Better Materials Management - achieved with the effective use of Information Systems

Arun Joseph VargheseArun Joseph Varghese on December 23, 2013

The first blog explored how a 2% decrease in Material Costs would bump up the overall RoI in an Organization by 5% points. This talks volumes of the effect that reducing waste and improving supply chain processes can have on an Organization. In fact one of the rarely outsourced departments in healthcare organizations is the revenue generating Pharmacies where profit margins can be as high as 300%.

This article further explores ways of leveraging an Information System to help manage pharmaceuticals, inventory and general supplies to increase RoI of an Organization.

a) Negotiating a Shorter Credit Period – This first point has absolutely nothing to do with the use of Information Systems but is the most widely practiced erstwhile strategy by the Purchasing Department of any Organization. But, Suppliers in turn negotiate to ensure that they get a longer credit period. Remember the premise behind shorter Credit Periods is to ensure that your days in accounts payable are as long as possible but sales outstanding is short improving the cash to cash cycle. The lower the Cash to Cash Cycle the better. The MIS reports can be used to keep track of your Cash to Cash Cycle across Suppliers which can indicate which area to improve, whether it is in inventory control or negotiating with the suppliers.
For your reference – Cash to Cash Cycle = Days in Inventory + Days Sales Outstanding – Days in Payable.
Apple and Dell have aced this strategy and have achieved negative cash to cash cycles in the Technology domain. In Healthcare, negative cash to cash cycles could have a different connotation though, such as Stock Outs of Vital Life Saving Drugs.

b) Vendor Managed Inventory – Let the experts handle it! Vendor Managed Inventory makes the supplier responsible in managing and replenishing inventories. This is a technique followed in the high end retail chains and requires the healthcare organizations to trust the vendors and use more technology such as e-procurement.
The key problems that Vendor Managed Inventory can solve are improving the utilization of resources; reduce number of urgent and non-urgent orders, reduce transportation costs, improve coordination, etc.
As a starting point, this strategy can be tried for some category of items if not all. The use of Consignment Stock for high valued items such as Implants (Ortho, Cardiac, etc.) is a step in the direction of Vendor Managed Inventory where the item is not paid for, to the Supplier until it is used for a patient.
The Information Systems can also be tuned to ensure automated electronic messages are in place, sales and demand data are transparently available to the vendor and that some of the information remains confidential.

c) Stock Reordering based on Stochastic methods - The Stock Reordering System in the Information System, must calculate the economical order quantity, set reorder levels dynamically, forecast the order quantity based on historical consumption patterns. The key is that the IS must statistically ensure inventory coverage to adjust based on demand fluctuations.

d) Classification of Items – based on consumption value, demand, stock moving status and criticality. The ABC Analysis is the most often used method for categorization of items based on its consumption value. This helps the procurement manager to differentiate the high value and low value items.
The combination of the consumption value to the demand predictability – XYZ, or Stock Movement Status – FSN – Fast/Slow or Non-Moving and Criticality component helps the procurement manager not only to classify items but also to decide his procurement strategies for each category of items.

Stock Management based on Consumption Value and Criticality (ABC-VED Analysis)

Stock Management based on Consumption Value, Demand Fluctuations and Criticality (ABC-XYZ-VED Analysis)

Some of the strategies that can be employed by the procurement manager are – Just In Time Procurement for the AX items, E-Procurement of CX,CY and CZ items etc.

e) Bar-coding/RFID Tagging do help in eliminating errors which is vital especially for patient medication administration and location/rack-bin identification of items.

f) Strategic Sourcing is an analytical, results focused approach that helps organizations to monitor their contracting and purchasing processes, evaluate their effectiveness, identify business effective improvements and build mutually beneficial strategic relationship with contractors and vendors.
The IS may additionally provide statistics and Information Reports on – Analysis Spend per Supplier/Contractor/Vendor, Maintain a Preferred Suppliers List, Analysis Number/nature of contracts, develop categorization etc. The key in Materials Management is achieving the cost effectiveness balance by ensuring there is no excess stock and there is least or no cost incurred on stock-outs at the same time fulfilling the varying demand.

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December 23, 2013


December 23, 2013