How Much Is Consignment Costing Your Hospital?
In a walkthrough of a major academic hospital in the Northeast US, the Chief of Surgery was lamenting how little space she had for new operations. The new hybrid Operating Room she was planning was going to be larger than their typical OR, making the issues even worse. As we walked through the ORs, a common theme emerged in her comments – “we don’t need this” and “we don’t need that.” Over the years, orthopedic and cardiovascular supply vendors had overfilled their storage shelves with items they were rarely, if ever, using. Like for other hospitals in the Northeast and many other parts of the US that are starved for space, this is prime real estate. The Chief stated the space cannot be taken up by unutilized items. Further, it could be a safety hazard if Joint Commission saw what was happening.
Back at our corporate offices, we looked deeper into the situation. We’ve collected data over the years that shows that consignment items cost 12% more on average than items that are owned. Further, the consignment items are overstocked by more than 50% compared to items that are purchased. Accurate, rich data is a wonderful thing isn’t it?
Can your hospital quickly adjust its inventory to take advantage of these savings? Most hospitals are using consignment as a “blunt instrument” (ironic how this is most often used in surgery – when we often say, “we are surgical in our use of ‘x’”). Consignment has many benefits – it moves the cost and management burden from the hospital to the vendor. This is great for certain items. On the flipside, it increases costs on average by 12%, and sometimes by up to 25%.
Why would a vendor be happy to put items on consignment? Its profitable for them! That 12-25% markup adds up to a lot of extra dollars on the items your hospital uses the most. It’s why a VP of Cardiology told me last week: “I can’t believe the cost of these ablation catheters. They cost more than stents.” Want to take a guess if the vendor was consigning them?
But the cost issue is further compounded by the space issue. Vendors are happy to place items “for free” on your shelves because they can use your space as a warehouse. Rather than renting space down the street, they utilize your shelves as their local storage, and then take supplies to every hospital in the city as needed. They believe this is their right since they are placing the inventory on your shelf “for free.” This opens up another Pandora’s box of issues, such as vendor access and safety and security issues, which hospitals in large part are trying to move away from.
Do you have the data to tell you what to consign and what to own? It becomes a fairly simple analysis that can be done on an ongoing basis if you have great, accurate data. In fact, we have one large academic hospital who reviews this every 6 months, and it only takes them 3 total hours to do the product-level review. Saving 12% on every item you use adds up to hundreds of thousands of dollars for most hospitals; in some cases it can move the needle by 7-figures.
So the question is – do you have the data to be confident to make quick decisions and to make them a routine part of your business operations? It could save your hospital huge dollars in real terms, while also creating more space for your operating (and revenue-producing) surgeons. If you need a better handle on your data, software like iRISupply has been purpose-built to help hospitals solve their ongoing operational issues like this while minimizing administrative time required to realize real cost-savings.