As ASC and community hospital financial consultants, a recurring theme we encounter is what approach should small- to mid-sized facilities take in regards to their material management functions? There are typically three scenarios: material management as an administrative function, a management function or a financial function. The range of dedication to material management varies from full-time material managers, to administrators performing material management functions, to clerks and accountants substituting as material coordinators. More often than not, as a material management division grows, so does the complexity of its operations. As complexity grows, so do inefficiencies.
As we analyze a facility's approach and dedication to its material management, there's a very simple question that must be asked, a question whose answer gives us the insight we need, an answer that not only lets us know how a facility is organized and functioning, but also gives us visibility into the mindset of the managers running the department. The question is:
"Is your materials division organized as a warehouse facility or a production facility?"
The differences are profound and cut to the very heart of a material management division's purpose. Over 95 percent of the facilities we've worked with are designed as warehouse facilities, regardless of what the manager believes. Whether a facility is a community hospital or an ASC, both were born from the larger concept of a general hospital, an environment where the facility needed to be stocked for all forms of contingent procedures. Even in larger hospital settings the concepts outlined in this article can be applied to dramatically reduce medical/surgical supply costs (up to 40 percent in some cases) and distribution costs (up to 70 percent). In addition to reducing supply costs, a complete makeover of inventory management is capable of the following: reducing inventory days by 80 percent, reducing inventory reconciliation and par level accounting times by 60 percent, reducing inventory touch points by over 95 percent, and in the end, reducing the overall cost of inventory by over 75 percent.
All of these cost savings and efficiencies are possible through various concepts developed in other industries including: Lean manufacturing, JIT (just in time), TPS (Toyota Productions System), ISO 9000 and Baldrige. A variety of these techniques can be used to transform material management divisions from warehouse facilities to production facilities with dramatic consequences on their cost structures. While the focus of this article is inventory management, a few quick words need to be said about supply and distribution costs.
Price parity
Top priority when dealing with material management, inventory and cost savings should focus on the price facilities are paying for their supplies. In today's world this means group purchasing organization pricing. The single biggest issue for smaller facilities is volume aggregation. You could be rostered on the largest GPO in the country, but if you're paying tier one pricing for the majority of your items, your GPO is getting more from its relationship with you than you are from them. It's also important to focus on the quantity of contracts your GPO has available for its membership. There are single source GPO's that offer good pricing; however, common problems with this approach is a facility might have multiple sources for similar items, paying GPO contract pricing from one manufacturer while list price from another.
The bottom line for GPO pricing: Look for consultants and management companies that have approached GPOs from the position of being an integrated delivery network, a facility that has the capacity to aggregate all of their volume together to access higher tiers. If you're able to take this approach, you'll get pricing parity within 5 percent of the largest health care systems in the country. In our practice we've seen cost savings in excess of 25-40 percent following these simple recommendations, well worth your time and effort.
Distribution fees
Distribution fees also have the ability to be dramatically reduced. Being able to group facility volumes and negotiate reduced distribution fees could mean savings of up to $100,000 a year for a mid-sized community hospital. ASCs are typically charged higher distribution fees which allow for even larger savings on a percentage basis. Once again, being able to aggregate multi-facility volume to achieve lower rates is essential.
Now's time to roll up our sleeves and begin the real inventory management control work.
Inventory overhaul
With pricing under control, it's time to transform material and inventory processes from warehousing to production. The key conceptual change in this process is simple: In the ASC environment, 95 percent of the surgical procedures are scheduled: in a community hospital, it's roughly 70 percent. These numbers clearly indicate these facilities operate on a production basis, a patient comes in, a procedure (production) is performed and the patient leaves. Inventory should be structured accordingly.
In a production-based facility, inventory is scheduled to arrive concurrently with production scheduling. For ASCs this means within a day or two of the scheduled procedure. Total inventory holding time for the supplies associated with a procedure shouldn't exceed 5 days. If an ASC is utilizing TPS, 80 percent of its inventory should be turned over on a weekly basis.
Reducing touch points
A typical ASC orthopedic procedure requires 25 standard supplies to be pulled from inventory during surgery set-up (on average). Those 25 supplies flow through at least six different material management processes (sometimes as many as eight) during their lifetime: ordering, invoicing, receiving, reconciliation, stocking, pulling, OR set-up and, reordering. For 25 items with an average of six processes, this equates to more than 150 "touch points" for a single scheduled procedure. Multiply that by the amount of procedures a center performs in one day and we start to understand the size and scope of this issue. Thankfully, TPS and JIT once again offer solutions.
One concept to employ as a solution is called "unitized product delivery." For each specific procedure, supplies are delivered not as 25 separate items, but as one item, standardized to the specifics of the procedure and the physician. For each procedure there is one item to handle, rather than 25. By unitizing delivery it is possible to reduce touch points from over 150 to six, a 96 percent decrease in time and manpower. Unitizing production creates efficiencies along every aspect of the supply chain. According to Jason Bennett, director of sales and marketing for vonGal Palletizers, unitizing is the unsung hero of materials handling. "Unitizing is an underutilized way to squeeze savings out of the materials handling process," says Bennett. "It helps answer the call for lowering operating costs while focusing on the bigger picture of decreasing our carbon footprint and lowering our impact on the environment."
Zero-cost inventory
In addition to unitizing delivery options for procedural supplies, it's crucial to employ a process that allows facilities to delay payment on inventory until after consumption. By changing ownership of inventory from the facility to the distributor, the cost of inventory is reduced to zero — a simple conceptual change that adds another layer of efficiency and cost savings. The process of changing ownership of inventory to a consignment structure is driven by suppliers and distributors. If your distributor doesn't have this program available, find one that does.
No longer does a facility have to stock hundreds of thousands or even millions of dollars' worth of inventory with the presumption that one day it will be used. Supplies are now delivered within days of a scheduled procedure, specifically for that procedure and in a unit that simplifies handling.
Technology
Technology plays an integral part of any inventory transformation. If your facility isn't engaging handheld computers, bar code scanners, EDI, automatic par level ordering, etc., there is a very real layer of work that can be eliminated. The technology is available and the right management company will more than likely be able to implement it into your facility free of charge.
Total inventory transformation
Each step outlined above combines into a very powerful, cost-effective transformation of inventory systems. Facilities run as warehouses are extremely inefficient and carry high costs. Production facilities run on a very lean process, waste is eliminated and costs can be dramatically reduced. The goal for every facility should be transforming inventory management into a financial function. Material management as a financial function enhances revenue, increases efficiencies and creates the potential for increasing production. If facilities can streamline material management to the point that more time can be focused on patients and the amount of procedures a facility can schedule is increased, patient care and productivity are simultaneously enhanced.
Changing material management psychology to that of a financial process rather than an administrative one actively focuses every member on the impact that change can have. As material management begins to see itself as a financial function, we've learned through Baldridge and ISO 9000 that efficiencies will accelerate. Checks and balances are inserted, processes are tracked and monitored, and their impact on patient satisfaction can be assessed. The bottom line being managers will become more active in the pursuit of cost savings, and the entire division will run much leaner, the net result being efficiency, productivity and exponentially improved patient care.
Via Novus Medical is a healthcare financial and material management consultant to small and medium sized healthcare providers in the ambulatory and acute care marketplace. Learn more about Via Novus Medical.
This article was originally written for the Texas Ambulatory Surgical Center Society.