Taking Stock of Your Department
By Bryant C. Broder, CSPDT, ACSP
Inventory. The word has been around since 1523. Perhaps more powerful than it sounds, the word "inventory" can make CEOs cringe at the thought of the investment!
Our good friends at Merriam Webster define inventory as: an itemized list of current assets; a catalog of the property of an individual or estate; a list of goods on hand; a survey of natural resources; the quantity of goods or materials on hand: stock; and the act or process of taking an inventory.
The list or catalog of your "current assets" in CS can be enough to make a 6-inch binder scream with pain, not to mention the aforementioned CEO, CFO, and materials manager! Volumes have been written on inventory control and inventory management over the years, most of which was written for the manufacturing or retail environment.
Inventory is one of the hospital's largest assets, however, many CEOs aren't satisfied with the contribution inventory makes toward the overall success of the business until it isn't where you need it when you need it. In other words, inventory management plays an integral part in program efficacy, but the skill is undervalued and may go largely unnoticed until there is a problem, such as:
- The wrong quantities of the wrong items are often found in CS, surgery, and warehouse shelves. Even though there may be a lot of surplus inventory and dead stock on your shelves, the right stock isn't available when customers request it.
- Inaccurate computer inventory records. Inventory balance information in the computer system does not accurately reflect what is available for sale in the warehouse.
- Unsatisfactory return on investment. Considering hospitals' substantial investment in inventory, profits are far less than what could be earned if the money were invested elsewhere.
Measuring Inventory Performance
In the new Training Manual for Central Service Technicians, published by the American Society for Healthcare Central Service Professionals (ASHCSP), there is a useful chapter on measuring inventory performance. Inventory turnover can be defined as the annual dollar value of items issued from CS, divided by the dollar value of supplies stored in CS. Collecting and organizing the data to run this equation may seem a daunting task to address, but once you've done it you'll be able to better manage one of the hospital's most valuable assets.
Inventory turnover is calculated with the following formula: Cost of goods sold from stock sales during the past 12 months divided by the average inventory investment during the past 12 months. There are several things to keep in mind when calculating turnover rates:
- Only consider cost of goods sold from stock sales, which are filled from warehouse inventory. Non-stock items and direct shipments are not included. Sure, these sales are important, but don't involve your warehouse stock (i.e. your investment in inventory).
- Inventory turnover is based on the cost of items (what you paid for them) not sales dollars (what you sold them for). Inventory turnover depends on the average value of stocked inventory.
To determine your average inventory investment:
1. Calculate the total value of every product in inventory (quantity on-hand times cost) every month, on the same day of the month. Be sure to be consistent in using the same cost basis (average cost, last cost, replacement cost, etc.) in calculating both the cost of goods sold and average inventory investment.
2. If inventory levels tend to fluctuate throughout the month, calculate the total inventory value on the first and fifteenth of every month.
3. Determine the average inventory value by averaging all inventory valuations recorded during the past 12 months.
As you determine your inventory turnover goals, consider the average gross margin the hospital receives on the sale of products. The lower the margin, the higher stock turnover.
Finally, calculate inventory turnover separately for every product line in every location. This will allow you to identify situations in which inventory is not providing an adequate return on investment. To improve inventory turnover, consider reducing the quantity you normally buy from the supplier. Inventory turns improve when you buy less of product, but purchase them more often.
If your system is not performing up to its potential, be sure you have implemented each of the following characteristics of good inventory management:
- Protect your department against theft. Pilferage is a larger problem than most people realize. Make sure that the only people in your department belong in your department. Ensure that access is secure and limited.
- Establish an approved stock list. Most dead inventory is "DOA" (dead on arrival). Order only the amount of non-stock or special-order items that will be used. Before adding an item to inventory, review it with the value analysis committee.
- Assign and use bin locations. Assign primary and surplus bin locations for every stocked item. All picking and receiving documents should list the primary bin location (in either characters or a bar code). With correct bin locations on documents, order picking is probably the least complicated job in your warehouse. Assign inexperienced people to this task and your most experienced workers to receiving inventory and stock management.
- Record all material leaving your department. There should be appropriate paperwork for every type of stock withdrawal. Under no circumstances should material leave the warehouse without being entered in the computer. Eliminate "no charge/no paperwork" material swaps. Process paperwork in a timely manner.
- Set appropriate objectives for your buyers. Buyers should be judged and rewarded based on the customer service level, inventory turns, and return on investment for the product lines for which they are responsible.
- Make sure every employee is aware of the cost of bad inventory management. Inventory loss through theft, breakage, or loss and obsolescence must be paid for with net profit dollars.
- Ensure that stock balances are accurate and will remain accurate. Implement a comprehensive cycle counting program. A good cycle counting program can replace your traditional year-end physical inventory.
So, what is effective inventory management? Having the right product or instrument in the right place at the right time...with no additional costs.
Bryant C. Broder is processing manager in surgical services at St. Mary's Mercy Medical Center in Grand Rapids, MI. He also serves as president of the American Society for Healthcare Central Service Professionals (ASHCSP).