INVENTORY MANAGEMENT TRENDS IN HEALTHCARE ORGANIZATIONS

Inventory management in healthcare organizations – hospitals, clinics, medical centers and warehouses – has been going through profound transformations in recent years, mainly in the US, European Union and Southeast Asia. It is known in these regions that the total cost associated with managing drug stocks can represent between 35 and 50% of the total operating cost in a private health organization and can consume between 16 and 28% of the annual budget of a hospital with more than 50 beds. . In 1994, costs related to inventory management in a typical North American hospital reached US$ 16,7 million/year.

More important than the sheer magnitude of the total cost associated with inventory management is its year-over-year growth: over the last ten years, this cost has grown much faster than US consumer price indexes. Taking the North American economy as a comparison parameter, a similar phenomenon must be being verified in other countries, directing the attention of professionals in the area to the reduction of costs related to inventory management. The question is how to reduce these costs through greater operational efficiency and productivity gains, as a result of the implementation of adequate inventory management techniques, and not at the expense of the deterioration of the quality of the health service provided to patients.

THE CURRENT STAGE OF PLANNING AND CONTROL OF INVENTORY COSTS

The first step to be observed in the planning and control of costs related to inventory management is their identification and quantification. The total cost associated with inventory management in healthcare organizations is the result of the sum of several components, such as:

• expenses with the purchase (the amount that is actually disbursed in the acquisition of the medicine);
• resupply costs (shipping and placing the order via telephone, fax or internet);
• capital opportunity costs (time value of money, applied to the unit cost of acquiring the drug);
• storage costs (that is, the warehouse as a cost center);
• costs of lack of medication (lives at risk, lawsuits and indemnities);
• losses due to perishability (expiry date);
• etc.

The second step is to know the current stage of inventory management in healthcare organizations. In other words, identify which techniques are being adopted as a priority, what are the circumstances of their use, what is their adherence to health services, what are their challenges and limitations and what are the real opportunities for future improvement, based on the distance between the current status and best practices (benchmarks), not just from the healthcare industry, but from the industry as a whole.

According to CSC Consulting, inventory management in healthcare organizations “tends to be driven by the staff of physicians – who define the drugs and require the maintenance of high levels of inventory – in an environment of discontinuous product flow and paper-based information, where technology and decision support systems are incipient, business practices are inefficient and contract administration costs are high”.

A survey conducted in 117 hospitals in the states of Georgia, Alabama and Florida (USA) sheds light on the current stage of inventory management in healthcare organizations and its potential for future evolution. Considering the United States as a comparison parameter and a radiating point of initiatives and management trends for the rest of the world, it is possible to assess the transformations that health organizations in Brazil will undergo, which are described in the next paragraphs.

Inventory management is cited by the vast majority of managers, analysts or material supervisors at these 117 hospitals surveyed as the main function or task of their position. These managers also pointed out that inventory management is the function with the greatest need for computerization within healthcare organizations. Most of the time, control and decision-making are done without the use of specific computer systems to support the decision (Excel spreadsheets, hospital material management software, etc.).

Table 1 shows the degree of adoption, in percentage terms, of different inventory management techniques. Point of Order (PP), ABC Classification and Economical Purchase Lot (LEC) are the main techniques used in North American hospitals, with adoption, respectively, in 92,9%; 61,9% and 54,8% of the researched cases. Applications of materials planning scheduling techniques, such as MRP (Materials Requirements Planning), and zero inventory, such as Just in Time (JIT) resupply, are adopted by just under a third of the surveyed cases.

Considering the complex nature of health services, these results indicate that not only can different inventory management techniques be applied simultaneously in this sector (segmentation by type of medicine or item), but also that there is an enormous opportunity for the adoption of more sophisticated, either in purchasing planning or in the development of new commercial relationships with the pharmaceutical industry in general (laboratories and distributors).

SEGMENTATION OF INVENTORY MANAGEMENT TECHNIQUES BY DRUG

Regarding the segmentation of inventory management techniques by type of medicine, there are different factors that make the use of a single technique prohibitive and uneconomical for all items. Expiration dates, number of suppliers, seasonal demand or consumption, storage space and package sizes are examples of some factors. Other factors may be resupply expenses and unit acquisition costs, which may vary item by item.

