July, 2007 Materials Cowan/Nowiki Managing Materials

July, 2007 Materials Cowan/Nowiki Healthcare Supply Chain Current State of the Supply Chain –$11 billion in process cost-saving opportunities –Institutions are lacking in technology and perspective in implementing supply chain solutions Dimensions of the Supply Chain –Organizations that comprise the supply chain –Process tasks that drive activities for consumer demand through manufacturer, distribution, and delivery –Information flows that must be in place to meet the needs of the institutions and organizations

July, 2007 Materials Cowan/Nowiki Materials Management Material Management is important because –It is necessary for good patient care –It is complex So many different items, qualities, prices, expectations Requires many people to specify items, purchase, and manage items –It is a major satisfier for physicians –Cost To purchase, warehouse, distribute, dispose Risk for malfunction, stock out, substitution

July, 2007 Materials Cowan/Nowiki Materials Management Organization –Purchasing Department –Finance Budget Asset Management Financing Group Affiliation Accounts Payable –Distribution Receiving Warehousing Distribution Inventory Management –Disposal Hazardous Waste Salvage –User Departments Pharmacy Surgery Radiology Nursing Units Information Technology –For each of these there are usually separate purchasing and distribution staff. Other –Maintenance, Installation General maintenance Environmental Services Biomedical Services –Information Technology

July, 2007 Materials Cowan/Nowiki MM – Some key issues What costs matter –Low inflation It is not the value of the inventory but the cost –To purchase –Of space –Of Distribution –Of Maintenance –High inflation the cost of inventory matters (as does the days in AR and AP)

July, 2007 Materials Cowan/Nowiki MM – Purchasing Cost Group Purchasing –VHA, Premier, UHC, Catholic Health Systems, HCA, –Volume purchasing – lower price but less flexibility and innovation –Another layer of skimming But they invest in other forms of innovation that has high value (clinical process improvement, shared IT) –Under investigation about 3 years ago and they restructured to encourage Innovation – (shorter contract lengths, more access to smaller suppliers – but still aggressive negotiating) Return purchasing savings, charge members for other services

July, 2007 Materials Cowan/Nowiki MM – Other Issues Where to find the opportunities –Surgery Standardization –Prosthetics/implants –Disposables (surgeon gowns, surgical drapes) –IT End User devices Software Licenses Service Costs –Radiology Film Contrast Media Maintenance Agreements

July, 2007 Materials Cowan/Nowiki MM – Other Issues Where to find opportunities –Pricing Audit of Group purchasing –Tiered pricing –Changed prices –Reconciling receiving reports and invoices Direct purchasing (when the depts order their own stuff) –Limit when you can –Monitor when you can’t

July, 2007 Materials Cowan/Nowiki MM-Where to find opportunities Standardization –Formulary in Pharmacy Limit the number and type of meds Prepackaged or reconstituted/packaged on site –Implants/catheters/drapes in Surgery Distribution –Unit dose packaging in Pharmacy –Bar coding for safety –Packaging for safety

July, 2007 Materials Cowan/Nowiki MM- Where to find opportunities Distribution –Use of robotics in Pharmacy –Case carts in OR –Exchange Carts in Central Distribution –Outsource in Linens Service Agreements –Built into price/lease –Compare with manufacturer, Outsource, Inhouse trained group

July, 2007 Materials Cowan/Nowiki MM- Where to find opportunities Salvage –Silver Recovery –Incinerator – power generation

July, 2007 Materials Cowan/Nowiki Defining Materials Management

July, 2007 Materials Cowan/Nowiki Defining Materials Management Materials management is the management and control of inventory, services, and equipment from acquisition to disposition.

July, 2007 Materials Cowan/Nowiki Primary Objective of Materials Management

July, 2007 Materials Cowan/Nowiki Primary Objective of Materials Management To minimize the total costs associated with materials while ensuring that the proper materials, both in terms of quantity and quality, are readily available for patient care.

July, 2007 Materials Cowan/Nowiki Defining Inventory Management

July, 2007 Materials Cowan/Nowiki Defining Inventory Management Inventory management is the management and control of inventory, or items that have an expected useful life of less than one year.

July, 2007 Materials Cowan/Nowiki Importance of Materials Management

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having -The right kind of materials on-hand.

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having -The right kind of materials on hand. -The right amount of materials on hand.

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having -The right kind of materials on hand. -The right amount of materials on hand. -time and lag time.

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having -The right kind of materials on hand. -The right amount of materials on hand. -time and lag time. -uncertainties. -ABC inventory method -Just-in-time inventory (JIT)

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having -The right kind of materials on hand. -The right amount of materials on hand. -time and lag time. -uncertainties. -ABC inventory method. -Just-in-time inventory (JIT). -discontinuities.

