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Chapter 13. Supply Chain Management An Integrated Approach to Improving Quality and Efficiency Daniel B. McLaughlin Julie M. Hays Healthcare Operations.

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Presentation on theme: "Chapter 13. Supply Chain Management An Integrated Approach to Improving Quality and Efficiency Daniel B. McLaughlin Julie M. Hays Healthcare Operations."— Presentation transcript:

1 Chapter 13. Supply Chain Management An Integrated Approach to Improving Quality and Efficiency Daniel B. McLaughlin Julie M. Hays Healthcare Operations Management

2 Copyright 2008 Health Administration Press. All rights reserved Chapter 13 Supply Chain Management What is Supply Chain Management (SCM)? Why is SCM Important for Healthcare Organizations? Tracking and Managing Inventory Forecasting Order Amount and Timing Inventory Systems Procurement and Vendor Relationship Management Strategic SCM

3 Copyright 2008 Health Administration Press. All rights reserved Supply Chain Management (SCM) The management of all activities and processes related to both upstream vendors and downstream customers in the value chain Tracking and managing demand, inventory, and delivery Procurement and vendor relationship management Technology enabled

4 Copyright 2008 Health Administration Press. All rights reserved SCM in Healthcare In 2006, the United States will spend over $2 trillion on healthcare. Annual cost/family for health insurance is forecasted to be $22,000 by By 2016, it is predicted that one dollar of every five dollars of the U.S. economy will be devoted to healthcare.

5 Copyright 2008 Health Administration Press. All rights reserved SCM in Healthcare Supply costs in hospitals account for 15–25 percent of operating costs (HFMA 2002; HFMA 2005). Transaction costs are estimated at $150 per order for buyer and seller (HFMA 2001). There is 35 percent inconsistency between hospital and supplier data, and it costs $15 to $50 to research and correct a single order discrepancy.

6 Copyright 2008 Health Administration Press. All rights reserved Inventory Inventory is the stock of items held to meet future demand. Inventory management answers three questions: -How much to hold -How much to order -When to order

7 Copyright 2008 Health Administration Press. All rights reserved Functions of Inventory To meet anticipated demand To level process flow To protect against stockouts To take advantage of order cycles To help hedge against price increases or to take advantage of quantity discounts To decouple process steps

8 Copyright 2008 Health Administration Press. All rights reserved Effective Inventory Management Classification system Inventory tracking system Reliable forecast of demand Knowledge of lead times Reasonable estimates of: -Holding or carrying costs -Ordering or setup costs -Shortage or stockout costs

9 Copyright 2008 Health Administration Press. All rights reserved ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly Pareto Principle -A -A very important -B -B moderately important -C -C least important Annual $ volume of items A B C High (80%) Low (5%) Few (20%) Many (50%) Number of Items

10 Copyright 2008 Health Administration Press. All rights reserved Inventory Tracking Track additions and removals -Bar-coding -Point of use or point of sale (POS) -RFID Physical count of items -Periodic intervals -Cycle count -Find and correct errors

11 Copyright 2008 Health Administration Press. All rights reserved Forecasting Exercise Averaging methods Trend, seasonal, and cyclical models Model development and evaluation VVH example

12 Copyright 2008 Health Administration Press. All rights reserved Forecasting Exercise I Identify the pattern and construct a formula that will “predict” successive numbers in the series. What is the next number in the series? (a) 3.7, 3.7, 3.7, 3.7, 3.7, 3.7, 3.7, 3.7 (b) 2.5, 4.5, 6.5, 8.5, 10.5, 12.5, 14.5, 16.5 (c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5 What is the formula for the next number in the series?

