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Chapter 7 – Operations of Storing: Storage and Inventory Management

Learning Objectives

Outline and explain the concepts and processes associated with storage and inventory management in the healthcare supply chain.

Discuss and give examples of the process of storage and inventory management of various supply chain items (medical and surgical, pharmaceutical, office supplies, etc…).

Relate, discuss and provide examples of the tools and resources of storage and inventory management integrates with healthcare supply chain sourcing and purchasing.

Distinguish the operational areas of a healthcare supply chain storage facility.

Relate the storage and inventory management of a medical/surgical item, such as cotton balls versus a cardiac pacemaker, versus Federal Schedule Pharmaceutical narcotics to the healthcare supply chain operation.

Evaluate the benefits of improved storage and inventory management practices for healthcare supply chain operations and management in terms of healthcare organization capabilities.

Introduction

The operational functions of storing and inventory management are the focus of this chapter.

The ability to store, secure and manage inventory are critical core business skills of the healthcare supply chain.

From warehouses or Consolidated Services Centers (CSC) to central supply storerooms in specific hospitals or clinics, the ability to provide adequate storage, security for highly pilferable or Federal Schedule items (security cages, secure rooms and vaults with limited access for personnel) are the essential aspects of the ‘storing’ functions.

Multiple Supply Chain Methods Within the Organization

The modern healthcare organization has multiple supply chains that provide the equipment, supplies, and medications needed to provide services to patients.

These three distinct supply chains have some overlapping features but, their specialized needs are what define the categories.

Storage Requirements

It is important to understand the storage requirements of each of these supply chain components as well as the space requirements to store these items.

Storage space is a function, but not limited to, the following:

number of stock keeping units (SKUs),

number of turns of the stock (number of times a year the SKUs stored are distributed and restocked/received back into inventory),

number of facilities the warehouse of CSC supports,

the safety level of SKUs kept in inventory,

Storage Requirements

the layout of the storage facility (bulk storage, small pick locations where bulk is broken down to smaller units of measure like boxes or ‘eaches’ versus full pallets or cases),

the material handling equipment utilized (small forklifts take smaller space to move and turn around in an aisle while large forklifts take more space),

the size of secure cages and vault space for items that require limited access (only screened and designated personnel; refer to FDA requirements for non-clinician personnel access of sensitive items) and more security,

the size of the receiving and loading dock and pack-out areas (to prepare for distribution and loading of trucks or vans for use at the points of care),

Space for specialty storage such as refrigeration units and radioactive material storage (such as lead lined storage cases), and

space needed for any repackaging or item processing.

Materials Management

Materials management is a branch of logistics that deals with the tangible components of a supply chain.

Specifically, the acquisition of items, quantity control of purchasing and standards related to warehousing, ordering, and shipping.

The Five ‘R’s of Material Management

Is it the right quality?

Is it the right quantity?

Is it the right time?

Is this the right source?

Is it the right price?

Keeping the 5 R’s in mind when dealing with moving materials will provide a guide for decision making and allow the materials management professional to meet their goals.

General Goals of Materials Management

Acquire items of the appropriate level of quality for the best possible price

Provide input on make or buy decisions

Keep inventory turning over. A constant turnover rate for inventory will reduce carrying costs and inventory loss due to damage or spoilage

Promote internal cooperation with regards to inventory coordination

Maintain high quality records and controls

Prevent supply chain disruptions

Develop relationships with vendors to create reliable alternative sources

Inventory Management

Inventory management is concerned with managing the amount of items that are stored in a warehouse.

It is important because if a company has insufficient raw materials or inputs in inventory that organization will have interruptions in production.

In situations where determining the level of demand would be difficult, there are several inventory management models which can be used to approximate needed inventory levels.

Inventory Models

The single-period model is used for one time orders such as purchasing items for a one-time event.

A fixed-order quantity model can be used to maintain a specific level an item in stock.

The fixed-time period model is similar to the fixed order-quantity model but the key difference is that instead of monitoring the inventory level and reordering when the inventory reaches a critically low level, the item is ordered regularly on a specific day regardless of the quantity needed.

Why is Inventory Management Important?

Inventory allows businesses to maintain independent in their operations.

Inventory allows an organization to continue operating during sharp increases in demand for their product or service

Inventory also allows for flexibility in production scheduling.