For example, according to the South Texas Center for Pediatric Care (STCPC), drug resupply and drug purchase costs (and hence the opportunity costs of holding inventory) are the two disproportionately higher cost components of inventory management in the clinic. pediatric medicine, as indicated in Table 2. The cost structure, in this case, is the driving factor for the need to apply specific inventory management techniques for the drugs used in the treatment of children. Through techniques such as ABC Classification and Economic Purchase Lot, it was possible for the STCPC materials management to plan and execute specific actions for the most critical items.

Inventory held by the STCPC is currently divided into three categories: injectable drugs or vaccines, non-injectable drugs and office supplies. Contrary to non-injectable drugs and office supplies, some factors must be taken into account when managing injectable (vaccine) stocks:

• vaccines typically represent a small fraction of a pediatric unit's total inventory, but tend to represent a large percentage of the amount invested in inventory each year. That is, they are class A items. In the case of the STCPC, 7 vaccines out of a total of 113 items account for 68,7% of the annual investment in inventory, or US$ 154.100,00;
• vaccines are perishable and some of them require refrigerated storage, as is the case with Varivax (chickenpox vaccine);
• consumption is seasonal, strongly dependent on immunization campaigns and the beginning of the school year.

971 batches of vaccine are applied annually by the STCPC. This value can be considered as the annual consumption or demand (D). Each lot contains 10 ampoules. The estimated order placement cost (CTR), based on the materials management payroll and the estimated time to place an order with the supplier (30 minutes) is $34,72 per order. The unit cost of acquiring a batch of ten ampoules is US$ 158,70 (Caq), and due to US government subsidies, the opportunity cost of capital (i) of the STCPC is 8% per year. Annual storage costs(s) per lot of 10 vials are estimated at US$12,77, calculated based on annual rent, staff, and benefits expenses, which total US$12.404,18. Applying these parameters in the economic purchase lot formula, we have the following policy for the acquisition of lots of 10 ampoules:

According to the economic purchasing lot (LEC), 52 lots of 10 vials must be purchased every 19,54 days, which is the stock coverage for this lot size. Having these results as a starting point, the STCPC was able to adequately answer the following questions:

• Given the perishability of vaccines, is 19,54 days an acceptable parameter for stock coverage? What is the impact on the total cost if the vaccines are valid for 10 days?
• Is it possible to get quantity discounts from the supplier if the lot size is adjusted for 30 day coverage? What is the impact on the total cost?
• How to deal with seasonal consumption? What is the impact on total cost of adopting a dynamic or time-varying lot size?

DEVELOPMENT OF NEW COMMERCIAL RELATIONS WITH SUPPLIERS

The development of zero inventory programs, such as JIT resupply, initially involves changes in the supplier selection criteria adopted by the hospitals' materials management. Some research reveals that health organizations that developed these types of programs progressively attributed less importance to criteria such as price lists, quantity discounts, reverse auctions and more importance to the supplier's brand, long-term contracts, product reliability, and the response time of suppliers in routine and emergency situations.

In the health sector, JIT resupply is popularly known as Stockless Materials Management (SMM). The SMM practice emerged in the US healthcare industry in the 70s, becoming extremely popular in the 90s. According to the consulting firm Arthur Andersen, the most precise operational definition for the SMM practice is as follows:

The SMM practice is a program developed between the hospital and the supplier, in which the supplier assumes the hospital's central distribution function, that is, purchasing, sorting and packaging activities. To this end, the supplier delivers the necessary medications daily to the hospital's reception area, pre-allocated in specific boxes for each unit.

The second step for adopting this type of program is the establishment of a continuous flow of information between the points of consumption in the hospital (stockrooms, units or patients) and the supplier, in order to generate visibility of the consumption of the medicine. Through this visibility, it is possible to synchronize the resupply of the supplier with the consumption of the medicine.

Table 4 presents the main differences between conventional resupply and the SMM practice. The advantages of the SMM practice are related to inventory reduction, rationalization of support staff tasks and improvements in service levels. These benefits, however, did not come for free. In exchange for participating in these programs, drug distributors tend to raise prices by between 3 and 7%. More recent studies indicate that, depending on the type of medication, price increases can exceed 15%.

