Saturday, October 20, 2012

Focus and Leverage Part 150

In my last blog posting I discussed why I thought it was imperative to use an integrated Lean, Six Sigma and Constraint’s Management approach in healthcare.  In this posting, and for the next several postings, I want to continue my healthcare discussion and how the tools of the Theory of Constraints can help healthcare organizations improve their performance.

One of the problems facing all healthcare facilities is in the area of inventory of medicines, supplies, etc.  It seems that hospitals are many times running out of an important SKU when it’s needed most.  So to guard against these SKU stock-outs, many times the size of the inventory is increased and even though there’s more inventory in the hospital stock room, there are still shortages that occur.  It’s frustrating to say the least!  In fact, one of the primary drivers of the constantly increasing cost of healthcare is the cost of materials management.  There have been some studies that have estimated this cost could go as high as 50% of a typical hospital’s budget.  Because of this, there is ever-increasing pressure from the hospital’s accountants to limit the inventory of SKUs.

One of the Theory of Constraints Thinking Process tools is the Conflict Resolution Diagram (CRD) the purpose of which is to visualize and resolve conflicts.  In the figure below we see such a diagram which demonstrates the opposing points of view or the conflict in material's management.   Both sides have the same objective and want to improve financial results (labeled Objective A).  But on the one hand, one side wants to protect the available supply of SKUs by increasing the amount of inventory while the other side wants to reduce the cost of inventory by reducing the amount of on-hand inventory and therein lies the conflict or opposing points of view.

The CRD is a necessity based logic structure which uses the syntax, in order to have “x” I must have “y” or from our CRD one side says, “In order to improve financial results, I must reduce the cost of inventory and in order to reduce the cost of inventory, I must reduce the amount of on-hand inventory.”  The other side is saying that “In order to improve financial results, I must protect the supply of SKUs and in order to protect the supply of SKUs, I must increase the amount of inventory.”  Clearly there is a conflict between the two points of view.  So how do we break this conflict?

One of the teachings of TOC is that compromise solutions should never be considered because one side typically gets what they want while the other side loses or both sides get some of what they want.  What we should be striving for always is a win-win solution!!  An optimum solution, if you will.  The way we do this is to surface the assumptions behind each side’s assertions.  The assumptions are the because statements that explain each point of view.  For example, one side is saying “In order to improve financial results, I must reduce the cost of inventory” because excess inventory hurts our cash flow position.  Maybe the other side is saying, “In order to improve financial results, I must protect the supply of SKUs” because if I run out of an SKU it could decrease throughput.”  If we can insert an injection or solution that counters both sets of becauses, then we have resolved the conflict.  So with this said, the solution must both reduce inventory while protecting throughput.  Sound like fun?

In my next blog posting, I’ll lay out that solution and demonstrate how it is possible to both reduce inventory and protect throughput at the same time.

Bob Sproull


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