A Well Oiled Machine
How HME providers can optimize inventory operations through technology.
- By David Kopf
- Apr 01, 2009
Today’s business challenge for providers is simple and complex at the same time. In the very basic terms, providers must do one thing: cut costs. With funding cuts and rental caps giving their profit margins a buzz cut, providers are looking for new ways to find efficiencies that reduce overhead. Understanding that challenge is the simple part.
The hard part is figuring out how find those cost reductions. However, there’s one very large bit of cost sitting in their warehouse operations: inventory. For providers, inventory represents a massive cost, as well as a significant opportunity to find new savings.
“You tie your money up in three places: salaries and benefits for employees, your accounts receivable, and the third place you tie it up is inventory,” says Jay Williams, national HME sales manager for HME software maker QS/1.
It’s not hard to guess which of those three often ties up the most capital. “Your acquisition costs for your product supplies are either your number one or your number two cost in an HME company,” says Mike Tracey of Mike Tracey Consulting LLC. “It runs neck and neck with payroll.
“Those are your two biggest costs. Most of your other costs are set — your rent and utilities are pretty constant,” adds Tracey, who spent many years operating HME businesses, but now consults providers on software and other business and operations issues. “And, you can play a little bit with payroll, but that’s a pretty fixed expense, too.”
This means inventory sits squarely in provider’s cost-cutting sites.
“Historically, providers focused on A/R, and now they’re being force to look at the inventory side because of the cuts that are coming,” says Robin Campbell, senior systems consultant for Computers Unlimited. “The belts are being tightened here, and they’re saying ‘We really have to manage this inventory.’”
But, if providers are left with a large amount of money sitting on warehouse shelves, in the backs of delivery trucks and out on store shelves, the question is how much of it should be there?
“The primary reason you want to do inventory control is that you have a lot of money tied up in inventory,” Williams says. “You either have too much inventory — which means you don’t have your money in your pocket working for you — or you have too little — and the problem with too little inventory is that someone walks in the door, wants a product, and if you don’t have it. So you’ve lost a sale.”
That’s where the “control” in “inventory control” comes into play. Like a tightrope walker balancing on a high wire, providers must strike a perfect balance between having the right supply of the right items on-hand in order to ensure patients are satisfied and business remains humming along, while at the same time, minimizing supplies of high-ticket items that are infrequently requested.
“It’s all about streamlining your business and cutting costs things that are going to make your whole company run more efficiently,” says Virginia Greenwood, national sales manager for DIABCO Healthcare Software Solutions LLC.
“I call it the ‘Goldilock’s Theory,’” Williams adds. “What you want is just the right amount of inventory.”
So where do providers get started?
Probably the best way to being optimizing their inventory systems is for providers to assess their current situation. For some providers, they might be starting from the ground up. Many providers, Williams says, simply use “the eyeball method” of inventory control. “They look at their shelves, and when they pull the last of an item they order some more,” he says.
A shelf here and a shelf there might be one one thing, but that can quickly add up, Tracey explains. One business he helped run combined a recently acquired HME business and a pharmacy. The inventory control system needed a lot of work, which was a concern, given the money tied up.
“It carried $500,000 to $600,000 of inventory, and was not run on a perpetual inventory system — it was all done manually,” Tracey explains. “We got [a perpetual system] up and running and we were actually able to reduce our inventory level by close to 20 percent by electronically tracking inventory and having processes automated as much as possible.”
It Starts With Software
Cutting inventory by a fifth is nothing to sneeze at, but it requires up-front investment. Providers need the tools to strike that delicate inventory balance, and the primary tool is HME-specific software.
“What I recommend for HME providers is that they find a good, solid HME software company that they can align themselves with, and that does a great job with billing, electronic claims, electronic remittance systems, and does the inventory side of things,” Tracey says, advising them to not try to cobble together something on their own.
“I see some providers out there are using a limited billing program for billing HME, and then using some sort of canned inventory system, but those canned systems really fall short when it comes to HME,” he explains. “You have to use an inventory system that is integrated with the billing system and the point of sale system. I see too many people out there using multiple programs, but they’re not interfaced or integrated. You go to sell something, but it doesn’t come out of inventory, so then you have to go into the inventory system and you take it out.”
