When Consignment is a Crutch

Crutches have their proper place in the healthcare supply chain – primarily in the supply closet for the physical therapy unit. While there are instances in a hospital environment where consignment inventory is used effectively to free up working capital and reduce overall supply expense, far too often it becomes the end in itself – a "crutch" that ultimately increases costs.

Take the case of an operating room where there are both planned and unplanned surgeries involving high-value implant devices. Buffer inventory is necessary due to the uncertainty of demand driven by emergencies or unknown implant attributes prior to surgery such as size. However, carrying these additional items on the books reduces working capital, and implant supplies tend to be slow-moving, resulting in higher inventory costs. Combine this with poor demand management and control processes and inventory levels and the result is that costs are driven higher still. A quick fix would be to negotiate a consignment agreement for these items and have the supplier manage the inventory. This would shift the inventory assets off the hospital balance sheet and back to the supplier but the end-to-end supply chain inventory levels remain the same.

Like all quick fixes there can be numerous drawbacks and hidden costs that can quickly erode any of the benefits of using consignment. To maintain their profit margins, suppliers may try to incorporate additional fees into the price or offer smaller discounts off of list price to cover the additional inventory management and carrying costs. Since these items are now consigned and vendor managed, the operating room materials staff often exercises little inventory control over them. Without the necessary control and accountability, inventory can be lost, damaged or expire. If the consignment agreement favors the supplier, the hospital could be liable in some cases. Also, the incentive to continuously improve and drive inventory levels downward to optimal reorder points is lost. That puts an important managerial function in the hands of the supplier, a party who, depending on the terms of the agreement, may not realize any benefit from driving improvement or efficiency.

When items are being considered for consignment, a true value based approach demands that the focus for all inventories should be on:

  • Continuous improvement and implementing leading practices in inventory demand management, control, and replenishment
  • Passing inventory demand from the patient case management system to the inventory and purchasing system to reduce safety stock levels and expedite costs
  • Releasing and receiving purchase orders and supplies in time for stocking of the case carts   

The changing dynamics of the health industry – with the twin pressures to control costs while improving the patient experience – leave no room for waste in the hospital supply chain. Implementing and enforcing inventory control procedures will address both those pressures by reducing lost, damaged, and expired items. This could require inventory to be secured in a nearby supply closet, dispensing device, or any access controlled area. In the case of implants where device tracking is critical, bar code automation could be used to associate the implant ID to the patient record, reducing manual paperwork and errors. Using lean pull methods, and electronic commerce technology when available, enable collaboration with the supplier to reduce lead times, which in turn results in lower end-to-end supply chain inventory.

Simply put, effective consignment inventory involves rigorous management by leveraging leading practices in inventory demand management, control and replenishment to offer incentives and capture value for both parties. It’s a clear case where getting rid of our crutches is an important step in enhancing overall flexibility and well-being. 

Guy Perry is a manager in PwC's Health Industries practice. He assists clients in the healthcare industry improve their supply chain operations through leading practices in business transformation and application of innovative technologies. Mr. Perry graduated from Southern Polytechnic with a BS in Computer Science and completed a Masters of Business Administration at Georgia State University. He holds the Certified Materials and Resource Professional credential by the American Hospital Association.

William Perry is a principal in PwC’s Health Industries practice, focusing on business transformation and ERP technology implementations in hospitals and integrated health systems with large physician group practices. He graduated from Vanderbilt University with a BS in Economics and completed a Master’s of Science degree in Health Administration at the University of South Florida. With 22 years of consulting experience, Mr. Perry has structured, planned and led multiple enterprise transformation projects focused on aligning the people, process and technology initiatives of healthcare organizations more closely with strategy and vision.


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