Chapter 20 Summary
The Shaping of Inventory Systems in Health Services
Jan de Vries - University of Groningen
Karen Spens - Hanken School of Economics
This chapter summary provides a very high level overview of some consideration in designing inventory systems.
The big take away is that the finely tuned industrial manufacturing models may fall apart, given the number of stakeholders in hospital inventory systems with conflicting positions.
For practical inventory management advice, please see one of my most widely read articles: Stocking Hospital Supply Rooms (Two-Bin Kanban)
“Despite the fact that hospitals carry large amounts of a great variety of products, studies suggest that healthcare organizations still pay little attention to the management of inventories”
The chapter opens with the statistic that inventory costs account for 10-18% of net revenues in healthcare. I suspect this is a total healthcare expenditures, because I’ve seen some statistics showing supplies account for up to 1/3 of a hospital’s budget.
The chapter identifies three major questions of inventory systems
1) How much to order?
2) What are the costs to order vs stock the goods?
3) What inventory control system can manage the above processes?
There are many mathematical models that try and help answer these questions.
A simple one is the Economic Order Quantity (EOQ), “the order quantity that minimizes the total holding costs and ordering costs” (wikipedia).
Another is the Economic batch quantity (EBQ) - a flawed, but frequently used system for planning inventory. The equation incorporates the costs to produce a batch, to hold a batch in inventory, and the annual demand and production capabilities. (accounting-simplified.com)
The issue is that many of these quantitative models fail to account for the qualitative complexity in organizing supplies in healthcare. They may be designed better for factories and industry where tighter control of the manufacturing process is present.
Part of the complexity arrises from the number of stakeholders with different viewpoints on how the supply chain should be managed. For instance, finance, administration, clinicians, pharmacy, industry, and politics may all have different views on how much should be kept in stock and where, and what the process to order more is.
There also may be debate within an organization on who is responsible for paying for capital tied up in supplies and inventory.
Open Stock: stock dispensed to patient
Closed stock: stock dispensed to unit / ward / department
2. Four decision areas when designing an inventory management system
2.1 Physical Infrastructure
The location and number of stock points is directly related to (1) how the goods are used in the hospital, and (2) how the goods are delivered and supplied to the hospital.
2.2 Planning and Control Systems
Stock planning involves balancing the timing of stock refills and the quantity of refill. This is influenced by the good’s demand, uncertainty in its usage pattern, and it’s critical nature.
2.3 Information System
Information Systems help track and plan hospital inventory. The major downside is that many hospitals have not fully integrated their different IT systems, and this leads to an incomplete and delayed picture of product usage.
2.4 Organizational Embedding
There are many stakeholders [lab, pharmacy, clinicians, administration, finance, IT, etc] involved in hospital inventory systems, and often they have conflicting interests. Some users want product always available and quickly delivered, whereas other stakeholders have a strong focus on minimizing inventory costs. Involving as many stakeholders early in the inventory (re)design process is important.
3. Example: A Dutch Hospital
A midsize Dutch hospital with 400 beds is presented as the chapter’s example. It was studied in 2006-2008. The hospital employs 150 people in inventory.
During the six month analysis phase it was discovered
43% of the time stock levels were below minimum safety level
These low stock levels lasted on average 20 days
16% of the time stock almost ran out and had to be rush ordered.
To diagnose the cause, the model proposed above in section 2 was used:
Physical infrastructure: too many stock points
Planning and control: fragmented storage and ordering
Information systems: many platforms, not well connected
Organizational embedding: pharmacy was thought to not be transparent in how it approached stocking.
Again, I highly recommend for practical inventory management advice, the very popular article I wrote two years ago: Stocking Hospital Supply Rooms (Two-Bin Kanban)