The Essence Of Inventory Management In Healthcare

Published Date: 02 Nov 2017

Inventory management encompasses all the activities that ensure that appropriate levels of inventory are held by an organisation at any point in time to satisfy specific customer demands. Rishi Gokarn (2010) posited that the management of inventory and how it can provide insight into firm performance is a topic of interest to shareholders, investors, business owners, and the general public. Firm profits can sometimes be deceptive and costs can be hidden in inventories. Rick Lavely (1998) further stressed that inventory means "Piles of Money" on the shelf and profit for the company. It should therefore become easier to judge the stability of a firm and the likelihood that it will perform well in future periods, through examination of inventory practices and how they differ over time.

As in any industrial process, inventory management in hospitals as a component of logistics is recognised as a critical factor for competitive advantage (Bowersox and Closs, 1996; Bowersox and Daughherty, 1995; Christopher, 1993). It is also admitted that bad inventory decisions can kill a firm’s profitability, drastically reduce its market share and generally inflict havoc on the effective supply of its products or services. Efficient inventory management is therefore a strategic weapon for enhancing profitability, giving firms a competitive advantage and serving as an important enabler of corporate success (Simchi-Levi et al., 2003).

Inventories in industry represent the stocks of raw materials, work-in-process items and finished goods that are kept to meet customer orders. Higher demand uncertainty, product variety, and customer service levels put increased pressure on managers to increase the inventory they hold. On the other hand, since the 1980s, many up and coming changes in industry such as improvements in information technology, adoption of just-in-time, outsourcing, etc. tend to reduce inventories. Keeping right levels of inventory is thus crucial in order to meet customer commitments while minimizing cost (Hançerlioğulları, 2010).

Customer satisfaction on the other hand can be measured according to the performance of processes to handle the needs of both the internal and external customer, (Swinehart and Smith, 2005). Aptel and Pourjalali (2001) therefore asserted that although procurement and inventory management are non-value adding activities in hospitals, they agreed with Jarrett (1998) that such activities are required since the nature and volume of items needed on a daily basis are difficult to predict. Service effectiveness can thus be enhanced by understanding good inventory practices and managing logistics if necessary.

Healthcare providers believe that unlike managers in manufacturing industry, they are unable to predict patient mix and the specific demands for particular items; hence they are unable to control or predict their schedules (Jarett, 1998). Fluctuations in the patient mix and the average length of stay in hospitals is also mentioned by Van Merode et al (2004) as one of the problems in scheduling of resources. Poulin (2003) indicated that more than 30% of hospital expenses are invested in logistics activities and half of this cost could be eliminated through logistics management, an integral part of which is inventory management. Improvements in the supply chain in hospitals could thus be expected to lead to excellent operating room and pharmaceutical management, better inventory management, enhanced vendor relationships, more satisfied patients and more effective workflow for hospital employees (Burt, 2006).

Aptel and Pourjalali (2001) identified inventory management as one of the important logistics activities in hospitals in addition to purchasing, receiving, management information systems, transportation, food services and home care services. The authors’ comparison of logistics parameters in hospitals in France and the USA revealed the differences in inventory management and alliances between the hospital and hospital as well as the hospital and vendors. They observed that, although hospitals provide critical services and require unexpected levels of inventory, just-in-time (JIT) deliveries could also be used to minimize the cost of inventory in hospitals.

It is notable that JIT, a philosophy which takes its roots from the Japanese Toyota Production systems (TPS) assumed popularity in the early 1980s and aimed at reducing inventory levels to the barest minimum (zero inventory) such that inputs are supplied or produced just in time to be used at each stage of the production/service delivery process. This inventory management approach results in considerable cost savings (Chen et al., 2005), although evidence of improved financial performance is mixed, particularly in hospitals (Fullerton et al., 2003; Cannon, 2008; Kolias et al., 2011).

Inventory management is pivotal in effective and efficient running of organizations. It is also vital in the control of medical and non-medical items and equipment that have to be held (or stored) for later use in the case of health service delivery. The principal goal of inventory management is to balance the conflicting economics of not holding too much stock and thereby tying up capital so as to guard against the incurring of costs, such as storage, spoilage, pilferage and obsolescence and, the alternative essential desire to make healthcare items available as and when required (quality and quantity wise) so as to avert the cost of not meeting such requirement (Adeyemi and Salami, 2010).