Warehouse Models

Warehouses have three basic, yet different, approaches to formation:

Stock Keeping Unit (SKU) storage: products are separated by specific type and stored together, thus reducing confusion and increasing efficiency

Job Lot storage: storing a product related to a certain job stored together, providing a more efficient picking and packing method.

Cross-docking: uses a different system where the warehouse does not store the product; instead it is where trucks from suppliers drop off large quantities of a given product and it is then broken down into smaller lots and repackaged ‘on the dock’ and not brought into inventory or storage but rather, immediately shipped to the final location.

Medical and Surgical

These items include, for example, scalpels, bandages, sutures, and splints.

Essentially, anything that is not a medication or equipment falls into this category.

Medical/surgical items are typically stored in large storage area within a hospital referred to as central storage.

Items are distributed from central storage to storage rooms near the point of use and restocked using various methods.

Pharmaceutical

Pharmaceuticals tend to have more specialized storage requirements than other items in a healthcare organization. ]

These storage requirements may be as a result of increased security requirements for narcotics or the need for a cold chain for certain types of medication.

This is particularly true for biological that need refrigeration and for radioactive material that need special handling and storage such as lead lined cases.

Capital Equipment

Capital equipment includes large, expensive items such as robotic surgery stations, MRI machines, specialized equipment for the heart catheterization lab and other such equipment.

The supply chain for these items is typically less complicated than for medical/surgical and for pharmaceuticals.

Typically, capital equipment is ordered directly from the manufacturer or a clearing house for capital equipment.

However, the complexities associated installing the capital equipment is much greater than storing smaller items in central storage.

Strategy

Integrating the three distinct supply chains present in most healthcare organizations takes strategic planning and adjusting the plan as needed to stay on target.

When the supply chain is incorrectly managed, the importance of an efficient supply chain becomes apparent.

In order to minimize supply chain costs, the efficient storage and distribution of inventory is paramount in today’s healthcare environment.

The opportunities for healthcare organizations to improve the efficiency of their supply chain activities extend from bed side to distribution center.

Supply Chain Point of Use Supply Replenishment and Charge Capture

The point of use for the majority of items in the healthcare supply chain is bed side in patient treatment rooms.

There are many ways to manage the usage of materials bedside but no matter the system they all come down to monitoring the usage of supplies and replenishing them as needed.

A popular choice for this purpose is Periodic Automatic Replenishment.

Common Ways to Store Items

Storage bins are a common way of storing smaller items within a stock room or central storage. There are a myriad of different storage options that cater to the needs of the storage items and the organization.

Interstitial space is space is the area between walls or floors of the building. Some hospitals have been able to take advantage of this space in existing facilities or plan storage locations in key interstitial areas around the facility.

Common Ways to Store Items

Central Storage

Central storage acts as the internal warehouse for a healthcare organization.

This storage is in addition to a warehouse or CSC but is at the hospital or clinic level, closer to the points of care.

Organizations must make a decision as to how often to replenish the stock within central storage.

This decision has a huge impact on business operations for an organization.

Distributor Warehouses

Examples of companies which operate distribution warehouses for the healthcare industry include Cardinal Health and Owens and Minor.

Figure 7-1

External Distribution Centers

Pros

The argument for outsourcing supply chain activities is that outsourcing supply chain activities can result in a competitive advantage for the healthcare organization because supply chain management is a multifaceted system that requires wide ranging expertise to be efficient.

Cons

A major argument against the use of an external distribution center is the control given up over the supply chain by the organization when it is outsourced.

This loss of control can result in anticipated fees and potentially increased shipping costs from the distribution center to the hospital.

Is Outsourcing the Best Option?

In order to facilitate decision making with regards to outsourcing, a decision making framework can be utilized. An example of such a framework is as follows:

Prior to deciding to outsource, the following four questions should be carefully examined:

1. Is the function a core competency?

2. Is the knowledge management strategy associated with the function fully understood and aligned with the goals of the organization?

3. Who will improve the function most in the future?

4. What is the externalization risk?

What Does Your Own Distribution Center Look Like?

There are three primary types of distribution centers:

1. Conventional: moves materials round the facility through the use of people and mobile equipment.

2. Mechanized: has equipment that helps move materials throughout the facility such as sorting or conveyer systems.

3. Automated: moves materials totally, or in part, through the use of robotics.

About 20% of healthcare organizations have their own distribution center.

