10 Ways to Right Size On-Hand Inventory and Improve Supply Chain Performance
Throughout provider organizations, team members with supply chain responsibilities continue to seek ways to reduce costs. While great progress has been made, more savings and efficiencies are needed, and in today’s healthcare environment, every supply item and every penny counts. As long term savings opportunities continue to evolve, there’s a significant opportunity that exists today, which can be immediately realized: change the way inventory is managed.
Even with contemporary inventory systems in place, supply chain teams are still challenged to accurately manage supplies. Why? Because systems are either too complex to be consistently used by staff, too expensive, too difficult to maintain and upgrade, or unable to provide visibility and essential reporting data elements in support of inventory and usage throughout the organization.
With supply chain representing the second highest cost for healthcare organizations, second only to staffing, an immediate step to reducing costs is reducing the amount of on-hand inventory.
Benefits of right sizing inventory include reductions of:
- Waste, product expiration, product loss
- Product variability
- Supply costs overall, with improvements in cash on hand
- Storage space
- Cost to manage inventory, which occupies both supply chain and clinical staff time
- Monthly holding costs, estimated at 3% of total supply spend
Supply chain expert Charles Poirier estimated that “If total healthcare costs in the U.S. are around $3 trillion, the system probably requires inventories equaling at least $300 billion. If a conservative 20 percent could be eliminated through better supply chain practices, $60 billion could be saved in working capital. With carrying costs usually estimated at being at least 10 percent, such a reduction would yield a decrease in working capital of $6 billion. That is a lot of new free cash flow.” (1)
10 Steps to Right Sizing On-Hand Inventory
Now more than ever, healthcare organizations strive to balance cost and care. It’s within this environment that IOS has launched a new supply chain best practices platform to advance opportunities for organizations to learn from each other, close gaps, reduce burdensome manual processes, increase accuracy, and reduce the trial and error that often accompanies technology implementations.
Working with supply chain leaders, the IOS team helps shape and share provider organization successes, in turn, identifying the industry standard best practices that drove results. By documenting this real-world intelligence, IOS advances the goal of helping every organization run a better supply chain and improve business processes on a stronger foundation.
Overview of Current State
Provider organizations can improve inventory management, related costs and staff time by taking 10 steps to improve inventory management:
1. Build the data infrastructure that will provide visibility to supply ordering, consumption and waste throughout the organization. Start with an accurate formulary that captures the supplies most frequently used by your organization, at your best available contract prices.
- Ensure your item master is your source of truth, representing the approved products and prices for your organization
- If data quality is a barrier to accuracy and automation, determine the most effective method to help your organization de-dupe, normalize and standardize data, whether that’s using an internal team or an outsourced resource
- Direct all requisitioning and purchasing to be conducted electronically, using the item master as the foundation for supplies being selected
2. Identify the correct level of supplies needed to sustain clinical operations. This may have changed recently; a physical count and ongoing consumption tracking will help set new, more accurate levels.
- Identify replenishment frequencies for each supply area to optimize labor / productivity. Track supply usage throughout your organization to set accurate levels for each product, in each area. By creating an accurate understanding of demand, new levels can be established that help eliminate waste
- Best Practice Tip: Determine whether supplies are replenished more frequently than necessary. If so, consider reducing the frequency while resetting the stock levels accordingly
3. Understand the business and clinical processes in each area – inventory systems are not “one-size-fits-all.” When it makes sense, customize for the area of your business and the care delivered
- Use lean concepts to redesign processes, eliminating redundant steps and minimizing touches. Your goal is to have the right inventory levels in the right places at the right times
- Best Practice Tip: An example of an area with unique requirements is the emergency department. With immediate access needed to supplies, consider systems that specifically support a “grab-and-go” approach, while eliminating stock-outs and providing visibility
4. Reorganize your supply areas.
- Create a requirements map to identify supply storage areas. Care, treatment and products determine where supplies should be stored and what needs to be in each area
- Organize items by type and use, and barcode label shelves to make it easy for clinicians and supply techs to find and replenish what’s needed
- Consolidate storage locations whenever possible. Move inventory into well-organized, managed locations where tracking – and accurate replenishment – is possible.
- Create price awareness to help identify high value items using a set dollar amount; train team members to help reduce overuse and waste
5. Improve partnerships between supply chain and clinical teams. Clinicians are your in-house resources for product and procedural expertise.
