University of Nebraska Medical Center Clinical Laboratory Science Program Nebraska Methodist Hospital Medical Technology Program CLS 431 - Clinical Laboratory Management II Materials Management Note: The majority of the information in this unit was obtained from the text Medical Laboratory Management and Supervision, by Lionel A. Varnadoe. (see references) According to Varnadoe, material management is the systematic process of overseeing and controlling the acquisition and utilization of supplies to ensure both availability and cost effectiveness. This function consists of the purchasing or requisitioning of supplies and the oversight of products after they arrive (166). Varnadoe also mentions that supplies are the second largest expense incurred by the laboratory, overshadowed only by labor costs. Supply expense is a very broad category and covers most of the material purchased by the laboratory, including reagents, pipettes, chemicals, phlebotomy supplies, and even office products (166). Varnadoe (166) states that the goals of material management must include steps to guarantee that: Supplies arrive in a timely manner. Spoilage is reduced to a minimum. Back orders and delays are avoided. Storage space is used to the best advantage. The most economically advantageous price is obtained. Financial resources are not tied up in inventory. Definition of Supplies & Equipment According to Wallace, the general guidelines used for classifying materials identify supplies as those items that are consumable; whose storage lives are a year or less, and/or costs are less than $500 (price varies with each organization). Equipment and instruments are those items with an extended use-life, no expiration date (storage life), and/or a cost of more than $500 (or whatever price the organization sets) (228). Wallace also states that when selecting equipment and instruments, buy to own is being replaced by a lease to upgrade philosophy. This is due to rapid advancements in technology and computerization of equipment and instruments. Standard instrumentation often becomes obsolete within a year. In addition, rapid changes come from the transition of research as analyte studies and methodology-analyte studies become clinically significant (229). CLS 431 Clinical Laboratory Management II Financial Resources Management Page 1
Supply Ordering Process When ordering supplies, there are various documents that may be used to expedite and simplify the record-keeping process. The mechanics of purchasing primarily involve two tools: the requisition (example on page 6) and the purchase order (example on page 7). The requisition is used to request the purchase of a product and is completed by the requesting department and sent to the purchasing department. In the purchasing department, the purchase order is prepared after review of the budget and, if necessary, consultation with the vendor. A purchase order (P.O.) is a document authorizing the purchase of a product or services from an outside vendor. The purchase order authorizes payment from the institution (e.g., the lab) to the vendor for delivery of the product (Hudson, 143). The vendor then ships the item requested and bills the institution. According to Varnadoe, products that have a predictable usage level or short shelf lives are frequently ordered in advance via standing orders. Under this procedure, a purchase order is issued to the vendor with instructions to ship a specific amount of product according to an established schedule. Examples of products that are frequently ordered in this manner include blood bank reagent cells and the Q.C. material used in chemistry (168). Varnadoe explains that standing orders offer benefits to both the laboratory and the supplier. The laboratory is assured of the timely delivery of needed items; the lab may also be able to take advantage of bulk prices or discounts offered by the vendors. Suppliers have a commitment from the institution to buy their products; this enables them to plan their production and inventory levels on a more predictable schedule (168). Inventory Management Varnadoe states that inventory management is a continual process of checking stock levels, rotating stock to ensure freshness, ordering supplies in sufficient quantities to meet current needs, and minimizing the cost of carrying inventory (i.e., having too much of the organization s money tied up in items sitting on the shelf waiting for use). According to Varnadoe, there are three methods that can be used to track inventory levels: perpetual, periodic, and random systems (169). Perpetual systems keep account of the inventory each time a product is used. Therefore, when any item is taken off the shelf, the person removing the product adjusts the inventory checklist. When it is time to reorder, the checklist is submitted to purchasing without any need for further checks (theoretically). Periodic systems are more common at the bench or department level. With this system, inventory levels are checked according to an established timetable (e.g., once a week), and then appropriate supplies are ordered. Random checks are used to document the value of supplies at a specific time. This verification process is useful in confirming the accuracy of perpetual systems, which can become distorted if not meticulously maintained. CLS 431 Clinical Laboratory Management II Financial Resources Management Page 2
