There are many reasons why hospitals choose to consign the expensive implants and supplies that they use in surgical settings. However, deciding to consign a product without continuously analyzing that decision can be costing your hospital millions of dollars each year. Read on to find out some best practices when it comes to reducing the costs of your consignment inventory.
Why hospitals stock inventory on consignment
No two hospitals have the same consignment strategy, but there are some common themes about why a particular product may be chosen to be stocked on consignment rather than owned. Among those reasons are:
- The need to keep some emergency stock that is seldom used, so the vendor stocks it on their shelves just in case on consignment.
- The hospital wants to minimize its exposure to product expiration, so it allows vendors to manage the inventory on a consignment basis and carry the expiration risk.
- The hospital has a broad policy for certain medical devices that they will stock them on consignment to transfer management responsibility to the vendor.
Why you need to re-visit consignment decisions periodically
Though many hospitals carry a mix of consigned and owned items, most that we have interviewed do not have a specific consignment strategy. Many times consignment decisions are made due to an offer that the hospital couldn’t refuse, or a particular need that occurred at a moment in time, and that decision is never re-visited again. And many times, a new administrator enters an organization and inherits the consignment decisions of the previous administration and doesn’t bother to re-negotiate those contracts. In any case, many hospitals have a “set it and forget it” mentality where they make consignment decisions based on the information available at that time and never re-evaluate those decisions as the data changes.
This mentality is sure to be costing your hospital money every day. Consignment, while it has its benefits, also has costs associated with it. It should not be used as a one-size-fits-all strategy, nor should it be avoided altogether as a way to save money. Instead, usage patterns of both owned and consigned products should be periodically reviewed to see if a shift in strategy is required.
How to decide whether to own or consign an item
As mentioned earlier there is a cost to consigning items instead of owning them. Products that are on consignment have all of the ownership risk transferred to the vendor, so naturally the vendors charge a premium price for assuming this risk. While the actual costs of consignment vary from vendor to vendor and contract to contract, we have heard anecdotally from multiple hospitals that a consigned product typically costs about 15% more to use than an owned item.
Given that significant premium, hospitals must be smart about which supplies they own and which they consign. From a planning perspective, hospitals should own the products that they use most often, as the expiration risk for those items is minimized and the 15% savings per item used will quickly add up. Hospitals should consign items that they almost never use, or that they keep on hand for emergency purposes only. Another option for these items would be to remove them from inventory altogether to free up valuable shelf space within the hospital and when possible use alternative products instead.
The caveat is that these usage trends change over time. Just because an item is used frequently today doesn’t mean that will be the case 12 or 24 months from now (and vice versa). Data must be reviewed periodically to ensure that the consignment decisions you are making today aren’t costing your hospital money in the future.
So, in the end the keys to a consignment strategy are:
1) Defining a strategy (for more guidance download this whitepaper) and sticking to it consistently across product categories; and
2) Analyzing data periodically (for example: quarterly or bi-annually) to determine if usage patterns across individual products have changed and a switch from consignment to ownership or vice versa is warranted.
Having your consignment strategy well-defined and applying it consistently can save your hospital millions of dollars per year that may be unnecessarily paid to vendors for very little benefit in return.
Where to get the data needed for periodic consignment evaluation
Hospitals do a good job of gathering data for specific decision points, like a request for proposal when the initial decision is made regarding a vendor contract. However, using data to evaluate those decisions later tends to be a challenge. In order to get the necessary data for a consignment evaluation, you must be able to access usage data for each of your supplies that you’re currently ordering. Ordering data is not a good alternative to usage data, as it will include data for items that are being over-ordered, or that are being ordered to replace expiring items and not necessarily used, and your annual needs for certain products will be overstated as a result. Without trustworthy usage data, you will not be able to make optimal decisions regarding product consignment.
If getting your hands on high fidelity usage data is currently a challenge, consider a medical supply inventory software system like iRISupply from Mobile Aspects. This hospital inventory management software will arm you with the data you need to make the best consignment decisions possible. iRISupply will not only provide you with the usage data you need, but will take it one step further and provide actionable recommendations about which products should have their current consignment or ownership status re-evaluated based on recent data. Mobile Aspects supply chain experts will also sit down with you quarterly as part of a best-in-class customer success program to discuss strategies to optimize your owned/consigned inventory mix and review the data behind those suggestions.