How To Master Inventory Management Of DME
- Volume 17 - Issue 10 - October 2004
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Supply chain inventory management (SCIM) is essential for doctors who perform a number of similar procedures, those who dispense a fair number of products and surgeons because a medical practice’s profitability will suffer if it has too much or too little inventory of durable medical equipment (DME) on hand. How can a physician determine the proper DME inventory level? One uncommonly used approach is based on the economic order quantity costing (EOQC) method.
EOQC is a century-old accounting formula that determines the point at which the combination of order costs and inventory carrying costs is the least expensive and inventory most profitable. This is the goal of SCIM. There are three key assumptions with the EOQC model: revenues (inventory depletion) are constant, costs per order are stable and just-in-time delivery allows the placement of orders so new orders arrive when inventory approaches zero.
How does the physician determine current inventory costs and proceed to implement a SCIM policy such as EOQC? The approach involves the following steps:
• perform an inventory of all DME in the office, clinic or ASC;
• analyze how much DME inventory is on-hand;
• determine associated inventory and ordering costs; and
• perform an EOQC analysis.
Why are procedurally based practices still not taking advantage of these basic DME inventory processes? Part of the answer is economies of scale as most podiatry practices are still small businesses incapable of large-scale SCIM initiatives. This will change in the near future as the pace of industry mergers, consolidation and acquisitions increases, and multiple offices and clinics form larger enterprise business units that require more DME and improved fiscal control of inventory. Another problem is inaccurate input data. Accurate product costs, activity costs, forecasts, history and lead times are crucial in developing DME inventory models that work.