Monday, October 22, 2012

Focus and Leverage Part 151

In my last blog posting I ended by saying that there it is possible to both reduce inventory and protect throughput at the same time.  But before I do so, let’s go into a bit more depth on why what a typical healthcare facility is using today isn’t working so well.

Most, if not all, businesses are linked one way or another to some kind of supply chain.  They need SKU’s or raw materials from somebody else in order to do what they do and pass it on to the next system in line until it finally arrives at the end consumer.  In a hospital environment this means that a doctor will prescribe a treatment that requires something to bring the patient back to a healthy state.  Maybe it’s a prescription for a medicine or maybe even an orthopedic item, so he writes the prescription and waits for the order to be filled and then given to his patient.  Hopefully what the doctor has prescribed is in the stockroom so the patient can begin the treatment.

For many organization the supply chain/inventory system of choice is one often referred to as the Minimum/Maximum (MIN/MAX) system.  In this type of supply chain system SKUs (or inventory) are evaluated based on a projected need and usage (a forecast), and some type of maximum and minimum levels are established for each item.  The typical rules that are followed for these min/max systems are:

§  Rule 1: Determine the maximum and minimum levels for each item
§  Rule 2: Don’t exceed the maximum level
§  Rule 3: Don’t reorder until you go below the minimum level
The foundational assumptions behind these rules and measures are primarily based on the belief that in order to save money and minimize your expenditures for supply inventory, you must minimize the amount of money you spend for these items.  Remember the conflict resolution diagram from my last posting?  The assumption here is that the purchase price per SKU (unit) could be driven to the lowest possible level by buying in bulk and the company would save the maximum amount of money on their purchase.  The reality is that there always seem to be situations of excess inventory for some items and of stock-out situations for others.  So why is it that even though we have plenty of  inventory, these stock-outs continue to happen?  Let’s take a more in-depth look at the typical rules for managing this Min/Max Supply System.

1.    The system reorder amount is usually always the maximum amount no matter how many SKUs are currently in the point-of-use storage bin.  The thinking here is that in order to obtain the maximum discount, we must always buy in bulk.

2.    Most supply systems only allow for one order at a time to be present in the system for a specific SKU.

3.    Orders for SKUs are triggered only after the minimum amount has been exceeded.  That is, for example, if the minimum level for a drug is set at 1,000, when it goes below 1,000 it can be re-ordered.
4.    Total SKU inventory is held at the lowest possible level of the distribution chain, the point-of-use (POU) storage location.  Typically this is at the hospital unit or ward.
5.    SKUs are inventoried once or twice a month and orders placed, as required.
Graphically, Rules 1, 2 and 3 look like what you see in Figure 1.  The problem with this system is that it’s prone to conditions of stock-outs on a fairly routine basis as depicted in Figure 2 where the pattern repeats itself.

Figure 1

Figure 2

In Figure 2 we see that even though there inventory in the system, we still have the stock-out situation happening.  Rules 4 and 5 are graphically illustrated in Figure 3.

Figure 3
In Figure 3 we see that parts are distributed from the supplier and pushed down through the links in the supply chain which ends up clogging the supply chain with disorganization and ineffectiveness.  The classic symptoms that we see using the Min/Max system are:

ü  Having the wrong medicines or drugs in stock or having too much of one and too little of another.

ü  Significant amounts of cash tied up in excessive inventory.

ü  Significant amounts of money lost through drug obsolescence or even being out-of-date.

ü  Hoarding of SKUs by nurses and other medical personnel so that they have their own personal stash when needed.  They all mean well because they have the best interests of the patient in mind.

 So if ordering in bulk quantities and having lots of inventory on hand isn’t the solution, then what is?  In my next posting I’ll introduce you to what my company (NOVACES) calls Dynamic Replenishment.

Bob Sproull

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