Inventory Management: What Decision Makers Need to Know

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The materials management department, like other parts of the healthcare system, is feeling the pinch to become leaner and more efficient. The process to drive down costs and streamline communication includes consolidating materials management information systems, automating the requisition process and holding regular meetings with strategic personnel to ensure that everyone is happy with the inventory on hand and that compliance for contracted items is high.

Consolidation

HMA, a for-profit hospital operator that owns and manages 56 hospitals in 15 states with headquarters in Naples, Fla., has a single materials management database system for all 56 hospitals. In years past, each hospital had a separate inventory database system. “Now we have visibility at the corporate level at what is being purchased, the prices being paid for those items and product utilization—in real time,” says John C. Horne, corporate director of materials management for HMA.

That was the first step for HMA. Now the company is examining ways to better benefit from the business intelligence that can be gleaned by mining the materials management database. “We want to know how to make sense of the massive volume of incoming information,” Horne says.

He and colleagues are looking for an add-on program to glean intelligence on their purchases. The current process of tracking specific items such as drug-eluting stents, for example, involves each hospital creating a monthly analysis on spreadsheets, which are then combined for a big picture view. “We know there is a much better way to do that,” Horne says.

Software can serve as a useful tool to track purchasing, consumption, replenishment, substitutions, replacements and a host of other departmental key performance indicators. At North Shore University Hospital, part of the North Shore Long Island Jewish Health System that encompasses 15 hospitals and multiple affiliates in New York, Chief of Cardiology Stephen J. Green, MD, uses GE Healthcare’s Centricity Practice Management system to perform multiple tasks, including report generation, quality improvement and inventory management. As products are used during cath lab procedures, a technologist enters that information into the report-generating database, which is then automatically imported to the inventory manager. Each day, the inventory manager generates a list of the products used the previous day and electronically orders what is needed. In most cases, the inventory manager has a direct electronic ordering line to the vendor.

“Phone calls and faxes are not as efficient as an electronic order entry system that interfaces directly with a vendor’s sales database,” says Horne. In fact, the method of transacting a purchase to the vendor is one of the metrics used by HMA to peer-review processes. Other metrics HMA measures include:
  • The number of electronic requisition lines versus the number of manually processed purchase order lines;
  • The number of times physicians buy compliant product versus non-compliant product; and
  • The number of catalog purchase order lines versus a non-catalog, or free text, purchase: “Free text orders, where the technologist types in the item rather than choosing from a pull-down menu, create a lot of additional labor,” Horne says.

Carl Roeder, a senior consultant with Soyring Consulting, an operational and managerial healthcare consulting firm based in St. Louis, says facilities should look at the budget to effectively assess the success or failure of their inventory management processes. “If the inventory budget is increasing every year rather than decreasing, there’s a problem,” he says. Managers or department chiefs can look at the number of days of inventory on hand. Each facility will have a different threshold it can feasibly tolerate for inventory on hand. Facilities should conduct analyses to determine this threshold and perform periodic reviews to ensure it falls within those numbers. It’s important to work with the supply chain manager to determine how many inventory turnovers they want in a specified time.
 

Problems without boundaries

Roeder says he sees similar supply chain management problems in both large and small hospitals.

One of the problems revolves around automation. The supply chain department may not have the automation needed to manage an effective inventory management program. In addition, if it does have a software solution, many times it is not being utilized optimally. “The department may be in various stages of implementing or utilizing its system,” Roeder says. “It’s best to know upfront how you are going to use the system and the timeline for implementing all of its components that will optimize inventory management.”

Another area that Roeder often sees as problematic in hospitals is the lack of personnel to fully implement all the functions they’ve purchased on their inventory management system. “I tend to see that in smaller facilities, but it’s a big problem. If you purchase a software solution for inventory management, you should budget for the resources that will be needed to operate the system. Especially for smaller hospitals that are already on tight budgets, optimally utilizing such a system can save thousands of dollars, as well as thousands of man hours.”