The advantages to owning the distribution center are primarily: long term cost savings, simplified ordering and logistics. As you may have guessed, building a distribution center is extremely expensive.

Costs of Storing and Handling Inventory

The costs associated with soring and handling inventory fall into two categories depending on if an organization outsources their warehouse or owns their own.

For companies who rent warehouse space from a third party, the costs come down to cost per pallet.

For companies who own their own warehouse, the storage costs are fixed based on the size of the warehouse.

Two techniques for the valuation of inventory, first in first out (FIFO) and last in last out (LIFO), originated in cost accounting.

First In First Out (FIFO)

Under FIFO, the oldest items in inventory are used first.

This is beneficial for products which have short shelf lives such as medication with special storage needs.

FIFO offers the advantage of knowing exactly what is in inventory and its current market value.

The final advantage to FIFO, is one of simplicity.

FIFO is a less complicated system than its counterpart, LIFO.

The major disadvantage associated with the FIFO system with regards to inventory is clerical errors as to quantity and storage location of items.

Last In First Out (LIFO)

The LIFO system is only used in the United States as its use for accounting applications is not allowed under International Financial Reporting Standards (IFRS).

This system can be considered the opposite of FIFO because items that are most recent acquired are the first ones used.

The primary benefit of LIFO is to reduce the cost of inventory on paper in times of inflation; however this system also makes items much more prone to spoilage while in storage.

A similarity between both FIFO and LIFO methods is that they depend on the type of product to be the same, with only fluctuations in the price.

Inventories

Inventory or supplies, equipment and pharmaceuticals on hand should occur at each level of the supply chain; from the warehouse or CSC to Central Supply, the stock on hand should be inventoried at regular intervals.

The intervals depend on the security concerns associated with the items.

Inventories contribute to a larger financial function called audits where orders, requisitions, invoices, receipt documents and the like are compared to stock on hand and items registered/documented as utilized.

Equipment

The availability of appropriate equipment for each job with in distribution center or warehouse is a critical component within the supply chain.

Best practices for warehousing are outlined by government agencies, with respect to worker safety, and by consultants and industry leaders, with respect to operational efficiency.

Pallets

Documenting the dimensions, quantity, size, and type of pallets is of central importance.

This information is used when purchasing new equipment to make sure it is compatible, that materials are correctly stored on the pallet and that there is a sufficient number of pallets in the facility to handle the storage and throughout of items.

Table 7-1

Adapted from (2012). Distribution Center Design Concepts Explained ... - MWPVL. Retrieved February 21, 2015, from http://www.mwpvl.com/html/distribution_center_design_concepts_explained.html.

Facility Layout

A common problem with distribution centers is that they were not built to anticipate current needs and are now running over capacity.

An overcapacity distribution center is a problem because it can result in slow order fulfillment, potentially unsafe working conditions for employees, and cost the organization additional time and money.

Common signs that this is the case are extreme levels of growth or when only two shifts are able to pick products because the third shift needs to replenish.

Storage Bins

This is a storage location and within storage facilities, bin locations are also unique as well as secure cages and vault areas.

Figure 7-2

Planning a New Facility

If a new facility is necessary for the continued growth of the organization, careful planning is critical so that time and effort does not need to be spent retrofitting the facility after it is complete.

The phrase “measure twice, cut once” has been used to describe the planning process due to the high cost of adding on additional capital equipment after construction is complete.

Greenfield

Greenfield is a term that refers to a new distribution center.

When designing a greenfield distribution center, the material handling system should be designed first and then a building planned around the material handling equipment.

However, this is typically not the case and the material handling system needs to be designed around an existing building.

An additional point of interest for greenfield construction is that it is generally cheaper to build up than to build out due to the cost of land.

Existing Structures

When a distribution center will be housed in a pre-existing building there are several considerations with regards to planning the facility layout.

A concern for both greenfield and existing distribution centers is the width of aisles in the facility as the aisle determines the type of equipment that can be used in that space.

