In hospitals deciding between financial fidelity and inventory accuracy is like flipping a coin

Flipping a coin to make a decision

In hospitals deciding between financial fidelity and inventory is like flipping a coin. This is probably true of every hospital in Australia. The Western Australia General’s Audit Report 2 on medical consumables in hospitals found that hospitals procure materials well but do not know if the items purchased are still in the hospital, have been used, or have been lost or discarded.

The audit was undertaken to ensure that hospitals were following good inventory management practices. The objective was to ensure that the right items, in the correct quantities, are purchased and stored appropriately until they were used or that expired items were appropriately discarded. The audit wanted to ensure that hospitals maintained a balance between having stock levels as low as possible, without having an unacceptable risk of running out of stock.

The report found that there was no material evidence that stock was not managed in a way that ensured that inventory was suitably purchased and stored, and then delivered to where and when it was needed, in the quantities needed. The report did not highlight the uneasy truce between financial fidelity and inventory accuracy.

The Uneasy truce between financial fidelity and inventory accuracy

There is an uneasy truce between financial fidelity and inventory accuracy. Fred Kimball, Marvin Logan and others have pointed out that the way auditors define inventory accuracy can give a false sense of comfort about how inventory management is performing.

The year-end stocktake or cycle counts in a hospital are performed to reconcile physical inventory with the financial figures on the balance sheet. Stores people and clinical staff count, recount, doublecheck the recount of physical inventory to reconcile the figures with financial records. Eventually, the audit arrives at a figure that identifies inventory accuracy something like 99 per cent. Often 99.6 per cent or even higher.

Such figures are misleading if they are not based on operational accuracy which is the number of lines in inventory that have no variation. I have no experience with robotic systems, however, with human systems, even those assisted by voice and pick-to-light systems there are line variances.

The Logistics Bureau an authority on inventory management states that there is no such thing as 100 per cent inventory accuracy. In warehouses, they identify inventory variance as ullage which can range from 0.1 to 2.5 per cent in highly automated warehouses. In hospitals, I think from personal experience the assessment is more likely to be 10 per cent or greater.

Financial Accuracy and Operational Accuracy

It will come as a surprise to most hospital executives that there are two methodologies for assessing inventory accuracy. Financial accuracy is in the dollar differences after inventory adjustments. This is the measurement used by most hospitals. The sole purpose of this measurement is to assure us that we have processes in place to avoid large adjustments in value on the company’s financial books.

The true measure of inventory accuracy is operational accuracy. As I pointed out in my book, ‘Hidden Hospital Hazards’, this has implications for patient safety and hospital margins. A high level of operational accuracy is needed for excellent customer service and productivity. If an item cannot be found to fulfil a request, the items have to go on backorder. This can cause delays in treatment and poor relations between supply and clinical staff.

From a productivity point of view, time is wasted if the right item cannot be found in the right quantity, at the right location, at the right time. Once an item cannot be found it has a spiral effect throughout the hospital. Research tells us nurses spend an equivalent of one full working day in a week searching for inventory. When an item cannot be found, it is common for other workers to be called away from their jobs to assist in finding the item. This is particularly problematic in the operating suite where it is a common problem.

Financial Accuracy Example

Fred Kimball depicts the difference between financial and operational accuracy very well. His example of financial accuracy is as follows:

  • Assume that there are two stock-keeping units (SKUs) in inventory
  • Each SKU’s value is $1.00
  • The book record is for 100 units on hand for each SKU
  • A physical inventory counts each item:
    • One location has 101 and the other has 99
    • The nett dollar difference is zero dollars
  • Inventory accuracy is 100 per cent

Operational Accuracy Example

An example of operational accuracy for the same scenario is:

  • The entire inventory is in two locations storage locations. The units of one SKU are in one location, and the units of the other item are in a second location
  • The physical inventory counts each location:
  • One SKU has 101 units and the other has 99
  • Both locations are incorrect as compared with the book record
  • Inventory accuracy is zero

 Whilst this illustration is simple, the point is clear. Financial accuracy is very different from operational accuracy. The irony is that if operational accuracy is correct, then financial accuracy is also correct. However, it doesn’t work the other way around.

Another Important Distinction

Fred Kimball says that another important difference between financial and operational accuracy is when accuracy is measured. With financial accuracy, the process expects all investigations, corrective transactions, and reconciliations to have been completed before the measurement is recorded. For financial purposes, this is as it ought to be.

For operational accuracy, the true measure is on the first count. If the item, sometimes defined by the lot or serial number and possibly brand cannot be found in its location the count is zero. It does not meet the 8 Rights of patient care.

  • The item for the right patient
  • The right item itself
  • The right quantity
  • The right route
  • The right time
  • The right documentation
  • The right reason
  • The right response

The chances are that most materials management staff will not know the importance of these 8 rights for medication. These are equally important for all items used in a hospital for patient care. But, harking back to the Western Auditor’s report on inventory management the report did highlight a glaring deficiency in materials management and financial practices in hospitals.

Actual Use and Consequent Waste

The report found that once an item left a store or treatment room, no hospital was able to determine if the item was used, discarded or remained somewhere within the hospital. Therefore actual use, and consequently waste, was not known. The audit said that senior staff expressed a desire to measure actual use and waste, but as yet, had not found a way to do this.

The Western Auditor General’s findings regarding the inability to determine actual use and consequent waste highlight the need for hospitals to prioritise using technology to track and trace materials. My book, ‘Hidden Hospital Hazards’ mentioned that an affordable solution to track and trace materials was implemented at Cabrini Health, Malvern in 2012. Such a solution would solve the uneasy truce between financial fidelity and operational accuracy.

With a track and trace, mechanism in place hospitals will no longer need to expense items before use. Such a mechanism would form the basis for hospitals to transition to a platform business model for their entire supply chain. As platforms they will gain 10X revenue compared to their shrinking rebates.

Please comment, share your thoughts,  or give me a call to agree or disagree.


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Want to Reduce Harm, Save Lives & Improve Hospital Margins?

Subscribe now to discover how to simplify the tracking, tracing and recording of medical consumables and devices used, in real time. Get your free copy of our eBook: Hidden Hospital Hazards.