inventory

CAN A JUST-IN-TIME INVENTORY SYSTEM HELP REDUCE COSTS AND INCREASE PRODUCTIVITY IN HOSPITALS?

Yitteck Angel Kua-WalkerB.A., The University of Hong Kong, 2001M.M.ED., The University of Georgia, 2003

PROJECT

Submitted in partial satisfaction ofthe requirements for the degree of

MASTER OF SCIENCE

in

ACCOUNTANCY

at

CALIFORNIA STATE UNIVERSITY, SACRAMENTO

SUMMER2010

ii


A Project

by

Yitteck Angel Kua-Walker

Approved by:

__________________________________, Committee ChairJames Mackey, Ph.D.

____________________________Date

iii

Student: Yitteck Angel Kua-Walker

I certify that this student has met the requirements for format contained in the University

format manual, and that this Project is suitable for shelving in the Library and credit is to

be awarded for the Project.

_____________________________________________ _____________________Monica Lam, Ph.D. DateAssociate Dean for Graduate and External Programs College of Business Administration

iv

Abstract

of


by

Yitteck Angel Kua-Walker

With the recent public focus on health care reform, hospitals are under more pressure

than ever to be more cost efficient. In order to accomplish this, hospitals must explore

new business models that will help them reduce costs, while at the same time increasing

productivity. The just-in-time (JIT) inventory system is selected in this project as a

potential cost-saving strategy for hospitals. This project explores the feasibility of

adopting a JIT inventory system in a hospital setting, through a detailed review and

comparison of 20 articles.

_______________________, Committee ChairJames Mackey, Ph.D.

_______________________Date

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TABLE OF CONTENTS

Page

Chapter

1. LITERATURE REVIEW ...................................................................................... 1

2. LIST OF RELEVANT ARTICLES ....................................................................... 8

3. 20 ARTICLE SUMMARIES ............................................................................... 12

4. ARTICLE COMPARISON ................................................................................. 51

5. FINDINGS AND CONCLUSIONS .................................................................... 54

References ..................................................................................................................61

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1

Chapter 1

LITERATURE REVIEW

In order to meet the demands of President Obama’s health care reform, hospitals

need to operate more efficiently and find ways to reduce costs. Hospitals generally strive

for quality health care delivery operations, not administrative efficiency (Jones, 2009).

Evidence of this inefficiency can be easily observed in their management of inventory.

Hospitals spend large amounts of money on supplies. In fact, some spend approximately

$83 billion per year on supplies alone (Scanlin, 1997). Large percentages of this

spending goes to very basic supplies, such as the $15 billion spent annually on supplies

like disposable gloves and gowns (Freudenheim, 1991). Unfortunately, poor inventory

management can lead to significant losses for hospitals, as spoilage and theft will render

many of these supplies useless. For example, the 11 hospitals under the New York City

Health and Hospitals Corp. had storage rooms that contained $10.2 million in supplies,

some of which were obsolete (Jones, 2009).

Inventory management involves more than just purchasing supplies; it also

involves handling, storing, moving, and restocking those supplies. In fact, the money

hospitals spend on inventory-associated works often equal the inventory’s original

purchase price (Dennision, Kathawala, & Elmuti, 1993; Fredudenheim, 1991). This

indicates that hospitals are spending an enormous amount of money on supplies and their

associated works. Nathan & Trinkaus (1996) estimated that about 35 percent of most

hospitals’ budgets are spent on supplies and their associated costs. This means that poor

2

inventory management will not only increase costs, but in turn negatively affect the

quality of patient care (Nathan & Trinkaus, 1996). Thus, inventory management is an

important area for hospitals to consider if they want to reduce costs. Many hospitals have

been searching for new ways to reduce costs, without sacrificing the quality of their

service. Various articles indicated that many hospitals have adopted just-in-time (JIT)

inventory systems in attempt to reduce costs and increase productivity.

Originally used in the manufacturing industry, JIT is a demand pull system. In

short, JIT attempts to accurately match demand with supply (Baum, 2006; Kim & Rifai,

1992). Products are steadily flown through the system from the supplier to the final

output without slack (Dennision, Kathawala, & Elmuti, 1993). Most of the relevant

literature defined a JIT system in hospitals as suppliers delivering small quantities of

supplies to hospitals or designated user departments just before they are needed. Due to

JIT’s tightly coordinated supply process, the importance of close relationships between

suppliers and hospitals is stressed in many articles. And, since the JIT system requires

both entities to make a serious commitment to their new relationships, using only a few

suppliers is critical (Barrett, 1994; Dennision, Kathawala, & Elmuti, 1993; Kowalski,

1986). This enhances the understanding between the two parties, so that the suppliers

better understand the hospital’s needs, and the hospital develops a realistic expectation of

the suppliers’ capability. Further, communication between suppliers and hospitals is

crucial in a JIT system, because these relationships are expected to be long-term.

(Kowalski, 1986). The two parties need to share essential information about their

3

operations, to make sure that the JIT system can be carried out smoothly and improved

over time (Dennision, Kathawala, & Elmuti, 1993). In addition, the suppliers’

geographic location should be carefully considered (Chapman, 1986; Kowalski, 1986).

To ensure an efficient JIT system, nearby suppliers are preferred because they can

provide more frequent deliveries and shorter lead times (Chapman, 1986). From the

supplier’s point of view, the delivery charges embedded in the product price will be

lower if the hospital is closer to the supplier’s warehouse.

Due to the differences in size, geographic location, and operating modes in

hospitals, there are no definite quantities of supplies being delivered, or frequencies of

delivery, in a JIT system. The quantities and frequencies vary according to individual

hospital’s needs and the unique arrangements with its suppliers. The following examples

demonstrate only a few ways of using a JIT system in a variety of healthcare settings.

First, the 11 hospitals under New York City Health and Hospitals Corp. have their

supplies being delivered as needed five days a week (Jones, 2009). Second, an academic

practice of 11 urologists at Northwestern University, Chicago, ordered all office supplies

from a single vendor and received all orders within 48 hours of placing the order (Baum,

2006). Third, Tampa General Hospital used next-day delivery for its medical supplies,

which totaled approximately $11 million per year (Richardson, 1987). Fourth, UCLA

Medical Center required a single supplier to deliver and replenish medical-surgical

supplies, intravenous solutions, linens, and forms, directly to its nursing units every night

4

(North, 1994). As these examples indicate, JIT is a flexible system and can be adapted to

a wide range of healthcare settings.

Several studies have shown the numerous benefits of using JIT in hospitals. The

benefit discussed the most is cost reduction, which is contributed to various areas. In a

JIT system, when the supplies are delivered as needed, the costs associated with unused

inventory are minimized (Baum, 2006; Kim & Rifai, 1992; Scanlin, 1997; Whitson,

1997). Hospitals can then make better use of the money freed-up from unused inventory.

At the same time, the associated holding costs of overstocked inventory are eliminated

(Baum, 2006; Chapman, 1986; Whitson, 1997). Those costs include supplies that are

lost, damaged, or expired (Baum, 2006; Chapman 1986; Neil, 2004), and also the costs

needed to move and manage supplies (Scanlin, 1997). By having supplies delivered JIT,

the number of employees in charge of inventory can be reduced (Dennision, Kathawala,

& Elmuti, 1993; Kim & Rifai, 1992; Neil, 2004; North, 1994; “Study examines costs”,

1996). This can not only reduce labor costs by laying off employees, but can also

increase productivity by allowing other employees to focus on their original tasks, such

as nurses caring for patients instead of handling unnecessary inventory. As inventory is

minimal, the space needed to store inventory is decreased (Baum, 2006; Clinton, 1999;

Dennision, Kathawala, & Elmuti, 1993; Kim & Rifai, 1992; Scanlin, 1997; Neil, 2004;

“Study examines costs”, 1996). The rooms freed-up from overstocked inventory can then

be used for income-generating activities. Sometimes a central supply department can be

diminished or even eliminated (Neil, 2004; Whitson, 1997). And some hospitals can

5

eliminate their off-site warehouses (Richardson, 1987). This can further reduce the

number of staff, which in turn reduces costs. Due to the smaller orders and higher

frequency of deliveries, hospitals can respond to price fluctuations quickly, and switch to

less expensive products (Kim & Rifai, 1992). Similarly, the ability to quickly change to

newer and better products is increased (Clinton, 1999). This will not only reduce costs,

but also create an opportunity to improve the quality of supplies.

Further, the development and application of new technology can enhance the

operation of a JIT system in hospitals. For example, the use of bar-code technology on

supplies can provide an up-to-date and accurate evaluation of utilization and charges, and

help discover any hidden inventory (Dennision, Kathawala, & Elmuti, 1993; Sacnlin,

1997). A computerized system connecting hospital and supplier can be used to

accurately order supplies and promptly receive orders (Dennision, Kathawala, & Elmuti,

1993; Freudenheim, 1991). This can simplify the ordering process and accelerate the

supply replenishment process. These technologies can also reduce the number of staff

needed to count, find, and order supplies, which in turn reduces costs.