- Bring together finance, nursing and supply chain leaders and chart the course for product charges to patients
- Identify a clinical champion for each area; nurses are powerful partners in the design, implementation and adoption of lean processes
- Identify which products must be captured and charged directly to the patient – and have an identification and scanning method in place. Note those items that may be automatically included within a procedure charge
6. Implement processes and technology that give supply chain visibility to every area. Converting processes from manual to electronic will build the data set needed for better reporting and data-driven decisions.
- Reducing inventory costs requires accurate, real-time data across the entire organization
- At least annually, conduct a physical count to update data and adjust your financial records for accuracy
- Identify technology needed to create an effective data infrastructure behind your processes; consider inventory management solutions to enhance current system
7. Conduct the physical count you’ve been avoiding! Use the opportunity to remove expired inventory from supply areas, reset accurate inventory levels with finance.
- Create a clean slate. Actually remove expired inventory from your supply areas and work with finance to manage the write-off of these goods
- Return shelf space to productive supplies that your clinical team needs to care for patients
- Best Practice Tip: Don’t record expired items as used. You don’t want them factored into supply usage
8. Create an environment of continual performance monitoring, with measureable, realistic goals. Work with your finance team to determine the areas where tracking and reporting will deliver the greatest benefit to your organization.
- Take time to set specific, measurable goals. State your goals in dollars and language your CFO and CEO will appreciate
- Start by measuring cost of inventory on-hand, then compare cost of supplies after 6- and 12-months of process improvement to validate improvements
- Assign a leader on the supply chain team with responsibility for measuring success. Build KPIs to create a continuous improvement environment
- Best Practice Tip: Ensure you’re creating visibility to your entire system of supplies
9. Inventory management is a continual, closed-loop process and good, supporting communication throughout your organization is needed to keep people and processes on track. Use a solution that tracks and receives items into your facility, tracks item consumption, enables perpetual inventory tracking, and extends across your entire procure to payment process.
- Inventory management is not a one-time activity. Use a system that:
- Tracks / receives items into your facilities
- Tracks item consumption
- Maintains an accurate formulary for approved ordering, price management
- Builds accuracy with 3-way price matching of incoming invoices
- Close the loop on your internal communication processes
- Partner with your clinical staff to identify and reduce problem areas
- Identify the ways new processes will help them deliver care
- If needed, implement change management practices for continuous review/revising of policies and processes
10. With updated supply levels, eliminate excess supplies by working your way through surplus inventory. Use this time to identify new items and vendors you need to help future-proof your in-house supplies.
- Once you’ve got good visibility to what’s needed, work through your excess inventories; it’s your immediate opportunity for inventory reduction and will reduce inventory dollars on your balance sheet, improving financial ratios
- Best Practice Tip: Write-off damaged, lost, expired inventory and get it off your books. Cash flow is improved, obsolete products are reduced, as are future write-offs
Best Practice Examples
Valley Dermatology, Heather Braswell, HT, CMA, Clinical and Anesthetics Manager
In a recent case study, Heather Braswell discussed some of the challenges of Valley Dermatology’s rapid growth. “While we experienced a surge in clinic growth and demand, we recognized the methods we used to keep track of our expenses weren’t efficient, despite being in business for nearly 20 years. Our inventory costs were consistently high, we weren’t ordering or restocking appropriately, and supplies weren’t rotated, so often they would expire which resulted in needless waste. This was especially impactful on our retail and cosmetic service lines. I was tasked with finding an inventory system that would let us consider each department and the unique way our clinic operates, then allow for customization to fit each area’s demand for supplies.”
Valley Derm selected the Envi solution for their inventory management requirements and the team has seen significant results, achieving best practice-based processes. Braswell added:
1. Allocation of expenses by department – “I can pull inventory and PO information from Envi to identify what specialty items were ordered. Then when we review financials, we can allocate supplies to service lines and understand expenses. I can track what’s spent per quarter, can see vendors by departments, and can create P&L for each area.”
2. Reset par levels, create a more demand-driven approach – “Tracking receipts, usage and the total dollar amount sitting in supply has let us set better par levels, utilize what we have on-hand and reorder less frequently. We’ve improved cycling our stock and weeding out products we stopped using or replaced. As we’ve improved, we’ve created a more ‘on demand’ method. We have established pars, but our supply chain team member uses demand planning to manage supplies. She knows where stock is located, what’s in surgery suites, what’s in main supply areas, what’s on the schedule and what to order.”
