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.


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