Achieving excellence in procurement and inventory management

Client’s issue and request

The procurement and supply chain management (PSCM) processes at a multi-specialty hospital in Mumbai were tardy and the total medical stock was around $327000. The hospital was also experiencing frequent complaints of materials stock-out, pilferage, lack of trust in inventory parameters set in the hospital information system (HIS) and increased dependency on manual work. Hospital management was quick to realise that clinicians needed to focus more on what they do best (taking care of patients) while administration invested in operational transformation.

IMS Health India was asked by the hospital management to rationalise and re-design the supply chain processes and to realign inventory levels in order to lower the spend base and achieve bottom-line savings.

Key objectives and scope of the study were:

• Map and determine the total improvement potential in the core PSCM practices and identify the key initiatives required to achieve these results
• Establish a robust implementation plan for how to achieve quantifiable results within agreed timelines
• Support exceution of the plan and put in place the control mechanisms required to sustain performance over time

IMS India’s approach

The IMS team initiated the project with an in-depth, two-week diagnostic phase, mapping the entire supply chain system and conducting a detailed gap analysis. After detailed conversations with various stakeholders and a comprehensive analysis of the processes, spend base, stock levels and consumption patterns, the key root causes were identified and presented to management for implementation.

IMS uncovered eight leading causes of the high spend base and inventory levels:

• Lack of clearly defined sub-categories leading to inaccurate estimation of the spend base and sub-optimal negotiating position
• Lack of stock keeping unit (SKU) rationalisation across major categories of items leading to increase in the number of SKUs being purchased
• Excess of suppliers across all categories of items being procured leading to a lack of bargaining power at the time of rate negotiations
• Lack of collaboration between clinicians and planning teams leading to procurement of multiple brands across oral drugs and surgical consumables
• Stocking pattern not in sync with vendor delivery times, leading to excess working capital locked in inventory
• Duplicity of storage areas, such as the separation of stocks for cath lab and cardio thoracic vasuclar surgery operation theater (CTVSOT) inside the cardiac block
• Lack of ownership on re-aligning inventory parameter settings in HIS, resulting in judgmental approach to defining order levels
• Misalignment in demand and planning cycles, leading to higher stocking patterns at the level of end users (15 days)

IMS recommendations

For each of the issues identified, IMS laid out specific recommendations that would alleviate the bottleneck and positively impact the inventory and supply chain system (See Figure 1)

Challenge/ Bottlenecks	Recommendation	Impact
Inability to accurately forecast and plan	Make HIS changes that would accurately classify the items under various cost heads	Exact estimation of the spend base leading to accurate forecasting and budgeting for next year and more negotiating power
Difficulty managing increasing inventory levels	Rationalise the number of SKU’s being currently used in the hospital with the help of clinicians	Less confusion, reduction in excess inventory as well as fewer stock-outs and a reduction in pilferage
Unable to procure material at best rates from vendors	Rationalise the number of vendors supplying materials to the hospital	Increase bargaining power at time of rate negotiations with limited set of suppliers to lower purchasing costs
Inability to manage procurement processes and increased inventory levels of multiple brands	Finalise the drug formulary with the help of consultants especially for oral drugs and surgical materials	A more strategic, and more informed process for purchasing, lowering inventory levels and ensuring everyone uses the same set of brands
Increasing concerns over excess working capital being locked in inventory	Create one- week stocking norms at end user level fed by main pharmacy store amounting to total of 30 days of stock	Freeing of storage space at the stores and release of working capital ($96-115 K reduction in stock)
Duplicity of storage areas	Streamline the supply of materials to Cath lab, CTVSOT and ICCU from the common cardiac pharmacy in the cardiac block	Streamlining of processes, freeing up of space and reduction in inventory by $27-29 K
Increasing dependence on a subjective approach to defining order level	Use of scientifically-determined ROLs at all levels of storage areas	Real-time tracking of stocks with regular SKU level alerts on critical items based on revised inventory policy and ability to maintain service levels of 99.9 per cent
Tendency to stock on higher side at the level of end users	Implement a twice-a-week delivery system from main pharmacy to end users	Lower stocking pattern in the supply chain downstream, leading to a reduction in pilferage and a more efficient utilisation of space
Figure 1

The IMS team then also suggested a step-by-step implementation plan that would ensure not only the success, but also the sustainability of this new system and substantial cost savings (see Figure 2).

POTENTIAL BOTTOM-LINE SAVINGS ACROSS PSCM PRACTICES
Savings resulting from streamlining inventory practices						Savings resulting from streamlining procurement practices
Unit	Current Inventory (Value)	Current Inventory (No. of days of storage)	Best practice (No. of days)	Potential savings		Category	Current spend base	Improvement potential	Potential savings
Main OT store	$ 85 k	110 days	7 days	$ 33-36 k		Surgicals	$745 k	8-10 %	$60-75 k
Pharmacy store	$ 71 k	17 days	15 days	$ 25-27 k		Cardiac	$782 k	15-20 %	$117-156 k
Cardiac block	$ 75 k	69 days	7 days	$ 25-27 k		Pharma	$727 k	10-15 %	$73-109k
Pathology store	$ 27 k	45 days	7 days	$ 13-15 k		Others	$218 k	8-10 %	$17-22 k
General store	$ 23 k	88 days	15 days	$ 7-9 k
Total hospital inventory	$ 310-318 k	45-50 days	15-20 days	$ 90-110 k		Total spend base	$2470 k	10-15 %	$247-371 k
Figure 2

This implementation plan included:

• Creation of a project management office to drive the PSCM recommendations
• Handing over HIS upgrades/customisations to an IT vendor
• Performing a detailed analysis of the spend base at sub-category and supplier level
• Aggressively labelling excess stock as ‘stocked up’ and shortages as ‘stock deficient’ and performing a physical stock check of all stores, along with pharmacy personnel, across the hospital
• Streamlining processes to ensure all patient billings are done on a real time basis
• Rationalise the number of SKU’s within each sub-category in collaboration with central committee, clinicians and planning team
• Consolidation of volume – annual demand estimations including quantities after bundling process and projections for the financial year
• Facilitating vendor workshops with rounds of negotiation to close and sign-off on rate contracts
• Revising inventory parameter settings for all major stores across the hospital to be in sync with twice-a-week indent system and partnering with IT dept to upgrade HIS

With this project, IMS India was able to achieve 25 per cent improvement in working capital and 8-10 per cent in bottom-line savings. Additionally, overall satisfaction and trust across stakeholders within the organisation was significantly improved, implying that initial investments in setting up robust supply chain processes can be a boon for the entire hospital ecosystem. Moving forward, the outcomes of this study is expected to set the stage for continuous, sustainable improvements as the syste`m matures into a best-in-class model of operational efficiency.