Best practice in hospital pharmacy inventory management suggests that hospitals should turn their pharmacy inventory 12-18 times annually. Considering that Walmart and Amazon turn their inventories at least eight times a year, a minimum goal of 12 for a hospital pharmacy department shouldn’t be tough to achieve. Factors such as drug shortages and the necessity of having critical medications on hand do make inventory management more difficult, however, by aligning inventories with demand data, many hospitals have been able to consistently achieve higher inventory turns. To determine your approximate pharmacy inventory turns, simply solve the following equation: Annual Cost of Goods Sold / Year-end Inventory = Inventory Turns.
Typical pharmacy departments today contain automated dispensing cabinets, which make it easy for pharmacy directors to obtain inventory data as well as analytics on suggested PAR levels. Regularly examining these analytics of how many days of inventory you have on hand can provide opportunities to change PAR levels and free up significant one-time cashflows for the hospital. In FTI’s engagements with pharmacy clients, there is typically anywhere from $500k to $1M in inventory reduction opportunities that have been identified and successfully implemented. It is important to note that this opportunity goes beyond the one-time cashflow savings, and if managed well, can lead to reductions in medication waste and inventory holding costs, as well as workflow improvements.
For multi-hospital systems, another way to improve the supply chain is by aggregating inventory management. Supply chain management science explains that aggregation of inventories is most impactful when product demand and product coefficient of variation are examined. Coefficient of variation is determined by taking the standard deviation of demand and dividing it by the mean of the product demand. Coefficient of Variation = (Standard Deviation / Mean) * 100. Using this value, inventories can be categorized as having either relatively high or low coefficient of variation to determine which medications to centralize and which ones to keep decentralized. The benefit of centralization is not equal across all medications. Fast-moving or high-demand products often have a low coefficient of variation and are best supplied by decentralized locations (hospitals), while slow-moving or low-demand products often have a high coefficient of variation and are best supplied by centralized locations (centralized medication storage facilities). Emergency use medications should be an exception to this rule, as they must be on hand for potential rare and emergent situations. Using this technique can significantly reduce the safety inventory that needs to be carried without affecting the customer (patient) response time.
Managing pharmacy inventory and supply chain is a balancing act, but with more real-time inventory management analytics available to pharmacy directors, the process has become easier. More efficient management of the supply chain will result in decreased inventory holding costs and improved cash flows for the hospital. Many multi-hospital systems have improved their inventory turns by implementing centralized medication distribution systems. Doing so can help reduce medication waste, ensure medication availability, improve patient safety by reducing medication variation, as well as streamline resource allocations and workflows.
Jigar Thakkar, PharmD is a Managing Director within FTI Consulting’s Health Solutions practice, specializing in hospital pharmacy performance improvement and business development. Jigar has spent most of his career focused on healthcare services and pharmacy, including leadership roles at several hospitals within the Chicago market.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals
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