13 Copyright 2008 Health Administration Press. All rights reserved Exercise I—Graphs Series a Series b Series c

14 Copyright 2008 Health Administration Press. All rights reserved Exercise I Solution a)3.7, 3.7, 3.7, 3.7, 3.7, 3.7, 3.7, 3.7 -Constant -Next number is 3.7 b)2.5, 4.5, 6.5, 8.5, 10.5, 12.5, 14.5, x, where x specifies the position (index) of the number in the series -Next number is 18.5 c)5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, x + Cs, where x specifies the position (index) of the number in the series -Cs represents the seasonality factor -C1 = 0, C2 = 2, C3 = 0, C4 = −2 -Next numbers: 9, 11.5, 10, 8.5

15 Copyright 2008 Health Administration Press. All rights reserved Exercise II Identify the pattern and construct a formula that will “predict” successive numbers in the series. What is the next number in the series? (a) 4.1, 3.3, 4.0, 3.8, 3.9, 3.4, 3.5, 3.7 (b) 2.9, 4.7, 6.8, 8.2, 10.3, 12.7, 14.2, 16.3 (c) 5.3, 7.2, 6.4, 4.5, 6.8, 9.7, 8.2, 6.3

16 Copyright 2008 Health Administration Press. All rights reserved Exercise II Solution Same as series above, but with a random component generated from normal random number generator with mean 0 (a) 4.1, 3.3, 4.0, 3.8, 3.9, 3.4, 3.5,  (b) 2.9, 4.7, 6.8, 8.2, 10.3, 12.7, 14.2, x +  (c) 5.3, 7.2, 6.4, 4.5, 6.8, 9.7, 8.2, x + Cs + 

17 Copyright 2008 Health Administration Press. All rights reserved Forecasting Methods Qualitative methods -Based on expert opinion and intuition; often used when there are no data available Quantitative methods -Time series methods, causal methods

18 Copyright 2008 Health Administration Press. All rights reserved Demand Behavior Trend -Gradual, long-term up or down movement Cycle -Up and down movement repeating over long time frame Seasonal pattern -Periodic, repeating oscillation in demand Random movements follow no pattern

19 Copyright 2008 Health Administration Press. All rights reserved Forms of Forecast Movement Demand Time Trend Random movement Demand Time Seasonal pattern Demand Time Demand Time Cycle Trend with seasonal pattern

20 Copyright 2008 Health Administration Press. All rights reserved Forecasting Averaging Methods Simple moving average Weighted moving average Exponential smoothing Averaging methods all assume that the dependent variable is relatively constant over time; no trends or cycles

21 Copyright 2008 Health Administration Press. All rights reserved Simple Moving Average Average over a given number of periods that is updated by replacing the data in the oldest period with that in the most recent period F t =Forecasted demand for the period D t-1 =Actual demand in period t − 1 n=Number of periods in the moving average

22 Copyright 2008 Health Administration Press. All rights reserved Weighted Moving Average Simple moving average where weights are assigned to each period in the average. The sum of all the weights must equal one. F t =Forecasted demand for the period D t-1 =Actual demand in period t − 1 w t-1 =Weight assigned to period t − 1

23 Copyright 2008 Health Administration Press. All rights reserved Exponential Smoothing Times series forecasting technique that does not require large amounts of historical data F t =Exponentially smoothed forecast for period t F t-1 =Exponentially smoothed forecast for prior period D t-1 =Actual demand in the prior period  =Desired response rate, or smoothing constant

24 Copyright 2008 Health Administration Press. All rights reserved Forecasting Trend, Seasonal, and Cyclical Models Holt’s trend-adjusted exponential smoothing technique Winter’s triple exponential smoothed model ARIMA models

25 Copyright 2008 Health Administration Press. All rights reserved Holt’s Trend Adjusted Exponential Smoothing Exponentially smoothed forecast that accounts for a trend in the data FIT t = Forecast for period t including the trend F t = Smoothed forecast for period t T t = Smoothed trend for period t D t−1 = Value in the previous period 0   = smoothing constant  1; 0   = smoothing constant  1

26 Copyright 2008 Health Administration Press. All rights reserved Forecast Accuracy Error = Actual − Forecast Find a method that minimizes error Mean absolute deviation (MAD) Mean squared error

27 Copyright 2008 Health Administration Press. All rights reserved Forecasting Model Development and Evaluation Identify purpose of forecast Determine time horizon of forecast Collect relevant data Plot data and identify pattern Select forecasting model(s) Make forecast Evaluate quality of forecast Adjust forecast and monitor results

28 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example

29 Copyright 2008 Health Administration Press. All rights reserved VVH Simple Moving Average

30 Copyright 2008 Health Administration Press. All rights reserved VVH Weighted Moving Average

31 Copyright 2008 Health Administration Press. All rights reserved VVH Exponential Smoothing

32 Copyright 2008 Health Administration Press. All rights reserved VVH Comparison (from the Excel  template)

33 Copyright 2008 Health Administration Press. All rights reserved Realities of Forecasting Forecasts are seldom perfect. Most forecasting methods assume that there is some underlying stability in the system. Service family and aggregated service forecasts are more accurate than individual service forecasts. I see that you will get an A this semester.

