DESIGN OF INVENTORY MANAGEMENT SYSTEM FOR

CONSUMABLE MEDICAL SUPPLIES AT PUBLIC HOSPITAL

USING SIMULATION

Ummu Hani and Mursyid Hasan Basri

School of Business and Management, Institut Teknologi Bandung

Abstract
Inventory management as part of supply chain is becoming the key of core
competence for any industries. Public hospital as healthcare industry has to
provide high service level to their customer. The problem arises when public
hospital has limited budget. Consumable medical supplies is one of the critical
and fast moving medical products that often face overstock and stockout
condition, in which it makes consumable medical supplies require suitable
inventory management and takes syringe as a sample. The important questions are
what is the appropriate inventory review policy? And how is most optimal
distribution system for consumable medical supplies at public hospital? This study
aims to find the optimal inventory management and distribution system for
consumable medical supplies at public hospital. The methodology is qualitative
study by interviewing several heads of units. Due to its complexity, it needs
simulation to reach the purpose of this study. By using simulation software, this
study builds models and simulates six scenarios. The results show that by using
additional storehouses as a connective between central medical warehouse and
depots or unit, and using continuous review policy at central medical warehouse,
public hospital can press their expenditure but still provide high service level to
their customer. Based on items under study, public hospital have potential saving
63% inventory cost for consumable medical supplies.
Keywords inventory management, hospital, simulation

Corresponding author :
Ummu Hani
School of Business and Management, Institut Teknologi Bandung, Indonesia
+62-85-649556685
ummu.hani@sbm-itb.ac.id
Jl. Ganesa 10 Bandung, Indonesia 40132
 DESIGN OF INVENTORY MANAGEMENT SYSTEM FOR
CONSUMABLE MEDICAL SUPPLIES AT PUBLIC HOSPITAL
USING SIMULATION

Ummu Hani and Mursyid Hasan Basri

School of Business and Management, Institut Teknologi Bandung

INTRODUCTION

Supply chain management, in particular inventory management and

distribution, has becoming the key of success at any kind of organization for
increasing its efficiencies and saving nowadays. Public hospitals in which has
limited budget but have to provide high service level to their customer, have to
implement the suitable inventory management for each type of their inventories.
The excellent practices of inventory management can provide high service level
and also give high saving for their cost.
Healthcare industry operates their activities different with other types of
businesses. This industry has its own pattern in managing the business.
Forecasting in healthcare industry is also very difficult. Prediction about patient
mix and supply consumption is hard to do by their executives and logisticians
(Jarret, 1998). It makes healthcare reform becoming foremost topic and mind
concern of both government officials and private citizens (Heienbuch, 1995).
Reducing charge for medical registration and fixing rates for medical
treatments are example ways to get succeed in reducing health expenditures and
achieve effectiveness and efficiency. Those ways also enhance the competition
among the healthcare providers, particularly the hospitals (Mettler et al., 2009).
Consumable medical supplies as one of critical fast moving products at
hospital often face stockout and overstock condition. The important questions
arise, what is the optimal distribution system and inventory review system for
consumable medical supplies? And how the impact of inventory system alteration
to potential saving cost?
This study is aims to find the optimal distribution system and inventory
review policy for consumable medical supplies, and find the potential saving cost
after alteration.
This research hopefully can be implemented in other types of hospitals in
which have similar characteristics in physical and other aspects, particularly at
public hospital and also can give contribution to knowledge about inventory
management for consumable medical supplies.
LITERATURE REVIEW

