Inventory Management: Taking Stock of Best Practices

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 to negotiating and managing relationships with suppliers. “By necessity, the outsourcing relationship with the GPO is not going to go away,” Gopalakrishan adds. “What increases the cost is what is inside the GPO and outside the GPO—and the general theme is that if any item gets out of the GPO, the chances are the cost is going to go up, even though in the interim, it’s going to look like the cost is going down.”

Leveraging IT systems

Cardiology departments and labs need to know what supplies are needed, the quantity and cost, as well the expiration date. With many supplies on hand, stock expiration can mean lost revenues and potential patient safety issue, especially due to the lack of industry standards for barcoding products. For example, Company A might have two different barcodes for one product, such as a catalogue number and a number for lot and expiration, while Company B might only use one barcode for all. The challenge then is keeping track of the diversity and getting expired product off the shelf.

Some manufacturers tout the capabilities of IT systems such as Clinical Supply Solutions, formerly QSight, to close that gap, according to Karen Hagarty, material resource utilization specialist at Covenant HealthCare, Saginaw, Mich. With QSight, Hagarty can scan in all inventory items, regardless of manufacturer and barcode, and track quantity and cost as well as expiration dates. She also can identify whether a product is a consigned product or purchased product.

In negotiating with vendors, the department can leverage the capabilities of the system to track expired product to secure more advantageous contracts. For example, the department can leverage the tracking capability and offer the supplier an added value of notification for when it is time to move expired stock off the shelf. They also can leverage the capability to generate itemized reports that show drug-eluting stent usage, high-end device usage, size of stent usage, compare costs and monitor what items are PPIs.

“I can reconcile at the end of each month to find missing stock or expired stock, look at current prices compared to what other vendors offer; look at purchases versus actual usage—all of which tell us how much leverage we have to negotiate a product,” Hagarty says.

Receiving notification of what products on consignment are about to expire and tracking actual usage are beneficial on both sides of the table. If a vendor will not do consignment, and the department has to purchase the product outright, such features can provide leverage to negotiate perhaps a written No Expiration Guarantee into the contract, so no one loses revenue.

But is IT the silver bullet?

When new technology is introduced into the healthcare supply chain, management and control issues are created that must be considered prior to the contract. Conducting a thorough assessment of inventory management processes and stock can help mitigate those issues and realize ROI.

Administrators must ask themselves how a new IT technology deployment will impact workflow and inventory management processes, since introduction of the new technology may cause the price or value of current inventory management processes to change. For example, using a system with RFID may add two to three hours to an inventory coordinators day just in putting the stickers on stock, which has the potential to increase his or her overtime. If the hospital has any stock on consignment, administrators must question what happens to any un-used or expired products that now have RFID tags on them? Will the vendor take them back, now that the package has been altered?

“You must identify what you need for the procedures you are doing, identify what that shelf level should be for up periods and down periods, evaluate the dollar value of the human resource currently investing in inventory management processes and look at product use and availability,” Nelson says, adding that these are the things administrators are going to need as justification for doing something different.

Nelson warns, however, that despite the ability of inventory management tools and systems, the reality is they cannot close the gaps within the lifecycle that need human intervention/interaction.

“A fundamental change is slowly creeping in,” says Gopalakrishnan. “Hospitals are getting sensitized to taking ownership of inventory and in having a stake in understanding how much they consume, in understanding the impact of variety on the cost of an operation and that variety takes more labor and time to manage. It’s a people issue and a behavioral issue and hasnothing to do with technology.”

Tackling inventory management is a necessary, albeit unglamorous, undertaking that requires more than just purchasing a software system as a solution. It requires a deep analysis of the ins and outs of personnel, processes and, stock to better negotiate and manage the capabilities of your suppliers and balance that with the demands of your physicians.

A Closer Look at a GPO

Using a group purchasing organization (GPO) to negotiate the purchase of medical goods and services can be a relief for hospitals or other healthcare provider organizations included in the GPO membership, according to Michael Ainsworth, director of cardiovascular contract services for Novation, a GPO based in Irving, Texas.

Novation serves the purchasing needs of more than 2,300 members and affiliates of VHA and UHC healthcare organizations, with national contracts for inventory such as drug-eluting stents, pacemakers, ICDs, balloons, guidewires, leads and biliary stents. A cardiovascular council of hospital administrators, lab directors and physicians reviews contracts to ensure Novation is acting on behalf of its members.

Members can use their own purchasing agreements to negotiate local pricing if need be; however, hospitals should approach local pricing agreements with trepidation, Ainswirth says. “If we know a second-generation product is coming down the pipeline, we let our members know and advise them against locking in at a certain local price, since it will go down over time,” he says. “In that case, negotiating a short-term contract or even a beneficial out-clause would allow you to renegotiate price as new technology enters the market.”