34 Copyright 2008 Health Administration Press. All rights reserved Order Amount and Timing How much to hold How much to order When to order Basic economic order quantity (EOQ) Fixed order quantity with safety stock More models

35 Copyright 2008 Health Administration Press. All rights reserved Definitions Lead time—time between placing an order and receiving the order Holding (or carrying) costs—costs associated with keeping goods in storage Ordering (or setup) costs—costs of ordering and receiving goods Shortage costs—costs of not having something in inventory when it is needed Back orders—unfilled orders Stockouts—occur when the desired good is not available

36 Copyright 2008 Health Administration Press. All rights reserved Definitions Independent demand is demand that is generated by the customer and is not a result of demand for another good or service. Dependent demand is demand that results from another demand. Demand for tires and steering wheels (dependent) is related to the demand for cars (independent).

37 Copyright 2008 Health Administration Press. All rights reserved Assumptions of the Basic EOQ Model Demand for the item in question is independent. Demand is known and constant. Lead time is known and constant. Ordering costs are known and constant. Back orders, stockouts, and quantity discounts are not allowed.

38 Copyright 2008 Health Administration Press. All rights reserved Inventory Order Cycle Demand rate 0 Time Lead time Lead time Order Placed Order Placed Order Received Order Received Inventory Level Reorder point, R Order quantity, Q Average amount of inventory held = Q/2

39 Copyright 2008 Health Administration Press. All rights reserved Reorder Point The point in time by which stock must be ordered to replenish inventory before a stockout occurs R = Reorder point d = average demand per period L = lead time (in the same units as above)

40 Copyright 2008 Health Administration Press. All rights reserved EOQ Model Cost Curves Minimum Total Cost Ordering Cost = o*D/Q Order Quantity, Q Annual cost ($) Optimal Order Quantity Holding Cost = h*Q/2

41 Copyright 2008 Health Administration Press. All rights reserved EOQ Model Insights As holding costs increase, the optimal order quantity decreases. (Order smaller amounts more often because inventory is expensive to hold.) As ordering costs increase, the optimal order quantity increases. (Order larger amounts less often because it is expensive to order.)

42 Copyright 2008 Health Administration Press. All rights reserved EOQ Model Implications Total Cost Ordering Cost Annual Cost ($) Order Quantity Holding Cost Q*

43 Copyright 2008 Health Administration Press. All rights reserved EOQ Model Implications Total Cost Ordering Cost Annual Cost ($) Order Quantity Holding Cost Q*

44 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example Cost $5/case Holding costs 33% or $1.67/case-year Ordering costs $100 Lead time 1 week She calculates annual demand as:

45 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example She calculates the reorder point as She calculates the EOQ as:

46 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example Annual demandD =2,782units/year Ordering cost per order (setup)S =100$/order Annual carrying cost per unitH =1.67$/unit-year Working days per year =365days/year Economic order quantityEOQ =577.21units Actual order quantity Q =577 IncrementDQ = 500 Number of orders per year D/Q =4.8orders/year Length of order cycle (days)Q/D =75.7days Average inventoryQ/2 =288.5units Annual carrying cost (Q/2) * H = $ Annual ordering cost (D/Q) * S = $ Total annual cost TC = $

47 Copyright 2008 Health Administration Press. All rights reserved Reorder Point with Safety Stock Reorder point (R) Order quantity (Q) Inventory level 0 Lead time Time Safety stock (SS) Lead time

48 Copyright 2008 Health Administration Press. All rights reserved Reorder Point with Safety Stock Reorder point Safety stock where z is the z-score associated with the desired service level (number of standard deviations above the mean)  L = standard deviation of demand during lead time

49 Copyright 2008 Health Administration Press. All rights reserved Safety Stock Reorder point Probability of a stockout = 16% Probability of meeting demand during lead time = service level = 84% Example units Z 100 Average demand during Lead time = dL

50 Copyright 2008 Health Administration Press. All rights reserved Model Insights As the desired service level increases, the amount of safety stock increases. (If fewer stockouts are desired, more inventory must be carried.) As the variation in demand during lead time increases, the amount of safety stock increases. (If demand variation or lead time can be decreased, less safety stock is needed.)