In addition to the benefit of cost reduction, JIT systems help eliminate waste in

hospitals (Barrett, 1994; Jones, 2009; Whitson, 1997). For example, hospitals can

eliminate waste if they ask their suppliers to deliver supplies in reusable packing

containers or have suppliers remove single-use packing materials before delivering to the

user departments (Clinton, 1999). This increases the medical staff’s productivity, as they

now have more time to focus on their patients, instead of dealing with inventory. Thus,

6

the quality of service can be improved when waste is eliminated (Barrett, 1994; Jones,

2009). Other benefits of using a JIT system include improving process flows and

reducing cycle times, which include the billing cycle and length of hospital stay (Barrett,

1994). This means hospitals’ productivity is enhanced.

While there are many benefits of using a JIT system in hospitals, some concerns

arise due to the nature of hospital work and operating modes. The major concern for

hospitals considering whether or not to switch to a JIT system is the unpredictability of

hospital work volume (Neil, 2004). A low level of inventory can impose risk when the

demand unexpectedly increases. Since the services provided at hospitals can mean the

difference between life and death, inventory levels need to be carefully managed in order

to avoid stockout (Baum, 2006; Whitson, 1997). One way to avoid stockout is to keep a

buffer or safety inventory (Baum, 2006; Whitson, 1997). Another way is to use JIT

systems only on those items, such as administrative form, labels, and linens, which do not

affect emergency situations (Kim & Rifai, 1992). Hospitals can also develop emergency

response plans with their supplier, or other hospitals, to deal with any unexpected

increase in demand, such as in the case of man-made or natural disasters. This advanced

planning will allow inventory costs to remain low without jeopardizing patient safety.

The JIT system is not a one-size-fits-all program, and does not suit every hospital.

Before implementing a JIT system, hospitals need to weigh the costs and benefits of the

prospective change. The JIT system can provide many long-term benefits, but requires a

lot of prior planning and initial work to make the system functional. Hospitals need to

7

evaluate their supplies’ usage patterns, carefully select the right suppliers, and then

develop a close working relationship with those suppliers. More importantly, educating

and training hospital staff on the JIT system is crucial to the success of the system

(Barrett, 1994; Kim & Rifai, 1992; Kowalski, 1986). With careful planning and

continuous monitoring and adjustment, a JIT inventory system can help hospitals reduce

costs and increase productivity.

8

Chapter 2

LIST OF RELEVANT ARTICLES

Aptel, O., & Pourjalali, H. (2001). Improving activities and decreasing costs of logistics

in hospitals: A comparison of U.S. and French hospitals. The International

Journal of Accounting, 36, 65-90.

Bailey, B. (1995). Distributor wants to rid materials management vocabulary of “just-in-

time” and “stockless”. Hospital Materials Management, 20(4), 9-10.

Barrett, M. (1994). Application of the just-in-time philosophy in health care

organizations. Hospital Cost Management and Accounting, 6(4), 1-6.

Baum, N. H. (2006, May 24). ‘Just in time’ means more dimes in your pocket: Stocking

only what your practice needs takes careful planning, but offers big savings. (The

Bottom Line). Urology Times, 34(1), 28.

Carlson, J. G. (1993). Just-in-time approach to systemwide efficiency and quality

borrows from industrial techniques. Strategies for Healthcare Excellence,6(2), 9-

12.

Chapman, S. (1986). Adapting just-in-time inventory control to the hospital setting.

Hospital Materials Management, 11(10), 8-12.

Clinton, M. (1999). Delivering radiology supplies just-in-time. Radiology Management,

21(3), 27-31.

9

Cook, Al. (2007). The dangers of stockpiling. Planning rules change as hospitals brace

for potential disasters. Materials Management in Health Care, 16(9), 32-34.

Dennision, R., Kathawala, Y., & Elmuti, D. (1993). Just-in-time: Implications for the

hospital industry. Journal of Hospital Marketing, 8(1), 131-141.

Duffy, M. (2009). Is supply chain the cure for rising healthcare costs? Supply Chain

Management Review, 13(6), 28.

Feare, T. (2004). Just-in-time to the operating room. Modern Materials Handling

(Warehousing Management Edition), 59(6), 18-22.

Freudenheim, M. (1991, March 3). Removing the warehouse from cost-conscious

hospitals. The New York Times, 5-8.

Jones, D. (2009, September 10). Hospital CEOs find ways to save. USA Today, 03b.

Kim, G. C., & Rifai, A. K. (1992). Efficient approach to health care industry material

resource management: An empirical research. Hospital Material Management

Quarterly, 13(3), 10-25.

Kowalski, J. C. (1986). Just-in-time for hospitals – So what’s new? Hospital Materials

Management, 11(11), 6-9.

10

Kumar, A. Ozdamar, L. & Zhang, C. N. (2008). Supply chain redesign in the healthcare

industry of Singapore. Supply Chain Management: An International Journal,

13(2), 95-103.

Marino, A. P. (1998). The stockless craze: Is it finally over? Hospital Materials

Management, 23(5), 2, 11.

Nathan, J., & Trinkaus, J. (1996). Improving health care means spending more time with

patients and less time with inventory. Hospital Material Management Quarterly,

18(2), 66-68.

Neil, R. (2004, February). The ups and downs of inventory management. Materials

Management in Health Care, 13(2), 22-26.

Ng, D., Vail, G., Thomas, S., & Schmidt, N. (2010). Applying the Lean principles of the

Toyota Production System to reduce wait times in the emergency department.

Canadian Journal of Emergency Medicine, 12(1), 50-57.

North, L. H. (1994). Beyond just-in-time: The UCLA medical center experience.

Hospital Material Management Quarterly, 15(3), 36-41.

Persona, A., & Battini, D. (2008). Hospital efficiency management: The just-in-time and

Kanban technique. International Journal of Healthcare Technology and

Management, 9(4), 373-391.

11

Richardson, J. (1987). Just-in-time inventory: A practical application. Hospital Material

Management Quarterly, 9(2), 83-86.

Scanlin, T. (1997). A case for ‘Just In Time:’ Could it be right for your hospital, too?.

Journal of Healthcare Resource Management, 15(8), 10-14.

Seattle children’s hospital saves $2.5 million in first year with streamlined inventory

distribution. (April 6, 2010). Retrieved from http://www.hfma.org/HFMA-

Initiatives/Healthcare-Financial-Pulse/Cost-and-Quality/Seattle-Children

%E2%80%99s-Hospital-Saves-$2-5-Million-in-First-Year-with-Streamlined-

Inventory-Distribution/

Sorensen, D., & Sullivan, D. (2005). Managing trade-offs makes budgeting processes pay

off. Healthcare Financial Management, 59(11), 54-60.

Study examines costs of change to JIT or stockless. (1996). Hospital Materials


Whitson, D. (1997). Applying just-in-time systems in health care. IIE Solutions, 29(8),

32-37.

Wilson, J. W., Cunningham, W. A., & Westbrook, K. W. (1992). Stockless inventory

systems for the health care provider: Three successful applications. Journal of

Health Care Marketing, 12(2), 29-45.

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Chapter 3

20 ARTICLE SUMMARIES

Article 1:



This article describes in detail the UCLA Medical Center's use of a specific just-

in-time (JIT), stockless distribution program. The form of distribution program used by

UCLA takes JIT partnerships to the limits. JIT, stockless distribution, along with

electronic data interchange (EDI), has enabled the UCLA Medical Center to significantly

reduce inventory and labor. However, UCLA took this a step further by asking: if EDI

technology allows a partnered vendor to handle supply needs directly with the user, why

does a hospital still need to be involved in the inventory and distribution area? This

question was the reason why the UCLA Medical Center entered an innovative new

partnership agreement with Owens & Minor, a medical-surgical supply distributor in

Richmond, Virginia.

At the beginning of the program in 1990, Owens & Minor received orders

transmitted by EDI, and then filled the orders by placing the required supplies in baskets

labeled for the designated nursing areas. The UCLA Medical Center night shift staff

replenished the nursing supply rooms when the baskets were delivered to the hospital’s

receiving dock at midnight. Over the following three years, the distribution program was

13

fine-tuned. Also, the PC-driven materiel management computer system was replaced by

a program called Automated Exchange of Information on Materials Management

(AXIOMM), which is an online, radio-frequency-driven, mainframe computer system.

An evaluation of the program done in early 1993 showed a savings of $8.4 million (a

20.7 percent reduction) in materiel expense through less inventory, the reduced cost of

supplies, and the elimination of 17 full time employees (27 percent of the distribution

staff).