Also, Lyson (1996) and Adeyemi and Salami (2010) posited that effective inventory management is a sine qua non for increased profitability in any manufacturing firm since about 70% of the total funds employed are tied up in current assets, of which inventory is the most significant component. They argued that inventory control enhances profitability by reducing costs associated with storage and handling of materials. Proper management of inventory is reflected in a company’s Return on Investment (ROI)

The essence of inventory management in healthcare is to ensure that at any point in time the capital of the hospital is not necessarily tied down in the form of various medical and non-medical materials and equipment in the store, which may provide opportunity for fraud and theft. This will ensure minimal rate of stock losses, which emanate from store operation as the required stock is of equal importance as the profit of the hospital. The management of the economics of stockholding in terms of how much of goods to re-order and when to re-order is appropriately referred to as inventory management (Lucey 1990; Keth & Muhlemon 1994; Abdulraheem et al., 2011).

The importance of controlling inventories cannot be overemphasized even though it is notably one of the most difficult areas that businesses grapple with globally, mindful of the fact that if inventory is not controlled, it would control the organisation.

Benson and Ignou (2008) viewed inventory control as the system that guarantees the provision of the required quantity of inventory with the right quality at the right time with a little amount of working capital tied up. They continued that inventory control entails the functions of purchasing, receiving, inspection, storage and issuing of inventory as well as appropriate stock management systems that also guarantees a short lead time.

Adeyemi and Salami (2010) agreed with the assertion of Benson and Ignou (2008) but proceeded to include the fact that in addition to following the procedure, setting up at the planning stage to achieve the above objective stock control includes monitoring stock levels periodically or continuously and deciding what to do on the basis of information that is gathered and adequately processed. They continued that efforts must be made by the management of organizations to achieve an optimum investment in inventory since it costs much money to tie down capital in excess inventory. They further indicated that in recent times, attention has been focused on the development of suitable mathematical tools and approaches designed to aid the decision-maker in setting optimum inventory levels. Economic order quantity model (EOQ) has thus been developed to take care of the weaknesses emanating from the traditional methods of inventory control and valuation, which to some extent has proved useful in optimizing resources and thus, minimizing associated cost.

It is worth also mentioning that Information Technology (IT) plays a key role in efficient inventory management. IT related systems such as Radio Frequency Identification (RFID), Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP) are known to contribute immensely towards effective and efficient inventory management. Kolias et al (2011) underscored the importance of business’ investments in IT in that it ensures improved product/input availability and results in the reduction of stockouts. That way, businesses could carry less backup inventory and for that matter lower inventory levels. Consequently, with lower inventory investment, inventory turnover may be higher in hospitals.

In the healthcare delivery system, healthcare facilities are required to hold some minimum levels of inputs to enable them deliver on their mandate, particularly, during emergency situations. In view of this, healthcare facilities including Ridge Regional Hospital make conscious efforts to hold sufficient amounts of inputs (inventory), in terms of drugs and non-drug consumables to enable the provision of acceptable health care services to its cherished clients. In attempting to meet this requirement, there is the tendency of the institution overstocking some of these inputs consciously or unconsciously. At the same time, they may occasionally experience stockout of these inputs which leads to situations where quality of care is compromised with its associated dire consequences especially during emergency situations.

Chen et al (2005) asserted that firms with abnormally high inventories have abnormally poor stock returns. On the other hand, firms with abnormally low inventories have ordinary stock returns whereas firms with slightly lower than average inventories perform best over time.

A well planned and effective inventory management system can therefore contribute substantially to an organisation’s profitability. An ineffective inventory management system on the other hand can lead to stockout or over stocking; both of which have serious financial implications for any business or organisation. (Abdulraheem et al, 2011). On the contrary, Shah and Shin (2007), opined that the relationship between an organisation’s level of inventory and financial performance is at best not straight forward.

It must also be emphasized that the best approach of predicting financial and inventory performance of businesses including healthcare institutions should not be done by merely analyzing the conventional operational metrics such as inventory turnover and margins, but rather by evaluating the combined dynamics of inventory and sales (Raman et al. 2005).