Generally speaking, there are three designations of aisles:

very narrow- typically about 72 inches wide and require specialized turret tricks for the handling and storage of pallets

narrow- usually between 108 and 132 inches wide, this size of aisle allows the use of electric forklifts such as stand-up or reach trucks

wide-typically aisles that are wider than 156 inches,common in facilities that store heavy items and need to use sit-down counterbalance lift trucks to move the products throughout the facility.

Loading Dock

Since the dock is the primary point of entry and exit of products to and from the distribution center, an inefficient dock can cripple the entire facility.

Activities that take place on a loading dock include: receiving, inspecting products, quality assurance, pallet building and lumping, sorting, cross docking, flow through, checks and audits, staging, load consolidation and loading.

A typical dock configuration has two distinct shipping and receiving areas.

Performing both of these operations on one dock increases security and allows for easier supervision of goods entering and exiting the facility.

However, depending on the overall strategy and the distributors involved, sometimes it is preferential to have a dock for receiving and a separate dock for shipping.

Facility Automation

It is becoming more common for distribution centers to use more complex methods of material handling.

The addition of conveyance, sorting, packing or other automation increases the efficiency of the facility and increases worker safety.

Table 7-2

Adapted from (2012). Distribution Center Design Concepts Explained ... - MWPVL. Retrieved February 21, 2015, from http://www.mwpvl.com/html/distribution_center_design_concepts_explained.html.

Automated Storage and Retrieval Systems

An automated storage and retrieval system is typically designed to move materials up to 150 feet in height.

There are different ASRS systems depending on the desired pallet depth and many different ASRS machine variations.

Examples of these variations include machines with turret forks, single aisle systems, aisle changing systems, and machines that can transport two pallets at once for high volume or oversized items.

Figure 7-4

Reprinted courtesy of Cardinal Health.

Automated Storage and Retrieval Systems

A-frame Dispensing Systems-

A-frame dispensing systems are automated picking machines that are typically used in distribution centers with a high volume of small products that are roughly the same size.

A healthcare example of this is the storage and distribution of pharmaceuticals.

Automated Full Case Picking Systems-

A completely automated picking system for full cases does not require an operator integrate multiple systems that can handle full cases or pallets.

Vendors that are currently providing full automated case picking systems includea: Witron, SSI, Schaeferm Symbolic, Nedcon, and Vanderlande.

Automatic Sortation Systems

There are a number of sorting systems that allow for the automatic sorting of items prior to shipping.

Examples include tilt tray sorters, Bombay sorters, and conveyor sorters such as cross belt, diverter, quad sorter, and sliding shoe.

Figure 7-3

Automatic Sortation Systems

Case / Tote / Unit Conveyor Systems

There are many different types of conveyer systems which can transport items either vertically or horizontally throughout a facility.

The primary advantages of these systems are a reduction in travel time and increase in worker safety.

Figure 7-5

Reprinted courtesy of Cardinal Health.

Automatic Sortation Systems

Carousel Systems-

Carousel systems are mechanized systems that are typically used to store loose items.

The machine has several bins that rotate either on a conveyor on a central axis.

Pallet Conveyor Systems-

These conveyor systems are simply larger versions of the smaller conveyor system used for cases or totes.

Robotic Goods to Man Systems [Less than Full Case]

Systems that use robotic vehicles to move products to the equipment operator save the operator time associated with picking, storage, and retrieval or items.

Shuttle Cart Systems-

Shuttle cart systems are most commonly used in high bay warehouses in place of an ASRS system to move pallets.

Receiving Inventory Methods

Just-in-Time Delivery-

JIT increases efficiency and decreases waste by minimizing the amount of inventory held by the organization and receiving shipments of supplies “just-in-time” or as they are needed.

Standard Replenish-

Items are received on the loading dock and placed into storage in the bulk or broken down from bulk to loose pick/small pick item locations and documented in the system as supplies on hand

Cross-Docking-

Items are received in the loading dock but immediately sent or distributed to the customer without placing the received items into storage as supplies on hand

Worker Safety

Worker safety is a constant concern in a distribution center. Over 145,000 people work in over 7,000 warehouses and distribution centers around the country.

The fatal injury rate for warehouses and distribution centers is higher than the national average for all industries.

Docks-

Worker injuries on docks commonly occur when forklifts are run off the dock, products fall on employees, or equipment strikes a worker.

Forklifts-

Nearly 100 employees are killed and 100,000 injures every year when operating forklifts. The most significant cause of forklift related death is forklift turn overs.

