The Key Inventory Management Metric For Hospitals To Track
As hospital executives look for new opportunities to reduce costs in an era when value is taking over for volume, the supply chain is increasingly coming in to focus. For too long, hospital supply chains – more specifically the procedures for managing surgical implants and supplies that make up a large share of supply costs for hospitals – have been managed inefficiently. A lot of this has to do with the top-down method that hospitals have traditionally used for ordering implants and supplies, with physicians dictating which implants and supplies should be kept in stock. While this is done to make sure that physicians have what they need to treat their patients, inventory managers in the procedural areas have often taken a hands-off approach to making sure that these items are managed efficiently. Some of the results are bloated inventories, expiring items and vendor managed stock that hospitals have no visibility in to. All of these poor outcomes are costing hospitals real money, and the time for this mismanagement is coming to an end.
As hospitals look for ways to become more efficient with their inventory levels, they need to rely on data and track their performance against metrics to start to turn the tide. There are several metrics to consider but one stands above the rest in terms of its ability to measure inventory management efficiency.
The Key Metric You Need To Track
There are many established metrics that help you determine if your inventory levels are appropriate, but one metric can help you manage your efficiency better than any other: Inventory Turnover. Inventory Turnover is an efficiency ratio that looks at how often you are going through your inventory in a certain time period. The formula for Inventory Turnover is:
Inventory Turnover = Cost of Goods Sold / Average Inventories
As an example, a hospital department that has $10 million of supplies on hand and $20 million of supplies used annually would have an Inventory Turnover of 2.0x ($20 million cost of goods / $10 million inventory).
The reason that Inventory Turnover is the single best metric to track is that by definition it measures your efficiency. If you have way too much inventory on hand, your Inventory Turnover ratio will be low. If you have too little inventory, your Inventory Turnover ratio will be too high. And as you measure trends in your data, you’ll start to see that as your procedure volume drops, your Inventory Turnover will start to decrease, meaning it’s time to adjust your inventory levels downward to correspond with the drop in procedures. And if your procedure volume increases, your Inventory Turnover will start to rise, which may signal it’s time to start keeping more stock of certain items. Because Inventory Turnover looks at both your usage and your on-hand inventory level, it is a great resource for measuring inventory efficiency.
How To Track Inventory Turnover As A KPI
The first step to incorporating Inventory Turnover as a metric is to begin measuring and tracking it. No matter how efficiently (or inefficiently) you’re running your inventory operations today, it is a near guarantee that once you start tracking Inventory Turnover as a Key Performance Indicator (KPI) you will see opportunities for improvement.
In order to begin tracking Inventory Turnover, you’ll need access to good data around your on-hand inventories and inventory usage. While Inventory Turnover typically depicts an annual statistic of how many times per year you are turning over your inventory, you can measure Inventory Turnover monthly by annualizing the monthly usage data. To track your Inventory Turnover on a monthly basis simply use:
Monthly Inventory Turnover = (Monthly Inventory Usage x 12) / End-of-Month On Hand Inventory
While the textbook definition of Inventory Turnover requires an average inventory value for the time period, we can use end-of-month inventory as a quick proxy of what that number would be since you shouldn’t be seeing wild swings in your inventory levels.
What Does A “Good” Inventory Turnover Look Like
When you start to track Inventory Turnover, you may notice large swings in the monthly turns due to the seasonal nature of hospital procedures. When key physicians go away for vacation, you may see drastic drops in volume that reduce your turns for a month. And when business picks up during busy season, you may see large increases in turns as your supply usage grows. However, you want to begin to identify what your norm is and start putting together plans to improve upon it.
After you’ve observed your inventory turns data for 2-3 months, start to set up a simple goal that represents a reasonable inventory turns metric for your department to achieve. Your next question is most likely: what is a reasonable Inventory Turnover goal to reach? We can turn to the retail industry to understand how a “good business” turns over their inventory. Looking at retail leaders like Wal-Mart and Target shows us that leading retailers are turning over their inventory 7-10 times per year. We have in fact seen certain specialty hospital departments like tissue/bone banks and Electrophysiology (EP) Labs meet or exceed these benchmarks (up to 9-12 times per year). However, we have seen best practices at hospitals for the procedural areas like Vascular Operating Rooms, Interventional Radiology and Cardiac Catheterization Labs be in the range of 4-5 times per year. Given the nature of these areas where different sizes and certain products need to be kept on hand “just in case”, it may be difficult to exceed these targets without sacrificing patient safety.
Just one note of caution: when you start measuring your Inventory Turnover, do not be surprised if your inventory turns are in the neighborhood of 1-2 times per year. This is absolutely normal, especially in areas where Inventory Turnover hasn’t been tracked and used to improve efficiency before. But once you start measuring Inventory Turnover, you will now have the tool you need to set targets and eventually meet or exceed industry best practices.
Where Can I Get Valid Data For Measuring Inventory Turnover?
Hospitals often have a challenge getting their hands on reliable and accurate usage data for their supplies. Ordering data is typically easier to access than usage, but do not use this data as it will include data for items that are being over-ordered, or that are being ordered to replace expiring items and not necessarily used, and your actual needs for certain products will be overstated as a result. Without trustworthy usage data, you will not be able to accurately measure your Inventory Turnover ratio.
If getting your hands on high-fidelity usage data is currently a challenge, consider a system like iRISupply from Mobile Aspects. This hospital inventory management software will arm you with the data you need accurately track your Inventory Turnover ratio. Mobile Aspects supply chain experts will also sit down with you quarterly as part of a best-in-class customer success program to review your inventory turns trends, and will even recommend supplies that can be reduced or eliminated to improve your Inventory Turnover ratio.
A community hospital in Illinois recently used data coming out of the iRISupply system to improve Inventory Turnover in the EP Labs. Using the data and recommendations from iRISupply, they were able to increase their Inventory Turnover ratio from 5.7x to 11.8x in just 8 months. The hospital is now undertaking a similar process in their other procedural departments, which they estimate will result in over $1.5 million in savings for the hospital.