Documentation is another area of concern that Roeder says needs to be addressed. If the products are not entered into the system, they cannot be tracked. This problem can overlap with the previous two areas Roeder cited. If the inventory management system is not fully implemented, it could cause documentation errors. Likewise, if the hospital does not commit the human resources necessary to document orders, receivables and utilization, it will suffer through inaccurate documentation, costing the facilities money in untrackable items and hours in manpower necessary to sift through the data to uncover and fix the problem.
 

Partnerships and relationships

Michael Szymansky has been the procurement representative for North Shore Cardiology for 11 years. Needless to say, he’s seen his share of changes, but the biggest change has been going from a manual paper-based inventory system to an automated inventory system. The first switch occurred nine years ago and they’ve changed or upgraded systems a few times.

One of the first things that hospitals and departments should do when implementing an electronic inventory solution is to thoroughly review their entire existing inventory. “Labs can accumulate items they don’t need,” Szymansky says. “It’s best to start off as clean as possible when implementing a new system. It’s always easier to add into the system as opposed to taking items out.”

He says he learned this the hard way. When they first deployed their management system, Szymansky switched over his entire inventory. A week after they went live, however, some of the products input into the system were already going back to vendors and he had to get into the database to take those out. When Long Island Jewish and Southside Hospital, North Shore’s corresponding hospitals, were going live with Centricity, they wanted to copy North Shore’s entire inventory over to theirs as a starting point. “I pushed them the other way,” Szymansky says. “I told them it didn’t make sense to start with errors in their system as opposed to taking the time up front to put in what they have cleanly.”

Szymansky and fellow attending physicians and department managers at North Shore meet quarterly with their counterparts from Long Island Jewish and Southside Hospital to discuss new products, physician preferences and vendor choice. The meetings can have 20 to 30 participants and last from 45 minutes to just under two hours. “Partnering with these other hospitals helps us keep costs down because we can negotiate a better price with more volume,” he says. “If all things are equal in terms of performance, price is the determining factor. If the prices are equal, then physician preference comes into play.”

Szymansky stresses the need to have user-friendly templates that won’t trip up technologists and others along the supply chain continuum as they add and subtract product from the database. He suggests that templates be divided up by procedures. A “Basic Diagnostic” folder would contain all the various products used in this category. An “Interventional” folder could have subfolders for balloons, stents, guidewires and closure devices. And there could be a separate folder for peripheral cases, also broken down by balloons, stents and wires.

“You don’t want your techs to have to jump around from folder to folder during a procedure. You want 90 percent of what they need to reside in one folder,” he says.

Relationships along the supply chain are important, Szymansky says. When he developed product templates for the report-generating system in the cath lab, he met regularly with his technologists to receive feedback. After each use, the techs would suggest ways to improve the drop-down menus. Another key relationship he’s developed is with purchasing. When Szymansky wants to suggest stocking new or different products, he does research to help purchasing with its price negotiations. “I try to gather as much information as I can on any similar products we might have on our shelf, so purchasing can compare them. If it’s a new product, I try to get information on competitor’s products. All this information is in the system for them when they call the company to negotiate a price point.”
 

Proliferation of technology

Many of the challenges involved in inventory management are driven by the emergence of new technology—and physicians are leading the charge. They are looking at the latest studies, the best outcomes and are making decisions about what they want to use, but the hospitals may or may not have that product under contract.

“Contractors at group purchasing organizations (GPOs) just can’t contract new technology fast enough,” says Horne, adding that HMA employs HealthTrust as its GPO. “We’re constantly trying to stay ahead of the ball, but technology emerges so quickly and physicians want to treat their patients with the latest and greatest technology to provide the best outcomes that we are sometimes in a reactionary position as an industry.”