July, 2007 Materials Cowan/Nowiki Importance of Materials Management To serve patients in the best possible manner by having -The right kind of materials on hand. -The right amount of materials on hand. -time and lag time. -uncertainties. -ABC inventory method. -Just-in-time inventory (JIT). -discontinuities. Cost--inventory is a non-productive asset

July, 2007 Materials Cowan/Nowiki Valuing Inventory

July, 2007 Materials Cowan/Nowiki Valuing Inventory First-in, first-out (FIFO) produces an inventory of newer items; therefore, the total cost of inventory is determined by multiplying the unit cost of the newest items in inventory times the number of units in inventory.

July, 2007 Materials Cowan/Nowiki Valuing Inventory Last-in, first-out (LIFO) produces an inventory of older items; therefore, the total cost of inventory is determined by multiplying the unit cost of the oldest items in inventory time the number of units in inventory.

July, 2007 Materials Cowan/Nowiki Valuing Inventory Weighted average determines the average unit cost and multiplies it times the number of units in inventory.

July, 2007 Materials Cowan/Nowiki Valuing Inventory Specific identification determines the actual cost of each item in inventory.

July, 2007 Materials Cowan/Nowiki Inventory Valuation Problem ABC Outpatient Clinic purchased surgical dressing trays on the following dates and amounts:

July, 2007 Materials Cowan/Nowiki Inventory Valuation Problem units price total Jan 1 beginning balance 100 $10 $ 1,000 March 1 purchase ,800 May 1 purchase ,200 July 1 purchase ,200 September 1 purchase ,800 November 1 purchase ,500 Total 1,500 $19,500 Ending inventory on Dec

July, 2007 Materials Cowan/Nowiki Inventory Valuation Problem Using FIFO, LIFO, and weighted average, what is ABC’s ending cost of inventory?

July, 2007 Materials Cowan/Nowiki Inventory Valuation Problem FIFO (ending inventory is comprised of the most recent 150 trays) purchased November 1 costs 100 $15 $1,500 September 1 costs (apply 50) Ending Inventory 150 $2,200

July, 2007 Materials Cowan/Nowiki Inventory Valuation Problem LIFO (ending inventory is comprised of the oldest 150 trays purchased) January 1 costs 100 $10 $1,000 March 1 costs (apply 50) Ending Inventory 150 $1,600

July, 2007 Materials Cowan/Nowiki Inventory Valuation Problem Weighted average (ending inventory is comprised of the average cost per tray times the ending inventory in units) $19,500 1,500 =$13.00 per unit x 150 = $1, 950

July, 2007 Materials Cowan/Nowiki Costs of Inventory

July, 2007 Materials Cowan/Nowiki Costs of Inventory Purchasing cost represented by price(P) x demand(D)

July, 2007 Materials Cowan/Nowiki Costs of Inventory Ordering cost represented by O

July, 2007 Materials Cowan/Nowiki Costs of Inventory Carrying cost which includes an opportunity cost IP Q 2

July, 2007 Materials Cowan/Nowiki Costs of Inventory and a holding cost HQ To make total carrying costs HQ+IP Q 2

July, 2007 Materials Cowan/Nowiki Costs of Inventory To make the total cost associated with stocking one item for one year PD+ D Q O+(HQ+IP Q 2 )

July, 2007 Materials Cowan/Nowiki

July, 2007 Materials Cowan/Nowiki Management of Inventory Economic Order Quantity: quantity of items that should be ordered each time –EOQ or Q c = √(2DO/(IP + 2H) Reorder Point (RP): # of units at which inventory is reordered; demand during the lag time; i.e. RP = (Annual demand / days per year) x lag time Quantity Time Constant demand Reorder point Possible stock-out Possible overstock Lag Time

July, 2007 Materials Cowan/Nowiki Economic Order Quantity

July, 2007 Materials Cowan/Nowiki Economic Order Quantity Economic order quantity (EOQ or Q e or Q) Q e= 2DO IP+2H

July, 2007 Materials Cowan/Nowiki EOQ/TC Problem See Problem 10.2 on page 149

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty Find the reorder point under conditions of uncertainty, given the following stock-out cost = $7.50 overstock cost = $2.00 probability of meeting demand

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder Point

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder Point 135 ?

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder Point

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder Point ?

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder Point

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder Point ?

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder PointCost

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder PointCost

July, 2007 Materials Cowan/Nowiki Reorder Point Under Conditions of Uncertainty potential demand probability Reorder PointCost

July, 2007 Materials Cowan/Nowiki Evaluating Inventory Performance

July, 2007 Materials Cowan/Nowiki Evaluating Inventory Performance Inventory Turnover Ratio total operating revenue inventory