The Cost of Using “Par Replenishment” in Place of Inventory Management

Presented by Matt Brennan, healthcare supply chain industry expert; John Freund, CEO, Jump Technologies

Confidential. Copyright 2015 Jump Technologies. All rights reserved.1

Agenda

• Affordable Care Act and impact on supply chain• What costly problems are occurring in hospitals today and why?• What are alternate approaches to inventory management?

• What criteria must you consider?• How do you match the right approach to each area of your organization?

• What will you need from inventory management technology?• Q&A

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Impact of Affordable Care Act on Hospitals

CMS actuaries estimate that by 2040 half of all hospitals will be losing money2.

Centers for Medicare and Medicaid Services (CMS) reports that in 2013, 27% of hospitals had a negative operating margin. This is expected to increase to 28-30% by 20191.

1Triple Tree Blog Post, 11/24/20152Mercatus Center, George Mason University, 10/27/2015

Hospital Expenses

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The Solution Is In The Supply Chain

• Savings in the supply chain• Supplies are the second highest expense after payroll• Cuts here have less direct impact on patient facing services

• Most common supply chain problems • Labor costs are too high• Items stock out causing

• Inventory hoarding• Off contract spending• Waste due to expiring products• Procedure cancellation/rescheduling

• Very few hospitals manage inventory• Most inventory solutions are really replenishment solutions that don’t manage

inventory

Brief History of Healthcare Financial Reform

• Inpatient Prospective Payment System (1987) first major attempt by the federal government to control hospital costs

• Diagnostic Related Groupings (DRGs) set a fixed reimbursement amount for all hospitals within a designated Metropolitan Statistical Area (MSA)• Until that time, more tests performed and longer patient stays resulted in revenue

• Many modifications made, none as significant as the ACA• The shift to disease prevention focuses on keeping people out of the hospital • Experts believe Walmart and Walgreens’ patient care efforts will be expanded to include simple, more profitable procedures hospitals rely on to stay profitable

Hospitals need simple, reliable systems that rapidly determine change in product consumption and report that change to the Supply Chain Management Team

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Shifting Forward

• Often, attempts to standardize supply replenishment with a one size fits all solution can increase operating costs without improving supply chain performance

• It’s our responsibility to determine the most efficient, reliable and affordable technological solution to manage the different types of inventories

• Closed cabinet point-of-use systems for high dollar, low inventory items that need to reorder same day may make sense but not for commodity items like gloves, needles, syringes, etc.

• How do we establish the best solutions for our institutions?

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What is Par Replenishment?

• Par levels are set for items stocked in the hospital / health system• At scheduled intervals, a supply technician visits storerooms and supply areas and conducts a visual assessment of every item• Experienced technicians don’t count each item – far too time-consuming• Based on experience with items and estimate of current levels, the technician reports item quantities to trigger a reorder

• If an item has par of 10 and inventory is 11, but the technician thinks the supply looks low, he or she may report it at 6 to trigger a reorder to avoid a stock-out

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Par Replenishment Hazards

• Traditional par replenishment requires someone:• Make a decision (should I count it or not, looks like enough – “eyeballing” it)• Count quantity on hand• Record count on paper or enter into data collection device• “Do the math”

• Par is written on the label; supply staff must subtract the count quantity from the par on the label and record or enter that result• With busy supply locations, distractions occur constantly, which can cause errors

• Additional risks…• A lot of responsibility in the hands of low-compensation employees• System can fail based on expertise of tech• Inexperienced tech can cause havoc

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What Are the Options?

• Closed Cabinet Systems• Expensive, critical care, one of a kind items that need to be kept available• Patient chargeable/trackable

• Kanban• 2Bin – Inexpensive stock usually maintained in large quantities

• Stock in virtually every clinical department of hospital includes15-80% of these items• Watermark – Similar functionality to 2Bin, used frequently for items that don’t fit in bins

• RFID – Human Tissue products, Vascular Stents, Coils, etc.• Patient chargeable/trackable• Usually smaller quantities of many different sizes

• Par Replenishment• Small quantities – many different sizes

• Vendor Managed Inventory (VMI)• Commonly consigned orthopedic implants (OR)

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Let’s Talk About Kanban

The 6 Most Common Errors Solved by Kanban:

1) Decision making (eyeballing)2) Counting3) Transcription4) Data entry5) Math errors6) Stock rotation

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Low Unit of Measure vs. Logical Unit of Measure

• LUM (Low Unit of Measure)• While allowing many hospitals to lower on hand inventory and go stockless with a Just in Time strategy, if not carefully managed, service fees can cost more than products!

