10 Steps to Improve Inventory Management and Reduce Cost

By Cheryl Flury

The ability to reduce costs, improve business operations and improve quality by improving supply chain processes has reached legendary proportions in healthcare. And, huge improvements have been achieved. For example, 10 years ago, very little business was being conducted electronically; smart mobile devices tracking patient, procedure and product information on the hospital floor were unheard of; disparate systems stood as lone silos, and not a lot of expertise existed for either sharing or reconciling data among them. Cloud-based services, while in use, weren’t recognized as the path to the future of understanding data in healthcare organizations.

Today, with better supply chain experience under our belts and a willingness to embrace best practices, well-established hospitals still see a widening gap between costs and revenue. With all of these improvements, where are the savings? Here are 10 things your organization can do now to reduce inventory costs:

1) Identify what level of inventory is needed to sustain clinical operations. Know the replenishment frequencies for each inventory area set for best labor productivity and verify whether supplies are replenished more frequently than necessary. Create visibility to and an accurate understanding of demand across the entire organization.

2) Understand the business and clinical processes in a given area – inventory systems are not “one-size-fits-all.” Use lean concepts to redesign processes that eliminate redundant steps and minimize the number of "touches," while ensuring you have the right inventory levels in the right places at the right times. An example of an area that may have unique requirements is the Emergency Department (ED). With immediate access needed to supplies, a system that can specifically support a quick “grab-and-go” approach, while eliminating stock-outs, is required.  

3) Have the conversation among finance, nursing and supply chain leaders to determine how your organization will handle product charges. What products must be captured and charged directly to the patient, versus those items that may be included as part of a procedure charge, or very low-cost and included in the room charge for an in-patient stay?

4) Form strong partnerships between supply chain and nursing. Create a leader in each region or for each business process; a super user who knows the system and processes. Identify a clinical champion for each area. Nurses are powerful partners in the design, implementation and adoption of lean processes.

5) Implement processes and technology that give supply chain visibility to every area of the hospital. To reduce inventory costs, accurate, real-time item velocity, across the entire organization is a must-have. Consider best-of-breed inventory management solutions and processes that can enhance your ERP or materials management system capabilities. Identify the technology lets you reach into every supply area in the hospital and connect the data, moving you toward more accurate, real-time reporting. 

6) Start with a clean slate. Actually remove expired inventory from your supply areas and work with finance to manage the write-off of these goods. Take them out of inventory, return the space on your shelves to productive supplies that your clinical team needs to care for patients. Make certain these items aren’t considered “used” by your inventory reporting system. Instead, they should be “wasted” so they aren’t factored into velocity reporting of your supplies.

7) Create an environment of performance monitoring, and set and measure realistic goals.  In many organizations, goals are set, but measurement proves difficult. Start with the goals. Measuring inventory turn improvements provides good indicators of your direction, but also, set goals measured in dollars. Understand the cost of inventory on-hand in your organization at the beginning of your journey, after six months, after a year.  Study the 80/20 rule (The Pareto Principle) of your inventory costs, and focus on those supplies that represent 80 percent of your spend. These can have the most significant and immediate impact on your inventory costs.

8) Remember inventory management is not a one-time activity. Monitor supply usage continually.  Reporting tools that continuously measure velocity for every supply your organization uses will help you adjust levels or reordering processes based on actual demand. 

9) When you’ve established good visibility to what’s needed, work through your excess inventories. Reducing excess inventories reduces inventory dollars on the balance sheet and improves financial ratios. And unlike scrapping obsolete items, there is no negative financial impact from inventory write-offs.  Cash flow improves, and there is less chance of dealing with obsolete products, so you’re also moving toward reduction of future write-offs.

10) Close the loop on your internal communication processes.  Earn trust from your clinical staff to help eliminate hoarding supplies in undisclosed locations. Work with nursing to build your plans; make sure they know how new processes will help them. Good change management requires ongoing communication.

Want more on this topic?  Read the complete white paper below: Reducing Costs by Improving Process and Technology for Inventory Management in Hospitals. Legend, Myth or Reality?