Escolar Documentos
Profissional Documentos
Cultura Documentos
2013
T A B L E
O F
C O N T E N T S
Overview
.............................................................................................................................................
2
Summary .......................................................................................................................................... 15
Acknowledegement ........................................................................................................................... 16
Bibliography ..................................................................................................................................... 16
OVERVIEW
Health care expenditures in the United States reached $2.6 trillion in 2010, nearly ten
times the $256 billion spent in 1980. (Centers for Medicare and Medicaid Services, Office of the
Actuary, National Health Statistics Group, 2012) The rate of growth has decreased slightly
recently, but is expected to grow faster than national income levels over the foreseeable future.
(Robert Wood Johnson Foundation, October 2008) Hospital care and clinical services account for
51% of the nations health expenditure. (Martin, et al., 2012) These facts motivate the need to put
more attention on cost efficiency in the health care industry. (Centers for Medicare and Medicaid
Services, Office of the Actuary, National Health Statistics Group, 2012) According to a research
study, supply chain costs may account for as much as 40% of the cost of providing care (Haavik,
2000) and it is estimated that if demand and inventory are better managed, the cost savings could
range from 6% to 13.5% of total healthcare costs. (Chandra & Kachhal, 2004)
A recent survey on the cost and quality of the health care supply chain (Nachtmann &
Pohl, 2009) provides information on the average amount in each cost category that large health
care providers spend as a percentage of annual operating expenses. Figure 1 illustrates how much
each cost would be if $100 million were spent on supply chain activities, which take
approximately 31% of total costs. The two cost categories of main interest to this paper are
Inventory Management and Order Management, which account for 61% of the supply chain
costs, or $61 million per year for a typical large health care provider.
FIGURE 1: TYPICAL ANNUAL OPERATING EXPENSES OF A LARGE HEALTH CARE PROVIDER
(NATCHMANN AND POHL, 2009)
Through an industry-wide analysis involving the retail and health care sectors, the Center
for Innovation in Healthcare Logistics (CIHL) at the University of Arkansas has identified three
supply chain practices that can have a significant impact on the healthcare value chain:
collaborative planning, forecasting and replenishment (CPFR), education and training for
materials management, and improved inventory management practices. A case study for the
Mercy Health System indicated that significant cost savings are possible by applying improved
inventory management practices to pharmaceutical items. The development and adoption of the
methodologies used within the case study by the healthcare industry can result in higher fill rates,
fewer back orders, higher inventory turns, and decreased overall healthcare inventory costs.
Covidien, Inc. as a global healthcare products provider, committed to innovative medical
solutions, improved world health, and delivering value through healthcare leadership and
excellence, partnered with CIHL to replicate the findings of CIHLs previous case study (Sisters
of Mercy Health System) on products within their system.
This project evaluates the potential for cost savings by applying advanced inventory
management practices driven by actual usage data. The focus of the study is on medical/surgical
(medsurg) items used in the operating rooms within Mercy hospitals at Fort Smith, AR (FTSM),
Oklahoma City, OK (OKLC) and Springfield, MO (SPRG). The medsurg items included 143
items at FTSM, 115 at OKLC and 152 at SPRG all manufactured by Covidien, Inc. The
effectiveness of using standard data identifiers is also demonstrated.
This case study attempts to reduce the two main costs of inventory/order management,
which are holding costs and ordering costs. The case study used the (r, Q) inventory policy to
develop a more cost-effective system. Figure 2 summarizes the steps involved in creating a better
inventory management strategy. These steps are explained in detail throughout the rest of the
paper.
Inventory
Data
Pareto
Minimum
Cost
Multi-Echelon
Sensitivity
Collection,
Holding
and
Inventory
Minimum
Cost
Analysis
and
Ordering
Cost
Forecasting
Analysis
and
Analysis
and
Data
Demand
Analysis
by
Inventory
Cost
Savings
Cleansing
Estimation
Location
Analysis
Projections
ClassiKication
FIGURE 2: STEPS FOR INVENTORY ANALYSIS
The first stage is data collection and cleansing of the actual usage data and receipt data
for the commodities. The effectiveness of using data standards such as GTIN numbers will be
discussed. The second stage consists of estimating the holding rate and ordering cost associated
with each item. In the next step, actual usage data is further analyzed using a Pareto analysis and
demand classification analysis. This permits an understanding of the different approaches that
must be taken for items in each of these categories. This is followed by forecasting analysis, in
which forecasts are made and the best forecast techniques are selected for each item. In the fifth
stage, an optimal (r, Q) policy will be determined for unique items at each location and in the
sixth stage another optimal (r, Q) policy will be proposed for pooled items. Finally, a sensitivity
analysis will be performed in which current policies will be compared to the proposed policies in
several aspects, and the projected cost savings will be discussed.
