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INVENTORY MANAGEMENT,LEAN AND FINANCE
John Carrico
What is inventory?
Inventory is anything that is purchased and held (stored) prior to use/need
product on-hand, current asset that has been acquired by cash (or payables) and is yet to be consumed
3
Inventory Distribution Management
Physical inventory is the actual counting of supplies and comparing the amount on hand with the amount on the financial statement
Inventory can be counted two ways: Periodic counting
Done at regular intervals (usually 6 or 12 months)
Cycle counting Continuously selecting subgroups to count Typically 10% of stock per month May be critical or volatile items
4
Inventory Distribution Management
Inventory control should: Provide monetary savings Improve service levels Improve internal operations Review supply utilization Reduce waste Fully utilize MMIS capabilities
5
Inventory Distribution Management
Inventory Valuation Last in, First out (LIFO)
Cost is defined as the newest (most recently received) item is used to define product cost.
First in, First out (FIFO) Cost is defined as the oldest item in the inventory
(conservative, understates the inventory) Average costing inventory
Method where a weighted average cost is computed.
Your valuation methodology may be the source of your never being “right on” at inventory count time
6
Types of Inventory
Official- On the Hospital financial books as an ASSET.
PerpetualAlways reflects actual on-hand quantity-computer
Periodic Periodically updated based on a count
Unofficial- Already expensed.
Consignment Housed in the facility, owned by the vendor, purchased when used. Is not included in inventory turn calculations.
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Inventory Ground Rules
Impact of Consignment on our performance Consignment stock is not counted as our inventory
and is not included in turns. The more items you consign, the higher your
expected level of performance (turns) of your owned inventory.
However, while you do not retain ownership of the product, you are still responsible for the loss or damage-how many of you have letters of understanding with your vendors?
8
Managing Inventory
Why Manage Inventories?
Reduce Costs-carrying costs
Free Up Space
Have Supplies Available
9
Managing Inventory
Controlling Inventory
Techniques you can use to monitor and reduce inventories
10
Inventory Distribution Management
Successful Inventory Control is achieving balance between stock on-hand and organizational need
Basic components to assist inventory management are: Order quantity Lead time Safety stock
11
“Normal” Departmental Inventory(% of total hospital supply inventory)
0% 10% 20% 30% 40% 50%
Lab
CCU
CS/SPD
Drugs/Meds
General Stores
OR
Note: All other individual departments are less than 5% of total supply inventory
Source: VCS Supply Chain Database
6.3%
9%
12.3%
15.8%
23.8%48%
12
Inventory Control Techniques
Inventory Turnover Rate
Turnover = Total $ Issued
Average Inventory Value
(or ending value)
13
Inventory Control Techniques
Balance Order and Inventory Costs
15 – 18 Turns
Higher
Cost
Lower
Less Order Frequency More
Order Cost
Inventory LevelsSweet Spot
14
Inventory Management
Inventory Turn Calculation Worksheet
$20,000,000 State your annual purchases$2,500,000 State value of inventory
16% State percent carrying cost of inventory
Turns Owned Inventory
Annual Cost for Holding Inventory
Inventory Reduction - One Time Cash Flow
Holding Cost Savings
Days On Hand (DOH)
8 $2,500,000 $400,000 $0 $0 33
4 $5,000,000 $800,000 $0 $0 655 $4,000,000 $640,000 $0 $0 526 $3,333,333 $533,333 $0 $0 447 $2,857,143 $457,143 $0 $0 378 $2,500,000 $400,000 $0 $0 339 $2,222,222 $355,556 $277,778 $44,444 2910 $2,000,000 $320,000 $500,000 $80,000 2611 $1,818,182 $290,909 $681,818 $109,091 2412 $1,666,667 $266,667 $833,333 $133,333 2224 $833,333 $133,333 $1,666,667 $266,667 11
Yellow Squares indicate where you should key in your hosptial values
15
Inventory Costs
Inventory Carrying Costs-what does it cost you to maintain your inventory?
