Taking aim at inventory

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Tuesday, September 30, 2003

The thought of another seven years under a Medicare consumer price index (CPI) freeze has HME providers introspectively probing their businesses for overlooked cash reserves. Clues may lie in the dust – specifically, what’s under those undisturbed particle blankets on the warehouse shelves. In fact, a thorough back room cleaning could be exactly what providers need to handle the CPI freeze and other financial challenges coming down the pike.

During the past five years or so under a CPI freeze, the industry has seemingly stretched its dollars to the breaking point. Whatever elasticity is left resides in the HME warehouse, said Tom Tucker, vice president of sales for DME and respiratory for Mundelein, Ill.-based Medline Industries.

“When products sit on the shelf, cash is in the wrong place,” he said. “Slow sellers are what hurt providers the most.”

But by taking advantage of programs such as just-in-time/stockless delivery, drop shipping and consignment selling, can providers jettison all inventory from the premises?

Not entirely, but providers should take advantage of every possible opportunity to reduce inventory, said inventory specialist Jack Evans.

“It costs a lot to bring products in-house,” he said. “Therefore it makes sense to use the manufacturer’s or distributor’s warehouse as your own.”

A common mistake providers make with regard to inventory is that they fixate on the acquisition price without thinking about ancillary costs, Evans said.

“Whenever I recommend distribution, someone always raises the question about paying an additional charge,” he said. “What providers don’t realize is that buying on volume is costing them extra money because of the carrying costs involved.”

Although getting vendors to shoulder the inventory load is a smart strategy, Evans also recommends that providers keep a marginal supply of product on hand.

“Providers need to keep some inventory available to keep a regular customer traffic flow,” he said. “Otherwise it could mean losing monthly add-on sales.”

Weighing inventory options

HME vendors offer ways for providers to streamline their inventories and all present compelling reasons for adopting them. When considering whether or not to commit to any of these programs, providers must first discern how well each one fits their product mix, market focus and operational structure.

Indeed, putting inventory management in the vendor’s hands requires a close, trust-based relationship. Optimizing product turns means looking at the supply channel for each market segment and determining the best way to purchase, store and deliver to the end-user, sources say.

For instance, which products can be drop-shipped from the manufacturer straight to the patient’s home? Look at supplies, answers Lou Slangen, director of sales and marketing for Elyria, Ohio-based Invacare.

“My estimate is half of the supply business goes directly to the clients,” he said. “It’s totally transparent to providers. The order goes into the Invacare Supply Group and is drop shipped to the patient without the provider touching it.”

Still, Slangen conceded drop shipping “is not one-size-fits-all” and that “you wouldn’t do this with certain products, like a highly configured wheelchair.”

Products best suited for drop shipping include incontinence, ostomy, wound care, diabetes and disposables, vendors say.

Just-in-time and bulk shipments also have their limitations. Before committing to a JIT or factory-direct container, Medline’s Tucker recommends that providers analyze which products represent their top 20% of sales.

“It’s designed for products the provider knows will sell quickly,” Tucker said of Medline’s container program. “The savings – between 10% and 20% – are from the manufacturer not storing it.”

JIT for HME

In touting the value of just-in-time distributor services, Mark Goldberg points out another way preoccupation with inventory is costing providers money.

“The amount of attention spent on handling supplies takes away from the core of their business, which is providing services to patients,” said Goldberg, marketing manager for McKesson Medical-Surgical, a subsidiary of San Francisco-based McKesson. “We believe they need to segment their business more distinctly and look at where their bread is buttered.”

Similar to the stockless inventory system initiated for hospitals in the early 1990s, McKes-son’s HME single-sourcing format ships product to the provider only when the patient needs it. Years of operating as a med/surg distributor prepared McKes-son for the intricacies of the home care market because “the margins are so slim you have to be efficient,” Goldberg said.

Steve Cole, president of Kansas City-based Dedicated Distribution insisted outsourcing inventory to his company doesn’t cost the provider anything extra.

“Our product line costs as much or less than buying direct,” he said. “What’s more, the provider gets to consolidate everything onto one purchase order which saves a tremendous amount of time.”

Those offering JIT programs said they can have an order to the provider in 48 hours at the latest. They usually pick up the freight costs as well.

Exeter, Pa.-based Pride Mobility doesn’t call its distribution program JIT, but the objective is to ship products to the provider on demand. There’s no magic to the method, said President Dan Meuser; it’s just a matter of having enough product available.

“We keep high levels of inventory,” he said. “We feel it’s worth it because it’s important to our provider base.”

Pride’s distribution centers are geographically located to serve 85% of the country within one day, Meuser said.

“When a customer walks in the provider’s door and orders a particular product, we want the provider to say ‘We have it in our warehouse,’” he said. “Because it is their warehouse.”

The upshot is…

Ultimately, it is up to the provider to determine whether any or all of the inventory management options can help them reduce costs and make them more efficient in the process. From the vendor’s point of view, each case is unique, contends Carey Winkel, senior vice president of planning and communication for Longmont, Colo.-based Sunrise Medical.

“It’s a concept of holistically understanding your customer,” she said. “Every product is unique and each provider has a model that makes them successful. Our job as a manufacturer is to understand them and bring them solutions that are multifaceted to help them meet their objectives.”

To Evans, the ideal situation for providers is to utilize as many programs as possible. “Look at all of them,” he said. “Buy products from distributors, get products on consignment where possible, maintain a warehouse of no more than 500 square feet, drop ship some categories and get containers from Asia. It’s not a question of doing one, but doing all of them smartly.”

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