The reduction in inventories is due to a higher frequency of deliveries, which in some cases may lead to the elimination of central warehouses. In addition to Table 4, the case of two hospitals in the United Kingdom that, after the implementation of the SMM practice, experienced a reduction in stock levels of more than 70%, which corresponds to an average demobilization of tied capital of 800 thousand pounds sterling. On an equivalent scale, a US hospital with 427 beds reduced its inventories by nearly 80% over five years through a gradual implementation plan of the SMM practice.

It should be noted that, from the mid-90s onwards, the possibility of extending the SMM practice to all types of hospitals and medications began to be strongly questioned. Cases of failure in applying the SMM practice are related to hospitals located in rural areas or more than 450 km away from the supplier. Another critical element is the involvement of the drug manufacturer, since the SMM practice is limited to the distributor-hospital link.

Finally, some distributors question the SMM practice, as the focus is solely on reducing the opportunity cost of holding inventory rather than reducing the total costs related to inventory management. According to some distributors, increases in inventory levels can result in lower total costs. A Brazilian limitation to the adoption of the SMM practice by public hospitals is the purchase by bidding, which implies long response times and great uncertainty.

PURCHASE SCHEDULE

Recently, the North Carolina Baptist Hospital (NCBH) decided to replace the Point of Order system with the MRP for intermittent or irregular drug use. It is common for inventory management systems to calculate reorder points based on past average consumption, which can cause major distortions if consumption varies greatly. For example, if consumption in a given month is 10 units, but in the previous eleven months it is zero, the order point will be a fraction of the value 10, since dividing by 12 months results in an average monthly order point less than 1 .

It is known that the consumption of medicines in a hospital varies according to the type and number of procedures, the months of the year, the level of acuity, etc. NCBH converted these elements into MRP system independent demand. The logic of phasing the order point in time (Time Phased Order Point – TPOP) allows that the moment of placing the order is not the result of the reaction to the real demand, but rather the anticipation of future events that are often known, such as the scheduling surgeries and other procedures scheduled in advance.

According to TPOP logic, the moment of resupply of an item is based on the projection of its stock level for the next weeks. Replenishment must occur when the on-hand quantity falls below the item's safety stock level. The system schedules the release of the order backwards based on the supplier's response time, generating a purchase order. The quantity purchased must be determined by specific lot-sizing rules – such as the Economic Purchasing Lot – which can be easily incorporated into the system. By implementing the MRP and TPOP logic in an MS-Excel spreadsheet, NCBH was able to reduce inventory levels by 27%.

EMERGENCY CONSUMPTION OR CONSUMPTION SHOCK

An important aspect of inventory management in healthcare organizations is consumption in emergency situations. A hospital materials manager must not only establish inventory policies for normal operating conditions, but also ensure the hospital's capacity to meet emergency demand. Several studies show that some assumptions related to inventory management in emergency situations can prove to be wrong, especially if the consumption shock implies an increase of more than 300% in average consumption under normal conditions. There are three main pitfalls:

• Assume that high levels of inventory, sized for normal operating conditions, increase the ability to meet consumption in shock situations.
• Finding that reductions in central warehouse inventory levels necessarily increase the likelihood of a point-of-use (patient/unit) stockout.
• Consider that increases in the frequency of reviewing inventories at the point of use reduce the number of shortages.

When these assumptions are not valid in situations of consumption shock, the development of new commercial relationships with suppliers, such as the SMM practice, seems to be more effective from the point of view of the total cost than the increase in inventory levels and/or its dispersion by central warehouses and points of use. Additional studies are still needed to refine current knowledge on how to deal with consumption shocks in healthcare organizations.

CONCLUSION

Inventory management in healthcare organizations is an area in rapid development, in which profound transformations have allowed substantial gains to be achieved through the simultaneous reduction of total costs and an increase in the level of service. The key is to develop mechanisms or criteria for segmenting the different inventory management techniques by drug type, user and medical practice or clinic. In addition to segmentation, a necessary but not sufficient condition, consideration should be given to the adoption of computerized decision support systems and the development of new commercial relationships with distributors and manufacturers for leaner management.

BIBLIOGRAPHY

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