Action Plan for Supply Chain Costs

You may be interested in the kinds of cost reduction opportunities we might find and how each might be addressed. Here are a few examples:

Automated Ordering Costs

Automated storage and ordering systems, such as Omnicell and Pyxis, can generate huge numbers of orders in certain situations. The key here is that the storage for fast-moving items must be large enough to accommodate both a cost-sensitive order frequency and a space-sensitive order quantities. These primary order cost drivers are typically handled by PAR and refill level settings. Space-constrained (insufficient) storage results in PAR and refill values that must be set too low relative to end-user demand. In such cases, the automated systems can order far too frequently and in too small a quantity. This can drive your supply chain handling expense through the roof. One solution is to intercept and consolidate machine-generated orders where necessary so as to minimize supply chain ordering costs. Another solution might be to eliminate the space constraints by relocating slow- and non-moving items.

Low Unit of Measure Ordering Costs

Ordering in eaches or other small units of measure can greatly increase your order handling costs. Even though being able to order in eaches is very convenient for slow-moving and special-order items, it is typically not disciplined so as to apply just to such items. It gets applied to all items, including fast-moving, high-volume items. This results in very high receiving costs as the eaches are counted, inspected and put away. These orders also have a very high incidence of billing problems where vendor picking errors or hospital receiving clerk counting errors create invoice-order-receiver discrepancies that are time-consuming to resolve. The answer is to order in case or primary unit of measure wherever possible.

Backorder Handling Costs

Hospital supplies vendors place great importance on their first-shipment service level. The higher this service level, so the theory goes, the fewer stockouts that occur. Well, it doesn't seem to work out that way. Many hospital staff members who must deal with stockouts say that the service levels of most primary vendors are fine. But what isn't fine too often is their ineffective handling of stockout fixes. Many vendors apparently are not knowledgeable and thus not helpful about which products might be suitable substitutes for the stocked-out item. Hospitals must search around themselves for replacement items, often turning a stockout from a minor, routine problem into a major, crisis problem. A possible solution: Vendors might set up hot lines for at least their best customers — lines staffed with real experts, such as experienced RN's.

Duplicated Point-of-Use Stocking

You might think that having all of the necessary items stocked within each hospital unit would be a good idea. It does succeed in cutting down nurse and nursing assistant trips to hunt down supplies missing from their local stockroom. However, many stock duplications occur on the same floor, with nearby unit stockrooms located within roughly the same walking distance. Worse yet, many of the duplicated items are costly, rarely used items. One solution: Sharing storage for slow- and non-moving items, either by having each unit be responsible for a portion of the shared stock or by setting up a shared stock area on each floor for these items.

Storage Space Mismanagement Costs

Which brings us to another unexpected but, in retrospect, almost obvious finding: Hospitals do not manage their storage space as efficiently as they could. This drives up inventory costs as well as the costs generated by working with poor space utilization. We see, for example, a third of the stocking space in a patient care area — where space is always at a premium — being used to store very slow moving and non-moving items. Another third is dedicated to occasional use and slower-moving items. This leaves just a third of the space for the bulk of what moves through the storage location — often a costly and inefficient use of space. One solution: Space management similar to what retailers use to make the most effective use of their limited shelf space.

Physician Preference Items (PPI's)

Doctors tend to want their preferred brand of supplies (and other items) that they feel are important to the quality of their patient care. This unfortunately creates the need for a very large number of often-costly, physician-unique items that have to be bought, handled and stored. A major part of a typical hospital's inventory is likely to be consumed by these PPI's. Operating rooms are generally the main contributors to this set of costs. A solution: We don't have one — yet. But we'll keep chipping away at the problem until we run across something that works.

These are just a few of the examples we have seen first hand. Many, if not most, are likely to be common to the majority of hospital supply chains. In addition, each institution is likely to have its own special set of costly supply chain processes.

Practice:   4. Prioritizing Actions

Action planning typically generates a laundry list, with little sense for relative value. The list must be pared down and prioritized before action decisions are made. Some thoughts on where the $$$ may lie ... Finding the Largest Opportunities ...

To return to the main topic list ...

 

Action is the Goal

In our studies, we try to envision action possibilities from the outset. This helps keep the analyses and model sharply focused on action rather than on fat reports and busy charts.

An action foundation also guides the data we utilize and how we analyze it. If we can't clearly see a practical end-use, we drop it.

Action helps prioritize where we spend most of our effort. If we find a large pool of high costs but find these costs hard to address, we will move on to more accessible cost takedowns. Physician preference items are a prime example of big costs but very tough to address.

Project output is an action plan that includes findings upon which it is based. Other supporting results can be provided as needed but the main focus is on action.