5 Ways to Improve Your Inventory Management

By: George Puckett

Published: 10/10/2007

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Learn five easy steps to save on your surgical supplies.


Supply costs are typically the largest expense after personnel costs in any healthcare business. While only a few pennies of every dollar earned by your facility make it to the bottom line as profit, money saved by reducing inventory-on-hand and overall purchasing and supply costs goes right to the bottom line. So, what can you do to improve your inventory-management practices? Here are six key areas to focus on.

Research and use vendor and GPO resources
One of the easiest ways to improve your inventory management practices is to ask your suppliers how they can help. Did you know most of the large suppliers offer assistance with purchasing and inventory management? With shrinking margins and fierce price competition, suppliers are always looking to earn your business. Many offer free or low-cost software that helps you send them orders, decide what to order and how much to stock.

Your local sales rep can help you set up your storeroom and set par levels. They see many different customers, and good sales reps have a lot of best-practice information, which lets you learn about successes and failures without trial and error.

Ask your group purchasing organization (GPO) about the resources it has available. Your GPO can help determine the most cost-effective and clinically effective products for your specialty. GPOs will also have information about programs offered by various suppliers.

Keep records
Create a spreadsheet or paper journal to track your orders, receipts, usage, stock outs and fill rates. You cannot effectively decide how much inventory to carry unless you have records about what you bought, when you bought it, when the supplier delivered the goods, how many you received versus how many you ordered, and how much you paid for them. Keep a separate inventory-usage journal of each product, the date and quantity used. Purchase and inventory journals let you analyze your purchase history, usage patterns and supplier performance and reliability. You should record

  • each product you order,
  • the date ordered,
  • the supplier,
  • the price,
  • the unit of measure (such as case, box or vial),
  • the date received and
  • the quantity received.

Leave room to add notes on special requirements for ordering or product-specific information. Also indicate whether the product is on contract.

Review your usage data
You can start analyzing the data you collect almost immediately; simply recording the information will get you thinking about what you can do with the data. One of the first things to figure out: Do you have any duplicate products? We all know surgeons have their personal preference when it comes to surgical supplies like sutures or gloves. If you're not careful, you end up stocking three, five, even 10 brands of gloves. When it comes to inventory management, reducing duplicate products is a key way to cut costs and reduce time spent managing your inventory. Keeping 10 different gloves in stock is a lot of work, and it ties up a lot more money than necessary.

Of course, everyone has preferences - so how do you settle on just one brand or style? Well, you probably can't force standardization, but you can make a business case for it. If you take the records you've started gathering and document how much of each duplicate product you are keeping on hand and what that translates to in terms of dollars and process costs, I think you'll find most people get on-board pretty quickly to help you keep duplicates to a minimum.

Another area to monitor closely is dead stock - products on the shelf no one is using. Say Dr. Jones leaves the practice, and the other practitioners don't use his products that you kept in stock. That means you have money tied up in inventory you don't need. If you keep your records up-to-date and are attentive, you can often react quickly enough to return the products to your supplier or sell them to another facility that uses them.

Using ABC Inventory Analysis To Explain The 80/20 Rule Of Surgical Supplies

Most facilities spend 80 percent of their supply budget on 20 percent of their supplies. Typically these are your center's most essential items, things like gloves, sutures, needles and other items you buy large quantities of throughout the year. By determining where most of your total dollars are being spent, you can focus on these items that will make the most difference on your bottom line and reduce the time you spend tracking your inventory. For example, if you spend $1 a roll on bandages and you buy 10,000 in a year and you also buy hand sanitizer at $1 each but you only buy 500 in a year, naturally your time will be better spent negotiating a better price on the bandages.

Here's a step-by-step way to determine which supply items you're spending 80 percent of your total dollars on:

' Use a spread sheet to track the item, quantity ordered and the item's cost.

' Multiply the quantity and the cost to find the total cost; do this for all your items. Add up your total costs to get your total supply budget - $1,168,504 in the example shown here.

' Divide the total cost by your total supply budget. In our example, $563,450 is 48.2% of the total supply budget.

' Once you do this for all your items, rank them from largest percent to smallest percent. Add up the percentages in the "cumulative % of purchases" column.

' Then rate the items. All items up to 80 percent are in class A, from 80 percent to 90 percent are in class B and 90 percent up to 100 percent are in class C. You should pay most attention to the A items, because they're going to make the biggest difference in your supply costs.

- George Puckett

ABC Inventory Analysis

Item no.

Quantity

Cost per item

Total cost

% of total purchases

Cumulative % of purchases

Classification

1

56,345.00

$10

$563,450

48.2%

48.2%

A

5

14,345.00

$23

$329,935

28.2%

76.5%

A

9

2,254.00

$45

$101,430

8.7%

85.1%

B

4

965.00

$100

$96,500

8.3%

93.4%

B

6

45.00

$555

$24,975

2.1%

95.5%

C

10

18.00

$1,234

$22,212

1.9%

97.4%

C

2

10.00

$1,000

$10,000

0.9%

98.3%

C

3

100.00

$100

$10,000

0.9%

99.1%

C

7

244.00

$35

$8,540

0.7%

99.9%

C

8

34.00

$35

$1,462

0.1%

99.9%

C

$1,168,504

100.0%

Establish reorder points and maximum stock levels
Use your journals to start setting reorder points and maximum stock levels. One way to figure out the maximum stock level is to determine your average daily usage. Figure out what you use in a month and divide it by the number of business days. For example, if you use 25 packs of suture in a month, and your facility is open five days a week, your average daily usage is 25 divided by 20, or 1.25 per day. If your supplier delivers this product once a week, you will need to stock enough to cover five days' usage, plus a little extra (safety stock). Depending on how reliable your supplier is, you'll probably need about one day's usage on hand as a cushion against late deliveries or unexpected demand. That means you never want to let your inventory fall below three or four packs. You will also want to have about six packs to allow for the week's usage. So add the six packs to the reorder point of four, and your maximum stock level is 10 packs.

Automate routine buying and inventory tasks
Why automate? Processing a vendor payment costs $10 on average; with automation it's $3. If you process 300 invoices a month, that's $2,100 saved. And average payment-processing time is 6.8 days - with automation, it's less than two.

When it comes to ordering, several types of software are available to help you automate. There are five categories:

  • Client/server. Stand-alone systems include small ones like QuickBooks to very large networking systems like SAP.
  • Auction and reverse-auction systems. You bid on time- and price-sensitive products.
  • Business-to-business marketplace systems. Spec-ialized communities of users.
  • Application service provider (ASP). Web-based.
  • Dedicated purchasing and inventory management.

Barcoding can streamline your supply receiving. There are more than 300 types of barcodes and encoding schemes. Universal product code (UPC) is among the most common. To incorporate barcoding in your inventory management, you'll need a server, workstations, barcode scanners, barcode printers, radio-frequency equipment and radio-frequency tags.

Before buying any software or barcoding devices, find out what's included in the price. Ask about product support, response time, services covered in your contract and typical repair costs. Also ask about updates and enhancements, how often they're offered and any additional charges.

Savings that go a long way
Remember, a 5-percent reduction in procurement process costs such as purchasing, receiving and payables has the same impact as a 30-percent increase in sales, according to National Association of Procurement Management data.