Opportunity Costs-Invested Capital-Cost of Money Cost of Space Handling Charges-labor expense Storage Costs Utilities/Insurance Data Processing Shrinkage
• Pilferage/theft• Obsolescence• Spoilage
16
Inventory Control Techniques
Setting LevelsReorder pointsReorder quantitiesMin/MaxEconomic Order Quantity (EOQ)
17
Inventory Distribution Management
Supply level calculations Maximum/minimum Economic order quantity
The greater the order quantity, larger the inventory.
The longer the lead time, the greater the inventory.
The higher the safety stock, the greater the inventory.
18
Order Cycle
Period of time elapsed between determining need and receipt of goods. Usually expressed in days or weeks. Shows how many periods (days or weeks) of stock are generally on-hand and how often the item is being ordered.
•Lead Time
Period of time between placing an order and receipt of goods.
Terminology
19
Safety Stock
A level or quantity of inventory on-hand to reduce the probability of a stock-out between time of order and time of receipt of stock (lead time). This is a level (usually less than the reorder point) that theoretically should never be needed or used. It is “insurance.” It increases the cost of inventory and that cost is weighed against the cost of a stock-out.
Terminology
20
Economic Order QuantityDefined as a calculation of the most efficient maximum order quantities consider factors such as lead times, carrying costs, ordering costs and available space. A very basic EOQ formula follows:EOQ = square root of (2(F*S)/(C*P)F = fixed cost of placing and receiving an orderS = annual usageC = carrying costs as a percentage of average inventory valueP = purchase price per unit
Terminology
21
Inventory Control Techniques
Maintain Accuracy Control access to your inventory Locator system/location checks Cycle counting First in First Out (FIFO) philosophy
22
Inventory Distribution Management
Fill-Rate- percentage of items successfully supplied to end user
Total Annual Stocking Cost (TASC) TASC = Annual Ordering Costs (AOC) + Annual Carrying Costs (ACC)
AOC = (D/Q)xS ACC= (Q/2)xC
D = Average Annual Demand Q = Order Quantity S = Fixed Order Cost C = Carrying Cost per Unit
23
Inventory Distribution Management
Economic Order Quantity (EOQ) D = Ave. Annual Demand S = Fixed Order Cost
C = Annual Carrying Cost Total Material Cost (TMC)
TMC = TASC + D(AC) TASC = (D/Q)xS + (Q/C)xC D = Average Annual Demand AC = Acquisition Cost
24
Inventory Distribution Management
Safety Stock (SS)
Z = Service Factor R = Average Replenishment Time S = Average Daily Demand σr = Standard Deviation of Replenishment
σs = Standard Deviation of Daily Demand
Order Point (OP) OP = EDDLT + Safety Stock EDDLT = Expected Demand During Lead Time
EDDLT = R(S) R = Average Replenishment Time S = Average Daily Demand OP = R(S) +
Integrated Enterprise Excellence
Utilize “Lean Organization” and “Standardization” approaches focused on aggressively identifying and
eliminating waste while achieving 5Rs (Right Product, Right Place, Right Quantity, Right Time, Right Price).
Quality Service Cost
– Increased Patient Satisfaction– Greater Value for the Community– Improved Competitiveness– Increased Employee/Physician Satisfaction
Which results in
Driving Enhanced
Technology
Definition:A systematic approach to the identification
and elimination of waste and non-value
added activities through continuous
improvement in all products and services
Characteristics:
• Equipment used synchronously to demand
• Utilizes people to their fullest capacity• Simple, flexible, visible, & responsive• Requires constant change• Creates products/services with minimum
consumption of:
- Capital investment
- Floor space
- Materials
- Labor
- Time
- Distance
Lean Organization
Definition of Waste
•Anything that doesn’t add value to the
process
• Anything that doesn’t help create
conformance to the customer’s
specifications
• Anything your customer would be
unwilling to pay (or need) you to do
Understanding Waste
• Identification and elimination of waste is
the central focus of a lean system.
• It is dependent on the understanding
and involvement of all employees.
• Successful implementation requires all
employees be trained to identify and
eliminate waste from their
work areas.
