We have uncovered an opportunity that could mean millions of dollars in savings to individual hospitals, and billions of dollars to the healthcare system nationally in the US and abroad. It has to do with how most hospitals manage supplies, medications and other materials.
Many, maybe most, hospitals manage their inventory of supplies and medications using what is called a “par-level” method. It works like this: a stocking quantity is established for each item, the par level, based on average usage and a target number of days supply. We might, for example, set a goal of maintaining a two-day quantity of material for each supply item. As the material is actually used, we would bring the quantities “up to par” daily, by conducting a physical inventory and restocking the quantity that was consumed. The goal, sensibly, is to not run out of supplies while maintaining a tight control of storage space and inventory quantities. So far so good.
It is interesting to note that this par method of inventory control is not used in a world-class manufacturing environment, although a manufacturer certainly has the same needs and goals for inventory control as a hospital. The suggestion that we do a daily physical inventory for a large number of inventory items would be greeted with astonishment and ridicule. Many world-class manufacturing companies do not even conduct an annual inventory, by sustaining a high level of inventory accuracy through tight controls and cycle counting.
The method of choice in manufacturing for commonly used items is called Kanban. In a Kanban system, as with the par level method, we set a target quantity that we want to maintain. The principal difference is that instead of attempting to bring quantities “up to par” daily, in a Kanban system we set a fixed quantity that we will use to trigger the replenishment of inventory. In a “two-bin” kanban system, for example, we set up two quantities or bins of the same supply, and only refill a bin when it is empty. While the bin is being refilled, we have a second bin to cover usage during the replenishment cycle.
The Kanban method has seven main advantages over a Par-level system:
1. No daily counting is needed. We wait for a bin to be emptied and always replenish the same quantity. Not having to count can save hundreds or thousands of hours per year in most hospitals.
2. It reduces the number of resupply trips. Since we do not refill a Kanban bin daily, but instead wait for it to be empty, the number of replenishment trips can be reduced significantly. The number of replenishment cycles can be cut by 50% or more.
3. Replenishment quantities are fixed. The refilling process is greatly simplified by eliminating the need for counting required by the par system. If we know ahead of time what the refill quantity will be, the item can be stocked in that quantity.
4. It is easier to manage and improve. By tracking the time between replenishment, the stocking quantities can more easily be refined and adjusted over time. This continuous improvement is more difficult to accomplish if all quantities are refilled daily, in varying quantities.
5. Kanban reduces inventory. Experience proves that, with the same target coverage of supplies, a Kanban system will run with up to 50% less inventory than a par system.
6. It is easier to maintain replenishment discipline. Since they do not have to count all inventory locations, or eye-ball the empty bins, supplies handlers find it easier to identify and refill the empty bins, thereby substantially reducing the opportunities for shortages.
7. Kanban promotes good inventory management practices, while the par level does not. In fact, counting everything is essentially impossible and very labor intensive, and most par-level users simply “eye-ball” the bins without counting. Organization and housekeeping, “5S” in lean terms, is much easier to maintain.
For all of these reasons, Kanban is the method of choice for hospital material management, for much of the material that is procured and managed. The gains in productivity, reduced shortages and reduced inventory represent a multi-billion dollar opportunity for the industry.