More Than Assets and Liabilities: How To Rebalance Healthcare's Supply Chain, Part 2
What if you looked into a box, expecting to find a housecat, but you find a bobcat? It sounds insane, but we promise that somehow helps explain healthcare inventory optimization.
(If you haven’t read Part 1, take a few minutes to familiarize yourself with the concepts we introduced there, and if you just can't wait to read about optimizing the medical supply buying process, you can jump straight to Part 3. We promise that we’re not saying that just for our sake. There aren’t ads anywhere on this site that we’re trying to get more clicks on. We just want to help you improve your supply chain efficiency.)
So far you have a good idea of what is physically in every storage area across your healthcare facilities. But so far you only know that it’s there. You haven’t made any qualitative judgements about it or any plans for it based on those judgements. But you can start.
Now we’re really getting to the important part of rebalancing your inventory.
How is this somehow related to Schrödinger's cat?
You’re absolutely determining the state of a given product when you observe it. But you’re determining more than the simple binary of “live inventory” and “deadstock” (not necessarily terms that we love, but they do play unfortunately well with this analogy).
Schrödinger's cat presumes that there’s a 50/50 chance of the outcome of the experiment (again: see Part 1 if you need a primer or reminder), but healthcare inventory doesn’t exactly work that way. For one thing, the majority of medical and surgical supplies in a given healthcare facility are going to be used as intended. As long as patient care is being provided, a provider will have a minority percentage of excess – let alone expired – inventory. For another thing...
The most important state of the product isn’t its current form, but its potential.
To prolong the suffering of a long-tortured metaphor, imagine that the cat is inhaling some poison just as you’re opening the box. It’s alive in the instant that you observe it, sure, but does that accurately represent the state of the cat? If you can tell with sufficient certainty that this cat is going to *ahem* expire, how should you treat it? Wouldn’t that treatment plan necessarily change if you thought there were a chance that the cat could be saved?
(Yes, you’re involved in medicine, so we’re counting on you to be even more sympathetic toward a medically vulnerable metaphorical pet. As ever: save the cat.)
So let’s ignore some traditional labels like “assets VS liabilities” that cover general business categories and ways of thinking about expenses. For inventory specifically, let’s determine for each product whether it is:
How can anyone tell the difference between viable product and deadstock?
With a little further explanation of what we mean, hopefully the categories themselves (at least) become clear.
Usable – inventory that’s usable as intended by the purchaser. In the case of a medical or surgical supply, it will be implemented in a case on a patient. Again, this is the vast majority of all healthcare inventory. It ain’t broke, so you don’t need to fix it.
Recoverable – inventory that’s usable, but not in its current or intended context. The most common version of this is product that will expire on the shelf where it is currently stored but could be used if only it were stored on another shelf instead. Why this happens is something we don’t have room to discuss here, but take a look at our old friend from Part 1:
That catheter that’s perfectly in-date and up to clinical standards just became unusable in the cath lab, because clinical staff preferences changed. To avoid it being tossed into the trash unnecessarily, could that catheter be moved to a surgery, maternity, or other department? Of course, provided that the different departments are sharing inventory data (or that they’re centrally managed by the materials management teams – what a thought).
Moving product within a facility is relatively easy (and happens all the time where transferring between a receiving area, storage area, and clinical area are concerned), but this gets more complicated when we’re talking about transferring between whole healthcare facilities. The further removed facilities are from each other, organizationally speaking – from an annex location to a sister hospital to a hospital in the same business association – the more difficult this can become. You will probably need to partner with an organization that already has connections to all sorts of healthcare providers in all sorts of locations. That’s not hard. You’re reading the blog of one right now.
All of which is not to say that moving product is the only means by which you can recover some of the value of your excess inventory. Selling supplies provides a partial return on what would otherwise be a total loss. Donating supplies to nonprofits can similarly provide a partial return in the form of a tax write-off (and, y’know, helping keep human beings and animals healthy, if that’s something you’re interested in).
How? Read on, particularly in the next section.
Lost – inventory that’s not usable except as landfill. Need to build a seawall? This stuff is great. Otherwise, it’s going to take up space in your dumpster. Expiration isn’t the only way that product gets slotted into this category – alternatives include compromised packaging, recalls, etc. – but expiration is the most common.
Moreover, it’s the most avoidable. If product is examined often and regularly enough, even if it would be headed toward expiration in its current context, it can be reallocated prior to expiration to avoid that loss.
How can healthcare providers become shippers?
Okay! Now we’re asking the interesting questions!
Healthcare providers in general – and hospitals in specific – receive an unbelievable volume of medical supplies on a weekly basis, let alone yearly. So they have the warehouse, dock, and all the equipment that comes with But having all the resources to process intake and track storage doesn’t necessarily mean you’re necessarily equipped to ship out.