Hospital Inventory Management System

This section discuss about literature review of hospital inventory management

system. In general, there are four types of inventory system that commonly used
at hospital: traditional system, JIT, stockless system, and VMI. This section also
discusses about replenishment system policy (periodic and continuous) and
centralized versus decentralized distribution system. Hospital at this research still
uses traditional system, and has no exact policy for its replenishment system.
New environment of healthcare competition is cost conscious, therefore
traditional distribution type of supply chain in healthcare sector must be
abandoned in order to remain viable and competitive. Revenue opportunities are
gathered from driving costs and enhance efficiency (Heienbuch, 1995). The main
goal of inventory management and supply chain research is to reduce the cost of
healthcare without sacrificing service typically by improving the efficiency or
productivity of the system (Rosetti, 2008).
Just in time (JIT) is one of inventory management system that commonly
implemented in hospital supply chain. But very few academic researches
concerned on JIT in service industries than JIT in manufacturing firms whereas
implementation of JIT in service industries, particularly in hospital, derive
benefits and subsequent savings.
In hospital, Just-in-time inventory management means products will be
ordered when just in time it will be used. So, the inventory in hospitals
warehouses will be at optimal amount.
The definition of stockless system as proposed by Royer (2002) is when the
distributor picks & packs products according to the particular needs of each
patient care unit and, in most cases, deliver them directly.
Arthur et al. (1990) in Royer (2002) give definition of stockless systems as a
system in which the supplier requisites the hospitals central distribution function.
The supplier delivers the products to the hospital receiving dock in single or
eaches packages, then it arranged by user department. The suppliers then send the
products directly to the hospitals point of use generally on daily basis.
Vendor managed inventory (VMI) system or shipment inventory system on
another rationale has been widely used in many kinds of industries. There is a
survey found that VMI attain higher advantages and adaptation in hospital
inventory management, rather than JIT system and stockless system (Gerber, 1991
in Dong, 2002).
Yao et al. (2005) in their research found that there are several testimony and
evidence has shown that one of VMI system advantage is improving performance
of overall supply chain system. Supply chain improvement can be gained through
decreasing level of inventory and increasing fill rates. In VMI system, the
suppliers directly manage the inventory of the buyer, in this case hospitals stock-
keeping units. As collaborative commercial system, VMI integrates occupations
between vendors and hospitals (as buyers) through sharing information.
Implementation of collaborative supply chain management such as JIT
system, VMI system, and stockless method can produce cost reduction and
inventory savings. It needs good information sharing between the parties.
In summary we can see at table 1 about advantages and weaknesses in
hospital inventory management strategy.
Table 1. The Advantages and Weaknesses for Every Inventory Management Strategy

System Method Advantages Weaknesses

JIT (Just-In-Time): The products is ordered and
delivered when just-in-time it will
AIDT (2006), Jarret
be used. Means very minimum
(2006), Kumar (2008)
inventory in warehouses
Reduce inventory costs Only suitable when the distance
significantly because between supplier and hospital is near.
low inventory. High risk because there is no
guarantee product will always can
fulfils customers need.

Stockless: The products are directly sent to Only need little Only suitable when the distance
unit or point-of-use, not hospital warehouse. between supplier and hospital is near.
Royer (2002)
warehouse. Job description of nurses will
increase.

VMI : Supplier manage hospital Simple and faster Only suitable when the order cost to
inventory. Supplier controls the system because product supplier is not high. Each unit in
Dong (2002), Yao et
amount of inventory in hospital are directly sent to unit. hospital need warehouse, which it can
al. (2005), Bhakoo et
unit. Unit directly order to vendor Inventory in warehouse increase cost.
al. (2012), Mustafa et
about the amount of product. is low.
al. (2009)

Traditional supply The products are shipped from Simple procedure and High total cost and risk on inventory
chain: supplier to distributor and then has no new system management.
packed in distributions adaptation. Theres no
Chandra et al. (2004),
warehouse. The products in requirement to
Vries (2011),
pallets shape are sent to each collaborate between
Heienbuch (1995),
hospitals warehouse. parties
Xiong et al. (2007),
Rosetti (2008), Jarret
(1998)

Centralized vs Decentralized System

 Internal distribution at hospital usually use decentralized system, some others
use centralized system. In centralized distribution system, the authority and
responsible to fulfill the demand for several warehouses are held by one place
(central warehouse). In decentralized distribution system, Every small warehouses
have to responsible with their own needs and have different system depends on
their policy and type of inventory.
Previous researches in hospital inventory management didnt discuss about
centralized and decentralized system at internal public hospital. Previous
researches focused on that system related to relationship with the supplier.

