change their habits relative to these items. Often, they do not notify the staff of their practice change.

Recently, while working with a client, we began to match issue history over the past year to each item in the general storeroom. From this data, we determined the new minimum/maximum reorder points for the inventory. Using a one-week safety-stock level and a three-week maximum-level point should produce an 18-turn-per-year on your inventory. As always, there will be some bulk items such as IV fluids, toilet tissue, OR custom packs, etc., that, due to their physical space requirements, will cause you to increase their turns. 

Working with our client, we reset their reorder points in their general storeroom area. After three months, we reduced their inventory by more than $100,000. We replicated this process in reviewing their OR inventory. Again, within three months we reduced this area by $25,000. This review also identified $40,000 of inventory in the OR that had not been used in the past 12 months. The review investigation into this revealed that this type of case was no longer being done at the hospital. These types of reviews are critical to any successfully managed inventory. 

Chris Toomes, director of professional services, Supply Chain Management, Memorial Hermann Healthcare System

The installation of any point-of-use inventory management system is essential to the success of a ‘best practice’ supply chain management process. Not only does the introduction of computers for tracking inventory at the station-level allow for timely monitoring of inventory levels and a nearly guaranteed pick up in revenue, but it also forces the development of standardized processes as well as the organization, identification and physically locating every item that is to be managed. 

Over the last five years, Memorial Hermann has installed more than 600 point-of-use stations allowing for a system-wide increase in gross annual revenue of over $67 million. Additionally, the installations automated the ordering of more than 150,000 inventory lines per month and enabled Memorial Hermann to streamline our invoicing and payment process to obtain a [days sales outstanding] of zero days with our primary distributor, allowing for greatly reduced distribution fees.

Memorial Hermann is fortunate to have several employees with diverse backgrounds and a wide variety of experience installing point-of-use systems in multiple large healthcare settings. Irrespective of the size or type of system installed – open or closed – our organization has realized enormous benefits from the essential re-evaluation of current process and staff assignments. In nearly every scenario, we have seen large increases in revenue as well as the virtual elimination of expensive excess inventory and obsolete stock. This transformation has allowed Memorial Hermann to allow clinical staff to focus on patient care instead of the daily routine of managing the supply chain.

The return on investment for Memorial Hermann has been tremendous. Financially, the system generates enough patient revenue to more than pay for itself annually and has enabled it to right size inventory and rationalize order patterns. 

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

Inventory management is not a thing, nor is it an end in the delivery of cost-effective supply chain management. It is, in fact, a means to that end – a never-ending process that must be viewed as a relentless pursuit of asset maximization. Managing inventory takes discipline, and all commodities are not managed the same, or with the same level of attention. Supply inventory management characteristics are velocity and value. The higher-demand higher-cost items require the most attention, and those with a lower demand and a low cost require less. Additionally, inventory is an asset regardless of the character we in healthcare assign as stock vs. non-stock. The fact is inventory is supply purchased and the conversion of a cash asset. Furthermore, inventory is not a cost-reduction strategy. It is the disposition of inventory that produces a cost reduction, when converting the asset back to cash.

Lana Makhanik, vice president, business development, VUEMED Inc.

One key reason not to dismiss inventory is that it is one of the key strategic and financial assets of the organization. Properly optimized and well-managed inventory becomes a great way to free up dollars tied up in unnecessary supplies and gain large financial savings through reduction in product purchases and waste prevention.

This is especially true in specialty procedure areas, such as OR, Cath Lab, EP Lab, Radiology and GI, where inventory accounts for a large portion of the budget and availability of these products is integral to patient care.

Typically, excessive inventories are the direct result of the absence of effective product tracking tools in these departments, and unwarranted and inadequate product reordering practices that lead to a high level of product waste and frequent stock-outs.

Hospital specialty procedure departments that installed VueTrack for their clinical supplies tracking have experienced more than an 800 percent return on investment, as a result of the following strategies:

1. Given VueTrack-provided reports on about-to-expire items, they are able to use, lend to another department, or exchange with manufacturers for fresh stock for over 90 percent of these products prior to expiration. The result is the prevention of tens of thousands of dollars from going to waste each month.

2. Using VueTrack’s sophisticated PAR level setting tools, they were able to adjust the purchases to reflect the actual consumption needs and reduce the inventory size by 18 percent, while supporting the same number and type of procedures.

3. Taking advantage of VueTrack-collected and organized utilization data, another customer was able to consolidate their inventory of several types of products to source them from a single manufacturer, earning tens of thousands of dollars in additional rebates throughout the year.

4. Reviewing VueTrack-provided reports on slow or non-moving items as well as its ability to track consigned vs. owned items, another customer was able to switch some of the slow moving items to consigned inventory and get a discount on a bulk purchase of regularly-used SKUs. This resulted in the owned inventory reduction of over 30 percent, in addition to over $30,000 in cost savings.

Don Boss, vice president of supply chain strategy, MediClick

One of our customers, a hospital in upstate New York, went from conducting physical inventory in two days to completing it in just a matter of hours. We helped them automate the process by using handheld scanners and barcodes connected to the item master file in MediClick for the Supply Chain.

The director of materials management didn’t believe we could cut the time down so dramatically. I told him if it didn’t work, I would stay and finish the inventory myself.

First, we loaded each barcode from stock items into the handhelds and synchronized them with the materials management system. That took about four hours. Second, we actually conducted the inventory count by scanning the barcodes on the shelves and entered the quantity of each item into the scanner. That only took two hours. The information was recorded everywhere, even in the database level of the MediClick application – all from the handheld.

With the handheld scanners and barcodes, we helped the material management department reduce time spent on physical inventory from days to hours. The materials team was freed to do other tasks.

Plus the materials department wasn’t closed for two days, eliminating the need for the hospital departments to stock pile supplies in preparation for inventory. They barely knew the materials management department was closed at all.

The key to success was the barcodes, which enabled us to move away from manual inventory in favor of truly integrated, electronic inventory. It eliminated the likelihood of errors and reduced the time it took to perform inventory.