With an expansion of the existing program in late 1993, Owens & Minor was

required to deliver and replenish medical-surgical supplies, intravenous solutions, linens,

and forms directly to the nursing units at UCLA Medical Center. Also, they own the

entire inventory at the nursing units and the “backup” supplies in the central supply area

until they are used. Under this new program, the medical center received a one-time

savings from disowning all supplies and projected an estimated cost savings of $385,000

per year due to an elimination of additional 21 full time employees and a lowered

distribution charge. The author believes that the key to succeed in this vendor-managed

distribution program was to have everyone, from top management (from both the medical

center and the distributor) to the floor nurse, involved in the design of the program. In

addition, feedback from UCLA staff and regular evaluations of the program were

important to make the program a success.

The article lists 16 commitments that Owens & Minor made to the program at the

UCLA Medical Center. The two basic features of the distribution program were Owens

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& Minor’s full responsibility for supplying, distributing, and replenishing all supplies

ordered, and its full ownership of the entire inventory. Once every hospital user is

connected (projected in the next two years), all supplies, including those from the nursing

floors as well as the nonstock areas, can be ordered through the AXIOMM paperless

system. The author concluded that this vendor-managed distribution program was a win-

win situation for both partners because they could eliminate duplication in the supply and

distribution chain.

Article 2:



This article discusses the advantages and disadvantages of using stockless and

just-in-time (JIT) purchasing programs in hospitals. The author states that the terms JIT

and stockless have slightly different meanings to hospitals and vendors, but they can be

used in conjunction. JIT is defined as a program that establishes regular, frequent

deliveries from a hospital’s distributor, and which reduces a hospital’s inventory from a

30-day or 60-day to a 10-day supply. A hospital with a stockless program can carry an

even lower amount of inventory and receives items in low units of measure from a

distributor.

15

Since less inventory is kept, a hospital can reduce space and warehouse space

used to store products. This also reduces the chance of losing money on obsolete, stolen,

spoiled, or damaged products. However, according to Bob Majors, materials

management director for Bloomington (Ind.) Hospital, the JIT model that originated from

the manufacturing industry does not fit well into health care supply chain logistics

because hospital volume is not predictable and thus the demand of inventory is

uncertain. He claims that the JIT or stockless programs peaked in popularity in the mid-

1990s and have now become less popular than when they were first introduced.

A successful example of using a stockless program is Community Health

Network, Indianapolis, which is a five-hospital network that includes the Indiana Heart

Hospital, Indianapolis. Community Health Network has been using a stockless program

with a single distributor since 1992. It does not have any asset inventory, a storeroom, or

a central supply department. This significantly reduces the number of full-time

employees needed to maintain a large inventory and a storeroom. The purchase orders

are paperless and all from one distributor, which further reduces the workforce that would

be required to buy different products from different vendors.

However, in a stockless system, the partnership is much deeper than the usual

hospital/distributor relationship. According to Ken Peterson, the vice president for

systems logistics management at Aurora Health Care, Milwaukee, which manages a

centralized distribution system for a network of 12 acute care hospitals, the downside of

solely depending on one distributor is the challenge in renegotiating a new agreement

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when the existing contract ends. In order to succeed in a stockless system hospitals must

choose the right partner, which means carefully investigate the reputation of the

distributor, and the local operation that the distributor runs. On the other hand, Peterson

believes that a hospital may need to use such a system if it has serious problems with

costs and efficiency and its nursing staff is extremely dissatisfied with the materials

department’s services.

The article ends by stating that the new distribution trend may go back to the

traditional approach of operating a big warehouse and taking more control over products.

An example of this move is HCA, Nashville, which is the industry’s largest hospital

system. It has higher holding costs due to carrying more inventory, but it has a lower

distributor fees than it would have with a stockless or JIT program.

Article 3:



This article discusses the application of the just-in-time (JIT) philosophy to health

care organizations. The author stated that the goals of the JIT system are to reduce cost,

eliminate waste, improve quality, and achieve optimal productivity, while using the

minimal amount of material, labor, and equipment. Thus, materials would be delivered

17

to the facility when they were needed, or “just in time”. Originally designed for

manufacturing industries, the author believes that the JIT system can be applied to the

health care field to improve process flows, reduce cycle time—including billing cycle

and length of stay, and improve quality.

Although cost is reduced due to inventory reduction, the author claimed that the

primary reason to reduce inventory was to discover the problems hidden by excessive

inventory. For example, high medical supply failure can be hidden if the inventory levels

are kept high because the faulty equipment is discarded and immediately replaced. In

this case, the equipment failure rates are unknown to the purchaser, and hence

unnecessary costs can occur. If the JIT system is adopted, the low level of inventory

would expose the underlying problem because inventory levels are closely monitored.

Similarly, the JIT system can be used to discover the hidden problems associated with

high levels of staff and patients.

Under the JIT system, the responsibility for detecting and correcting deviations

from the norm is placed on process operators, which is a feature of JIT quality control

and the foundation of another Japanese management philosophy called total quality

management (TQM). The author stated that the use of TQM and continuous quality

improvement have been gaining in popularity within the health care field.

Another JIT philosophy is to adopt health care providers’ suggestions when

formulating plans to reduce errors and waste, because they understand the machines and

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processes better than anyone else. Moreover, an emphasis on simplicity is one of JIT's

key components. Hospitals can eliminate complex billing procedures, which will

accelerate the billing process and improve efficiency. The JIT approach can eliminate the

need for a separate inspection process after discharging a patient if each case is reviewed

and tracked during the patient’s stay, which will also improve efficiency. In addition, the

JIT concept of adding value should be used to determine which processes are value-

added, and reduce non value-added activities such as counting, moving and inspecting

products.

In order to successfully implement the JIT system, hospital personnel need to be

educated about the philosophy behind JIT and their role in the JIT system. The author

believes in the feasibility of applying the JIT approach to the health care industry. In

conclusion, a JIT management system is not only an inventory reduction program, but

also a way of reorganizing and rethinking a Hospital's most basic processes and

procedures.

Article 4:


borrows from industrial techniques. Strategies for Healthcare Excellence, 6(2), 9-

12.

19

This article discusses the application of a just-in-time (JIT) approach to health-

care organizations, and presents a case example adopting JIT principles. The author

defined JIT management as a concept of matching inputs with outputs to reduce work in

process. Instead of stockpiling inventory and labor, materials and labor are delivered

when they are needed. In addition to inventory reduction and quality improvement, JIT

principles focus on the simplification and elimination of unnecessary work processes, and

the reduction of cycle time.

The author believes that using a JIT approach in health-care organizations would

not only benefit the organizations, but also the patients. In health-care organizations,

inputs are care while outputs are the patient's health. Thus, the target should be to

optimize the quality of patient care throughout the organization. In order to improve the

quality of patient care, managers should focus on: time per stage of care (cycle time),

interconnections between stages of care, service quality, staffing, and patient wait times.

However, managers need to keep in mind that cost minimization in a department can

create sub-optimization across a system when adopting a JIT approach. Some

measurable benefits of using the JIT approach listed in the article include a reduction of

redundant clinical and administrative procedures, a reduction of delays due to inadequate

documentation, a reduction in staff waiting time, and a reduction of costs by using

flexible staffing models.

Patient care and outcomes can be affected by the wide fluctuations in demand on

health-care staff in different departments. To solve this staffing problem by adopting JIT

20

principles, the author suggested using some part-time staff, on-call staff, and contract

staff to supplement a core group of full-time staff. Also, full-time staff can be allowed to

work flexible hours or a flexible work week. More importantly, JIT principles need to be

applied to the linkage between departments in order to improve patient services on a

system-wide basis.

The case example presented in this article examines the physical therapy

department in an unnamed hospital, which is providing a narrow range of services,

thereby sub-optimizing the hospital system. The recommendations for change include (1)

measuring the performance of the physical therapy department based on met and unmet

internal orders for services on a JIT basis; (2) providing a two-week forecast of service

requirements to the department by Friday each week; (3) identifying in advance all

patients’ rehabilitation plans with functional outcome goals and measuring the goals

throughout treatment; and (4) switching to a flexible staffing model with added fringe

benefits. The expected benefits for the hospital should include higher retention of trained

staff, increased ability to attract high quality staff, and cost savings from the reduction in

staff and staff hours.

Article 5:



21

The author believes that hospitals’ rising costs might be due to inefficient supply

chain practice, rather than malpractice lawsuits. He suggests that adopting money-saving

logistics practices, such as just-in-time (JIT) and bar coding, may help hospitals reduce

cost. This article presents the way St. Luke’s-Roosevelt Hospital Center in New York

City implemented a customized JIT inventory system, which helped them save more than

$3 million per year.

In this article, JIT is defined as “the process of timing materials flow so that

products arrive just before they are needed.” This can reduce costs by eliminating or

minimizing storage area and carrying less inventory. JIT can take many forms to provide

just-in-time deliveries without jeopardizing patients’ needs. For example, the inventory

from JIT deliveries can be used to replenish the safety stock that hospitals keep on-site,

rather than for immediate use. Hospitals have to create a customized system that works

well with their needs and the realities of their supply chain. The hospital in this article,

St. Luke’s-Roosevelt Hospital Center, is a 5,000-bed hospital in New York City. It

introduced the JIT system in the early 90s to regain control of its ordering function from

its dozens of nursing stations. It achieved its goal and has since expanded the JIT system

to other departments. More than 75 percent of the hospital’s supplies are currently

managed through a JIT system.