Conveyor systems-

Workers can be injured if they are caught in pinch point or hit by falling object. Additionally there is a potential for repetitive motion injuries for employees who continually load or unload the conveyer system.

Material Storage-

Materials that are stored improperly have the potential to fall, injuring workers.

Worker Safety

Manual Lifting and Material Handling

Back injuries can occur from the improper lifting of materials or from over extension.

Communication of Hazards

Employees should be made aware of potential hazards in the work environment.

Charging Stations

Charging stations for equipment pose a fire or explosion risk if they are not maintained and used properly.

Poor Ergonomics

Poor ergonomics encompasses activities which can result in musculoskeletal disorders in workers. (E.g- improper lifting)

Other Hazards

Other potential hazards within a distribution center or warehouse include inadequate safety provisions, the improper use of locking out procedures, and incorrect use of PPE.

Simulation and Operations Management

Simulation is a tool for visualizing real world processes.

As computers became more powerful as well as affordable in the 1990’s process simulation became an increasingly important aspect of operations management.

Process simulation certainly has a role in all aspects of business, but simulation stands out as a business tool for complex processes such as supply chain management.

Process Improvement-

Simulation provides an inexpensive method for trying out new processes.

Information Systems for Storing Functions

Storing functions such as provided in warehouses or CSCs also have specialized information systems for work processing (receiving, storing, inventorying, quality control and distribution) and inventory management.

Two systems with significant market share in the industry are from companies named, and associated systems, TecSys and Manhattan.

These information systems are interfaced, integrated, into the other healthcare organizational systems such as the Enterprise Resource Planning (ERP) systems and clinical systems.

The modern healthcare supply chain invests heavily in quality information systems and the design, build, implementation and training of staff on those important systems.

Follow the Cotton Ball

Can you imagine how you would receive a truck load of cotton balls that have been sourced and purchased and now ready to receive?

The bulk cases on pallets would be placed in a specific location (with a location number with cross reference in the computer system or manual system so it can be found easily) and some bulk items would be broken down to replenish the loose pick or small pick locations.

Some cotton balls may be cross-docked and resent immediately to the end user locations.

All the actions associated with receiving would be documented in the automated or manual system so the match with the invoice can be completed and the bill to the manufacturer or distributor paid.

Summary

In this chapter the operational functions of storing and inventory management were the focus of the discussion.

The ability to store, secure and manage inventory are critical core business skills of the healthcare supply chain.

Storing, as well as inventory management processes are crucial elements of the healthcare supply chain.

The more efficient, effective and efficacious that these functions are performed the greater the benefit of the healthcare organization supply chain in pursuit of their mission and vision of the organization.

Discussion Questions

Outline and explain the concepts and processes associated with storage and inventory management in the healthcare supply chain.

Discuss and give examples of the process of storage and inventory management of various supply chain items (medical and surgical, pharmaceutical, office supplies, etc…).

Relate, discuss and provide examples of the tools and resources of storage and inventory management integrates with healthcare supply chain sourcing and purchasing.

Distinguish the operational areas of a healthcare supply chain storage facility.

Evaluate the benefits of improved storage and inventory management practices for healthcare supply chain operations and management in terms of healthcare organization capabilities.

Exercises

What considerations would you think about when designing a storage facility?

Where would you possibly store cotton balls as compared to a Federal Schedule Narcotic? What would be the storage considerations of each item?

How would you explain the difference in regular receiving versus cross-docking?

What would be the differences in a warehouse or CSC versus Central Supply in a hospital?

What considerations for material handling equipment are important and why?

What regulatory considerations are important in a storage facility?

Journal

Search the World Wide Web and find two or three healthcare storage facility pictures or graphical layouts; what are the differences in layout, security locations and storage equipment?

Search the World Wide Web and find three different material handling equipment types; what are the size differences and how would this impact the storage facility and what safety and licensure requirements would be required for each equipment type,

Search the World Wide Web and find two warehouse or CSC information management systems (hint TECSYS and Manhattan; you have seen these earlier in the text) and how do these information systems lend themselves to efficient, effective and efficacious healthcare supply chain storage?

Discuss how regular supply items (SKUs) are different from highly sensitive or security oriented supplies or pharmaceuticals with regard to inventory intervals and method of inventory.