Types of Replenishment System

The most common situation at inventory management is stock levels are

depleted over time and needed to be replenished by new arrival units. Therefore,
applying the right inventory review policies in every stage of distribution process
(from raw material to end customer) is always be a vital problem for achieving
better performances at any organizations (Sezen, 2006). In general, there are two
kinds of inventory review system: continuous review and periodic review.
For many decades, continuous review policy, as known as economic order
quantity (EOQ) model, has been becoming a most commonly used policy for
inventory purchasing models development (Schniederjans, et al., 2000). In this
review system, purchase order or replenishment process is placed when the
inventory on hand is less than or equals the reorder level, or usually called reorder
point (ROP) (Eltawil, et al., 2007). The order amount is called Q. Continuous
review policy is a simple inventory system, usually used by many industries in
order to keep their service level high.
In periodic review policy, inventory level is reviewed and made
replenishment process at every specific time (Williams, et al., 2008). Order up to
level (OUL) is used to determine the order amount, in which the order amount is
OUL minus the inventory on hand.

RESEARCH METHODOLOGY

The research method of this study is qualitative, in which interviewing people

to describe the existing causal process then develop new idea and techniques in
inventory management by data processing. This study is conducted at one of
public hospital at Bandung city, Indonesia.
The first stage of the methodology is preliminary study. Preliminary
study includes literature review and initial interview. Literature review is
conducted to find the research gap and basic knowledge of research. From
literature review, it is also found about other case that has similar characteristics.
 By initial interview with the head of medical warehouse and head of
pharmaceutical warehouse, the main problems of medical consumables at public
hospital are known. Then problem formulation and research objectives are
formulated.
The next important stage after preliminary study is qualitative study. It aims
to identify the root cause of problems in hospital medical consumable inventory
management. This stage provides a depth analysis through interviews with several
units in hospital and field observation.
Some interviews are conducted with head of five units, since the hospital has
several units in managing their inventories of consumable goods. The interview is
semi-structured interview, in which the list of questions has prepared before.
Those interviews are very helpful to capture the problems that happened from
several different perspectives. The interview also has function to gain important
information about their readiness to implement the new system, related o their
ability and supported infrastructure. While visiting the unit for interview the
respondents, field observation is conducted through data gathering and observe
the real process. This study takes three types of syringe as a sample.
The third stage is developing inventory management system scenarios. Due to
its complexity, simulation is very needed at this stage. This study is using Arena
simulation software to simulate each of scenarios. Scenarios are also made based
on the detail knowledge of hospitals distribution system. The final stage is
analyze the results of simulation then goes to conclusion.

SCENARIO DEVELOPMENT AND LOGIC FLOWCHART

There are six scenarios which are developed at this study.