In addition, St. Luke’s-Roosevelt Hospital Center uses a bar code for every unit

that the hospital orders. The bar code, one of logistics’ most effective tools, provides

essential data such as product identification and expiration date, which is important to the

22

hospital’s supply replenishment process. This paperless system minimizes transposition

errors in order, prevents supply hoarding from each cost center, and provides easier lot

control for recall products. More importantly, it provides real-time data for the hospital

to use when ordering, reporting, and planning. As a result, a JIT system can reduce the

cost of treating and caring for patients because of the lowered overall cost of purchasing,

moving and managing supplies.

The article concludes by giving a list of areas that management should examine in

order to improve their logistics process. Logistics re-engineering is a process, which

requires extra time and money. But it can yields immediate benefits.

Article 6:


32-37.

Since the government switched from cost-plus reimbursement to flat fees

regardless of complications or a provider’s actual expense for medical services in 1983,

hospitals continue to search for innovative ways to reduce costs while maintain quality.

This article discusses how hospitals can reduce the acquisition price of supplies when

using a just-in-time (JIT) system. It covers the benefits of JIT, the opportunities for JIT

application in health-care, and the accounting implications of using a JIT system. The

23

benefits of JIT briefly described in this article are cost savings as a result of inventory

reduction and associated holding costs, space for other revenue generating activities, and

the transfer of labor costs to the distributor.

The article heavily focuses on the possibilities of using JIT in the healthcare

industry. The areas where JIT can be applied in health care include central supply,

materials management and pharmacy, nursing, swing beds, relationships between nursing

units and supplying departments, and physician practices. First, under JIT the central

supply function is minimized because the need to store goods between supplier delivery

and internal delivery to units or department is decreased by adopting a JIT method where

an individual unit directly receives items from the supplier.

Second, materials management and pharmacy are the most obvious opportunities

to apply JIT systems in the healthcare industry, because they both deal with tangible

goods, suppliers, and inventories. To reduce costs, hospitals need to reduce the number

of suppliers, choose suppliers which are geographically closer, and improve relationships

with suppliers. At the same time, hospitals should develop a community network with

other hospitals or pharmacies to ensure backup systems for life-critical supplies. This is

important because it allows hospitals to have low inventory costs without putting patient

safety at risk.

Third, a flexible work force, a crucial JIT element, can be applied to nurses with

multiple skills who provide numerous nursing, diagnostic, and care-giving functions for

24

patients in hospitals. These nurses form a pool of floaters who go to work at the units

which need extra staff. The unit of inventory in this case is the multi-skilled nurse. The

flexible work assignments avoid excess “inventories” on departments with small

workloads in the hospital. This system also provides greater flexibility for scheduling.

Moreover, nurses with multiple skills can provide better patient-focused care

because patients do not need to interact with a new nurse for every activity or service

throughout the day. This resembles the use of work cells in manufacturing companies

using a JIT system, where a small group of multi-skilled workers handles the entire

manufacturing process. In addition, the careful arrangement of space and schedules can

also provide better patient-focused care as the transportation of patients and waiting times

for services are diminished. This elimination of non value-added time is a key element of

the JIT system.

Another area making use of JIT principles is the use of swing beds for patients

who are between acute status and skill care (nursing home) status. Instead of being

transferring to a nursing home, patients can stay in the hospital where staff members are

familiar with their cases while recovering. This improves the quality of care and

outcome measures. Furthermore, JIT’s supplier relationships can be applied to the

relationship between nursing units and supplying departments such as central supply and

pharmacy. Increasing nursing units’ financial responsibility for their inventory can

encourage them to reduce their inventory levels and safeguard their inventories. The last

area using JIT procedures is the physician’s documentation-related processes. If orders

25

for ancillary services are received faster, then there will be shorter wait times for services

and faster posting of results to patients’ medical records, which will reduce the non

value-added time. This can improve physicians’ use of their limited time.

Regarding the accounting implications for JIT systems, process costing, often

used in the manufacturing industry, can be used in the business office, or materials

management, in health care organizations where services are basically homogeneous and

repetitively performed. Also, JIT systems affect the identification of cost drivers, the

number of product cost elements, the application of product costs, and the nature of

performance measures. For example, when a rehab department handles its own patient

transportation instead of using a centralized transportation department, the allocation of

transportation costs can be eliminated. Moreover, hospitals can adopt activity-based

costing as they reduce their allocations and identify their true cost drivers.

In addition to focusing on reducing inefficiencies, JIT systems provide continuous

improvement and total quality control by requiring their suppliers to deliver products that

meet specific quality requirements. The only disadvantages of a JIT system mentioned in

this article are the added costs to the hospital’s bottom line and the opportunity costs of a

stockout. By keeping buffer inventories to prevent stockouts, the author believes that JIT

systems can improve hospital operations, improve patient service, and increase profits.

Article 7:

26



When this article was written in 1993, just-in-time (JIT) applications were

relatively new to the hospital industry, as compared to the manufacturing industry.

Accordingly, this article discusses the application of the JIT system to the hospital

industry in detail. It discusses the reasons for hospitals to adopt JIT, the benefits of JIT,

supplier relations, product/service design, production scheduling, standardization of

materials, integrated information systems, and pull systems/ordering.

The authors claim that a large number of hospitals have closed down due to the

economic conditions in the United States. In order to survive hospitals need to be more

cost conscious, especially when it comes to material costs, which are a significant portion

of hospitals’ total costs. In particular, approximately half of the material costs are spent

on handling, storing, and restocking of products. Thus, improving material management

could help reduce hospitals’ total costs by reducing inventory, its associated opportunity

costs, and labor costs.

JIT should not only be an inventory management method, but also a management

philosophy that treats the company as a whole and emphasizes quality, elimination of

waste, flexibility, and respect for people. The benefits of JIT listed in this article include,

but are not limited to, the following: (1) Reduced amount of in-process inventories,

purchased goods, and finished goods; (2) Reduction in space needed; (3) Reduced

27

manufacturing lead times; (4) Increased productivity levels and utilization of equipment;

(5) Improved relationships with vendors; and (6) Reduction in the number of indirect

laborers, such as material handlers.

To implement a JIT system, the relationship between hospitals and suppliers must

improve. To this end, hospitals should only use a few suppliers, and both sides need to

commit to the relationship and create an environment of open communication. In

addition, the authors believe that suppliers’ involvement in the design of products may

help improve product quality and minimize costs to both suppliers and hospitals. Further,

sharing accurate scheduling information between the two entities is essential to the

success of a JIT system. This removes the uncertainty of demand and improves the

understanding of future material requirements. In short, suppliers should be treated as an

integral part of the hospital.

The standardization of ordering materials is crucial to the elimination of

redundant ordering of parts for a particular product/service. The authors suggest

hospitals create an “approved product list” to standardize supplies, or conduct an ABC

analysis of materials used on products/services. More importantly, all information should

be stored in a computerized system connecting hospital and supplier. This provides

accurate, dependable information regarding the needs of the hospital to its suppliers.

Moreover, to facilitate the “pull” system for inventory purchases in a JIT program,

hospitals can use standardized containers, such as surgical carts, which hold the items for

each department. This would help staff members, who use and restock the items, ensure

28

that adequate quantities of those items are available, and notice the overproduction of any

items. In addition, the use of bar-code technology could provide an even more accurate

evaluation of utilization and charges, thus helping to eliminate any “hidden” inventory.

Hospitals need to think and plan in great detail prior to implementing a JIT

system. Importantly, hospitals must prepare for a significant reduction in the number of

suppliers, and an increase in the amount of information shared with those suppliers. The

article concludes that a JIT system can help hospitals reduce costs, increase profits,

market share, and worker morale, if it is correctly implemented.

Article 8:



This article discusses how hospitals can be prepared for disasters without stocking

a large amount of inventory. Disasters in this article not only include natural disasters

like hurricanes and tornadoes, but also man-made disasters such as biological and nuclear

warfare and explosions. According to the author, it is poor financial management to have

a large inventory because investments in inventory indicate a certain degree of risk for

obsolescence and theft. Also, in the case of liquidation, inventory would be the lowest

29

return of value. Thus, just-in-time (JIT) inventory management is more economical than

having a large inventory.

In the event of a disaster, some areas of the hospital such as outpatient or elective

types of procedures would probably be closed because all staff would be reassigned to the

emergency department. Supplies in those areas could then be transferred to use for the

emergency. Therefore, the author believes that most hospitals actually have an abundant

amount of inventory, even if they were to adopt JIT inventory management. Most

hospitals can get through normal disasters without outside help, but not many hospitals

can handle thousands of casualties within a short period of time on their own. For

situations like these, a coordinated plan that involves several hospitals and other

centers/facilities which have medical supplies and equipment is needed because it is not

just a hospital disaster, but a community disaster.

