Managing Materials

July, 2007Materials

Cowan/Nowiki

Managing Materials

July, 2007Materials

Cowan/Nowiki

Healthcare Supply Chain

• Current State of the Supply Chain– $11 billion in process cost-saving opportunities– Institutions are lacking in technology and perspective in

implementing supply chain solutions

• Dimensions of the Supply Chain– Organizations that comprise the supply chain– Process tasks that drive activities for consumer demand

through manufacturer, distribution, and delivery– Information flows that must be in place to meet the

needs of the institutions and organizations

July, 2007Materials

Cowan/Nowiki

Materials Management

• Material Management is important because– It is necessary for good patient care– It is complex

• So many different items, qualities, prices, expectations• Requires many people to specify items, purchase, and

manage items

– It is a major satisfier for physicians– Cost

• To purchase, warehouse, distribute, dispose• Risk for malfunction, stock out, substitution

July, 2007Materials

Cowan/Nowiki

Materials Management• Organization

– Purchasing Department– Finance

• Budget• Asset Management• Financing• Group Affiliation• Accounts Payable

– Distribution• Receiving• Warehousing• Distribution• Inventory Management

– Disposal• Hazardous Waste• Salvage

– User Departments• Pharmacy• Surgery• Radiology• Nursing Units• Information Technology

– For each of these there are usually separate purchasing and distribution staff.

• Other– Maintenance, Installation

• General maintenance• Environmental Services• Biomedical Services

– Information Technology

July, 2007Materials

Cowan/Nowiki

MM – Some key issues

• What costs matter– Low inflation

• It is not the value of the inventory but the cost– To purchase– Of space– Of Distribution– Of Maintenance

– High inflation the cost of inventory matters (as does the days in AR and AP)

July, 2007Materials

Cowan/Nowiki

MM – Purchasing Cost

• Group Purchasing– VHA, Premier, UHC, Catholic Health Systems, HCA, – Volume purchasing – lower price but less flexibility and

innovation– Another layer of skimming

• But they invest in other forms of innovation that has high value (clinical process improvement, shared IT)

– Under investigation about 3 years ago and they restructured to encourage

• Innovation – (shorter contract lengths, more access to smaller suppliers – but still aggressive negotiating)

• Return purchasing savings, charge members for other services

July, 2007Materials

Cowan/Nowiki

MM – Other Issues

• Where to find the opportunities– Surgery

• Standardization – Prosthetics/implants– Disposables (surgeon gowns, surgical drapes)

– IT• End User devices• Software Licenses • Service Costs

– Radiology• Film• Contrast Media• Maintenance Agreements

July, 2007Materials

Cowan/Nowiki

MM – Other Issues

• Where to find opportunities– Pricing

• Audit of Group purchasing – Tiered pricing– Changed prices– Reconciling receiving reports and invoices

• Direct purchasing (when the depts order their own stuff)

– Limit when you can– Monitor when you can’t

July, 2007Materials

Cowan/Nowiki

MM-Where to find opportunities

• Standardization– Formulary in Pharmacy

• Limit the number and type of meds• Prepackaged or reconstituted/packaged on site

– Implants/catheters/drapes in Surgery

• Distribution– Unit dose packaging in Pharmacy– Bar coding for safety– Packaging for safety

July, 2007Materials

Cowan/Nowiki

MM- Where to find opportunities

• Distribution– Use of robotics in Pharmacy– Case carts in OR– Exchange Carts in Central Distribution– Outsource in Linens

• Service Agreements– Built into price/lease– Compare with manufacturer, Outsource,

Inhouse trained group

July, 2007Materials

Cowan/Nowiki

MM- Where to find opportunities

• Salvage– Silver Recovery– Incinerator – power generation

July, 2007Materials

Cowan/Nowiki

Defining Materials Management

July, 2007Materials

Cowan/Nowiki

Defining Materials Management

Materials management is themanagement and control of inventory,services, and equipment fromacquisition to disposition.

July, 2007Materials

Cowan/Nowiki

Primary Objective of Materials Management

July, 2007Materials

Cowan/Nowiki

Primary Objective of Materials Management

To minimize the total costs associatedwith materials while ensuring that theproper materials, both in terms ofquantity and quality, are readilyavailable for patient care.

July, 2007Materials

Cowan/Nowiki

Defining Inventory Management

July, 2007Materials

Cowan/Nowiki

Defining Inventory Management

Inventory management is themanagement and control of inventory,or items that have an expected usefullife of less than one year.

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

-The right kind of materials on-hand.

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

-The right kind of materials on hand.-The right amount of materials on hand.

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

-The right kind of materials on hand.-The right amount of materials on hand.

-time and lag time.

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

-The right kind of materials on hand.-The right amount of materials on hand.

-time and lag time.-uncertainties.

-ABC inventory method-Just-in-time inventory (JIT)

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

-The right kind of materials on hand.-The right amount of materials on hand.

-time and lag time.-uncertainties.

-ABC inventory method.-Just-in-time inventory (JIT).

-discontinuities.

July, 2007Materials

Cowan/Nowiki

Importance of Materials Management

To serve patients in the best possiblemanner by having

-The right kind of materials on hand.-The right amount of materials on hand.

-time and lag time.-uncertainties.

-ABC inventory method.-Just-in-time inventory (JIT).

-discontinuities.

