With pressure on medical care to manage and reduce costs

Question

Orlando's Arnold Palmer Hospital, founded in 1989, specializes in treatment of women and children and is renowned for its high-quality rankings (top 10% of 2000 benchmarked hospitals), its labor and delivery volume (more than 16,000 births per year), and its neonatal intensive care unit (one of the highest survival rates in the nation). But quality medical practices and high patient satisfaction require costly inventory-some $30 million per year and thousands of SKUs ("SKU" means 'stock keeping unit'). With pressure on medical care to manage and reduce costs, Arnold Palmer Hospital has turned toward controlling its inventory with just-in-time (JIT) techniques.

Within the hospital, for example, drugs are now distributed at nursing workstations via dispensing machines (almost like vending machines) that electronically track patient usage and post the related charge to each patient. The dispensing stations are refilled each night, based on patient demand and prescriptions written by doctors.

To address JIT issues externally, Arnold Palmer Hospital turned to a major distribution partner, McKesson General Medical, which as a first-tier supplier provides the hospital with about one-quarter of all its medical/surgical inventory. McKesson supplies sponges, basins, towels, mayo stand covers, syringes, and hundreds of other medical/surgical items. To ensure coordinated daily delivery of inventory purchased from McKesson, an account executive has been assigned to the hospital on a full-time basis, as well as two other individuals who address customer service and product issues. The result has been a drop in Central Supply average daily inventory from $400,000 to $114,000 since JIT.

JIT success has also been achieved in the area of custom surgical packs. Custom surgical packs are the sterile coverings, disposable plastic trays, gauze, and the like, specialized to each type of surgical procedure. Arnold Palmer Hospital uses 10 different custom packs for various surgical procedures. "Over 50,000 packs are used each year, for a total cost of about $1.5 million," says George DeLong, head of Supply-Chain Management.

The packs are not only delivered in a JIT manner but packed that way as well. That is, they are packed in the reverse order they are used so each item comes out of the pack in the sequence it is needed. The packs are bulky, expensive, and must remain sterile. Reducing the inventory and handling while maintaining an assured sterile supply for scheduled surgeries presents a challenge to hospitals.

Here is how the supply chain works: Custom packs are assembled by a packing company with components supplied primarily from manufacturers selected by the hospital, and delivered by McKesson from its local warehouse. Arnold Palmer Hospital works with its own surgical staff (through the Medical Economics Outcome Committee) to identify and standardize the custom packs to reduce the number of custom pack SKUs. With this integrated system, pack safety stock inventory has been cut to one day.

The procedure to drive the custom surgical pack JIT system begins with a "pull" from the doctors' daily surgical schedule. Then, Arnold Palmer Hospital initiates an electronic order to McKesson between 1:00 and 2:00 P.M. daily. At 4:00 A.M. the next day, McKesson delivers the packs. Hospital personnel arrive at 7:00 A.M. and stock the shelves for scheduled surgeries. McKesson then reorders from the packing company, which in turn "pulls" necessary inventory for the quantity of packs needed from the manufacturers.

Arnold Palmer Hospital's JIT system reduces inventory investment, expensive traditional ordering, and bulky storage, and supports quality with a sterile delivery.

There are inherent benefits of using a pull strategy to manage inventory. By focusing on the customer's orders to generate production, you make only what is demanded, eliminating wasted time in producing what isn't needed, wasted materials that might not be needed, and, the need for less working capital to be tied up in inventory and the associated costs of acquiring that working capital.

1. As a group, choose a company or organization that you are all familiar with that you believe operates under a push strategy.
2. Decide what steps would be necessary to convert that company or organization from a push strategy to a pull strategy. For each step:Describe what actions you would have to perform as part of that conversion. As a general rule, five separate actions would be about right for this assignment.
3. Note the particular rationale (JIT, Reduced Cycle Time, etc.) with which your action is consistent.
4. After you make your list, prioritize your list from most important to least important.
5. As a conclusion, describe what types of "wastes" might be saved from this conversion to a pull strategy. Try to make sure that your answer to this part is consistent with the types of results that could be expected under the actions you suggested in part 2a.