The article presents a supply experiment to show the average inventory of a

certain product. Surprisingly, the experiment found that there was a 32 to 45-day

inventory of exam gloves. It also presents a way to estimate the internal supply depletion

rate. It is important to know how long supplies would last and how intense product

demand will be in a disaster. After acquiring this information, materials managers need

to evaluate if they have enough inventory to support the emergency until the distributor

can deliver additional supplies. The distributor should work closely with their network of

distribution locations to determine the time frame in which they can deliver additional

30

orders to hospitals in an emergency. With a time frame in mind, hospitals can better

estimate how much inventory they need to have.

Products may have different product identifiers from different distributors, which

makes communication difficult during a disaster. In conclusion, the author suggests

using a Microsoft Excel spreadsheet to make a list of the most-needed items along with

various distributors’ product identifiers highlighted, which provides a way to make fast

orders to alternate distributors when the primary distributor is not available during an

emergency. Being prepared is crucial in the health care community, but stockpiling

supplies is not the solution.

Article 9:



This article discusses the effect of using a just-in-time (JIT) or stockless system in

hospitals and the key role of communication in the JIT/stockless system. According to

the article, in 1990 the nation’s 6,700 hospitals spent $15 billion on products such as

disposable gloves and gowns, sutures, and therapeutic solutions. On top of the large

amount of money spent purchasing supplies, hospitals also need to spend approximately

an equal amount of money to move products through the system. A JIT/stockless system

31

can address this by lowering hospitals’ holding and handling costs. Randy Jackson, the

vice president of St. Luke’s Episcopal Hospital in Houston, claimed that they have saved

$1.5 million a year since switching to JIT deliveries, and projected another $500,000

saving after a stockless system is fully implemented. The savings come from reducing

staff, eliminating inventory, and converting storerooms for other money-generating uses.

At the same time, distributors profit because they typically add three to five percent

service fees for the more frequent and complicated JIT delivery method. Thus, stockless

services benefit both hospitals and distributors.

However, the majority of the nation’s hospitals still do not accept stockless

services for a variety of reasons. For example, some hospitals’ administrators worry that

suppliers would deliver more supplies than the hospitals need to increase profit. Frank

Ryan, president of Johnson & Johnson Hospital Services, said that these concerns could

be dangerous if hospitals do not have the internal systems and controls to manage a

stockless program. In addition, hospitals need to carefully examine whether the cost

reduction from going stockless exceeds the extra expenses.

This article concludes by giving an example of the importance of good

communication in a JIT/stockless system. Managers from Baxter International, a major

hospital supplier, meet daily with nurses and executives in St. Luke’s Episcopal Hospital

and Hermann Hospital. Baxter can tailor their services to individual hospital’s wishes

and work closely with hospital staff to deal with problems. Baxter then delivers the

precise orders, often in a small quantity of supplies, directly to individual departments

32

just when they are needed. With only two to three days of supplies in stock, Baxter has,

in effect, become the central supply, or the warehouse, of the two hospitals. Due to this

JIT/stockless system, Hermann and St. Luke’s are able to realize a substantial savings by

eliminating a 68,000-square-foot warehouse and a 20,000-square-foot warehouse

respectively.

Article 10:






This article describes the reasons why Seattle Children’s Hospital needed to

change to a just-in-time (JIT) distribution system, the ways its new system works, and the

results of the new system. Seattle Children’s Hospital is a 250-bed flagship hospital,

which handles approximately 300,000 inpatient and outpatient clinical visits a year. The

hospital had high inventory costs due to surpluses and shortages in supplies, equipment,

and clinical materials. The excess supplies stored throughout the hospital were often

obsolete because of inventory inconsistency. And the shortages prompted rush orders,

33

which were often in unnecessary large quantities and more expensive because they were

from off-contract suppliers.

Seattle Children’s Hospital adopted a JIT distribution system and an inventory-

control methodology, kanban, with little cash outlay or significant commitment of labor

resources. In order to determine the optimal inventory quantities of supplies, the hospital

analyzed historical data to find out the average consumption and usage patterns for each

supply. Then, the hospital and its major distributors developed a two-bin kanban system

for most of its supplies. The foundation of kanban is to create visual cues to monitor the

need for more of a given item. Designated staff checks bins every five to six hours and

scans the empty bins’ bar-code to initiate replenishment orders with the distributors of

that particular item. The new supplies typically arrive within a few hours from the time

of ordering to restock the first empty bin (at the same time, the clinicians are using

supplies from the second bin). This two-bin kanban system ensures no outage and no

overstocking.

The vice president and chief procurement officer of the hospital, Charles Hodge,

believed that the system is very simple and easy for clinical teams to follow. Data

visibility, showing on an on-screen dashboard, is the key to succeed in this system

because inventory velocity can easily be monitored and order quantities can be quickly

adjusted according to the actual needs. Although it took approximately 18 months to

implement initially, it has saved more than 23,000 hours of clinician time per year.

Clinicians no longer need to manage inventory and tuck away additional supplies in the

34

fear of a stockout. While the total direct cost for the system was around $200,000, the

hospital has already reduced its supply costs by five percent and achieved a Return on

Investment of $2.5 million in the first year. This is a huge saving for a hospital of this

size.

Article 11:



This article describes Tampa General Hospital's experience with using a just-in-

time (JIT) inventory delivery system. The author states that JIT inventory control and

delivery systems was previously used in the hospital industry as “stockless purchasing” to

different degrees. Of the hospitals that have experimented with stockless purchasing,

only those which could accurately monitor the turnover rates of user departments were

successful. And only a small number of hospitals that use a JIT system have high

turnover rates and excellent service levels. The author defined JIT as a system seeking a

department’s highest supply turnover rate without causing any negative effects in

services. JIT inventory can be continually refined, so long as accurate usage information

is available and orders can be timely processed and delivered. Individual hospitals may

have different definitions of their JIT systems.

35

Tampa General Hospital, the hospital studied in this article, is a 1,000-bed

teaching institution. Before adopting a JIT system, the hospital had many ordering

methods and various delivery systems. Due to the complexities of the systems and the

confusion it created, the hospital-wide inventory turnover rate was about 4.55 times a

year. After using a JIT system, the inventory turnover rate improved to 8.31 times a year

(a 44.8 percent increase) within two years. This study showed that ordering supplies

more often and with greater accuracy is the key to a JIT system. Materials managers

created a list of department-by-department approved products to control the number of

new products and to simplify the order processing system, which accelerated the order

processes and in turn reduced lead time. Also, the products are directly delivered to

individual departments by vendors. As a result, Tampa General Hospital eliminated its

off-site warehouse and continued to use next-day delivery for its medical supplies.

The author concluded that any hospital can be successful with a JIT system, as

long as they understand and solve four basic problems: (1) accurate usage information

must be available; (2) orders must be processed quickly; (3) vendor fill rates must be

high; and (4) receiving and distribution must be strengthened. If JIT systems are widely

recognized, understood, and practiced, hospitals will need fewer warehouses and require

less handling, which in turn will lead to lower costs.

Article 12:

36



Quarterly, 13(3), 10-25.

This article presents a research study examining the feasibility of implementing a

just-in-time (JIT) system in health care industry. The study compared health care

institutions that have adopted a JIT system and those that have not. The results show that

the introduction of JIT philosophy in the health care industry’s material management

system improved the system and reduced implementation problems. Moreover, the

introduction of JIT philosophy had a positive impact on the institutions' inventory

management, service quality, and competitiveness.

The article starts by discussing the impact of JIT philosophy. The authors define

JIT as a continuous flow of products adapted to demand changes that produces only

necessary quantities of products at predetermined points in time. To achieve this flow-

like system, JIT needs to be supported by JIT purchasing, total quality control, multiple-

process layout designing, job standardizing, and production smoothing. In the

manufacturing industry, the major benefit of JIT purchasing is that the levels of parts

inventories in the assembly plant and the carrying costs for those parts are significantly

reduced. The success of JIT systems in the manufacturing industry has driven many

service sector industries to adopt JIT as their material management system.

37

Since the health care industry has recently faced fiscal constraint, there is an

urgent need to reduce operating costs in order to survive and stay competitive. That is

why the health care industry has to adopt a more efficient approach for administrative

processes and inventory management. The authors believe that a JIT material

management system is the solution. But they recognize that JIT in the health care

industry was only in its early stages in 1992, when this article was written. The JIT

material management system in the health care industry is also known as “stockless

material management system” or “stockless purchasing” in this article. Different

hospitals, or even departments, may have a different definition of a stockless material

management system. However, the bottom line is to have an integrated effort with

hospital, distributor, and manufacturer all working together.

The research study in this article used two groups of hospitals in the United

States: hospitals that implemented stockless systems and hospitals that did not implement

stockless systems. Data was collected through mailed survey questionnaires and in-depth

personal, on-site interviews with materials managers. The results showed that hospitals

using the stockless system had a better material management system with fewer problems

than the non-stockless material management environment. Also, larger hospitals seemed

more aggressive in implementing the stockless system than smaller size hospitals. The

authors concluded that the implementation of stockless system for the health care

industry is an efficient way to improve the material management system.