Waste exists in all work . . . . and at all levels in the organization
8 Types of Waste
Transportation Inventory Movement Waiting Over Production Over Processing Defects People skills/potential
LeanOrganization
SmallLots
PullSystems
LevelScheduling
SupplierDevelopment
Lead TimeReduction
ErrorProofing
PlannedMaintenance
WorkplaceOrganization &Visual Controls
Employee / ProcessControl
Containerization/packaging
QuickSet-up
Plant, Machine& Office Layout
Transportation/Logistics
Reduction of
Variation
MachineProcess
Capability
StandardizedOperations
Lean Tool Box
A Four Step Focus
• Step One - Understand what waste is
• Step Two - Use appropriate waste elimination tool to eliminate specific waste(s) identified
• Step Three - Brainstorm to develop a vision so asto create a plan
• Step Four - Aggressive implementation of plans. Do it now!!!!
Lean Organization
Finance
3 Financial Statements Income Statement Cash Flow Statement Balance Sheet
Income Statement
Displays revenues and expenses Clearly states net profit or loss Also called “statement of revenue and
expense”
Sample Income Statement
Sales Revenue $1,000,000 Cost of Goods Sold Direct Material ($150,000)
Direct Labor ($100,000)
Overhead ($150,000)
Total Cost of Goods Sold ($400,000) Gross Profit $600,000 Operating Expense Office Supplies ($50,000) Salaries ($225,000) Utilities ($25,000)
Total Operating Expense ($300,000) Net Income $300,000
Balance Sheet
Summarizes assets, liabilities, and shareholder equity or net assets (non-profit)
Assets = Liabilities + Shareholder Equity Both sides of equation must “balance”
out http://www.investopedia.com/video/play/introduction-balance-sheet#axzz
1cjqs0ph6
Balance Sheet
11/11/2011
ASSETS LIABILITIES
Current Assets Current Liabilities
Cash $62,950 Accounts payable $22,420
Accounts receivable 60,880 Short-term notes 1,800
(less doubtful accounts) Current portion of long-term notes 6,000
Inventory 62,150 Interest payable
Temporary investment Taxes payable
Prepaid expenses 2,650 Accrued payroll 1,140
Total Current Assets $188,630 Total Current Liabilities $31,360
Fixed Assets Long-term Liabilities
Long-term investments Mortgage $30,000
Land Other long-term liabilities
Buildings Total Long-Term Liabilities $30,000
(less accumulated depreciation)
Plant and equipment 150,000
(less accumulated depreciation) (56,870) Shareholders' Equity
Furniture and fixtures 15,570 Capital stock $110,000
(less accumulated depreciation) (4,720) Retained earnings 121,250
Total Net Fixed Assets $103,980 Total Shareholders' Equity $231,250
TOTAL ASSETS $292,610 TOTAL LIABILITIES & EQUITY $292,610
Cash Flow Statement
Records all cash movement Inflows from operations and investments Outflows for business expenses and
investments http://www.investopedia.com/video/play/what-is-cash-flow#axzz1cj
qs0ph6
Cash Flow Statement
Beginning Cash Position $6,000,000
Cash Flow from Operating Activities
Net Income $8,000,000
Depreciation Expense $4,000,000
Net Change in Accounts Receivable ($2,000,000)
Net Change in Account Payable $1,000,000
Total Adjustments to Operating Income $3,000,000
Net Cash Flow Provided by Operating Activities $11,000,000
Cash Flows from Investing Activities
Purchase of New Computers ($1,500,000)
Purchase of Assembly Line Machines ($2,000,000)
Decommissioning Fund Contributions ($500,000)
Net Cash Used in Investing Activities ($4,000,000)
Net Cash Flows from Financing Activities
Increase in Short Term Debt $500,000
Redemption of Long Term Debt ($3,000,000)
Issuance of Common Stock $250,000
Cash Dividends on Common Stock ($2,000,000)
Net Cash Provided by (Used in) Financing Activities ($4,250,000)
Net Increase / Decrease in Cash and Cash Equivalents $2,750,000
Cash and Cash Equivalents at the End of the Period $8,750,000