1.2 Problem Statement

A careful analysis of available records (Annual Report, 2008-2012 of Ridge Regional Hospital) indicate that the hospital was unable to honour all approved requisitions made by its user departments for inventories/working inputs during the above-mentioned period. In the same vein, reports on Stocktaking conducted in the Hospital within the same period revealed that significant amounts of inventories were either ‘distressed’ (near expiration) or expired and had to be disposed of. This implies that the institution experienced occasional stockout of some essential inputs or held inventory which turnover rate was relatively low. On the other hand, the annual reports revealed that the institution’s financial performance (profitability) within the same period under consideration could at best be described as inadequate, to the extent that there were occasions when it was unable to honour its financial obligations as and when they fell due. These included non-payment or late payment of trade creditors and inability to pay certain overheads such as car maintenance allowance and fuel allowance regularly to its staff. Ghalayini et al., (1997) noted that as performance measurement remains a surprisingly unsettled area in contemporary management, inventory improvement’s effect on performance merits empirical examination.

It is against this background that the researcher sought to find out whether there is a link/correlation between the management of inventory and the institution’s financial performance (profitability).

1.3 Research Questions

The researcher aimed at answering the following research questions by the end of the study:

How effective is the inventory management system currently in use at the Ridge Regional Hospital?

Is there a correlation between inventory management and profitability of the Ridge Regional Hospital?

H0: There exist a relationship between profitability and inventory management.

H1: There exist no relationship between profitability and inventory management.

1.4 Research Objectives

1.4.1 Main Objective

The main objective of the study was to assess the impact of inventory management on profitability in an organisation, with reference to the Ridge Regional Hospital.

1.4.2 Specific objectives

The specific objectives of the study were:

To examine the effectiveness of the existing inventory management system of the organisation.

To establish the correlation between efficient inventory management and profitability of the firm.

H0: There exist a relationship between profitability and inventory management.

H1: There exist no relationship between profitability and inventory management.

1.5 Significance of the study

First of all, findings of the study will add to the existing body of scholarly knowledge and possibly help fill the gap in literature with regard to establishing the relationship between inventory management and profitability in a peculiar area such as the healthcare delivery system of a developing country like Ghana.

Moreover, recommendations from the study could potentially contribute positively towards the efficient management of inventory at the Ridge Regional Hospital.

Furthermore, findings of the study will guide policy makers at all levels of the healthcare delivery system in Ghana and by extension developing countries in the formulation and enforcement of policies that will highlight inventory management/control in healthcare institutions.

Above all, it will set the tone for further research work in the subject area in view of the fact that inventory management is so critical to effective and efficient healthcare delivery.

1.6 Limitations of the study

Although this research made a considerable amount of contribution to the existing body of knowledge in terms of looking at the impact of inventory management on organisation’s profitability, particularly for a not-for-profit organisation, it had some limitations.

First of all, the study site could have posed a limitation. The study was restricted to the Ridge Regional Hospital, Accra – Ghana. To make the study more meaningful, it should have been conducted across all the 10 Regional Hospitals in Ghana. If this had occurred, the outcome of the study would have been more representative of the national situation or perhaps the situation in similar Hospitals across developing countries in the world.

Moreover, limitations associated with the data collection process should also be considered. The non-availability of required secondary data for the study was very challenging. Frantic efforts were therefore made to extract them from different sources and put together to serve the purpose.

Similarly, the required primary data for the study were collected through questionnaire and structured interview and therefore the mood of respondents as well as their level of understanding of the content of these instruments may have impacted the results.

The final limitation involved the attitude of staff towards the data collection exercise. Some of them were uncooperative and were economical with the facts on the subject. This was in view of the fact that that sensitive information relating to the institution’s inventory management system as well as financial performance were at stake.

1.7 Structure of the study

This study was organised into five chapters including Chapter One. Chapter Two reviews relevant literature related to the subject under consideration. In Chapter Three, the methodology used for the study is described including the study design, data collection methods and analysis. The results of the research were presented in Chapter Four. Chapter Five discusses those results and their implications for future practice and further research.