Table 2. List of inventory management system scenarios

type review policy

Scenario Annotation
periodic continuous
medical warehouse distribute
to pharmaceutical warehouse
existing medical warehouse use medical warehouse use
and other units.
distribution periodic review continuous review
Pharmaceutical warehouse
also distribute to units
direct medical warehouse distribute
distribution syringe to all units directly, medical warehouse use medical warehouse use
(decentralized pharmaceutical warehouse as periodic review continuous review
) distribution unit
pharmaceutical warehouse medical warehouse use medical warehouse use
and outpatient installation has periodic, pharmaceutical continuous review,
centralized function as connection warehouse use continuous, pharmaceutical warehouse
between medical warehouse outpatient installation use use continuous, outpatient
and units periodic installation use periodic
Existing Distribution System
 The existing condition of this public hospital is very distracted and disorderly
managed. There is no exact calculation about their review system policy. The
medical warehouse give information to procurement unit about how much they
need to several months ahead only based on last few months demand. The hospital
order to supplier periodically but the order amount is based on contract.
In units, the review period system is different for each unit. Some of them
using periodic review, some of them using continuous, and some others has no
certain system.
Now, syringe procurement follow the rule of lump sum contract, which is the
amount at lump sum contract has to fill the necessity of syringe during the next
contract period (usually three until four months). The unpredictable real demand
for next several months has wide standard deviation (wide range). This is a
challenge for hospital, to make a contract in which can cover all the needs for next
several months.
The existing distribution system for consumable medical supplies at this
hospital is based on the patient type. There are three type of patients:
Public health assurance patient: all the bills are certified by government,
Health insurance patient: has insurance which is given by private sector or
governments company
Regular patient in which they have no any insurance.
Although the brand and type of consumable medical supplies is same for all
types of patient, but the distribution is separated by customer type. For public
health assurance patients, all medical consumables are distributed from vendors
to medical warehouse. Then medical warehouse distributes the goods to the point-
of-use (emergency unit, laboratories, outpatient installation, inpatient installation).
But medical consumables for regular patients and health insurance patients are
distributed from medical warehouse to the pharmaceutical warehouse. Then
pharmaceutical warehouse be on duty to serve and distribute the goods to all
pharmacy storehouses and other point-of-uses in which serve regular patient and
health insurance patient.
Direct Distribution Scenario (Decentralized)
At this scenario, medical warehouse send syringe directly to all type of
units. Information flow of demand also sent direct from units to medical
warehouse. Pharmaceutical warehouse has function become distribution unit at
medical warehouse. It means pharmaceutical warehouse space is closer to medical
warehouse, or merges into one place. Pharmaceutical warehouse as distribution
unit has function to receive defecta from units and send goods to units.
This scenario nearly adopt stockless system concept, in which inventory at
units has to be as minimum as possible. It means safety stock at every unit is
decrease from existing condition. All of inventories are centralized at medical
warehouse. Replenishment system at units depends on the amount of requiring
syringe. At high amount required units, its better to adopt continuous review
system. Otherwise, units that only need low amount of syringe and rarely used,
its better to adopt periodic review system.
Process lead time from check inventory on hand when there is input demand
at medical warehouse until send syringes to units is one day. A periodic system,
the review period is two weeks. At continuous system, medical warehouse order
new syringe to supplier when its inventory reach ROP. These mechanisms has
discussed at the previous section.
Centalized Distribution Based on Installation Scenario
This scenario use installations as centralized warehouse and as connective
between medical warehouse and units. There two installations which have many
units in practice: pharmaceutical installation and outpatient installation.
At this scenario, the available pharmaceutical warehouse will serve only units
under pharmaceutical installation as well as outpatient installation will serve only
units under outpatient installation. Units that work under pharmaceutical
installation are called depots. Units that work under outpatient installation are
called poly. But the installations which have only two or one units directly
connected to medical warehouse. They dont need connective storehouse because
they only serve themselves.
At pharmaceutical warehouse, demand information flow from depots to this
warehouse. Then pharmaceutical warehouse has to check the inventory on hand. If
its inventory has already reach ROP, pharmaceutical warehouse has to send
defecta to medical warehouse.
Different condition is implemented at outpatient installation; this installation
has to send defecta periodically to medical warehouse every two weeks. But if this
installation runs out of inventory, it is permitted to request syringe to medical
warehouse.
Logic Flowchart
Before conduct simulation, logic flowchart has to be built. The logic
flowchart becomes basic for simulation model. Modeling the simulation based on
the review policy, continuous and periodic which are can be seen at figures below.
Figure 1. Logic flowchart for continuous review policy
 Figure 1. Logic flowchart for periodic review policy

RESULTS AND DISCUSSION

This section show the comparison between all scenarios includes average
inventory level, inventory saving cost, and cycle service level. From this section,
it is known which scenario has better results than the others.
The first comparison is about average inventory level. Table 3 represent that
centralizatrion system has the lowest amount of average inventory level than the
others, particularly for syringe 3ml.
 Table 3. Comparison of Average Inventory Level for Each Scenario in unit
existing distribution direct distribution centralized
type
existing periodic continuous periodic continuous periodic continuous
3 ml 26632 21079 14700 10082 9761 9737 7257
5 ml 23686 11871 9873 7137 8071 6421 6847
10 ml 13101 11425 9633 7932 9078 7583 7065

The next comparison is about inventory saving cost. Inventory cost is

obtained from average inventory level multiplied by the unit price. Then to
emphasize the comparison, percentage of potential inventory saving is also
calculated. From cost percentages, centralized system has the biggest potential
saving cost. From percentage of cycle service level, direct distribution with
periodic review and centralized with continuous review have similar result.