Varnadoe discusses two techniques for determining how and when to replenish stock; minimummaximum and just-in-time replenishment strategies (169). The minimum-maximum technique establishes a set point (minimum) at which inventory is to be recorded and a reorder to (maximum) level to be maintained. Varnadoe illustrates this technique with a blood bank example: the minimum stocking level for blood bank saline may be fixed at 5 cases and the maximum stocking level at 10. When inventory is taken and 7 cases are found on the shelf, an order for 3 units would be placed to bring the count to the maximum point (169). The just-in-time ordering technique is a commitment by the supplier to guarantee delivery of an item at the exact moment of need. This limits the financial costs associated with stocking and storing inventory items. An example of this technique is the standing-order system used in the lab for obtaining short-dated items such as reagent cells or test kits. Financial Control of Inventory According to Varnadoe, there are several techniques and formulas for managing inventory, and monitoring and controlling supply expenses (170). This next section focuses on some of these formulas: 1. The economic ordering quantity (EOQ) is a formula used to determine the quantity of supplies to order at one time. 2. The economic ordering point (EOP), also referred to as the reorder point (ROP), is the point at which inventory should be ordered. 3. The optimal reorder time (ROT) is the best time to place an order to take advantage of EOQ and EOP. In order to determine the EOQ, EOP, and ROT, managers must understand certain underlying concepts relating to inventory. The following concepts are defined by Varnadoe (170). Annual usage: Determining the level of inventory needed is based on the workload of the laboratory. Historical ordering data based on actual purchases and usage, as well as, predictions of future volume influence the anticipated level of supplies that must be ordered. Average daily usage: This information can be obtained by dividing the amount of supplies ordered in a year by 365 days. Cost of ordering: The cost of running a centralized purchasing department is directly tied to the number of purchase orders placed and the associated work involved with keeping track of invoices as products are shipped and received. This figure is obtained by dividing the expenses of the purchasing section by the number of purchase orders issued. CLS 431 Clinical Laboratory Management II Financial Resources Management Page 3
Annual holding cost: This concept involves decisions based on bulk orders, space utilization, and whether it is better to have the product on hand or in the supplier s warehouse. When the vendor is holding the stock, the institution s money is available for other purposes. Also called cost of carrying inventory, its value is determined by considering the interest lost by not having the money in the bank. Annual holding costs should also account for the expense of maintaining a stockroom for storing material not needed immediately. Cost per unit: This is a straightforward calculation once the decision has been made as to the best price available. Factors such as quantity discounts and container size (i.e., box, or case) affect this decision. Dividing the purchase price by the container size provides this value. Lead time: This is the amount of lead time, or advance notice, needed between placing an order and its arrival. It influences the minimum inventory that must be kept in stock, as well as the quantity that needs to be requested. Using the above definitions and concepts, the following formulas are derived for EOQ, EOP, and ROT: EOQ = 2 (annual usage cost of ordering) annual holding cost per unit EOP = annual usage lead time in days 365 days or EOP = (average daily usage lead time) + safety level ROT = EOQ 365 days annual usage CLS 431 Clinical Laboratory Management II Financial Resources Management Page 4
Example of Inventory Management Methods (Varnadoe, p.170) Using the following figures we can calculate the EOQ, EOP, and ROT: Annual usage = 11,000 20/pk blood agar plates Cost of ordering = $25 per order Annual holding costs = $2.50 per yr. Lead time = 7 days EOQ = 2 (11,000 packs $25/order) = 550,000 $2.50 holding/yr. $2.50 220,000 = 469 packs/order EOP = 11,000 packs 7 days = 211 packs 365 days ROT = 469 packs/order 365 days = 15.5 days/order 11,000 packs Thus, for maximum financial benefit and storage space utilization, order 469 packs of plates each time the inventory drops to 211 (about every 16 days). However, there may be a need to make some small modification once this information is available. These modifications may be based on such factors as weekly ordering system and bulk sizes. However, keep in mind that the farther the ordering system strays from standards, the fewer the economic benefits (Varnadoe, 170). References: Hudson J. (2004). Principles of Clinical Laboratory Management. Upper Saddle River, NJ: Pearson Prentice Hall. pp. 143-145. Varnadoe LA. (1996). Material management. In Varnadoe, LA (Ed.) Medical Laboratory Management and Supervision. Philadelphia, PA: F.A. Davis Co. pp. 165-171. Wallace MA, Klosinski DD. (1998). Clinical Laboratory Science: Education & Management. Philadelphia, PA: W.B. Saunders Co. CLS 431 Clinical Laboratory Management II Financial Resources Management Page 5
Requisition No. 0001 Anywhere Healthcare Systems Purchase Requisition (Not to be used as a purchase order) To be filled out by department Department Clinical Laboratory Date 3/28/XX Deliver to Clinical Laboratory / 200 Bldg. Room Name and Address of Vendor(s) suggested (if any): 1. Medical Products, Inc. 2. 1256 Street Des Moines, IA 51530 Quantity Unit Description Unit Price Total Price 8 237117 Mononucleosis Test Kit $15.09 $120.75 5 143321 Microscope Slides, Frosted $55.44 $277.20 Total $397.95 Requested by: Signature Date Department Director approval: Signature Date Administration approval: Signature Date To be filled in by purchaser Purchase Order No. Date Ordered Order to of (representative) (company) Quoted by to (vendor representative) (hospital representative) Expected Delivery Date Freight to be paid by vendor Not to exceed Comments: CLS 431 Clinical Laboratory Management II Financial Resources Management Page 6
Anywhere Healthcare Systems Purchase Order Purchase Order: 7000 Department: Clinical Laboratory Date: 3/20/XX Vendor: 00012345 Medical Products, Inc. 1256 Street Des Moines, IA 51530 Please ship the following items noting the terms, prices and conditions given below: Payment terms: 30 days Freight terms: FOB: Destination Ship by: Trucking Company Department ID: Clinical Lab Requisition ID: 0101 Requestor: Clinical Lab Buyer: Anywhere Healthcare Systems Item # Quantity Unit Description Unit Price Total Price 1. 8 237117 Mononucleosis Test Kit $15.09 $120.75 2. 5 143321 Microscope Slides, Frosted $55.44 $277.20 Total PO Amount $397.95 Bill to: Anywhere Healthcare Systems Ship to: Anywhere Healthcare Systems Financial Services Receiving Department 2456 A Street 6542 B Street Omaha, NE 68165 Omaha, NE 68156 CLS 431 Clinical Laboratory Management II Financial Resources Management Page 7