Objective:
To optimize the total capital invested by balancing the cost of storing goods against the cost of replenishment, stock-outs and resulting service failures
Calculation:
| Total inventory issued | 20 days | |||
| x | ||||
| Value of in-stock inventory | Number of workdays in the month |
Target:
Central Stores — 12 to 15 annual turns (1 to 1.25 turns per month)
Stat Stores — 5 to 10 annual turns (0.5 to 1 turn per month)
Central Warehouse — 12 to 15 annual turns (1 to 1.25 turns per month)
Background Details:
Rationale
Stock inventory acts as a buffer between suppliers and customers for high-use items. A central store replenishes point-of-use inventories by breaking down cases and supplying items to point-of-use locations in low units of measure for easy access. Monthly monitoring of inventory turnover allows organizations to track and balance opposing factors: the financial costs of carrying inventory and minimizing stock-outs.
Inventory carrying costs includes the level of capital investment in inventory plus expenses for overhead items such as space and utilities. On the other hand, every time a replenishment order is placed regardless of the size of the order, expenses are incurred in the form of issuing the order, receiving and put-away costs. Supply chain departments must ensure that the target balances the carrying costs with the costs of replenishment.
Ensuring a product is available when it is needed has a direct impact on patient care. The rate of inventory turns must be calibrated to minimize stock-outs. In addition to putting patients at risk, stock-outs lead to reduced customer confidence in the supply chain department. As a consequence, clinicians could begin creating unofficial inventories within their departments, leading to overcrowded wards, increased inventory investment, and higher obsolescence rates.
Another factor in setting appropriate inventory target levels is the need for slow-moving items — items that are critical to patient care but for which demand forecast is uneven must still be kept in inventory. Every healthcare organization has different clinical needs that will affect its decisions in this area.
Benefits
Financial Stewardship
Managing inventory turnover rates correlates with an organization’s ability to manage its assets and maximize return on investment. Ensuring controls are in place to optimize inventory turnover rates balances replenishment costs and carrying costs, including upfront capital investment, space requirements, overhead costs, and write-offs due to damaged or obsolete products.
Customer Service
Optimal cycling of inventory ultimately results in less point-of-use storage space being required. This space can be reallocated to more value-add clinical functions. This must be balanced with minimizing the risk of stock-outs.
Underlying Leading Practices
Demand Management
Comprehensive understanding of an organization’s requirements for stock and non-stock items is a critical component to help the supply chain department optimize inventory levels, improve service levels, and reduce stock-outs.
Baseline Forecasting
Better forecast information communicated from the customer through to the supplier improves the accuracy of inventory planning and supports inventory-reduction initiatives.
Identification of Product Standardization Opportunities
Product standardization contributes to lower inventories and, by extension, higher inventory turnover because less variety of supplies needs to be stored.
Centralized Inventory Warehousing
Consolidating the inventory functions of multiple hospitals in one site provides opportunities for demand levelling and implementation of leading inventory management practices, all managed by trained supply chain professionals.
Logistics Process Automation
Automated inventory replenishment and electronic receiving capability speed up the order processing cycle, reduce errors, and lower the need for safety stock inventories.
Target Considerations
Establishment
Targets will vary depending on the location and size of the hospital. Rural hospitals might require higher inventory levels to act as a buffer against longer lead times and higher transportation charges. Smaller organizations may also carry higher inventory levels as a consequence of meeting minimum order and packing requirements.
Organizations using third-party warehouses or “stockless” service providers could have only stat stores left on site. The turns for these inventories will typically be lower than traditional on-site inventories, and the targets should be adjusted accordingly.
Specialized inventory types, such as operating room and pharmacy inventories, may also require different targets.
Impact of Other Metrics
Inventory turnover should be closely monitored in conjunction with metrics 4.1 Stock-outs at the Cart Level and 4.2 Fill Rates to Customers to ensure customer needs are still being adequately met.
Adjustment Factor
Due to the different lengths of months and the presence of holidays, the number of working days per month varies from 19 to 23. This could have an impact of over 20 per cent difference from month to month, making comparisons difficult. To avoid the issue, the calculation includes an adjustment factor (20 divided by the number of working days in the month) to normalize each month’s data to a 20-day month (four full work weeks).
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 2.3 Operating Costs as a Percentage of Expenditures 3.1 Number of Purchase Orders in One Month 3.2 Percentage of Rush Purchase Orders 4.1 Stock-outs at the Cart Level 4.2 Fill Rates to Customers |
2.2 Inventory Policy |
Implementation:
Calculation Parameters
Calculation:
| Total inventory issued | 20 days | |||
| x | ||||
| Value of in-stock inventory | Number of workdays in the month |
| Variable | Include | Exclude |
|---|---|---|
| Total inventory issued | Include monthly value of inventory issued from:
|
Do not include monthly value of inventory issued from
|
| Value of in-stock inventory | Include month-end inventory value for all items in:
|
Do not include month-end inventory value for all items in:
|
| Number of workdays in the month | Include all regularly scheduled working days in the month | Exclude:
|
| 20 days | Days in month adjustment factor |
Data Accessibility Rating
EASY - Data are available for computation
Possible Data Sources
Electronic
Inventory Module:
Information systems typically offer standard month-end inventory transactions reports. These reporting modules provide the Total inventory issued and the Value of in-stock inventory required to calculate inventory turnover.
Business intelligence tools could be used to collect data from multiple systems for consolidated reporting of multiple sites and inventory locations.
Manual
A manual method is not feasible but should not be required.
The calculation for the Number of workdays in the month should be based only on standard workdays — exclude statutory holidays and other organization-wide acknowledged days off.
Implementation Challenges
Challenges:
- Organizations must maintain a focus on meeting customer needs while optimizing inventory levels. Inventory reduction should be supported by process or technology improvements to avoid service delivery issues. It is vital to implement monthly monitoring of service-related metrics with inventory turns to quickly identify and resolve issues as they arise.
- For some items, the inventory replenishment costs (ordering, receiving, put-away) may be higher than the actual inventory carrying costs. Items should be evaluated by type, with decisions about optimal ordering quantities based on packaging, size and value.
- Some hospitals may currently be measuring this metric using a different calculation. Organizations may need to change their reporting methodologies to be able to benchmark with other hospitals.
- Most hospitals exclude inventory at the point-of-use locations. In the future, organizations should ideally include this inventory in their measurements.