Item Number (GTIN) developed by GS1 standards is one of the most widely used item identifiers
by the healthcare industry leaders. By using GTINs, the discrepancies related to multiple item
identifiers, as in this case, ABC Item Nbr and User Nbr, can be eliminated. Each item has a
different GTIN for each unit of measures and hence, discrepancies related to units of
measurement can also be avoided.
Research on the use of data standards within the healthcare supply chain and the
implementation of data standards in the healthcare supply chain has shown the benefits of data
standards at an operational level. This study illustrates the operational benefits of data standards
at strategic and tactical level decision-making. GTIN helps to streamline the view between
trading partners and also improve the data quality, which is vital in any analysis.
An activity based costing approach was used to estimate the ordering cost at each
location. A number of key activities were identified at each location. Then, the Mercy team
collected a minimum estimate, most likely estimate and maximum estimate for the following
metrics related to each activity: Time spent for each activity per day (in hours/day), Cost
associated with each activity per hour (in dollars/hour) and activity quantity for each activity per
day (lines or SKUs/day). The cost of placing and processing orders are computed and tabulated in
Table 2.
TABLE 2: LEVELS OF ORDERING COST
FTSM
Unit Cost Total Demand Usage Value
# of items % of items # of items % of items # of items % of items
A 32 20.92% A 30 19.61% A 25 16.34%
B 30 19.61% B 33 21.57% B 30 19.61%
C 91 59.48% C 90 58.82% C 98 64.05%
Total 153 Total 153 Total 153
OKLC
Unit Cost Total Demand Usage Value
# of items % of items # of items % of items # of items % of items
A 22 17.32% A 30 23.62% A 20 15.75%
B 24 18.90% B 33 25.98% B 27 21.26%
C 81 63.78% C 64 50.39% C 80 62.99%
Total 127 Total 127 Total 127
SPRG
Unit Cost Total Demand Usage Value
# of items % of items # of items % of items # of items % of items
A 35 21.60% A 36 22.22% A 32 19.75%
B 35 21.60% B 37 22.84% B 43 26.54%
C 92 56.79% C 89 54.94% C 87 53.70%
Total 162 Total 162 Total 162
The results show that the 80-20 rule in the Pareto segmentation of ABC analysis (based
on Usage Value) is valid for the items.
The demand characteristics analysis classifies the items into four categories: intermittent
(denoted as I), lumpy (L), smooth (S) and erratic (E) based on the properties of lumpiness and
intermittence. Intermittent, Lumpy and Erratic demands are hard to forecast and hard to model
and hence it is harder to manage products that exhibit these type of characteristics. Table 4
illustrates the percentage of items under each of the classes.
TABLE 4: DEMAND CLASSIFICATION ACROSS THE SITES
The observations suggest that 70% of the items are intermittent in nature and 20%
are lumpy. (Table 4) The traditional forecasting approaches such as simple exponential
smoothing and moving average are often not appropriate for these items.
FORECASTING ANALYSIS
The goal of this task is to select the best forecasting techniques for each item at
each location. We selected the Mean Absolute Scaled Error as the performance measure
because it is appropriate for demand series which are intermittent or lumpy. The
following forecasting techniques were considered for the analysis: MCARTA (an
intermittent demand forecasting technique developed by the U of A researchers), Croston
(0.1), Croston (0.2), Syntetos (0.1) (Boylan, et al., 2008), Simple Exponential Smoothing
(0.1), Simple Exponential Smoothing (0.2), Moving Average (19) and Moving Average
(9). The values used as the forecasting parameters are selected from range of 0 to 1 based
on common industry practices. Figure 3 shows the percentage of time that each technique
was selected as best at FTSM. MCARTA was selected as the best for the majority of
items at each location: 61% at FTSM, 65% at OKLC and 71% at SPRG.
FIGURE 3: PERCENTAGE FORECASTING TECHNIQUES PICKED AS BEST BY ITEMS
SINGLE-ECHELON OPTIMIZATION
In this task, the impact of adopting an optimal (r, Q) policy is measured. The
forecast estimate and the forecast error from the best forecasting technique were used to
model the lead time demand distribution for each item (assuming an underlying Gamma
distribution). At various (r, Q) levels, the operational performance measures such as stock
out, fill rate, average backorders and average on hand inventory (computed by the loss
functions of the lead time demand distribution) as well as order frequency and inventory
turns can be computed and subsequently total inventory cost related to the item can be
computed. The (r, Q) policy for item i, is optimized using the model below:
! = ! ! + ! !
