Inventory Management: Taking Stock of Best Practices

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With a potential for generating cost savings and increased revenue, hospitals are looking toward inventory management to find ways to streamline the entire supply chain to stay competitive without sacrificing the quality of services provided for patient care.

At the heart of inventory management is a focus on evaluating and improving internal processes and external relationships—whether practicing just-in-time inventory or consignment, outsourcing supply procurement, utilizing the services of a group purchasing organization or investing in IT systems—surviving contract negotiations and ensuring one’s own interests are kept at the fore.

From ordering through usage to reordering, a good place to start when analyzing inventory management processes is in mapping all human and economic resources involved. Inventory management needs are different across various-sized cardiac service lines. What is required for a 1,000-case hospital may be entirely different for a 10,000-case hospital.

With an inventory management map in hand, the next challenge is to identify and quantify “unmet needs,” which are typically what inventory management software and/or hardware systems intend to solve, according to Christopher M. Nelson, RN, RCIS, FSICP, director of cardiac education and training at Sentara Healthcare in Chesapeake, Va.

Other considerations for effective inventory management strategies include: determining what products are to be captured—i.e., everything or just high dollar items; capturing product utilization during the case via (integrated) intraprocedural documentation; automating billing based on intraprocedural product utilization; and automating equipment and supply ordering based on intraprocedural utilization.

Along with identifying gaps in inventory management processes currently in place, cost is another factor. To understand the true costs associated with managing inventory, two issues must be considered: physician preferred items (PPIs) and the role of a group purchasing organization (GPO).(see sidebar)

Cost considerations: PPIs and GPOs

When it comes to PPIs, studies have shown that the increased involvement of physicians in the research and development of a product, such as a stent, can create the situation wherein they prefer that product more than any others in the market. This could increase the number of suppliers, thereby increasing the administrative costs incurred by the hospital, according to Mohan Gopalakrishnan, PhD, an associate professor of supply chain management at the W.P. Carey School of Business at Arizona State University in Tempe.

The situation is further complicated when you enter the contractual arena, as new suppliers approach hospitals, promoting the strong preference of their physicians for their product. Other suppliers also want to reopen their contracts to negotiation or review, which again, creates further administrative costs. More contracts and more suppliers equal more administrative costs. Hospitals end up paying for perceived quality products before the marketplace has established their true value. 


“The cost of procurement goes up because of increased variety with PPI,” says Gopalakrishnan. “Also, if the hospitals try and establish a direct relationship with the suppliers for specific PPIs, in addition to relationships developed through GPOs for similar items, then this proliferation in maintaining contractual relationships contributes to increased procurement costs.”

The challenge is in mitigating the costs associated with PPIs—but how? How does one incentivize physicians to rationalize the number of suppliers in order to bring the cost of inventory management down? One idea is to create a form of gainsharing among physicians and the hospital for moving toward standardization with respect to PPIs. For example, hospitals or integrated delivery networks (IDNs) could help physicians in private practice secure items by aiding them with contractual issues so that the physician’s individual cost for procurement lowers. “This is not a quid-pro quo gainsharing, but it is an incentive,” Gopalakrishnan says.

Additional ideas include involving physicians in supply chain decisions and developing other incentives for physicians, such as financial bonuses and preferred schedule time-slots, but only if the number of suppliers are reduced and if cost-savings are realized.

GPOs are a vital resource, simply in eliminating the headache of dealing with multitudes and varieties  of supplies, in addition