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Understanding Fundamental Principles
According to industry inventory management expert Mr. David Piasecki, healthcare inventory is a term that describes medical items used in the delivery of healthcare services or for patient use and resale. Much like Durable Medical Equipment, a certain safety margin of stock should always be available. Inventory ranges from normal administrative office supplies to highly specialized chemicals and reagents used in the clinical laboratory. It should be distinguished from capital supplies, such as major equipment, instruments, and other items that are not used up faster than inventory or related inventory wastes.
Historical Review
Historically, asset utilization ratios provided information on how effectively the enterprise used its inventory assets to produce revenues, or deplete its cash. For example, the inventory turnover ratio (ITR) determines the total volume of inventory turnover (change) during a pre-determined accounting period (month or quarter). It is defined as cost of inventory purchased for the period, divided by average inventory (AI) at cost.
Consulting Firms
Dunn and Bradstreet, the supply chain management – consulting firm and others, do not provide exact comparatives for private healthcare ITR. Nonetheless, ITR is useful as an internal performance indicator of inventory turnover speed and cash flow enhancement. Currently however, for public hospitals, 60 – 75 days is estimated to be the average time for inventory turnover.
The main problem with traditional ITR, similar analyses such as AI and ICP, and the usual inventory costing methods (e.g., last-in first-out, first-in first-out, specific identification, average costs), and even just-in-time inventory costing, is that they do not embrace Supply Chain Inventory Management. This occurs because sources of profit or loss are not recognized in the traditional inventory cost accounting equation:
Assessment
Cost of goods sold = beginning inventory + net purchases – ending inventory
Conclusion
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Filed under: "Doctors Only", Glossary Terms, Practice Management | Tagged: beginning inventory, cost of goods sold, david marcinko, David Piasecki, DME, Dunn and Bradstreet, ending inventory, inventory turnover ratio, ITR, medical inventory management, www.healthcarefinancials.com, www.healthdictionaryseries.com | 3 Comments »
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