Having many purchases that are not compliant with contractual agreements can drive up costs because they are generally bought at list price and hospitals do not earn potential rebates on them. “We try to drive our hospitals to utilize the group purchasing agreements,” Horne says. “Our goal is to maintain a 95-plus percent compliance rate. If there is a contract product available, we expect physicians to use it 95 percent of the time.”

Horne stresses that HMA is not selecting products merely based on favorable cost. HealthTrust has a cardiovascular advisory board on which sits an HMA member. New products are evaluated within a hospital setting. Physicians report to the advisory board and it votes whether to contract the product or not. “We see contract compliance as an important initiative to drive down costs. We know as members of the HealthTrust advisory board that we’re not putting substandard products on contract just to hit a price point. We’re putting products on contract that have been evaluated extensively through the HealthTrust hospitals,” Horne says.

Each quarter, HMA reviews compliance. In the cath lab, for example, Horne and his team would look at the purchase order lines over the last three months and measure how many of those purchase order lines are contract and how many are non-contract. They also would examine the potential contract alternatives that could have been purchased. “Then our divisional materials managers work with individual materials managers, chief financial officers and cath lab managers to drive evaluations or conversions and make those changes within the lab,” he says.

Hospital administrators are increasingly scrutinizing departments with large inventories such as surgery and cardiology to decide whether or not to increase supply change management coverage. “More and more, I see hospitals where the supply chain is providing the manpower to manage these areas,” says Roeder. “They want to ensure the bottom line is met aggressively.”

For those cardiology departments that want to control their inventory management, a software tracking solution is integral to efficiency. However, any software vendor that offers its product must be knowledgeable about the system already in place, says Roeder, so they can guarantee it will be a smooth interface. “Unplanned interface problems will cost the facility time, money and resources and ultimately lead to frustration that could stall the robust utilization of the system. Too often, I have seen robust systems languishing from disuse because of poor interfaces,” he says.

The physician’s role

It also is important to have physician champions, says Green. “To have control of inventory management, it has to start at the physician level with physician buy-in for product choices. You need people who are part of the hospital system or champions from private practice who are connected strongly to the hospital who are willing to do this. If physicians are not oriented that way, they may demand you carry particular items at list price.”

North Shore Long Island Jewish Health System recently unified its pharmacies. Physicians and pharmacists from the 15 hospitals meet regularly to discuss whether a new item should be on formulary, pricing and the need for it,” Green says. “We save millions of dollars this way.”

In a white paper titled “Effective Asset Management in an Uncertain Economy,” David Berger, director of Western Management Consultants, Toronto, says that many senior management teams panic in uncertain economic times. Poorly targeted and executed cost-cutting can lead to morale and quality problems that could take years to undo. One sure way to avoid low morale is to have buy-in from senior management. In the cardiology department, it’s important to have physician champions who can help ease the transition from one product to another.

Echoing Roeder’s comments about having the resources to effectively manage electronic solutions, Berger says that needed expenses are often deferred: “The fat is cut, but so is muscle and bone.” Supply chain decisions should cut the fat only, he says.

Inefficient processes and systems can lead to poor asset management, while standardized, efficient, enterprise-wide processes, databases and systems can enhance management, Berger writes. This echoes HMA’s move to consolidate all 56 hospitals onto one materials management database system. It also confirms North Shore’s partnership with its corresponding hospitals in the health system to affect competitive pricing for products.

Finally, Berger correlates silo thinking with poor asset management. His solution is shared vision, processes and systems for mutual benefit along the supply chain.

Smart inventory control can seem like a very simple process: identify your needs, optimize your information management tools and understand the nuances of the supply and demand chains. Yet, there so many variables that hospital decision-makers need to know to keep costs under control, keep their physicians happy, and maintain a steady inventory. There are several key features that can help to ensure success: Strategic partnerships with managers and physicians along the inventory management continuum, physician champions for contract products, full implementation of software solutions and the necessary personnel to fully optimize inventory management information systems.