38

Article 13:




This article describes a “just in time” (JIT) approach to inventory management

and the steps needed to use this approach to reduce overhead expenses. According to

Chris Gonzalez, MD, assistant professor of urology at the Feinberg School of Medicine at

Northwestern University, Chicago, JIT philosophy is an attempt to accurately match

demand with supply in order to limit the expenses associated with overstocked inventory.

The steps Dr. Gonzalez implemented include: (1) arranging the return of all

excess and unused supplies; (2) terminating all standing deliveries from vendors; (3)

selecting a single vendor for all office supplies who will deliver all orders within 48

hours; and (4) appointing an existing staff member as the supply manager to manage all

inventories. Dr. Gonzalez also recommended determining demand based on average

usage, centralizing inventory, working with a limited number of supply distributors, and

monitoring the process for fluctuations in demand. The medical practice, consisting of

11 urologists at Northwestern, showed a significant reduction in its overhead expenses

after using the JIT approach.

Dr. Gonzalez admitted that setting up such a system requires a lot of work, but the

time invested would pay dividends in the long run. The bottom line in this article is cost

39

savings. Dr. Gonzalez believed that the JIT approach to controlling inventory can be

easily accomplished in any practice, regardless of size, location, or even practice

structure. The key is to avoid common pitfalls, such as making inventory too lean, which

can lead to “stockouts” where supplies are depleted. In health care settings, a “safety”

inventory should be built into the determined usage levels to avoid this problem.

Article 14:



This article discusses the applicability of just-in-time (JIT) inventory control to

hospitals. The author believes that the difficulty in implementing a JIT inventory control

is the uncertainty in supply or demand, which is directly related to lead time. The two

major uncertainties are the actual lead time demand and the actual replenishment lead

time. First, the uncertainty of the actual lead time demand may create stockouts and poor

customer service, which can be prevented with safety stock (buffer inventory). Second,

the uncertainty of the actual replenishment lead time may create a need for additional

safety stock. These problems can be solved by using a JIT approach because lead time

will be reduced as the average inventory level is lower with a JIT system. Thus, the

“danger zone” when a stockout could occur is much smaller. As a result, the safety stock

needed to maintain the same level of customer service is reduced.

40

Due to the reduction in cycle stock with a JIT system, the lot size is reduced,

which in turn lowers the inventory holding cost. However, this benefit of a JIT system

may increase the risk of stockout unless the uncertainties mentioned above are reduced.

For a properly working JIT system, cost reduction and uncertainty reduction have to be

accomplished together.

The article points out that suppliers and their location are key factors for JIT.

Suppliers can benefit from a JIT system as it will increase their efficiency of production

and delivery systems, which can in turn reduce their hospital customers’ internal cost.

When considering a JIT arrangement, a geographically closer supplier location is ideal,

but not always practical. The author suggests some creative arrangements when a near-

by supplier is not available. One suggestion is to use a transportation cooperative with

surrounding hospitals where shipments to several hospitals in one area are coordinated

with the supplier. Another suggestion is to use a small ‘valve’ warehouse to consolidate

and hold material for several hospitals in a region with small, more frequent deliveries.

In order to reduce lead time, the author stresses that clear communication with the

supplier on expected performance levels and accurate information flow between supplier

and hospital are important.

The author points out that a JIT system only works efficiently when there is

regular review of the forecasting accuracy of the materials requirement system and

supply usage trends. He also suggests focusing JIT on the inventory that are relatively

expensive, high use, and have predictable usage patterns. As a result of less inventory

41

and tighter inventory control, a JIT system reduces shrinkage, spoilage, storage space,

and carrying costs. These cost reductions are more than enough to offset the extra

expense needed in control and material handling.

Article 15:


This article presents various hospital CEOs’ methods to reduce costs through use

of the just-in-time inventory system and lean management. These hospital CEOs believe

that the quality of health care can be improved while at the same time eliminating waste.

The 11 hospitals under the New York City Health and Hospitals Corp. (HHC),

one of the largest hospital and health care systems in the country, had storage rooms

overflowing with $10.2 million in supplies. Some of the supplies expired before they

could be used and others were unnecessary. By moving to a just-in-time inventory

system, HHC will have a one-time saving of $5 million. For example, HHC now saves

almost $4 million a year on gloves by stocking two, instead of 20, types of rubber

gloves.

By reducing waste, the nurses in the emergency department at St. Vincent

Indianapolis Hospital can significantly reduce the steps to get necessary supplies.

Moreover, Delnor Hospital in Geneva, Illinois saved $80 million in expansion expense in

obstetric department by designating a nurse to handle discharges promptly. Delnor

42

Hospital has also improved its quality (minimizing medication error) by eliminating

unnecessary hospital stays.

Denver Health, which provides health services to a quarter of Denver’s

population, has saved $27 million on supplies and increased productivity by employing

the Toyota system. Similarly, ThedaCare, which manages four hospitals and dozens of

clinics in Wisconsin, has reduced the cost of its inpatient care by 25% through the use of

lean management. The CEO of ThedaCare believes that a huge savings on the Medicare

and non-Medicare side will be shown if all hospitals achieve similar results. However,

Simpler Consulting, which trains hospitals in the Toyota Production System, often sees

resistance to change in hospitals’ management. The CEO of Simpler Consulting believes

that 90% of the time and costs in hospital care is wasted and money could be saved if

hospitals employed the right tactics.

Article 16:



18(2), 66-68.

This article examines a specific just-in-time (JIT) supply distribution service, and

then discusses two hospitals that successfully use the service. The authors claim that

approximately 35 percent of most hospitals’ budgets are spent on supplies and the labor

43

to manage the inventories, which are usually managed through complex and multi-

layered systems. To remain competitive, hospitals need to reduce inventory costs. One

popular method hospitals can adopt is a JIT system, which requires suppliers to

frequently deliver smaller quantities of products directly to the point-of-use (POU)

locations.

The distributor highlighted in this article is Baxter Healthcare Corporation in

Deerfield, Illinois. It handles sales and distribution of more than 200,000 products,

including intravenous solutions and rubber surgical gloves to all kinds of health care

facilities. Its ValueLink program, a stockless-JIT supply distribution service, aims to

provide an economical hospital logistics service that improves supply-chain quality.

ValueLink manages the supply replenishment process within hospitals through

integration information management to ensure the supply chain is managed to its

maximum efficiency, which is accomplished by delivering the required supplies in the

hospital’s desired unit-of-measure to specific POUs on a timely basis. In addition to

tailored distribution services, Baxter uses proven JIT and electronic data interchange

(EDI) concepts and other cutting-edge technology to achieve the philosophy of total

quality management.

The two hospitals using the ValueLink system presented in this article are

Vanderbilt University Hospital in Nashville, Tennessee, and St. Luke’s Episcopal

Hospital in Houston, Texas. The data showed that both hospitals have significantly

reduced inventory costs, saved operating expense, saved space, and reduced inventory

44

line items. Other benefits include a streamed supply replenishment process, revenue-

generating opportunities from vacated space, reduction of labor cost, product

standardization opportunities, and elimination of packaging waste. The authors

concluded that JIT systems and EDI are feasible in the health care industry and can

produce significant cost savings.

Article 17:



The author of this article believes that the concepts of just-in-time (JIT)

production and inventory management have been used to some extent in different areas

of the hospital/health care industry for many years, just without using the name JIT. This

article discusses various JIT concepts used in hospitals, including purchasing, food

service, pharmacy, laundry/linen service, general supplies, and surgical case carts.

First, in purchasing, JIT concepts can be seen in the relationship between the

hospital and a primary vendor. This commitment to one single vendor has many benefits

for the hospital, including: acceptable fixed pricing, reliable, consistent, fast deliveries,

and low probability of shortages and stockouts. In addition, both hospital and vendor

receive the benefit of cost reduction. Second, JIT concepts have been widely used in

45

hospital’s food service, to deliver perishable products on a daily, or even twice-a-day,

basis. As preset menu cycles are used, food services department can somewhat control

and forecast the demand for a certain period of time, and then communicate it to a small

number of suppliers. After the food is assembled on meal trays in specific portions,

meals are delivered to patients just in time at breakfast, lunch, and dinner.

For pharmacies, the level of inventory can be kept low because wholesalers are

willing and able to make daily deliveries to hospitals. JIT concepts are applied to unit

dose delivery systems, as dosage and medication prescriptions are established for a one-

to-three-day period, which allows pharmacy departments to plan purchases and maintain

an adequate inventory. However, pharmacy departments’ inventory turnover rate is not

as high as that in food service because they need to keep some expensive, slow-moving

products as an emergency supply, which creates a “fixed” component of the pharmacy

inventory.