What we’d like to presuppose is: maybe you do?
“I don’t have a logistics network.” Well, what about healthcare facilities in your network? If you’re a single provider in a single facility, what about healthcare facilities in your GPO or regional healthcare association? All you need to send your excess supplies to their ultimate destinations is the supply chain data from those destinations. (And, yes, that could be a big ask, but we’ve seen hospitals agree to exchange supplies based on something as arbitrary as being located in the same state, so you could base your association on anything – including a shared desire for savings.)
“I don’t have a fleet of delivery vehicles.” You know who does? FedEx, UPS, and the good ol’ USPS. If the ecommerce revolution has taught us anything, it’s that having a printer makes you a shipper. Picking, packing, and shipping doesn’t have to be an undue burden on staff. The action itself doesn’t have to be any different from moving a box from the warehouse to the clinical areas or pulling product for a case. The only difference is the destination: that product is going to a box to be shipped out.
“I don’t have staff that can spare the time to do all that picking, packing, and shipping.” Now, once again, you raise an interesting objection, and on this one we have to agree with you. Science has proven that multitasking actually just doesn’t work at all. Every minute that an employee is dividing their attention between ordinary inventory management and occasional inventory optimization, both tasks suffer.
So you have a couple of options if you want to get serious about preventing product expiration and rebalancing your assets. 1. You partner with an organization that has already established its logistics – and reverse-logistics – capabilities. Or 2. You create a position so that optimization is 100% of someone’s job and establish a (re)distribution plan from the ground up.
How much is a specialist’s time worth?
We had a conversation recently with a provider who had around $2M in PPE that they were afraid that they couldn’t use. They weren’t willing to spend anything unless it would provide them at least $1M in loss prevention (in this case, expiration avoidance).
Of course, executing any business initiative – even if its sole purpose is to save money – actually costs money.
But how much should cost reduction cost? Better question: how much return should providers expect on their investment?
There’s unfortunately a lack of good evidence about supply chain salaries in the healthcare industry specifically (extra disappointing because sharing pay data – especially among coworkers – can improve morale and decrease biased pay gaps). But we can make some generalizations based on reports of materials managers making between $50K and $100K per year.
Let’s be generous and say that we’re talking about someone whose compensation puts them at the top of that range. Let’s be even more extreme and say that a healthcare system is fully a fully new position at $100K. To make this hire worthwhile, the new supply chain pro needs to create more value than they cost (sure, that’s basic economics, but it *ahem* pays to pay attention to that in the healthcare context, because that’s not something providers do enough).
If we’re being extreme and saying that your single new employee uses all year to complete this initiative and requires a massive amount of additional resources, maybe the project costs $200K. Which means better than 5:1 ROI. (And, again, this is a really extreme example. The higher likelihood is that a health system could expect to achieve a 7:1 cost-savings ratio, provided they partner with an outside agency rather than try to set everything up from scratch.)
How often do healthcare providers get to brag on that kind of efficiency, when most providers are skating by with a 5% or lower operating margin?
And we wish this went without saying – we wish this were obvious – but if no investment is made and all $2M worth of product expires, that’s a $2M loss. You didn’t save $100K by not hiring for that position or outsourcing.
You lost two. million. dollars.
While we’re talking about waste in budget and effort, a larger discussion deserves to be had about what tasks are worth the attention they require. Remember our harsh words regarding count sheets? If a person with a $50K salary spends a full month working up count sheets, that costs the provider more than $4K. Maybe that doesn’t seem that much for something necessary, but if count sheets provide no significant benefit and often create reporting mistakes that have to be fixed later (and take up more valuable time), every dollar of that was wasted.
(And that’s on the low end. In almost all cases, more than one person gets roped into the count sheet creation process, and they’re all skilled individuals with salaries and skillsets much more valuable than what we just estimated.)
How long is this going to last?
Short answer: hey, when you find out, let us know, will you?
Long answer: actually, the short one was right. We’re pretty good (okay, okay, extremely good) at crunching the numbers and turning what we find into a plan for our healthcare partners. We can tell you how much you need based on what you have and what you’ve used before. And even though healthcare is in unprecedented times – on the product sourcing and usage sides – Z5 partners are continuing to do better at inventory optimization than the facilities that are trying to rebalance their inventories on their own.
We can see a path to getting healthcare’s supply chain back to better-than-normal (we wouldn’t be offering this guide if we couldn’t). But the path is getting longer, rather than shorter.
Part of the problem is that most healthcare facilities aren’t considering the advice in this or our previous advice in this rebalancing series. But that’s only part. Because this is a three-part series.
Counting what you have is expected. Offloading what you don’t need is recommended. But there will not be anywhere to offload those supplies if healthcare providers don’t start sourcing more strategically.
See you in this series’ conclusion - Part 3: Suppliers On Life Support - to find out why.