51 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example Desired service level = 95 percent -With five orders/year, this means that the hospital would experience one stockout every four years Standard deviation of demand during lead = σ L = 11.5 cases of diapers Amount of safety stock needed: New reorder point:

52 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example Average daily demand d =7.64units Average lead time L =7days Std dev demand during lead time  L = 11.5units Service level SL =0.95 Increment  SL = Stock out risk 0.05 z associated with service level 1.64 Average demand during lead timedL =53.48units Safety stock SS =18.9units Reorder point ROP =72.4units

53 Copyright 2008 Health Administration Press. All rights reserved VVH Diaper Example Reorder point (72) Order quantity (577) Inventory level 0 Lead time = 1 week Time Safety stock (19) Lead time Average demand = 53.5 cases/week

54 Copyright 2008 Health Administration Press. All rights reserved More Inventory Models Fixed period with safety stock -Orders are bundled and/or vendors deliver according to a set schedule Quantity discounts Price breaks Etc.

55 Copyright 2008 Health Administration Press. All rights reserved Inventory Systems Simple JIT MRP ERP

56 Copyright 2008 Health Administration Press. All rights reserved Two-Bin System When the first bin is empty, stock is taken from the second bin and an order is placed. There should be enough stock in the second bin to last until more stock is delivered.

57 Copyright 2008 Health Administration Press. All rights reserved JIT—Kanbans Microsoft Visio® screen shots reprinted with permission from Microsoft Corporation.

58 Copyright 2008 Health Administration Press. All rights reserved Flow and Pull Continuous or single piece flow—move items (jobs, patients, products) through the steps of the process one at a time without interuptions or waiting. Pull or just-in-time (JIT)—products or services are not produced until the downstream customer demands them. Heijunka (i.e., “make flat and level”)—eliminate variation in volume and variety of production. -Level patient demand

59 Copyright 2008 Health Administration Press. All rights reserved Enterprise Information Technology Trends Computer Integrated Manufacturing Concurrent Engineering Collaborative Engineering SCM MRP II MRP I CAD/CAM ERP Business Webs Networks TCP/IP Mobile Networks Automation E-Business E-Commerce Data Processing Mainframe Minicomputer Microcomputer Handheld Appliances

60 Copyright 2008 Health Administration Press. All rights reserved MRP Product Structure Table top (1) Lead time = 2 weeks Leg (4) Lead time = 3 weeks Table (end item) Lead time = 1 week

61 Copyright 2008 Health Administration Press. All rights reserved MRP Logic Order table tops Week12345 Order table legs

62 Copyright 2008 Health Administration Press. All rights reserved ERP Systems Link Functional Areas

63 Copyright 2008 Health Administration Press. All rights reserved Procurement and Vendor Relationship Management E-procurement Value-based standardization Outsourcing Vendor managed inventory (VMI) Automated supply carts Group purchasing organizations (GPO) Disintermediation

64 Copyright 2008 Health Administration Press. All rights reserved Strategic Supply Chain Management Many are the same as any other improvement/change initiative: Top management support Employee buy-in Structure and staffing need to support the desired improvements Process analysis and improvement Need relevant, accurate data and metrics Training

65 Copyright 2008 Health Administration Press. All rights reserved Strategic Supply Chain Management Need to evaluate cost and benefits of technology-enabled solutions Need to highlight the necessity and benefits of strategic supply chain management Improved inventory management through better understanding of the systems -Consequences of unofficial inventory -Just-in-time systems -Improved inventory tracking systems

66 Copyright 2008 Health Administration Press. All rights reserved Strategic Supply Chain Management Vendor partnerships -Information sharing -Investigation and determination of mutually beneficial solutions -Performance tracking Continually educate and support a system- wide view of the supply chain and seek improvement for the system rather than for individual departments or organizations in that system.


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