In a recent white paper entitled, “Know Now: The Need for Improved Inventory Visibility of Medical Devices” we explained the need for change in the healthcare supply chain relating to field inventory. For the past decade medical device manufacturers have seen continued growth of inventory levels to support a growing customer base with current days of inventory on hand averaging 137 days for each company. To ensure product availability, medical device manufacturers have been forced to place inventory in closer proximity to the over 6,000 healthcare provider locations they serve. The growing levels of field inventory has created serious challenges for stakeholders in the supply chain including: product expiry, charge capture, product integrity controls, counterfeiting, ability to comply with government regulations, poor demand forecasting, and last but not least, increased labor costs.
One of the major factors that is creating these challenges is consignment inventory which is a supply chain model where manufacturers place inventory at a hospital and retain ownership of the inventory until it has been consumed by the hospital. Healthcare providers often demand consignment inventory because it frees up working capital and can reduce overall supply expenses. Many medical device products require a variety of sizes and configurations to solve unique patient requirements. This inventory can be slow moving and tie up valuable working capital if a hospital purchases this inventory outright. Medical device companies will most often provide inventory on consignment because it can give them an advantage over their competitors and help drive revenue growth.
Sounds like a real “win – win” proposition, right? The healthcare provider gets free access to copious amounts of inventory, only paying for what they use, and medical device companies get “top shelf” access to product demand from their customers. In the Becker’s Hospital Review article, “When Consignment is a Crutch”, the authors point out the numerous drawbacks and hidden costs of consignment inventory for both healthcare providers and suppliers. The major issues are the lack of management, oversight and control by either party of the consigned inventory, “Since these items are now consigned or 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.” The authors go on to say, “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.”
The lack of inventory control, as noted by the authors, starts with the lack of inventory visibility at the consigned location. Today in most cases the management of consignment inventory is done manually by representatives who aren’t extremely motivated to count products on shelves, conduct expiry audits or negotiate consignment reconciliation settlements. Another major issue is inventory access. Numerous individuals have unfettered access to consigned inventory. Within a hospital, consigned products can be moved from one department to another, making it difficult to track for the medical device company. On the other side, medical device sales and inventory representatives often pull inventory that has been consigned to one hospital and move it to another to meet the needs of an unplanned surgery. Again, the tracking of this inventory movement to ensure the appropriate hospital is billed for the product can be extremely time consuming if it is done at all.
The pressure on both healthcare providers and suppliers to be more cost effective, efficient and resilient is now more than ever an imperative. Future consignment inventory programs need automation, control and transparency. This starts with improved inventory visibility throughout the supply chain but most importantly at the consignment location.
At Terso we are seeing strong interest in the healthcare community to deploy automation technologies, like RFID and inventory management software platforms to create value-based consignment inventory solutions. These systems enable medical device manufactures to know exactly what inventory is available at each consignment site and receive product consumption events automatically in real-time. Inventory can be quickly replenished, order-to-cash timelines are shortened, write-offs for expired products are lower and the amount of inventory at each consignment location goes down. Hospitals can be assured of product availability from their suppliers, providing a pathway to enhanced surgery scheduling, staff and facility demand planning, and patient safety.
Technology is playing an important role in a new, value-based approach to consignment inventory. In the future, consignment inventory will neither be a blessing or a curse, but an efficient necessity.