As the Northwest’s premier network for pediatric health care, Seattle Children’s Hospital handles nearly 300,000 inpatient and outpatient clinical visits each year across dozens of subspecialties in four states. It’s an intense volume for the 250-bed flagship hospital, presenting Charles Hodge, vice president and chief procurement officer, with numerous opportunities to create efficiencies, lower costs, and improve the quality of patient care.
One important step for Hodge and his team: revamping distribution of the hospital’s supplies, equipment, and clinical materials. Their experiences with a high-speed, “just-in-time” inventory process--including a first-year savings of $2.5 million--holds numerous lessons for other healthcare providers.
The Opportunity
Like many other facilities, Seattle Children’s Hospital was experiencing shortages and surpluses that were driving up inventory costs and impacting the clinical process. No one would notice a pending shortage of, say, tongue depressors until the last one was gone. Scarcity would prompt a rush order for too many units, sometimes from off-contract sources. Clinicians would perceive a need to tuck away additional amounts “just in case.”
Over time, such inventory inconsistency resulted in excess, and often obsolete, supplies being stored throughout the facility. “We ended up with no standardization or control and a lot of unnecessary costs,” says Hodge.
A Conceptually Simple Solution
For Seattle Children’s Hospital, the solution to these supply chain challenges—and significant cost savings—came with little cash outlay or significant commitment of labor resources.
The hospital adopted kanban, an inventory-control methodology developed by Toyota in the mid-20th century and successfully used throughout the manufacturing industry for decades. The basic premise of kanban is creation of visual cues to signal delivery of a given item and need for more.
First, Hodge and the hospital’s procurement team reviewed extensive historical data to uncover average consumption and usage patterns for thousands of different supplies. These usage patterns helped the team determine optimal quantities to make accessible to clinicians.
With these targets in mind, the hospital partnered with its key distributors to deploy a two-bin kanban system for a vast majority of its supplies. As an example of how the system works, the supply area for a department or floor would have two bins for a particular supply, such as syringes. The first bin holds a day’s supply. When that bin is empty, clinicians can access the second bin immediately. Before that second bin is used up, the first bin has been restocked and replaced in the supply area. There’s never an outage and never an oversupply.
Staff dedicated to monitoring inventory circulate through the hospital every five to six hours to retrieve empty bins and bring them to a “demand-flow staging area.” They scan the bin’s bar-code, which initiates a replenishment order with the appropriate distributor. The new supply arrives from the distributor within a few hours and then the workers take the full bins back to their locations throughout the hospital – and retrieve the next wave of empty bins as well.
“We don’t want to be in the inventory management business,” Hodge says. “There are far better uses for our capital. We do keep an inventory of disaster-recovery supplies on hand. But other than that, we’re strictly a just-in-time enterprise.”
The total direct cost for the system -- racks, bins, scanners, and software-- was less than $200,000 and required six people approximately 18 months to implement.
“Conceptually, it’s a very simple system,” says Hodge, “and that makes it very easy for our clinical teams to believe and support. We’ve taken them completely out of the reordering cycle. They never need to manage inventory and they never have to ‘hide’ their own personal stash of supplies for lack of confidence in the system. We believe this alone has saved more than 23,000 hours of clinician time per year.”
First-Year Results
The results from the system’s rollout have been nothing less than impressive. Today, 99.6 percent of all inventory bins are replenished within just 12 hours. “We’ve cut our returns by 80 percent as well,” Hodge notes, “so we’ve been able to cut the wasted expenses from restocking fees and off-contract purchases.”
One important key to the system’s success: data visibility. The hospital’s system features an on-screen dashboard that shows Hodge an array of metrics, such as how fast the bins are being emptied and refilled. “We can see the inventory velocity,” he says. “So if something is turning over quickly, we can adjust the size of the bin and increase our order quantities and maybe achieve a better price. Conversely, if a bin is turning slowly, we might want to reduce our order quantity so that we don’t have as much money tied up in stagnant inventory.”
Collectively, in the first year of the new distribution system, Seattle Children’s Hospital has already reduced the costs of its medical supplies by 5 percent and achieved an ROI of $2.5 million. “For a health system of our size, this is a tremendous --and fast--return,” Hodge says. “We haven’t even completed our rollout yet, so we’re very optimistic about our ability to increase that number in the coming year.”