How To Master Inventory Management Of DME
Case Example: How To Implement EOQC Suppose a large tertiary podiatry clinic performs a good deal of surgery and uses 10,000 self-absorbing bone fixation pins every year. Historically, it is known that the cost per pin is $200, and the annual inventory carrying cost per pin is $10. According to the above formula, the EOQC is 632, as follows: 2 (10,000)($200)/$10 = $400,000 Square root of $400,000 = 632 In other words, there are 16 orders per year (10,000/632 EOQC). The time between each order is 3.3 weeks (52 weeks/16 orders). Therefore, the vital economic questions of when and how much DME to order have been answered. Prior to final implementation, one must run the EOQC numbers using samples that are representative of the office’s DME inventory base. This will help determine the overall short-term and long-term effects the calculation will have on office warehouse space, cash flows and business operations. Keep in mind that dramatic increases in inventory levels may not be immediately feasible. If this is the case, you may temporarily adjust the formula until you can make arrangements to handle the additional storage requirements and compensate for the effects on office cash flow. If the projection shows a decreasing inventory level and increasing order frequency, you may need to evaluate staffing, equipment and process changes to handle the increased activity. Finally, one should evaluate the values for order costs and carrying costs at least once per year, taking into account any changes in interest rates, storage costs and operational costs. What About Potential Drawbacks? EOQC may be a useful technique if there is an opportunity to change the current DME ordering policy of a medical practice or if the current policy is inadequate. Though it may appear that this equation would solidify purchase quantity, there are still other factors to consider. For example, a medical practice still needs to review the likelihood of a stock shortage, the length-of-time DME is kept on hand, quantity discounts that vendors may offer and product volume within the practice. Moreover, practice goals and strategies may sometimes conflict with EOQC methodology. Measuring DME performance solely by inventory turnover is a mistake. Some practices have achieved aggressive goals in increasing inventory turns only to find their bottom line has shrunk due to increased operational costs. While EOQC may not apply to every DME inventory situation, some practices will find it beneficial in at least some aspect of their operations. Whenever there is repetitive purchasing of DME, one should consider the proper use of EOQC. Though EOQC is generally recommended in practices where DME demand is relatively steady, one can apply the EOQC model to items with seasonal demand variability by going to shorter time periods for the EOQC calculation. One can simply divide the year into the increments in which annualized sales are relatively constant (i.e., summer, spring, fall and winter). Then apply the EOQC model separately to each period. During the transition between seasons, DME inventories would either be run down or built up with special seasonal orders. Just ensure that usage and carrying costs are based on the same time period. Final Thoughts EOQC is not a panacea that solves all DME inventory cost problems or easily adds to bottom line profits. There is much to consider before adopting an EOQC policy for all DME across an entire medical business enterprise. However, it is a good SCIM tool to consider when determining the best ordering policy to use for a DME intensive medical organization. Dr. Marcinko is a healthcare economist, certified financial planner and certified medical planner. He is also the Academic Provost for www.MedicalBusinessAdvisors.com, an online resource center providing financial education to physician clients and support for their business consultants. Dr. Marcinko can be reached at (770) 448-0769 (phone), (775) 361-8831 (fax) or e-mail at firstname.lastname@example.org. Editor’s Note: Dr. Marcinko previously wrote “Seven Reasons To Appraise Your Practice” (see page 24, August issue) and “Key Strategies For Protecting A/R Accounts” (see page 76, May issue).