Cost--inventory is a non-productive asset

July, 2007Materials

Cowan/Nowiki

Valuing Inventory

July, 2007Materials

Cowan/Nowiki

Valuing Inventory

First-in, first-out (FIFO) produces aninventory of newer items; therefore,the total cost of inventory isdetermined by multiplying the unitcost of the newest items in inventorytimes the number of units ininventory.

July, 2007Materials

Cowan/Nowiki

Valuing Inventory

Last-in, first-out (LIFO) produces aninventory of older items; therefore,the total cost of inventory isdetermined by multiplying the unitcost of the oldest items in inventorytime the number of units in inventory.

July, 2007Materials

Cowan/Nowiki

Valuing Inventory

Weighted average determines theaverage unit cost and multiplies ittimes the number of units ininventory.

July, 2007Materials

Cowan/Nowiki

Valuing Inventory

Specific identification determines theactual cost of each item in inventory.

July, 2007Materials

Cowan/Nowiki

Inventory Valuation Problem

ABC Outpatient Clinic purchasedsurgical dressing trays on thefollowing dates and amounts:

July, 2007Materials

Cowan/Nowiki

Inventory Valuation Problem

units price total

Jan 1 beginning balance 100 $10 $ 1,000March 1 purchase 400 12 4,800May 1 purchase 400 13 5,200July 1 purchase 300 14 4,200September 1 purchase 200 14 2,800November 1 purchase 100 15 1,500 Total 1,500 $19,500Ending inventory on Dec.31 150

July, 2007Materials

Cowan/Nowiki

Inventory Valuation Problem

Using FIFO, LIFO, and weightedaverage, what is ABC’s ending cost ofinventory?

July, 2007Materials

Cowan/Nowiki

Inventory Valuation Problem

FIFO (ending inventory is comprised of the most recent 150 trays) purchased

November 1 costs 100 $15 $1,500September 1 costs (apply 50) 50 14 700 Ending Inventory 150 $2,200

July, 2007Materials

Cowan/Nowiki

Inventory Valuation Problem

LIFO (ending inventory is comprised of the oldest 150 trays purchased)

January 1 costs 100 $10 $1,000March 1 costs (apply 50) 50 12 600 Ending Inventory 150 $1,600

July, 2007Materials

Cowan/Nowiki

Inventory Valuation Problem

Weighted average (ending inventoryis comprised of the average cost pertray times the ending inventory inunits)

$19,500

1,500= $13.00 per unit x 150 = $1, 950

July, 2007Materials

Cowan/Nowiki

Costs of Inventory

July, 2007Materials

Cowan/Nowiki

Costs of Inventory

Purchasing cost represented by price(P) x demand(D)

July, 2007Materials

Cowan/Nowiki

Costs of Inventory

Ordering cost represented by O

July, 2007Materials

Cowan/Nowiki

Costs of Inventory

Carrying cost which includes anopportunity cost

IP

Q

2

July, 2007Materials

Cowan/Nowiki

Costs of Inventory

and a holding cost

HQ

To make total carrying costs

HQ+IPQ

2

July, 2007Materials

Cowan/Nowiki

Costs of Inventory

To make the total cost associatedwith stocking one item for one year

PD+

DQ

O+(HQ+IPQ2

)

July, 2007Materials

Cowan/Nowiki

July, 2007Materials

Cowan/Nowiki

Management of Inventory

• Economic Order Quantity: quantity of items that should be ordered each time– EOQ or Qc = √(2DO/(IP + 2H)

• Reorder Point (RP): # of units at which inventory is reordered; demand during the lag time; i.e. RP = (Annual demand / days per year) x lag time

Quantity

Time

Constant demand

Reorder point

Possible stock-out

Possible overstock

Lag Time

July, 2007Materials

Cowan/Nowiki

Economic Order Quantity

July, 2007Materials

Cowan/Nowiki

Economic Order Quantity

Economic order quantity (EOQ or Qe or Q)

Qe=

2DO

IP+2H

July, 2007Materials

Cowan/Nowiki

EOQ/TC Problem

• See Problem 10.2 on page 149

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

Find the reorder point under conditions of uncertainty, given the following

stock-out cost = $7.50overstock cost = $2.00probability of meeting demand

.10 .25 .30 .25 .10135 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point

135 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point

135 ? 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point

135 .00 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point

135 .00 ? 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point

135 .00 1.88 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point

135 .00 1.88 ? 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point Cost

135 .00 1.88 4.50 5.63 3.00 15.01 136 137 138 139

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point Cost

135 .00 1.88 4.50 5.63 3.00 15.01 136 .20 .00 2.25 3.75 2.25 8.45 137 .40 .50 .00 1.88 1.50 4.28 138 .60 1.00 .60 .00 .75 2.95 139 .80 1.50 1.20 .50 .00 4.00

July, 2007Materials

Cowan/Nowiki

Reorder Point Under Conditions of Uncertainty

potential demand

135 136 137 138 139probability .10 .25 .30 .25 .10Reorder Point Cost

135 .00 1.88 4.50 5.63 3.00 15.01 136 .20 .00 2.25 3.75 2.25 8.45 137 .40 .50 .00 1.88 1.50 4.28 138 .60 1.00 .60 .00 .75 2.95 139 .80 1.50 1.20 .50 .00 4.00

July, 2007Materials

Cowan/Nowiki

Evaluating Inventory Performance

July, 2007Materials

Cowan/Nowiki

Evaluating Inventory Performance

Inventory Turnover Ratio

total operating revenue

inventory