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Just-In-Time Inventory Is Saving Hospitals

By Pat McGraw

Hospitals are constantly searching for ways to lower costs while remaining patient-focused, and for many, that search has led them to Just-In-Time Inventory (JIT).

Being patient-focused has historically led many hospitals down the path of purchasing supplies in bulk to gain pricing discounts, then setting up and running their own supply warehouse which comes with the cost of space, logistics, inventory management and staff.

This desire to ensure that the needed supplies are always in stock has led many hospitals to maintain $1 million supply inventories – plus the cost of the warehouse space, logistics, inventory management, staff, and shrinkage.  And when cost-cutting initiatives surface, the focus is placed on the price paid for the supplies and payment terms rather than how to be patient-focused with lower costs associated with maintaining this level of supplies.

But that has begun to change as more and more hospitals turn to just-in-time inventory (JIT).

What is Just-In-Time Inventory?

Just-in-time inventory (JIT) is an inventory management approach that uses data to identify usage patterns so that the organization can maintain low inventory levels and order just order what you need as closely as possible to when the supplies are needed.

This has a significant impact on cash flow, freeing working capital from being tied up in supplies that sit on a warehouse shelf for the foreseeable future.  Additionally, less warehouse space is required as well as staff, helping lower costs.

And the organization is less likely to be saddled with supplies that expire or no longer meet the changing needs of the medical staff.

Advantages of Just-In-Time Inventory

The greatest advantage of Just-in-time inventory is that it improves your cash flow and frees up your working capital.

For example, that hospital with a $1 million supply inventory could set supply levels that allow them to return 50% to 85% of their stock, providing them with $500,000 to $850,000 in cash.  On top of that, they will be able to lower warehouse, logistics, inventory management and staffing expenses.

Other advantages include the added flexibility of being able to order what the medical team prefers, rather than requiring them to use what is in-stock.

Disadvantages of Just-In-Time Inventory

The potential for being caught in a situation where patient demand surpasses forecasts and you find yourself with insufficient stock on-hand and a delivery time for replenishment stock that falls outside your acceptable limits for your patient-care goals.  This is typically caused by a major event that dramatically increases the number of patients being served or inventory management errors where the quantity on the shelf is dramatically different than the quantity shown in the inventory system.

Another ‘disadvantage’ is the initial sticker shock that some report during the shift from bulk purchases and discounts to smaller order sizes and higher per unit pricing.

How to overcome the disadvantages

The primary – and most serious disadvantage is not having the needed supplies when the patient requires them and that is avoided with careful planning, the development of relationships with suppliers and contingency plans and processes that address worst-case scenarios.  Those experienced with shifting to just-in-time inventory readily admit that more thought and strategy is required than the traditional inventory management system and that on-going monitoring of inventory records and usage to ensure the accuracy of records is key.

As for ‘sticker shock’, this should also be addressed in the pre-planning and then, over time, as the long-term cost benefits from lower storage, personnel and inventory management are recognized.  An effective communication plan that sets and manages expectations is the best solution.

What to do next?

Want to brainstorm about your company’s inventory management system? Call <Name, Credentials, Title>, at 443.470.5911 for a confidential, no cost or obligation discussion. Or, click here to schedule an appointment.

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