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Managing Materials. 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 - PowerPoint PPT Presentation
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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
