The magic cube of field inventory management

The Magic Cube of Field Inventory Management

ARVATO OFFERS OPTIMAL INVENTORY MANAGEMENT IN THE MARKET 

Arvato makes use of a tool to support medical technology manufacturers in analyzing what optimal field inventory management could look like for their companies. The Magic Cube of Field Inventory Management facilitates the basic process.

Medical device manufacturers increasingly face the challenge of managing their products at the point of care. Their customers, the hospitals, need products to be delivered quickly to the ward and also require constant availability of medical technology without a high level of financial investment. For manufacturers, this involves write-offs due to expired products, additional inventory costs and over-burdening of sales departments with secondary activities, all in an increasingly competitive field.

Managed consignment stocks as an optimal complement to central warehousing

Many notable medical technology manufacturers rely on European central warehouses within logistics structures that are organized globally. Due to the relatively long delivery times to the point of care, “out of stock” situations can occur and lead to rush and emergency deliveries, which can often be very costly, or even to a loss of sales for the medical technology manufacturer. Professional inventory management models are the solution here. Intelligent field inventory management solutions in particular create a bridge between central warehouses and local availability of inventory.

Optimized inventory management as a challenge for manufacturers

“Manufacturers of medical devices try to differentiate themselves from competitors within the market by offering a higher level of service, such as bundling of modular service packages that go above and beyond just delivery to the hospital’s receiving department or direct sales, or by offering advantageous billing plans. The goal here is to set the hospital’s payment date as close as possible to the surgery date and at the same time guarantee the highest possible level of product availability,” explains Dr. Sebastian Verhoeven, Vice President of STOK Europe. Ways to approach this include setting up long-term consignment warehouses or using implant or loaner kits for short-term consignment such that individual components are assembled for particular operations and delivered to hospitals as needed for a surgical procedure.

A clear weak spot in the use of these inventory management concepts is the great burden on the manufacturer’s sales representatives, who have to monitor inventory on site or often have to handle returns of kits and short-dated items themselves. Additional difficulties also arise. One of these challenges involves optimal inventory management. Manufacturers often do not have full insight into product usage and thus don’t have complete knowledge about actual inventory and demand in the hospital. This uncertainty can quickly lead to excessive or incorrect inventory. This brings with it a risk of write-offs due to loss or expiration, sales losses or incommensurate capital commitment in consignment warehouses. In the worst-case scenario, there is a risk of expired products being implanted.

Another challenge for manufacturers is selecting the right combination of long-term and short-term consignment models and thus finding a customized solution for every product and every customer. Often, one plan is simply used for all product and customer groups. This reduces complexity, but it also misses out on potential cost savings. “STOK, with its specially developed calculation tool, offers a possible solution for combining different approaches yet not getting overwhelmed by complexity. STOK prepares a customized, cost-efficient plan using current manufacturer inventory data. We ensure a high level of service in combination with a low management burden for all customers,” explains Matthias Klütt, Country Manager of STOK DACH & Benelux.

What concepts are on the market already?                                                                                                                                    Long term consignment – cycle counting, inventory management, etc.

Generally, long-term consignment (LTC) refers to manufacturers setting up warehouses at the point of care in which products are stored continuously until they are used. Hospitals sign out used items, triggering billing as well as replenishment. Failure to do so results in a lack of transparency and thus discrepancies between physical and systemic inventories, which can lead to out-of-stock situations. In order to avoid this, manufacturers often build up excessively high inventory levels and thereby increase the amount of capital committed in the market as well as the expiration risk for unneeded products.

Regular cycle counts increase transparency with respect to consignment warehouses and minimize the aforementioned discrepancies. For these counts, the manufacturer’s distribution employees or specialized STOK employees go to the hospitals to take inventory and clear up discrepancies on-site or after the fact. The manufacturer receives detailed analyses of use and recommendations for optimizing inventory management. Outsourcing to service providers reduces sales representatives’ workloads, leaving them with more time for their primary tasks, like distribution and customer care. Service providers also benefit from scaling effects, as they work simultaneously for multiple manufacturers.

Inventory or use-before-date management supplements cycle counting by identifying and selectively collecting products that are close to their expiration dates. The objective is to make appropriate use of these products within the given time and thereby prevent write-offs. In addition, short-dated products are marked so they can be used before they expire. Sterilized items with a remaining shelf life that is too short are proactively collected prior to the expiration date and replaced if needed.

Vendor-managed inventory (VMI) is the full-service package within long-term consignment, including inventory checks, the refilling of products to the defined target inventory level and billing services. “Manufacturers that use the STOK VMI service increase their revenue, because the nursing staff just needs to retrieve the required product from the shelf; everything else is handled by STOK. That, of course, is very popular,” says the STOK DACH & Benelux Country Manager.

Short-term consignment

In contrast to the LTC model, short-term consignment (STC) does not involve fixed locations in hospitals. Instead, hospitals receive the products in the form of kits, each of which is made available in different configurations for an operation. The kit, including unused material, is then picked up and an invoice is generated on the basis of the items that have been removed. Here, there is no risk of excessive inventory or expiration. However, use and transport of these kits often takes a few weeks, which delays billing and increases the risk of damage or loss.

Unnecessarily long circulation times also delay payment by the hospital and damaged or lost products have to be written off. If the manufacturer itself handles the return, there is often a conflict between the employee’s actual core activities and the need to pick up a kit at short notice. Aspects related to costs and feasibility must also be taken into account; sales representatives are often over-qualified and too expensive for tasks such as picking up an implant kit. Many of the kits do not fit into the sales fleet vehicles, often making it necessary to use expensive transporters to deliver the kits to the point of care and then pick them up again.  STOK, on the other hand, has access to this type of logistics resources. Suitable vehicles are used specifically for tasks such as picking up implant kits. This often can reduce the time in circulation to a few business days. 

