'Just in time' means more dimes in your pocket

January 1, 2006

Every practice is struggling to increase reimbursement and decrease overhead costs. You don't need an MBA to figure out that these two approaches are the easiest methods of increasing your net income.

Every practice is struggling to increase reimbursement and decrease overhead costs. You don't need an MBA to figure out that these two approaches are the easiest methods of increasing your net income.

One important method for managing overhead is with a "just in time" (JIT) approach to controlling inventory. Chris Gonzalez, MD, assistant professor of urology at the Feinberg School of Medicine at Northwestern University, Chicago, has successfully implemented a JIT philosophy that can be easily accomplished in any practice, regardless of size, location, or even practice structure. After reading this article, you will understand the JIT approach to inventory management and the steps needed to use this approach to significantly reduce your overhead expenses.

JIT philosophy is an attempt to accurately match demand with supply, according to Dr. Gonzalez. If done correctly, supplies can be ordered "just in time" for use, thus limiting the associated expenses of overstocked inventory that nearly every practice, including my own, experiences.

JIT has been a mainstay of many large businesses and corporations. For example, Dell Computer doesn't order parts from its vendors until they receive orders for its computers. In a similar fashion, Wal-Mart doesn't warehouse huge inventories unless there is a demand from its stores. When a product is sold, an inventory request goes out to vendors to replace the product, a system that avoids stockpiling huge inventories and reducing profits.

JIT philosophy was first popularized by the Japanese after World War II and has been an effective method of minimizing costs tied up in unused and wasted inventories. Dr. Gonzalez has successfully used the JIT principle to limit overhead expenses in an academic practice consisting of 11 urologists at Northwestern.

How did he do it? First, he arranged to return all excess and unused supplies from the office inventory stockroom for credit. Then he announced to the vendors that all standing deliveries were to be terminated. The practice then selected a single vendor for all office supplies, which was asked to promise delivery of all orders within 48 hours of placing the order.

The department's main supply room was ordered to only contain supplies that were needed for the next 4 weeks, and the exam rooms were stocked with appropriate supplies that were to last 1 week. A supply manager was appointed from the existing staff, thus incurring no added expense, and the manager was authorized to record all inventories that were used and all that were ordered to replace the used stocks of drugs, catheters, and supplies.

Impressive results

The practice realized an immediate savings of $10,000 created by returning unused or overstocked supplies, according to Dr. Gonzalez. Over a 12-month period, the practice was able to reduce overhead costs from $87,000 to $175,000.

JIT has been described in various forms previously in both hospital and office settings, but there are pitfalls to avoid. This can be a very effective method if used with discretion. Beware of a tendency to make inventory too lean, which can lead to "stock outs" where supplies are depleted. This can obviously be a very big problem in the health care setting, and "safety" inventory needs to be built into the determined usage levels to avoid this problem.

Dr. Gonzalez also suggests that you determine demand accurately with average usage levels for each supply component, centralize inventory physically and electronically, work with a limited number of supply distributors for on-time delivery at regularly scheduled intervals, and constantly scrutinize the process to catch fluctuation in demand.