:
! 1.00 [ ]
! 0.985 [ ]
! 1 [ ]
! , ! 0 [ ]
MULTI-ECHELON OPTIMIZATION
Multi-echelon optimization allows for analysis of the pooling effect of inventory
by allowing the stocking policy at the sites to depend on the stocking policy at the CSC.
This allows for possible cost savings as a result of the pooling effect at the CSC. The
algorithm aggregates demands from bottom to top (sites to CSC). This involves
calculating replenishment interval and replenishment size at the sites as well as
calculating demand interval and demand size at the CSC. Followed by that, the algorithm
solves for single inventory at the CSC and then obtains waiting time due to the
backorders at the CSC. The waiting time due to the backorders at the CSC is added to the
lead time at the sites and then the model solves for the single inventory at the individual
sites. The optimization model is as follows:
(! , ! , ! , ! , ! , ! , ! , ! )
! ! , ! , ! , ! , ! , ! , ! , ! 0.985
!
!
Since only 45 items are used across all three sites and replenished by the CSC,
these items alone are used in the multi-echelon model. The majority of the items studied
have low total usage value (Table 5) and hence savings will be lower than the savings
from the single-echelon analysis.
This time series for the daily on hand inventory was used to compute the average
fill rate and the average on hand inventory for each item. We observed that 37% of items
at FTSM, 60% at OKLC and 48% at SPRG have been backordered at least once during
the 366-day time horizon. It is possible that demands for these items might have been met
through a rush delivery or a substitute item, for which we do not have the records. The
average fill rate across all the items is 94.7% at FTSM, 91.9% at OKLC and 93.7% at
SPRG which is lower than the desired 98.5%. Meanwhile, the total of daily average on
hand inventory across the items within a location is considerably high: 10,118.9 units at
FTSM, 9,039.4 at OKLC and 20,359.5 at SPRG. The daily average on hand inventory for
an item within a location is 85.0 units at FTSM, 87.8 at OKLC and 137.6 at SPRG.
Figure 4 compares the fill rate and average on hand inventory of the current
method with the proposed model. The current average inventory is considerably higher
than the average inventory for the proposed inventory model. Meanwhile the fill rate for
the current inventory model is usually lower than the proposed fill rates.
1
Real-time observations of on-hand inventory were not available; therefore, we adopted this approach. To
initialize the approach, we have to make an estimate for the initial on hand inventory and hence we
arbitrarily set it as the maximum number of units used for the item. Since, it is not possible for total annual
usage to exceed total ordered, we assumed that the initial on hand served towards the excess demand.
10
The current cost and the proposed cost were estimated for each facility and are
shown in Table 6 and Figure 5. Table 6 shows the dollars saved from each location at
each level of holding and ordering cost. It should be noted that considerable savings can
be achieved by adopting the proposed model. The holding cost contributes most to the
total cost and savings from the proposed model comes mostly from the reduction of
holding cost. In summary, the proposed policies indicate that less inventory can be
carried while still meeting the desired fill rate levels.
TABLE 6: CURRENT COST AND SAVINGS ACROSS LOCATION AT LEVELS OF HOLDING AND
ORDERING COST
Percentage
Current Cost Savings
Location savings
Min Likely Max Min Likely Max Likely
FTSM $ 34,872.96 $ 40,833.31 $ 46,843.64 $ 25,362.25 $ 29,760.22 $ 34,206.12 73%
OKLC $ 38,611.87 $ 45,287.84 $ 52,015.38 $ 26,627.52 $ 31,311.05 $ 36,058.93 69%
SPRG $ 73,187.66 $ 86,300.94 $ 99,489.33 $ 57,336.65 $ 67,789.20 $ 78,322.44 79%
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The current cost and the proposed cost for the multi-echelon optimization model
were estimated for each facility and are shown in Figure 6. It has to be noted that both
single-echelon and multi-echelon optimization has considerable savings at each location
by driving down the holding cost. As mentioned before the savings for single-echelon is
greater than that of multi-echelon analysis because the majority of items selected as the
pooling items have low unit costs and low usage values.
FIGURE
6:
COMPARING
TOTAL
COST
ACROSS
THE
LOCATIONS
-
45
ITEMS
12
Table 7 shows the dollars saved from each location at each level of holding and
ordering cost.
