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SPANNING THREE DECADES OF VALUE MANAGEMENT LEADERSHIP

May 9, 2002

THERE IS STILL GOLD TO BE FOUND IN HOSPITAL INVENTORIES

“ A 3% Reduction in Supply Inventories Typically Equals a 1% Reduction in Total Hospital Expenses…” 

McKesson

Robert T. Yokl-President, The HCP Group, Ltd 

HCP’s studies show that hospital inventories (even with all the computer power that has been added over the last few years) are higher than they have ever been due to a lack of knowledge about the art and science of inventory management.  On average, we have found official and unofficial inventories are 30% to 50% higher than we believe are required to meet most hospitals customers’ requirements? It is therefore our opinion that hospital inventory management is a lost art that has been delegated to overly sophisticated material management information systems and point-of-use supply cabinets. 

This means that billions of dollars annually are being wasted at our nation’s hospitals that could be invested annually, used for capital projects and are a drag on healthcare organizations’ cash flow. Why is this observable fact occurring when millions of dollars have been spent over the last few years on new MMIS systems and point-of-use supply cabinets to manage inventories?

 Computers And Supply Cabinets Don’t Manage Inventories People Do!

The most progressive inventory policy for a healthcare organization to have is not to own or maintain any inventories -- beyond safety stock.  You might say that this is an unrealistic goal --- or is it?  Inventories in and of themselves add no value to your hospital’s bottom line, they only add cost.  In fact, inventories are considered to be a liability by astute inventory managers, not an asset for this very reason.  Inventory management practices start with PEOPLE (not computers) making inventory management policy and establishing inventory rules. Therefore, the first objective you should adopt to reduce your hospital-wide inventories is to institute a policy that says that, “ no inventories will be stored or warehoused in any location or department beyond safety stock unless it is found to be absolutely impossible, or economically unfeasible to meet your customer’s replenishment requirements.”  Next, you need a set of inventory management rules that are decided by and managed by PEOPLE to meet your stated objective.

5 Basic Rules For Inventory Management

Now that we understand that inventory management practices start with PEOPLE setting inventory policies and rules to manage inventories effectively, what rules should we be establishing to lower our inventory values?  Here are five basic inventory management rules to get you started:

1.    Inventories with a value exceeding $250,000 should be considered OFFICIAL INVENTORIES and as such should be maintained on a perpetual inventory system by the material management department.

2.    Never carry inventory on any commodity if you have another replenishment option that is available to you, e.g., just-in-time, stockless, consignment, printing on demand, etc.

3.    If you absolutely must carry inventory, NEVER carry it in two locations. For example, X-ray film, sutures and maintenance supplies should be warehoused in the using departments only, not in your warehouse too.

4.    With the exception of the pharmacy, operating room and laboratory, all other inventories must turn a minimum of 26 times a year or every two weeks.

5.    No product is to be approved as a stock item in your warehouse unless it is:

(i) used by more than one department, (ii) is requisitioned once a week with an annual value of $25,000 or (iii) it is of such a critical nature that patient lives  would be placed in jeopardy without having it on hand at all times.

Naturally, these rules are the basics of inventory management. You will need to add to them to meet your particular circumstances and unique operating environment.

  Inventory Management is an Art and a Science Managed by PEOPLE

MMIS systems and point-of-service cabinets are a far cry from the paper perpetual inventory systems and traveling requisitions cards that were used by hospitals for over 100 years to manage their inventories, but the art and science of inventory management hasn’t changed even with the advent of these modern inventory management tools.  Effective inventory management, still requires PEOPLE to set policies to maintain inventories at the lowest acceptable levels and to establish inventory rules on safety stock, reorder cycle, economic order quantities, and to refine and hone your inventory policies and procedures. MMIS systems and point-of-service cabinets won’t lower inventories of and by themselves – yet!

 Copyright © 2002 The HCP Group, Ltd.

Robert T. Yokl, President, The HCP Group, Ltd., has over 35 years of experience as a consultant and manager in the field of Supply/Value Chain Management and is one of the country's leading healthcare experts in value analysis, value engineering and materials management. He is the developer and program leader of the award winning Certified Value Analysis Practitioner Training Program™. Mr. Yokl is also the developer of the healthcare industry's leading ValueNetCentral™ Value Analysis Software. Over the past two decades he has trained thousands of healthcare managers in his patented Strategic Value Analysis™ and Team-Based Project Management™ processes and has assisted scores of organizations in developing their own value management programs. He has published six books, videos and audios on supply/value chain management. His latest book being, “ Strategic Value Analysis™: The #1 Smart Strategy for Taking Cost Out of a Healthcare Organizations’ Supply/Value Chain”.