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    Beyond purchasing--Managing hospital inventory

    Each year, the average health system invests millions of dollars in pharmaceuticals. While hospital pharmacists are expert at evaluating the efficacy of drugs, many haven't looked closely enough at their inventory management processes. In fact, the typical health system pharmacy does not use calculated methods for determining product orders. As a result, hospital pharmacies average a relatively low 10.2 inventory turns per year, lose contract compliance opportunities, and continue costly process inefficiencies.

    A disciplined inventory management program applies "buying science" to pharmacy procurement and can make a huge difference in inventory investment, labor conservation and patient safety.

    While many hospitals today use robotics to fill prescriptions and sophisticated systems to track and monitor patient care, most still use manual processes to determine what, how often and how much to order. The vast majority of hospital pharmacies still rely on a "want book," using pen and paper to take notes throughout the day on items to be ordered. They double the work by visually inspecting the on-hand inventory of items in the pharmacy, and cap off this process by manually entering their daily order into technology systems provided from their pharmaceutical distributor.

    Many pharmacy buyers were trained as pharmacy technicians and in lieu of formal purchasing instruction, rely on their own intuition. A typical hospital pharmacy has more than 2,000 products in its inventory. Relying on visual inspection, memory or experience to decide how much to order leads to costly overstock and stressful buying emergencies. Compounding this problem is the fact that most hospital pharmacies do not have a process for accurately reconciling what is received against what their pharmaceutical distributor bills.

    The serious consequences of traditional pharmacy purchasing include:

    • lack of inventory control
    • missed contract compliance
    • excess inventory levels
    • frequent stock-outs and costly emergency deliveries
    • workflow interruptions and expensive rework
    • increased health system labor requirements

    Taking control of inventory is much easier than it was a few years ago. The right inventory process redesign includes three components: technology; buyer experience; and change management.

    At the core of the program is a discipline that relies on velocity rankings, a term used to illustrate the speed at which a product moves off the shelf. Wholesale channels use inventory classifications of A, B,C, and D items as product velocity metrics. An "A" item can typically represent 10% of the stocked SKUs (stock keeping units) but 60% of sales, while a "D" item can represent 25% of stocked SKUs and only 10% of sales. Each velocity group has its own inventory turn goals. These rankings help focus more of a pharmacy buyer's time on "A" items and less time on slower moving "B" and "C" items.

    Ideally, the order process incorporates computer calculated reorder points and reorder quantities for each item, built in to the ordering process, eliminating the need for the want book. The pharmacy can rely on suggested, automatically generated order quantities, contract compliance checks, and other time and cost saving decision-support features. A process like this ensures adequate on-hand inventory while preventing costly overstock.

    Thorough manual reconciliation of daily distributor deliveries is burdensome and impractical for most hospitals. With the millions of dollars worth of inventory on their pharmacy shelves, however, hospitals need reassurance that what they receive and what they paid for are the same. Hospitals should take advantage of their distributors' receiving technologies that automate the check-in process and instantly compare what is delivered to what is invoiced.

    Hospital pharmacies will realize significant measurable benefits from redesigning their inventory management processes, such as:

    Increased inventory turns-The higher the number of inventory turns, the less capital is invested at any given time. Hospital pharmacies should strive for an inventory turn rate of at least 14 turns, and ideally over 16.

    Improved contract compliance-Contract items represent a significant area for pharmacy savings for pharmacy-the more compliant with buying group contracts, the higher the savings. Without a disciplined inventory management process, a pharmacy runs the risk of stock-outs that lead to non-contract purchases. Outmoded pharmacy buying methods contributed to an average 40% of hospital pharmacy drug spend invested in non-contract items.

    Southwest Washington Medical Center (SWMC), a 442-bed hospital outside of Vancouver, Wash., adopted McKesson's Asset Management program last year, and its pharmacy department experienced savings of 2.5 hours a day in purchasing staff time. In one year, the department increased its inventory turns and realized a cost savings of $170,000. Pharmacy staff say the program has allowed them to identify areas in need of improvement, and to find other opportunities for savings.

    Hospital pharmacies can expect new challenges over the next decade, including adopting electronic medication administration record technology, implementing automated prescriber order entry, and coping with continuing clinical labor shortage. Modernized inventory management can help them address these challenges, by optimizing the purchasing and inventory management processes to free up pharmacist time, reduce costs, and increase capital availability for future needs. The result is a more efficient system that can produce significant savings for the hospital while providing pharmacy with more time to focus on patient care activities.