That compromise solution also creates a system that isn’t tailored to the unique business needs of HME providers, such as documentation for accreditation, Tracey explains.
“You have to have a system for tracking the manufacturer’s serial number and where that item has been, is it a rental, has it been sold, is it in maintenance, is it in the warehouse,” he says. “A good software system tracks inventory so that when you order a product, say an oxygen concentrator, it asks you for the serial number.
“And it will give you a history and say it was rented to Mr. Jones from this date to that date, and then it went back in the warehouse, and then it went to this patient, and then it came in for repair, so you get a very good history, which the accreditation agencies like to see,” he continues. “Also if there’s a recall on a batch of serial numbers, you can find them within a few minutes.”
Tracey adds while that sounds like a lot of functionality, today’s HME management systems are highly cost-effective and require little in the way of the large up-front costs HME systems used to require, when and installation would entail installing a server, desktops and software licenses. Instead, providers simply need to a web browser to access many HME systems.
“I can remember being quoted as high as $60,000 from some of the HME software vendors that were out there, but those days are over,” he explains. ”Providers will have some outlay, but not like they had 20 years ago. It’s become more cost-effective.”And if a provider has an HME-specific billing and business management system up and running already, there is a very good change that it incorporates inventory control features already (see “Learn More,” page 28).
“If they already own an HME billing package, the odds are that it already has an inventory control package built in,” Williams says. “The first thing they need to do is contact their software vendor and see.”
Williams says that step, while simple, is one some providers overlook, because they are fixated on the A/R portion of the package.
“When [providers] buy a program or switch from program A to B, the only thing that is important is ‘I have to bill, I have to bill, I have to bill, I have to have cash flow, and I don’t have three months to set up my inventory control,’” Williams explains. “So what that usually means is that they don’t know how to use the inventory control, and for many of them, their solution becomes ‘I can fix my inventory if I buy another software package.’”
Thusly, the provider winds up repeating the problem, when the solution was already sitting on their desks. They just need to learn how to use it.
“First of all the software company has to be able to provide the training on inventory software so that people aren’t intimidated by it otherwise you’re throwing your dollars away,” Greenwood says. “By all means people have to be trained properly. That’s key.”
And if the provider had staff trained on the software when they initially purchased it way back when, “they need to contact their software vendor and be retrained on how to do inventory control with that program,” Williams says, adding that the training process should help lead them into implementation of the system.
Grouping and Coding
As providers learn their system, they will be better able to start approaching how it is they will begin to tackle the overarching task of actually controlling their inventory. It’s not an instant process.
“A lot of times, [implementing inventory control] is not going to be something you’re going to do in a week,” Williams says. “It might take you a month, two months or three months to really wrap your head around your inventory.”
And that depends on the items that are being offered by the provider. “For example, the HME dealers have supplies, disposables, the ‘bent iron’ DME rental equipment, they have liquid oxygen, and they have cylinders,” Campbell says. “Each one of those categories has unique inventory requirements.”
Those requirements each require special information be associated with each type of item. For instance, oxygen cylinders have their own unique tracking requirements, so having a system that can track cylinders by lot numbers and that includes their maintenance information is important documentation that must be integrated into the inventory system, she explains.
Tracking cylinders like a rental doesn’t work well, because tanks come in and out, but the providers don’t charge rent for the tank, Campbell explains. “They are part of the contents,” she says. “It’s unique in that I have to track the item, but I’m not generating revenue from the item per se.” And thusly, the inventory system must reflect that.
Perhaps the best way to approach organizing the inventory is through grouping similar items.
“When you get ready to organize it you’ll want to pick something, start with it and get that under control,” Williams says. “You organize it by group first, and attack one group at a time. Identify all groups and then start with the one that turns over a whole lot.”
Once providers have started with a group, the need to begin describing the items, starting with the most general description to the most specific. This will help the provider not only give each item an item code, but ensure that those codes reflect all the similar products within the group.