Many hospitals’ laundry/linen service has also established close relationships with

a single supplier, which is a key JIT concept. Since demand can be predicted, laundry

departments can pre-schedule shipments from suppliers without a need to keep a large

inventory. Similarly, general supplies are another area that shows JIT concepts.

Hospitals select a primary vendor to replenish general office supplies on a preset

schedule due to a pre-established rate of consumption, so that they do not need to keep

them in storerooms. Lastly, a surgical case cart system shows JIT concepts because

surgical case carts’ demand can be predicted so they can be scheduled in advance for

46

elective surgeries. In conclusion, the author suggests hospitals carefully study the

application of JIT in different areas of hospitals and find ways to expand JIT concepts

into other areas of the hospital.

Article 18:



This article presents the results of a case study that examined the costs of

switching from conventional distribution of medical-surgical supplies to a just-in-time

(JIT) or stockless arrangement. The major factor compared in the study was the trade-off

between the increase in markup the distributor will charge for the more sophisticated

arrangement (from dropping boxes at a hospital’s dock once or twice a week to delivering

a small quantity to nursing stations daily or more often) and the benefit of reduced costs

the hospital will achieve from eliminating warehouse space, on-shelf inventory, and labor

costs.

Researchers at Pennsylvania State University in University Park, PA devised a

computer “what-if” model to determine distributors’ bottom lines of charging markups on

supplies and services when a hospital changes to JIT or stockless and implemented it at

Pennsylvania State’s 503-bed Milton S. Hershey Medical Center in Hershey, PA. They

47

conducted surveys of both hospital materials managers and medical-surgical distributors

and collected data at various storage sites and distribution facilities.

The results showed that the markup on unit prices distributors must charge to

break even was 2.68% for JIT and 4.4% for stockless. Therefore, this case study

concluded that hospitals using a JIT or stockless system are more profitable, if the

additional unit price markup is 5% for JIT hospitals or 8% for stockless hospitals.

Markups increase costs for hospitals, but the savings in inventory, full-time employees,

and warehouse space are more than make-up for the additional cost.

There are a number of assumptions built into the computer model and the details

of the distribution arrangement. For example, a major assumption is that a distributor

will charge an additional percentage or fixed markup of item unit price when a hospital

changes to JIT or stockless system. The researchers claimed that the results of this case

study might not represent the general case.

Article 19:



This article discusses the trend of using stockless or just-in-time (JIT) distribution

in health-care industry. The author defines JIT in the health care industry as bulk

deliveries to hospital receiving docks at frequent intervals (usually three to seven times

48

per week), for the purpose of keeping minimal inventory. On the other hand, stockless

distribution was defined as the delivery of the lowest unit of measure either to the

hospital receiving docks or directly to the user departments in the hospital. The author

stated that JIT and stockless distribution were introduced to health care industry in 1989.

In the early 1990s the terms “stockless” and “JIT” were used interchangeably by hospital

administrators and material managers to describe an approach to reduce costs in the

supply system.

In the 1990s, materials managers in the health care industry believed that

stockless or JIT was essential to help them reduce costs. At the same time, big

distributors began to customize their stockless programs to fit the needs of any hospital.

Hospitals saw many instant benefits of using a stockless system, such as a reduction of

full-time employees and cash flow from inventory buy backs. However, only a few

hospitals looked closely at all the components of the total costs when evaluating such a

program. As hospitals have begun to better understand the costs and benefits of a JIT

system, they have learned to design contracts that promote mutual benefits and savings

between hospitals and distributors. The author believes that the stockless approach is

losing its status as the ultimate distribution approach.

JIT and stockless distribution are appropriate in many situations, but they are not

the end-all solutions for hospitals. Also, they are not appropriate for all hospitals, such as

a small rural hospital, located hundreds of miles from the nearest distributor warehouse,

with no or only rudimentary computer systems. Before going stockless, many factors

49

need to be carefully considered, including distance to the distributor’s warehouse,

distributor’s capabilities for delivery to dock or to point of use, cost per delivery, current

inventory levels, and hospital staff’s willingness to change. Before deciding whether JIT

or stockless is right for their hospitals, administrators and materials managers should

work closely together to evaluate the goals and values of the entire hospital.

Article 20:


21(3), 27-31.

This article describes the adoption of a just-in-time (JIT) inventory management

system by the radiology department of Dartmouth Hitchcock Medical Center (DHMC).

Due to its increased need for more space and the increasing time needed to inventory and

order supplies, the radiology department decided to change to a JIT delivery system in

1992. A JIT implementation team, which was comprised of the radiology department’s

administrative director, technical manager, business manager, asset manager and the

director of materials management, was formed to develop the program. The appointed

asset manager is the only one who is authorized to order supplies and request services

from the hospital’s various departments. Then, the list of specific supplies, the quantities,

and the frequency of delivery needed to be decided. The standardization of supplies

throughout the department provided an opportunity for cost savings.

50

The JIT implementation team developed a request for proposal (RFP) and invited

three reputable radiology suppliers to bid on the guaranteed exclusive right to supply 80

percent of the department’s supplies for three years. The author believes that the

selection of a primary supply vendor was important because a long-term partnership

between the medical center and the vendor would be formed. Eight criteria were used to

evaluate each vendor’s response to the RFP: price, service, financial stability, support

personnel, product selection, computer capability, value-added services, and company

culture. After implementing JIT for three years, the department reduced costs by

approximately eight percent, reduced supply inventory to one week, significantly reduced

inventory levels (from over $400,000 to $16,000 inventory values), saved time, reduced

waste, and increased its ability to quickly switch to new or less expensive products.

In 1995, DHMC offered the JIT program to its network of eight affiliate hospitals

(The Hitchcock Alliance) and four outpatient clinics (The Hitchcock Clinic). The team

developed a new RFP which encompassed 90 percent of the network’s radiology supplies

for three years. The selected vendor customized delivery schedules for each facility and

packed supplies in reusable containers or removed the supply cartons after delivery,

which reduced waste. With the expansion of JIT to the entire network, DHMC further

reduced costs by 2.5 percent. The savings realized by small hospitals and clinics were in

the high double-digit range. The article concludes by stating the need to have continuous

monitoring, adjustment, and enhancement of the network JIT program due to each

facility's changing needs.

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Chapter 4

ARTICLE COMPARISON

The 20 articles selected for this review all discuss the application of just-in-time

(JIT) systems or concepts in a variety of healthcare settings. However, the articles differ

in the methods used to explore this issue. The articles can be broadly divided into three

categories: (1) theoretical; (2) case studies; and (3) a combination of the two. Articles in

the second category introduce the application of a JIT system in the healthcare setting

through the use of specific case(s), whereas articles in the first category discuss the JIT

system in a more abstract way. Articles in the third category combine the methods from

the other two categories.

The first category includes seven articles: 3, 6, 7, 8, 14, 17, and 19. These articles

discuss the theoretical application of the JIT system in a variety of healthcare settings, but

with different emphases. For the most part, all of these articles discuss the guiding

philosophy behind a JIT system, the system’s general benefits and drawbacks, and

generic ways to apply the system in a healthcare setting. But, each article tends to focus

on a specific aspect of the JIT system. For example, article 6 focuses heavily on the

possibilities of using a JIT system within specific areas in a healthcare setting, while

article 7 focuses on the reasons why a JIT system is more economical than stockpiling.

Eight articles belong to the second category: 1, 10, 11, 13, 15, 16, 18, and 20.

These articles present specific case studies demonstrating how the JIT system has been

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used to improve inventory management systems, reduce costs, increase productivity, and

improve quality. Most of these articles discuss applying a JIT system to entire hospitals

or medical centers, but no two articles present the exact same JIT system. For example,

two articles – 13 and 20 – focus on the adoption of a JIT system in a very specific

healthcare setting. Article 13 explores the implementation of a JIT system in a medical

clinic of 11 urologists, and article 20 looks at the adoption of a JIT system by the

radiology department of a large medical center. These two articles were of particular

interest, because they discussed in detail how a JIT system can be tailored to fit the

specific needs of the individual hospital or department.

There are five articles in the third category: 2, 4, 5, 9, and 12. Articles in this

category first describe the theoretical foundation of the JIT system, and then support their

theoretical discussions with related case studies. In general, the case studies presented in

these articles are not as extensive as those in the articles of the second category. For

example, in article 9 the effect of using a JIT system in hospitals is discussed, with an

example given to show the key role of communication in the JIT system.

While most of the articles are written from the perspective of the healthcare

facilities’ management, a few articles approach the discussion of a JIT system differently.

For example, article 8 looks at the need for a JIT system from the point of view of a

disaster management professional, concluding that a JIT system, as opposed to

stockpiling, is a better solution for disaster preparedness. And article 18 focuses on

examining the costs of switching from a traditional distribution system to a JIT system,

53

from the distributor’s point of view. In sum, all of the articles discuss the theory and

application of a JIT system differently, but they all strive to demonstrate the feasibility of

adopting a JIT system in a healthcare setting.

