As I strive to find ways to reduce costs in our day-to-day operations, I want to ensure that whatever changes we make, our standard of care is not compromised in any way. In fact, I look for ways that combine cost efficiency with enhanced service — although this is not always easy to achieve.
Specifically, our supply costs — which are over a million dollars per year — consume a significant portion of our overall operating budget. This means a lot of our money is tied up in inventory that is sitting on our shelves. Reduced reimbursement and escalating expenses are further squeezing our margins and forcing us to cut costs and look for ways to be more cost efficient.
To help control our costs and improve cash flow, our supply partner, Medline, suggested we implement a supply management program that eliminates our inventory holding costs yet allows us to maintain access to our supplies. This is a form of consignment but with much more control and financial benefits. Types of products we put on this program include surgical packs and sutures, which are expensive items, as well as syringes and other basic supplies.
The following are four main benefits we have seen with our “access” inventory management program:
1. Improved cash flow
In a traditional supply management program, we would order our supplies on a weekly basis, receive an invoice, pay for the products and then have the supplies sit on our shelves. In this scenario, our money is tied up in the inventory. With our access inventory management program, we order our products, receive them and put them in our storeroom. But the big difference with access inventory management is we do not get billed until we use the products. Our money can now work for us earning interest in the bank or used for other investments in our facilities.
Each month, our sales representative counts our inventory, reconciles what products we used in the previous 30 days and then issues a report on the products we used. Once we’ve approved the report, we issue a purchase order and then we are invoiced. The invoice matches our purchase order every time, facilitating a clean accounts payable process with only one bill for a month’s worth of supplies.
Once we get our bill, we have up to 30 days to pay the invoice, which means we get extended terms of 45 days or more after we use the products. This extended time enables us to get reimbursed by third party companies before we have to pay the invoice, so we do not have to use other funds to pay our bills, extending our cash flow.
2. Reduced product obsolescence
Monthly reports tell us how long a product has been sitting on our shelves so we can monitor slow-moving items. In our previous supply program, we may have lost up to five percent of our inventory’s value due to obsolescence and expired product. Now, if we’ve ordered too much or our patient volumes have been lower than planned for a period of time, we have two choices on what we can do with the older product: we can move the inventory to one of our other facilities that may have an immediate need, or we can return it to our supplier. Either way, we save ourselves significant money by not letting old product go to waste.
3. Reduced administrative costs
We receive only one invoice every month. This invoice is based on a report of the products we used from our inventory. The invoice matches our purchase order in dollars and units because our purchase order was based on the usage report we received and approved.
This process has eliminated the labor intensive chore of our accounts payable department needing to match numerous invoices and receivings in order to pay our supplier invoices. Consequently, we have seen a reduction in our processing and administrative costs.
4. Enhanced inventory and purchase control
Every month we see our usage trends broken out for each facility. Reports that look similar to a checking account bank statement show us a beginning balance for each product in inventory, the amount of product received during the month and the amount of product billed during the month. This gives us strict accountability for the inventory and enables us to adjust our ordering levels based on usage.
Another benefit is that since the cost of holding inventory is eliminated with this supply management program, we can order “safety” stock, which reduces the possibility that an item will be out of stock if we have an unplanned jump in the number of cases. This also lowers our costs by reducing the number of rush deliveries we occasionally have each month.
Conclusion
Now that we have used this inventory management program for several months, we are looking to add more products to it. The no-holding cost program is ideal for surgery centers since our budgets are always tight and cash flow is at a premium. This program gives us the best of both worlds — it eliminates our investment in our inventory but keeps our shelves stocked with products so we have access to them when we need them. Consider discussing with your supply partner if such an arrangement can work for you and them.
Sherrye Crone is the administrator for Solus Management Services, based in Memphis, TN.
Medline Industries, Inc., manufactures and distributes medical products to healthcare providers including ASCs. Learn more at www.medline.com.