TABLE
7:
CURRENT
COST
AND
SAVINGS
ACROSS
LOCATION
AT
LEVELS
OF
HOLDING
AND
ORDERING
COST-
45
ITEMS
Percentage
Current Cost Savings
Location savings
Min Likely Max Min Likely Max Likely
CSC $ 13,975.04 $ 18,003.51 $ 22,031.98 $ (4,332.40) $ (3,397.52) $ (9,370.67) (35)%
FTSM $ 14,260.58 $ 16,540.84 $ 18,849.29 $ 351.09 $ 1,831.58 $ (1,378.73) 21%
OKLC $ 14,944.70 $ 17,333.76 $ 19,752.37 $ 96.88 $ 4,373.12 $ (2,813.13) 29%
SPRG $ 23,128.49 $ 26,967.53 $ 30,845.34 $ 11,986.58 $ 16,708.67 $ 13,363.48 35%
Figure 7 and Figure 8 illustrates the substantial savings that can be achieved from
the proposed model at the Fort Smith hospital.
FIGURE
7:
HISTOGRAM
OF
SAVINGS
IN
FORT
SMITH
(FTSM)
FIGURE
8:
HISTOGRAM
OF
PERCENTAGE
SAVINGS
IN
FORT
SMITH
(FTSM)
13
The results show that approximately 50% of the savings come from the
Springfield (SPRG) site. (Figure 9)
FIGURE
9:
SAVINGS
BY
LOCATION
Also, approximately 50% of the savings come from Class A items. (Figure 10)
FIGURE
10:
SAVINGS
BY
ABC
CLASSIFICATION
ACROSS
THE
LOCATIONS
As mentioned before, intermittent and lumpy demands are hard to forecast and
great savings are expected from them. Results also confirm this anticipation. (Figure 11)
Intermittent and Lumpy demands are hard to forecast and hard to model with
traditional forecasting techniques. The results also show that MCARTA is a very good
model to forecast the demand across the locations. (Figure 12)
14
FIGURE
12:
SAVINGS
BY
FORECAST
TECHNIQUE
ACROSS
THE
LOCATIONS
SUMMARY
The analysis shows that high on hand inventories are carried across the locations
in the Mercy hospital network, especially at Fort Smith (FTSM) and hence considerable
savings are possible by better managing the items using the proposed inventory policies.
These savings are predicted from both single-echelon optimization and multi-echelon
optimization models that are discussed in detail. In addition, despite the lower on-hand
inventory, the proposed model achieves the desired fill rate.
It is to be noted that the majority of the items have intermittent or lumpy demand
and therefore modeling and forecasting the demand using the traditional methods is not
sufficiently effective. Therefore, we selected MCARTA as the best forecasting technique
15
for most of the items through an analysis which shows 61% of items at FTSM, 65% at
OKLC and 71% at SPRG are better forecasted using this technique. Furthermore, the 80-
20 rule is valid in this system in terms of unit cost, demand and actual usage value. The
implication is that vital items are fewer in nature and adoption of inventory best practices
on these items may generate considerable savings. Future work should investigate the
allocation of the inventory from the central store of the hospitals to localized units within
the hospital in order to understand the effect on service of the new inventory policies.
ACKNOWLEDEGEMENT
This material is based upon work supported in part by the Center for Innovation in
Healthcare Logistics at the University of Arkansas via a grant from Covidien, Inc.. Any
opinions, findings, and conclusions or recommendations expressed in this material are
those of the author(s) and do not necessarily reflect the views of Covidien, Inc.
BIBLIOGRAPHY
Boylan, J. E., Syntetos, A. A. & Karakostas, J. E., 2008. Classification for Forecasting
and Stock Control: A Case Study. Journal of Operational Research Society , pp. 473-
481.
Centers for Medicare and Medicaid Services, Office of the Actuary, National Health
Statistics Group, 2012. National Health Care Expenditures Data. s.l.:s.n.
Chandra, C. & Kachhal, S. K., 2004. Managing Helth Care Supply Chain: Trends, Issues,
and Solutions from a Logistics Perspective. Orlando, Florida, s.n.
Haavik, S., 2000. Building a Demand-Driven, Vendor-Managed Supply Chain.
Healthcare Financial Management.
Martin, A. B., Lassman, D., Washington, B. & Catlin, A., 2012. Growth In US Health
Spending Remained Slow In 2010; Health Share Of Gross Domestic Product Was
Unchanged From 2009. Health Affairs.
Nachtmann, H. & Pohl, E. A., 2009. The State of Healthcare Logistics: Cost and Quality
Improvement Opportunities, s.l.: Center for Innovation in Healthcare Logistics,
University of Arkansas.
Robert Wood Johnson Foundation, October 2008. High and rising health care costs:
Demystifying U.S. health care spending. s.l.:s.n.
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