Forward stocking locations

 “A very high percentage of hospital inventory today consists of safety stock. If we bundle it at a centrally located forward stocking location (FSL), the level of safety stock can be significantly reduced, which decreases the amount of capital committed,” explains Matthias Klütt. Emergency shipments in particular, as well as delivery of implant kits, can be made to hospital wards from FSLs within a few hours. Both LTC and STC models, in conjunction with FSLs, involve intensive management by the manufacturer; this work, however, is not part of the manufacturer’s core area of expertise.

The customized STOK solution – a combination of different services

For medical device manufacturers, there are numerous drivers determining which consignment model is best suited for particular needs. Three main drivers play a special role; the product value of the individual items, the frequency of use and turnover with the hospital. However, the population density of a region and the size of clinics should also be taken into account. To prepare an individualized, modular field inventory concept within the framework of the solutions described above, manufacturers should rely on a combination of complementary services. A portfolio made available by STOK, the Magic Cube of Field Inventory Management, can be a useful approach for this. 

A few core statements can be used as guidelines for deriving and applying this approach:
  1. The combination of high fluctuations in consumption with low product values as well as low turnover should lead to the use of a direct purchasing model (lowest service level, as the hospital carries out all activities itself). Here, an exception may be made if the customer is seen as strategic and a higher level of service can be transformed into potential for growth.
  2. If, on the other hand, the volume of sales with the hospital is high, a higher service level should also be considered, not just in order to reward the customer for the sales, but also to secure the high share of sales at the institution or to obtain an additional share of the sales.
  3. The higher both product values and fluctuations in consumption are, the more sense it makes to make products available individually. Here, direct delivery from FSLs and implant kits are suitable options.
  4. In a very large number of cases, it is worth offering long-term consignment services with regular cycle counts. This is true in the case of low fluctuations in consumption and relatively high product values as well as with relatively low product values with a relatively high sales volume. It is interesting in this context that more than two-thirds of hospitals surveyed, according to a recently conducted STOK study,* prefer that counts occur at least quarterly!
  5. Sales volume per customer correlates with metropolitan areas. The more hospitals there are in a region, the higher the cost efficiency. This makes it possible to provide a higher level of service, since services like FSLs or VMI can be offered even for smaller institutions or departments with a lower sales volume.

The following figure graphically represent the core statements above and categorizes the particular service level, the inventory-lowering potential and the amount of management work required for the manufacturer.

 

 

A more detailed figure.

Additional benefits through outsourcing of inventory management

The potential bundling effects constitute another important factor, in addition to lowering the amount of management-related work, increasing the level of service and lowering the amount of capital committed. Nearly 80 percent of hospitals surveyed* evaluate the simultaneous performance of inventories for multiple manufacturers as positive or very positive, since this involves significantly less disruption of hospital processes. Moreover, using outsourcing models yields additional synergistic potential for manufacturers, since the STOK employee only has to come one time, check in one time and bring the items into the hospital one time, which has a positive effect on every business case.

Managing inventory efficiently with STOK

“By incorporating STOK services into the manufacturers’ consignment warehouse models, we help our customers save costs and simultaneously distinguish themselves from the competition by increasing the level of service. Administration of consignment warehouses is moved from a central point, the hospital, to a higher level of the supply chain and thereby becomes both more efficient and more transparent. The value of the inventory and thus the committed capital decreases and stock-out situations are simultaneously avoided due to rapid transfer from forward stocking locations onto the market,” explains Dr. Sebastian Verhoeven. A STOK study* also confirms that 98 percent of those surveyed are satisfied with STOK’s current on-site analyses of discrepancies.

Arvato’s own forward stocking locations can be seamlessly integrated into any consignment solution. The FSLs are, of course, integrated into Arvato’s European warehouse management and quality management systems. This means that clients have a comprehensive overview with full control of their inventories and products beyond the central warehouse. At the same time, they benefit from the just-in-time distribution of urgent deliveries.

Trained drivers use STOK’s own vehicles to make these urgent deliveries, so there is no need to pay high prices for express delivery services from central warehouses. “The sales rep only needs to convey the information about when certain products are needed, for example, for an operation in the hospital. STOK takes care of the rest,” says Verhoeven. Another result of the study* shows that for three-quarters of the hospitals surveyed, the inventories that are performed make the daily workload easier.

The sales rep only needs to convey the information about when certain products are needed for an operation in the hospital. STOK takes care of the rest.

Dr.-Ing. Sebastian Verhoeven
Vice President STOK Europe

Analysis tool as a basis for an individualized solution model

STOK’s complexity-mastering, high-quality portfolio of services benefits both manufacturers and hospitals. It is possible to calculate which type of inventory management and which services will bring the greatest benefit for each manufacturer – first using the Magic Cube’s core statements and then using a calculation tool developed by STOK and the University of Duisburg’s professorship for transport systems and logistics. To do this, data from the manufacturer’s supply chain, such as the locations of the actual stock in the field or information about write-offs, can be stored using a template. Using this data, STOK then prepares a customized model that supports the manufacturer in building up an optimized mix of LTC, STC or FSLs.

The Magic Cube is used for orientation purposes. “We adapt these recommendations to the individual customer and work with the manufacturer to find the most suitable service packet and then increase that manufacturer’s sales, reduce inventory discrepancies and lower costs,” notes Klütt. STOK takes care of product management and uses its years of experience to optimize medical technology companies’ inventory in the field.

*All results of the study carried out in collaboration with the University of Paderborn’s professorship for service management can be viewed here: To the results

Do you have any questions? Please get in touch.

Dr.-Ing. Sebastian Verhoeven

Dr.-Ing. Sebastian Verhoeven

Vice President STOK Europe