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

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

PROJECT

Submitted in partial satisfaction of the requirements for the degree of

MASTER OF SCIENCE in ACCOUNTANCY

at CALIFORNIA STATE UNIVERSITY, SACRAMENTO

SUMMER 2010

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

A Project by Yitteck Angel Kua-Walker

Approved by: __________________________________, Committee Chair James Mackey, Ph.D.

____________________________ Date

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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. Associate Dean for Graduate and External Programs College of Business Administration

_____________________ Date

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Abstract of CAN A JUST-IN-TIME INVENTORY SYSTEM HELP REDUCE COSTS AND INCREASE PRODUCTIVITY IN HOSPITALS? 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 Chair James Mackey, Ph.D. _______________________ Date

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 Obamas 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 inventorys 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 JITs 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 hospitals 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 suppliers point of view, the delivery charges embedded in the product price will be lower if the hospital is closer to the suppliers 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 hospitals 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 staffs 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-intime 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), 912. 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 whats 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 childrens hospital saves $2.5 million in first year with streamlined inventory distribution. (April 6, 2010). Retrieved from http://www.hfma.org/HFMAInitiatives/Healthcare-Financial-Pulse/Cost-and-Quality/Seattle-Children %E2%80%99s-Hospital-Saves-$2-5-Million-in-First-Year-with-StreamlinedInventory-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 Management, 21(2), 1-2. 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.

12 Chapter 3 20 ARTICLE SUMMARIES Article 1: North, L. H. (1994). Beyond just-in-time: The UCLA medical center experience. Hospital Material Management Quarterly, 15(3), 36-41. This article describes in detail the UCLA Medical Center's use of a specific justin-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 hospitals 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

14 & Minors 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 winwin situation for both partners because they could eliminate duplication in the supply and distribution chain.

Article 2: Neil, R. (2004, February). The ups and downs of inventory management. Materials Management in Health Care, 13(2), 22-26. 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 hospitals distributor, and which reduces a hospitals 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 mid1990s 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

16 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 departments 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 industrys 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: Barrett, M. (1994). Application of the just-in-time philosophy in health care organizations. Hospital Cost Management and Accounting, 6(4), 1-6. 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 timeincluding 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

18 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 patients stay, which will also improve efficiency. In addition, the JIT concept of adding value should be used to determine which processes are valueadded, 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: Carlson, J. G. (1993). Just-in-time approach to systemwide efficiency and quality borrows from industrial techniques. Strategies for Healthcare Excellence, 6(2), 912.

19 This article discusses the application of a just-in-time (JIT) approach to healthcare 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: 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.

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. Lukes-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. Lukes-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 hospitals supplies are currently managed through a JIT system. In addition, St. Lukes-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 hospitals 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: Whitson, D. (1997). Applying just-in-time systems in health care. IIE Solutions, 29(8), 32-37. Since the government switched from cost-plus reimbursement to flat fees regardless of complications or a providers 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, JITs 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 physicians 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 hospitals 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 Dennision, R., Kathawala, Y., & Elmuti, D. (1993). Just-in-time: Implications for the hospital industry. Journal of Hospital Marketing, 8(1), 131-141. 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: 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. 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: Freudenheim, M. (1991, March 3). Removing the warehouse from cost-conscious hospitals. The New York Times, 5-8. 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 nations 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. Lukes 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 nations 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. Lukes Episcopal Hospital and Hermann Hospital. Baxter can tailor their services to individual hospitals 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. Lukes 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: Seattle childrens hospital saves $2.5 million in first year with streamlined inventory distribution. (April 6, 2010). Retrieved from http://www.hfma.org/HFMAInitiatives/Healthcare-Financial-Pulse/Cost-and-Quality/Seattle-Children %E2%80%99s-Hospital-Saves-$2-5-Million-in-First-Year-with-StreamlinedInventory-Distribution/ This article describes the reasons why Seattle Childrens 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 Childrens 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 Childrens Hospital adopted a JIT distribution system and an inventorycontrol 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: Richardson, J. (1987). Just-in-time inventory: A practical application. Hospital Material Management Quarterly, 9(2), 83-86. This article describes Tampa General Hospital's experience with using a just-intime (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 departments 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 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. 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 industrys 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 flowlike system, JIT needs to be supported by JIT purchasing, total quality control, multipleprocess 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: 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. 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: Chapman, S. (1986). Adapting just-in-time inventory control to the hospital setting. Hospital Materials Management, 11(10), 8-12. 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 nearby 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: Jones, D. (2009, September 10). Hospital CEOs find ways to save. USA Today, 03b. 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 Denvers 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: 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. 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 multilayered 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 hospitals 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. Lukes 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, revenuegenerating 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: Kowalski, J. C. (1986). Just-in-time for hospitals So whats new? Hospital Materials Management, 11(11), 6-9. 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 hospitals 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 oneto-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: Study examines costs of change to JIT or stockless. (1996). Hospital Materials Management, 21(2), 1-2. 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 hospitals 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 States 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: Marino, A. P. (1998). The stockless craze: Is it finally over? Hospital Materials Management, 23(5), 2, 11. 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 distributors warehouse, distributors capabilities for delivery to dock or to point of use, cost per delivery, current inventory levels, and hospital staffs 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: Clinton, M. (1999). Delivering radiology supplies just-in-time. Radiology Management, 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 departments 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 hospitals 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 departments 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 vendors 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 networks 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.

51 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 systems 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

52 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 distributors 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-intime 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 hospitals 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 nonfinancial 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 everdeveloping 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 centers 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 nonemergency 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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63 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 childrens hospital saves $2.5 million in first year with streamlined inventory distribution. (April 6, 2010). Retrieved from http://www.hfma.org/HFMAInitiatives/Healthcare-Financial-Pulse/Cost-and-Quality/Seattle-Children %E2%80%99s-Hospital-Saves-$2-5-Million-in-First-Year-with-StreamlinedInventory-Distribution/ Study examines costs of change to JIT or stockless. (1996). Hospital Materials Management, 21(2), 1-2. Whitson, D. (1997). Applying just-in-time systems in health care. IIE Solutions, 29(8), 32-37.