54

Chapter 5

FINDINGS AND CONCLUSIONS

The idea of using of a just-in-time (JIT) system to manage hospitals’ inventory

was proposed as early as the late 1980s, but despite its numerous benefits it still does not

seem to be widely accepted. One possible reason for this is the relatively small amount

of research available examining the application of a JIT system in hospitals, as opposed

to the large amount of research studying the use of a JIT system in the manufacturing

industry. And the highly customized JIT systems discussed in most case studies do not

reassure hospitals that the same system would work as well for them. There are also

many other concerns that have not been studied to the level that most hospitals feel safe

in adopting the JIT system. In this chapter, I will discuss the difficulty of developing a

generic definition of a JIT system, the benefits of using JIT, concerns hospitals have

about adopting JIT, questions that the current research has yet to answer, and future JIT

research issues.

Most of the relevant literature provides a varying definition for a JIT system,

because JIT is not a one-size-fits-all program. Due to the inconsistent definition of the

term, the JIT systems discussed in the literature come in many different forms and depths.

In fact, most literature even uses the term JIT interchangeably with the term “stockless”,

although a few authors believe that there is a slight difference. I do not think that the

term we use to describe the system is important; the concepts behind the system are what

we need to focus on. The essence of a JIT system is its cohesive operating partnership

55

between hospitals and suppliers to ensure efficient inventory management with “just-in-

time” resources. The actual quantity of supplies for each delivery, the frequency of

delivery, the delivery location, and the manner of packaging are all details to be

determined between the two specific entities. Also, due to its operating flexibility,

suppliers can tailor-make the JIT system to fit an individual hospital’s unique needs,

which in turn maximize the benefits both supplier and hospital can achieve through the

system.

Adopting a JIT system can simultaneously lead to both financial and non-

financial benefits. Since the foundation of the JIT system is inventory management,

implementation of the system starts by coordinating a unique arrangement that requires

suppliers to deliver supplies frequently, and then manages those supplies using minimal

resources from within the hospital. Through maintaining inventory at its minimal level,

the costs associated with the inventory, such as rent for warehouses and labor costs, can

be greatly reduced. At the same time, various articles also demonstrate that the savings

in time and money, which were spent on buying and managing inventory, can lead to an

increase in productivity, and enhance the quality of supplies and services. In addition,

internal controls over inventory would be improved by using a JIT system, because of the

low level of inventory on-hand. Close management of a much smaller inventory would

minimize the opportunities for employees to waste or steal supplies. With the ever-

developing of new technology, I believe the JIT system would become easier and less

costly for hospitals to implement in the near future.

56

Despite the demonstrated financial and non-financial benefits, some hospitals'

management still believe that a JIT system is not the right choice for their hospitals.

Hospitals’ reluctance to switch to a JIT system generally stems from their fear of a

stockout that could put their patients’ life at risk. In order to address this problem, some

literature suggests keeping a safety inventory to avoid stockout. But the size of the safety

inventory can be problematic. If it is too big, it defeats the purposes of a JIT system; if it

is too small, it still poses the risk of stockout. Also, without having a large amount of

inventory in stock, hospitals may feel that they do not have enough physical control over

their supplies and that they have to greatly rely and trust the suppliers. This means

hospitals need to develop a long-term and solid relationship with the suppliers, which

makes the selection of suppliers crucial.

In addition, since JIT requires a highly customized system that highlights the

hospital's unique relationship with their suppliers, it is not simply a computer program

that hospitals buy, install, and then implement. The system requires significant initial

planning, and continuous monitoring and adjustment. Since it requires a drastic change

in the way hospitals manage inventory, employees will need to be educated about the

concepts and functionality of the system, and then given ample time to adapt to the new

system. Therefore, hospitals should carefully weigh the costs of implementing a JIT

system against the benefits they expect to achieve, before making the decision to

implement such a system.

57

Further, the process of implementing a JIT system raises other serious concerns

that hospitals should consider. The JIT system can be invasive and expensive to

implement. And once it is implemented, it will require a lengthy period of commitment

to the system from the hospital. If a hospital is not satisfied with the JIT system, it will

be extremely difficult to switch back to their original system. The use of incremental

implementation may help relieve this concern. For example, the specific JIT system

discussed by Clinton (1999) used incremental implementation of JIT, in which only 80

percent of one medical center’s supplies were initially involved in the system, which later

expanded to 90 percent of the supplies for a network of eight affiliate hospitals and four

outpatient clinics. This method of incremental implementation of a JIT system could

provide hospitals with an opportunity to test the waters before fully implementing the

system. However, hospitals will still face the difficulty of selecting the appropriate level

of JIT implementation to experiment with, while maintaining the ability to withdraw

from the system if it does not fit. Due to these problems with the implementation and

transition process, many hospitals are left uncertain as to whether they want to risk

making such a big change.

Besides the general concerns hospitals may have, there are many specific

questions that an individual hospital would want to answer before implementing a JIT

system. First, going back to the concern over stockout, hospitals need to determine the

types and quantity of supplies to be included in their safety inventory. It would be

impractical and unnecessary to include a sample of all of the hospital's supplies in the

58

safety inventory, but what is the ideal mix of supplies? Also, how often should hospitals

inspect the safety inventory to make sure that the supplies are not obsolete or lost?

Should hospitals replenish the regular inventory by first using the corresponding items in

the safety inventory, and then replenish the safety inventory with the newly arrived

supplies? How much storage space is needed to store the safety inventory?

Another very important area is the hospitals’ relationship with their suppliers.

Clinton (1999) suggested eight criteria to evaluate suppliers: price, service, financial

stability, support personnel, product selection, computer capability, value-added services,

and company culture. Are there any other criteria that hospitals should add to this list?

How should hospitals weigh the criteria in the selection process? How long should the

contract with the suppliers last? Most literature recommends using one supplier, or at the

most a few suppliers, but which is better for individual hospital?

The last area of questions concerns the most fundamental element of a JIT

system: the inventory. How should a hospital select the types of supplies to be included

in the JIT system? How frequent should the supplies be delivered, and in what quantity?

Which departments in a hospital should be included in the JIT system? Should a hospital

try out the system with one or two departments before expanding it to the entire hospital?

Other important financial questions are directly related to the costs and benefits of the

system. How much time and money will a hospital need to invest initially? How much

space can a hospital expect to save by reducing the level of inventory? How many

hospital employees can be let go? How much cost reduction can a hospital expect by

59

implementing the system? How soon should a hospital expect to experience cost savings

and other benefits? All these questions should be carefully examined before

implementing a JIT system.

Researchers should continue to examine the feasibility of a JIT system in

hospitals, by exploring the issue in several directions. First, further research is needed to

better understand which types of supplies should be included in the system, and which

should be excluded. For example, past literature has not extensively studied which

supplies would provide the greatest cost savings with the lowest risk of stockout. The

following groups of supplies should be examined in future studies: (1) supplies that have

a high turn-over rate and a highly predictable pattern of use; (2) supplies that are for non-

emergency use only; and (3) supplies that are very expensive.

Second, the possibility of developing a more standardized JIT distribution system

by suppliers should be examined. If a relatively standardized JIT system can be

developed and widely adopted, more hospitals would be exposed to and familiar with the

system. This may enhance hospitals’ confidence in the JIT system. For example, the

ValueLink program examined by Nathan and Trinkaus (1996), which successfully helped

two hospitals reduce costs, can be further examined as a possible template for use in other

hospitals. Along the same lines, it may be possible to develop a relatively standardized

JIT system for specialized departments, such as radiology, if a hospital wide system

would be too complicated to standardize.

60

Third, future research should explore ways to help rural hospitals, which are not

close to any major suppliers, implement a JIT system. For example, the suggestion, by

Chapman (1986), of using a small warehouse to consolidate and hold supplies for several

hospitals in rural areas should be further examined. This could help bring the benefits of

a JIT system to hospitals that believed JIT would not work for them. Lastly, the concerns

of those hospitals that are not willing to adopt a JIT system should be further examined.

Through a thorough study of their concerns, researchers can gain invaluable clues as to

what issues merit further research, and which areas of the system need improvement.

To successfully implement a JIT system, hospitals first need to possess a positive

attitude towards the system and the readiness for a major change. Then, they need to

understand their supply usage patterns to choose the areas that can successfully adopt the

system. At the same time, finding the right suppliers and establishing a sincere

relationship with them are crucial. Once the system is in place, employees must be

educated about the concepts behind JIT, and trained to properly use the system. After the

system is up and running, it will require a great deal of patience from management and

staff, as continuous monitoring and the flexibility to make necessary adjustments are

essential to a smooth and profitable JIT system. But with careful prior planning and

adequate adjustments, a JIT system can help hospitals reduce costs and at the same time

increase productivity.

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REFERENCES







borrows from industrial techniques. Strategies for Healthcare Excellence,6(2), 9-

12.




21(3), 27-31.





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Quarterly, 13(3), 10-25.







18(2), 66-68.





63













32-37.

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