Professional Documents
Culture Documents
Management
An Integrated Approach to
Improving Quality and Efficiency
Chapter 13. Supply Chain
Management
Daniel B. McLaughlin
Julie M. Hays
Chapter 13
Supply Chain Management
What is Supply Chain Management (SCM)?
Why is SCM Important for Healthcare
Organizations?
Tracking and Managing Inventory
Forecasting
Order Amount and Timing
Inventory Systems
Procurement and Vendor Relationship
Management
Strategic SCM
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SCM in Healthcare
In 2006, the United States will spend over
$2 trillion on healthcare.
Annual cost/family for health insurance is
forecasted to be $22,000 by 2010.
By 2016, it is predicted that one dollar of
every five dollars of the U.S. economy will
be devoted to healthcare.
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SCM in Healthcare
Supply costs in hospitals account for 1525
percent of operating costs (HFMA 2002;
HFMA 2005).
Transaction costs are estimated at $150 per
order for buyer and seller (HFMA 2001).
There is 35 percent inconsistency between
hospital and supplier data, and it costs $15
to $50 to research and correct a single
order discrepancy.
Copyright 2008 Health Administration Press. Al
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Inventory
Inventory is the stock of items held to meet
future demand.
Inventory management answers three
questions:
- How much to hold
- How much to order
- When to order
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Functions of Inventory
To meet anticipated demand
To level process flow
To protect against stockouts
To take advantage of order cycles
To help hedge against price increases or to
take advantage of quantity discounts
To decouple process steps
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Classification system
Inventory tracking system
Reliable forecast of demand
Knowledge of lead times
Reasonable estimates of:
- Holding or carrying costs
- Ordering or setup costs
- Shortage or stockout costs
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-A very important
-B moderately
important
-C least important
High (80%)
Annual
$ volume
of items
A
B
C
Low (5%)
Few
(20%)
Many
(50%)
Number of Items
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Inventory Tracking
Track additions and removals
- Bar-coding
- Point of use or point of sale (POS)
- RFID
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Forecasting
Exercise
Averaging methods
Trend, seasonal, and cyclical models
Model development and evaluation
VVH example
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Forecasting
Exercise I
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Exercise IGraphs
Series b
18
16
Series a
14
12
10
Series1
8
0
1
Series c
10.0
9.0
8.0
7.0
6.0
Series1
5.0
4.0
3.0
2.0
1.0
0.0
1
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Exercise I Solution
a)
Constant
b)
c)
0.5 + 2x, where x specifies the position (index) of the number in the
series
Next number is 18.5
4.5 + 0.5x + Cs, where x specifies the position (index) of the number in
the series
Cs represents the seasonality factor
C1 = 0, C2 = 2, C3 = 0, C4 = 2
Next numbers: 9, 11.5, 10, 8.5
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Exercise II
Identify the pattern and construct a formula
that will predict successive numbers in the
series.
What is the next number in the series?
(a) 4.1, 3.3, 4.0, 3.8, 3.9, 3.4, 3.5, 3.7
(b) 2.9, 4.7, 6.8, 8.2, 10.3, 12.7, 14.2, 16.3
(c) 5.3, 7.2, 6.4, 4.5, 6.8, 9.7, 8.2, 6.3
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Exercise II Solution
Same as series above, but with a random
component generated from normal random
number generator with mean 0
(a) 4.1, 3.3, 4.0, 3.8, 3.9, 3.4, 3.5, 3.7
3.7 +
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Forecasting Methods
Qualitative methods
- Based on expert opinion
and intuition; often used
when there are no data available
Quantitative methods
- Time series methods, causal methods
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Demand Behavior
Trend
- Gradual, long-term up or down movement
Cycle
- Up and down movement repeating over long
time frame
Seasonal pattern
- Periodic, repeating oscillation in demand
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Trend
Demand
Demand
Random
movement
Time
Seasonal
pattern
Demand
Demand
Time
Time
Trend with
seasonal pattern
Time
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Forecasting
Averaging Methods
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D
Dt n
t 1
t 2
n
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Ft w D
t 1
t 1
w t 2 D t 2 w t n Dt n
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Exponential Smoothing
Times series forecasting technique that does not require large
amounts of historical data
F 1 F
t
Ft
Ft-1
Dt-1
=
=
=
=
t 1
Dt 1
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Forecasting
Trend, Seasonal, and Cyclical Models
Holts trend-adjusted exponential smoothing
technique
Winters triple exponential smoothed model
ARIMA models
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FITt Ft Tt
and
Ft Dt 1 ( 1 )FITt 1
Tt Tt 1 (Ft 1 -FITt 1 )
FITt = Forecast for period t including the trend
Ft = Smoothed forecast for period t
Tt = Smoothed trend for period t
Dt1 = Value in the previous period
0 = smoothing constant 1; 0 = smoothing constant 1
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Forecast Accuracy
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Forecasting
Model Development and Evaluation
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t 1
Dt 2 Dt n
n
13
14
5
60 43 53 54 45
51
F 14
5
13-29
13
t 1
t 2
13
12
t 2
12
t n
11
t n
11
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Dt 1 1 F t 1
14
D13 1 F 13
14
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VVH Comparison
(from the Excel
template)
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Realities of Forecasting
Forecasts are seldom perfect.
