By level versus Kanban methods: which one for hospital materials management?

We have discovered an opportunity that could mean millions of dollars in savings for individual hospitals and billions of dollars for the healthcare system nationally in the US and abroad. It has to do with how most hospitals manage supplies, drugs, and other materials.

Many, perhaps most, hospitals manage their inventory of supplies and drugs using what is called a “partial tier” method. Here’s how it works: you set a stock quantity for each item, the pair level, based on average usage, and a target number of days supply. We could, for example, set a goal of maintaining a two-day supply quantity for each supply item. As the material is actually used, we would keep the quantities “up to par” on a daily basis, taking a physical inventory and replenishing the quantity that was consumed. The goal, sensibly, is not to run out of supplies while keeping tight control of storage space and inventory quantities. So far so good.

It is interesting to note that this even method of inventory control is not used in a world-class manufacturing environment, although a manufacturer certainly has the same inventory control needs and goals as a hospital. The suggestion that we take a daily physical inventory of a large number of inventory items would be met with amazement and ridicule. Many world-class manufacturing companies don’t even conduct annual inventory, maintaining a high level of inventory accuracy through strict controls and cycle counting.

The method of choice in the manufacture of commonly used items is called Kanban. In a Kanban system, as with the even level method, we set a target quantity that we want to maintain. The main difference is that instead of trying to bring the quantities “up to par” on a daily basis, in a Kanban system we establish a fixed quantity that we will use to activate the inventory replenishment. In a “two bin” kanban system, for example, we set up two quantities or bins of the same supply, and we only refill a bin when it is empty. While the tank is being refilled, we have a second tank to cover usage during the replenishment cycle.

The Kanban method has seven main advantages over a Par level system:

1. A daily count is not needed. We wait for a container to empty and always replenish the same amount. Not having to count can save hundreds or thousands of hours a year in most hospitals.

2. Reduce the number of refueling trips. Since we don’t refill a Kanban container on a daily basis, but instead wait for it to be empty, the number of replenishment trips can be significantly reduced. The number of refill cycles can be reduced by 50% or more.

3. Replenishment quantities are fixed. The recharging process is greatly simplified by eliminating the need for counting required by the peer system. If we know in advance what the refill amount will be, the item can be stored in that amount.

4. It is easier to manage and improve. By tracking the time between replenishments, stock quantities can be more easily refined and adjusted over time. This continuous improvement is more difficult to achieve if all quantities are filled daily, in varying quantities.

5. Kanban reduces inventory. Experience shows that, with the same target supply coverage, a Kanban system will run with up to 50% less inventory than a peer system.

6. It is easier to maintain refueling discipline. Since they don’t have to count all inventory locations, or look at empty containers, supply handlers find it easier to identify and refill empty containers, substantially reducing opportunities for shortages.

7. Kanban promotes good inventory management practices, while the peer level does not. In fact, counting everything is essentially impossible and labor-intensive, with most peer-level users simply “watching” the containers without counting. Organization and cleanliness, “5S” in tight terms, is much easier to maintain.

For all these reasons, Kanban is the method of choice for the management of hospital material, for much of the material that is acquired and managed. Productivity gains, shortage reduction and inventory reduction represent a multi-million dollar opportunity for the industry.