Table 4. Comparison of Inventory Cost for Each Scenario (with integration) in IDR
existing distribution direct distribution centralized
Unit
type continuou continuou
price existing periodic periodic periodic continuous
s s
4,880,00
3 ml 484 12,900,000 10,200,000 7,115,000 5,143,000 4,713,000 3,512,000
0
4,661,00
5 ml 653 15,467,000 7,752,000 6,447,000 5,271,000 4,193,000 4,471,000
0
6,330,00
10 ml 798 10,455,000 9,117,000 7,688,000 7,245,000 6,051,000 5,638,000
0

Table 5. Comparison of Potensial Saving Cost Percentage for Each Scenario

existing distribution direct distribution centralized
type
periodic continuous periodic continuous periodic continuous
3 ml 21% 45% 62% 60% 63% 73%
5 ml 50% 58% 70% 66% 73% 71%
10 ml 13% 26% 39% 31% 42% 46%
average 28% 43% 57% 52% 59% 63%

Table 6. Comparison of Cycle Service Level for Each Scenario

existing distribution scenario direct distribution centralized
type
existing periodic continuous periodic continuous periodic continuous
3 ml 94% 93% 99% 97% 98% 95% 97%
5 ml 92% 98% 97% 98% 95% 93% 97%
10 ml 86% 94% 98% 96% 96% 93% 97%
average 91% 95% 98% 97% 96% 94% 97%

Considering about the advantages and weaknesses for these two scenarios,
direct distribution and centralized, centralized system provide better information
sharing system. This factor is critically important in managing the inventory.
Another advantage is every unit should not have safety stock at their place. The
weakness of this system is hospital has to provide place for outpatient warehouse.
But if reviewed from the amount of syringe is small, it can be overcome by
utilized the existing place. Due to the current condition of hospital, which is
lacking of technology, particularly lack of RFID system to check the inventory all
the time, the improvement for its technology is much suggested.
The advantage of direct distribution is hospital should not have place for
additional storehouses. The major weakness of direct distribution is medical
warehouse has to manage inventory and provide goods for eighteen units directly
and at the same time manage the relation with the supplier. It would be exhausted
and have high risk in providing goods if its not supported by adequate facility and
human resources.

CONCLUSION

The principal purpose in managing inventory in public hospital, particularly

managing consumable medical supplies inventory, is to provide high service level
to customer with cost efficiencies. Overall study reveals that every type of
distribution and replenishment system has its own advantages and weaknesses. In
finding the suitable inventory management system for consumable medical
supplies in public hospital, simulation modeling system as a tool can be optimally
used.
The simulation results show that distribution scenario with additional
storehouses or centralized distribution with use continuous review has the largest
percentage of inventory saving cost. Although its results are similar with direct
distribution scenario, this distribution system provides better system of
information sharing. More specific, the continuous review policy is the optimal
replenishment and review system for syringes as consumable medical supplies. It
is represented by high service level and the highest percentage of potential saving
cost (63%).
Due to the lack of human resources, IT system and other obstacles, the
centralized distribution with continuous review is hard to be implemented directly.
The second recommendation is direct distribution with periodic review inventory
system with potential saving 57% but has higher service level than centralized
system with periodic review system.
This study can be implemented at public hospital generally, and at
consumable medical supplies specifically. By simulating the hospital plans with
similar concept, this study gives high contribution to practice. This study also
contributes to inventory management knowledge by finding the suitable
distribution and replenishment system of consumable medical supplies with fast-
moving and low price characteristics.
Recommendation for Further Research
This research only simulates six scenarios for searching the optimal
distribution and inventory review system. There are many scenarios of distribution
system that can be developed and simulated. For instance, stockless system and
just in time system.
Further research can also take another sample of consumable medical
supplies in order to reveal generalization of this study. For example, further
research can take another sample which has different characteristic, slow moving
consumable medical supplies.
In short, many researches about this topic should be embraced in order to gain
better results and find better way to increase efficiencies and provide high service
level at public hospital.
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