Most forecasting methods assume that
there is some underlying stability in the
system.
Service family and aggregatedI see
service
that you will
forecasts are more accurate get an A this semester.
than individual service
forecasts.
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Definitions
Lead timetime between placing an order and
receiving the order
Holding (or carrying) costscosts associated with
keeping goods in storage
Ordering (or setup) costscosts of ordering and
receiving goods
Shortage costscosts of not having something in
inventory when it is needed
Back ordersunfilled orders
Stockoutsoccur when the desired good is not
available
Copyright 2008 Health Administration Press. Al
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Definitions
Independent demand is demand that is
generated by the customer and is not
a result of demand for another good or
service.
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Assumptions of the
Basic EOQ Model
Demand for the item in question is
independent.
Demand is known and constant.
Lead time is known and constant.
Ordering costs are known and constant.
Back orders, stockouts, and quantity
discounts are not allowed.
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Order
quantity, Q
Average
amount of
inventory
held = Q/2
Inventory
Level
Reorder
point, R
0
Time
Lead
time
Order Order
Placed Received
Lead
time
Order
Placed
Order
Received
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Reorder Point
The point in time by which stock must be ordered
to replenish inventory before a stockout occurs
R dL
R = Reorder point
d = average demand per period
L = lead time (in the same units as above)
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Minimum
Total Cost
Total Cost
Holding Cost = h*Q/2
Q OPT
Order
Optimal
Quantity, Q
Order Quantity
2Do
2(Annual Demand)(Order or Setup Cost)
=
=
h
Annual Holding Cost
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Holding Cost
Ordering Cost
Q*
Q*
Order Quantity
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Total Cost
Holding Cost
Ordering Cost
Q*
Q*
Order Quantity
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Cost $5/case
Holding costs 33% or $1.67/case-year
Ordering costs $100
Lead time 1 week
She calculates annual demand as:
D d period
53.5 cases of diapers
2,782 cases
week
52 weeks
year
year
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$1.67 case
333,174 cases 2 577 cases
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Annual demand
Ordering cost per order (setup)
Annual carrying cost per unit
Working days per year
Economic order quantity
D=
S=
H=
=
EOQ =
2,782
100
1.67
365
577.21
577
500
4.8
75.7
288.5
481.80
482.15
963.94
units/year
$/order
$/unit-year
days/year
units
orders/year
days
units
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Inventory
level
Reorder
point (R)
Safety
stock (SS)
0
Lead
time
Time
Lead
time
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R d L SS
Safety stock
SS z L
where
z is the z-score associated with the desired service
level (number of standard deviations above the
mean)
L= standard deviation of demand during lead time
Copyright 2008 Health Administration Press. Al
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Normal(100, 20)
2.5
Safety Stock
2.0
Normal(100, 20)
2.5
1.5
Reorder
point
2.0
1.0
1.5
0.5
0.5
<
-Infinity
84.1%
140
120
100
80
60
40
0.0
Probability of
a stockout = 16%
160
1.0
15.9%
>
120.0
<
-Infinity
84.1%
15.9%
160
120
140
100
120
100
80
Example
units
60
40
0.0
>
120.0
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Model Insights
As the desired service level increases, the
amount of safety stock increases. (If fewer
stockouts are desired, more inventory must
be carried.)
As the variation in demand during lead time
increases, the amount of safety stock
increases. (If demand variation or lead time
can be decreased, less safety stock is
needed.)
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R d L SS 53.5 cases
week
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d=
7.64
units
L=
days
L =
11.5
units
Service level
SL =
0.95
Increment
SL =
0.05
1.64
dL =
53.48
units
Safety
stock
SS =
18.9
units
ROP =
72.4
units
Reorder point
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Order
quantity (577)
Inventory
level
Safety
stock (19)
Reorder
point (72)
0
Lead
time =
1 week
Time
Lead
time
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Quantity discounts
Price breaks
Etc.
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Inventory Systems
Simple
JIT
MRP
ERP
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Two-Bin System
When the first bin is empty,
stock is taken from the
second bin and an order is
placed. There should be
enough stock in the second
bin to last until more stock
is delivered.
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JITKanbans
Microsoft Visio screen shots reprinted with permission from Microsoft Corporation.
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Enterprise Information
Technology Trends
E-Commerce
E-Business
Automation
Data Processing
Computer
Integrated
Manufacturing
Concurrent
Engineering
ERP
Collaborative
Engineering
Business Webs
SCM
Appliances
MRP II
Handheld
MRP I
Microcomputer
CAD/CAM
Minicomputer
Mainframe
Networks TCP/IP
Mobile Networks
196019701980199020002010
Copyright 2008 Health Administration Press. Al
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Table top
(1)
Lead time = 2 weeks
Leg
(4)
Lead time = 3 weeks
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MRP Logic
Order
table tops
Order
table legs
Week
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E-procurement
Value-based standardization
Outsourcing
Vendor managed inventory (VMI)
Automated supply carts
Group purchasing organizations (GPO)
Disintermediation
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Continually educate and support a systemwide view of the supply chain and seek
improvement for the system rather than for
individual departments or organizations in that
system.
Copyright 2008 Health Administration Press. Al
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