• Example: • Inexpensive commodity type items managed in a closed-cabinet system, such as a 2 cent needle or 11 cent box of tissues, ordered by the each, had a $1.30 transaction fee added • Fixed quantity replenishment schemes that deploy Kanban methodology using 2Bin and Watermarks prevent this; they don’t allow the supply staff to determine the quantity. Quantity is determined by manager utilizing the Velocity Report tool

• Combine Kanban and LUM (Logical Unit of Measure) to create a very effective replenishment scheme for all commodity-type items

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New Key Performance Indicators (KPIs)

ARV vs. PRV• When Actual Replenishment Velocity (ARV) is added to KPIs, and compared to historical or Projected Replenishment Velocity (PRV), supply staff can focus on the 10-15% of the stock moving more quickly than expected (greatest chance of stocking out) • The other end of the spectrum – 10-15% of stock moving more slowly than expected

• This is the stock that sits idle, with greater chance of expiring• When managed, it can provide space to increase the quantities of the rapidly moving stock

• Remaining 70-75% of stock being consumed at the projected rate only needs a simple barcode scan to trigger an error free order

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Simplifying the Data

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Efficiencies Gained

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- Fixed quantity replenishment- Fewer SKUs ordered on a daily basis (40% fewer)- Reduced touches by staff- Eliminated cycle counts within PAR areas- Eliminated data entry errors- Reduced nursing time- Reduced restocking time for supply staff- Fewer stock-outs (1.5%)- Improved Pyxis compliance (74% to 97%)- Improved nursing engagement

One Size Does Not Fit AllPatient Care Units• Kanban (2Bin and Watermark) works perfectly for commodity items • Example: Large academic Level 1 Trauma Center with a Children’s Hospital

• Determined 80% of the inventoried supplies on the patient care floors cost less than $20 each• Moved low-cost supplies to Kanban; remaining 20% managed through a combination of closed cabinetry, RFID tracking and traditional par methods

Specialty Procedure Areas• Same institution discovered only 15% of the OR, Cath Lab, EP Lab and Interventional Radiology Labs were commodity items; the other 85% more expensive specialty items

• In specialty areas, Kanban is still a good fit for commodity items but the overwhelming majority of the stock requires one of the other methods of inventory control

Bone/Tissue Banks• FDA requirements for human tissue products strict yet achievable

• RFID technology good fit with discoverable chain of custody, which tracks who, when, where of the product right up until the time of implant

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What Do You Need from Your Inventory Management Technology?

Mobility• Supply staff cover more departments/units and travel greater distances than ever• Staff spending more time out of department; need simpler, lighter, smaller technology tools to collect replenishment data. Large $1,800 terminals with $450 annual maintenance contracts not ideal

Affordability• Capital Equipment Dollars get smaller each year; priority will be to replace aging patient care technology • Supply Chain solutions will need to be developed with little or no capital investment

Versatility• The same software tools must be capable of managing:

• Kanban – Nursing Units and Clinics• Perpetual Inventories – OR Storeroom• Par Areas – Cath Lab Storeroom• RFID – Bone/Tissue• Closed Cabinets - Intraocular Lenses19

IT Impact and Software Development

• IT resources• Largely focused on the many applications and interfaces needed to get and keep systems communicating with each other• Not unusual to take several months for a request to be approved in concept, scheduled for development or deployment a year or two later

• Cloud Computing / New Applications • New applications in the healthcare supply chain becoming more viable

• Usually don’t require initial capital investment• Cloud computing shaving months off traditional implementation schedules

• Best practices being incorporated into applications available to all users without cost or time needed for development

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Q & A

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Thank you for learning more about par replenishment and additional supply

management options

Visit us at www.jumptech.com