3. Examine and reduce on-hand inventory – “Bringing Envi into the clinic required a purge of our supply areas and treatment areas. Seeing what was taking up room on the shelves allowed me look at the system in a different way.”
4. Increase employee buy-in and accountability – “Every employee has a vested interest in being accountable for all the supplies that the clinic needs to run day to day. This makes them think about how they use the supplies available to them and think twice about what they would do without those supplies.”
5. Designate employees from each department manage stock – “The designated department employee is also responsible for receiving orders, creating orders and stock usage. Only the designated department employee is allowed access to the main storage areas. This keeps supply hording in check and makes sure everything is accounted for appropriately.”
6. Improve tracking and visibility to consumption – “Our biggest problem was tracking what happened to an item from the time it was ordered to when it was used on a patient or sold. Envi’s usage reports help us track that product, plus we can keep up with cost increases which helps us negotiate with our suppliers.”
When Think opened in 2015, initial supply chain processes were entirely manual. The team wanted to ensure there would be plenty of supplies on hand, enabling every department to deliver seamless care throughout the organization, and ultimately realized they were overstocked. “Everything was manual,” said Jason Gregory. “We needed to track and manage inventory in different stock locations in our facility, but we didn’t have a way to do that. We were receiving supplies in manually, then didn’t have good visibility to what had been received, where items went once received, and what invoices were completed and ready for payment. We recognized that orders sometimes went out without approvals.”
Think Whole Person select Envi to help with their inventory management processes. Gregory noted:
1. Reducing excess inventory – “As a start-up, we had excess inventory, which translated to cash tied up on shelves. With Envi, we order more frequently and in smaller amounts, which means less cash sitting around, and cash flow has improved.
2. Improving ordering processes – “We implemented an order approval process and using functionality in Envi, we have visibility to approvals, have reduced manual follow-up both internally and externally, and increased the speed at which we can pay invoices.
3. Reducing back-log, managing receiving – “We’ve gotten rid of our back-log. We’ve also been able to smooth out the cost of goods sold (COGs). Without inventory management, we didn’t have visibility to consumption, when things were received and when billed. We’ve used Envi to smooth out and lower COGS and improve margins. We now have cost information that lets us track and control costs, and build more accountability in ordering.”
4. Building strong reporting – “Having all documents processed electronically means good reporting. All departments have added their purchasing information into Envi and now, we have reporting that helps us understand use, and supports planning of department budgets. We have more detail about what’s being purchased. We’re tracking inventory, expenses and costs. With P&L reviews, we can see whether we saved on budget and if not, we know why. We couldn’t do this previously.”
One of the most significant challenges for the team at One Medical was the need to consolidate separate supply chain systems and processes to a single platform. As the organization experienced rapid growth, the need to streamline became clear. “As we grew, we had multiple systems that weren’t standardized,” said Laura Arthur. “With multiple systems and vendors supporting different items and locations, we needed to build automation in our internal systems and processes.”
One Medical invested in building a strong foundation of systems and support, enabling the clinical team to focus on delivering exceptional patient care. Arthur added, “We take administrative work off the clinician’s plate by having a local team member in every office fully trained on Envi, to manage inventory and stock the office. With less burden, clinicians focus on engaging, meaningful interactions with patients.”
The One Medical supply chain team has identified and measured benefits in a number of areas:
1. Reduced on-hand inventory – “We’ve reduced the amount of on-hand stock and increased product turnover, helping reduce product expiration rates. “Our offices have seen up to 10% reductions in on-hand supply costs and improved cash on hand through lower inventory.
2. Reducing the number of products purchased – “We’re streamlining and standardizing the number of products in each office, saving time for our local teams, and using our space better. With the data we now have available, we’re making better financial and purchasing decisions.
3. Labor savings – “We’re seeing labor savings throughout and especially in AP, by reducing manual activities.”
4. Organization level visibility – “Ultimately, we know our locations have what they need, where they need it, when they need it and that we’re making the best purchasing decisions possible so that we can deliver on our mission of delivering the highest quality affordable care for all.”
There’s a straightforward return on investment for organizations that improve their supply chain software and processes. A Modern Healthcare article noted “The return on investment is fairly straightforward: As health systems use more advanced supply chain software, they free up cash, which they might use to buy new equipment or hire another physician—activities that generate revenue.”(2)
(1) Charles Poirier. Diagnosing Greatness: Ten Traits of the Best Supply Chains