“For example, walkers would start with walker, then folding or rigid, then adult or junior, then standard or heavy duty, with wheels or without,” Williams explains. “The reason for this is that you’re going to have an item code. Some people start with the manufacturer’s name and make up the rest, some people use the manufacturer’s part number, but that item code needs to be specific.”
Moreover, while the item numbers will be uniform, staff might know an item number, but anybody who knows the system can find a needed item via the general-to-specific product description
“A company needs something that is easy to use so that is is easy to navigate,” Greenwood says. “They don’t want anything that is complicated.”
Once the item codes are in place, providers can move on to the next step in increasing efficiency: barcoding.
Barcoding and Handhelds
Barcoding has three main benefits: it ensures changes in the inventory are correctly recording, it increases efficiencies, and lets inventory be managed in real-time.
“What barcoding does is eliminates human error,” Campbell says. “It allows people to use scanners to identify equipment and the movement of that equipment, and that’s the key to the inventory control —being able to track where that equipment is at any point, and, for accreditation purposes, where it has been.
“If you don’t barcode, you’re writing down serial numbers and that just creates havoc,” she continues. “People make mistakes, people can’t read the writing, and it creates extra work.”
That said, barcoding, like grouping and coding products, is a process. “Your inventory isn’t just sitting in the warehouse so that you can decide, ‘Okay, let’s go barcode it today,’” she explains. “It’s everywhere.”
But once barcoding is in place, new efficiencies begin to flourish. For starters, assuming that inventory control is integrated with the point of sales system, barcoding means instant inventory updates after every sale.
“When it comes to your point of sales side of things or for checking and scanning inventory, you want to be able to scan it instead of manually entering it,” Tracey says. “You want to be able to scan right at the register and not manually punch in items.”
The back-end of the business benefits as well. If warehouse staff are using handheld scanners, they can update the inventory system in real time if they are using wireless handhelds, or in close to real time, if they use handhelds that are synchronized via charging units, Campbell and Williams explain. In either case, as staff stock items in warehouse bins, or pull them for orders, the inventory system will be updates as to the changes in remaining stock.
That sort of system also helps when picking orders, Campbell says. Handheld units can be used to pick orders, sorted by bin numbers. So, the warehouse worker can go from bin to bin, pulling items, scanning them, and updating the system and the order.
This can also have a large benefit when it comes to Uncle Sam, as well, Williams says.
“Tracking inventory becomes important because for tax purposes you need to report the value of your inventory every year, so obviously a handheld data collection unit can speed up that process,” he says. “I worked with a company that supplied hundreds of nursing homes, and they used to have six or eight people spend three or four days collecting the inventory data. Then they did it with two handheld units used by four people — and they did it in under a half a day.”
Drop Shipping and Automatic Purchasing
Also, any system that can implement drop shipping can represent a great savings, because the inventory never touches the provider warehouse, Campbell says.
“The technology is there through [electronic data interchange] to place and order, and that order is sent to the vendor, the vendor can send an acknowledgement back electronically that it received the order, and then send it directly to the patient,” she explains. “Then they can send confirmation of shipment to the provider and at that point that should be able to come into the provider’s system and then the provider can be able to bill.
“That kind of technology on the supply side would be a huge cost saving in comparison to ordering it, getting it into the warehouse, putting it on the self, pulling it off the shelf, putting it in a box and sending it to the patient,” she adds.
Another automation element that Tracey says providers should look for and implement is automatic purchasing, which ensures that supplies are ordered when they reach certain minimum stocking thresholds.
“You can set it up to have stock levels on every single item and with a few clicks get a listing of everything you need to order based on the stock levels you set,” he explains. “You get a listing that can be sorted by vendor, and by preferred vendors and those kinds of criteria, but you also can go through and edit that, you can say ‘I know that I said I’d like to keep six of these, but that’s changed I’m going to knock that down to three.’”
Tracey says that automatic purchasing tools typically also record recent purchases so that providers can sort automated orders based on the best price, or supplier lead time, or similar criteria. This also includes shipping charges, another major cost saving achieved simply through the group orders that automatic purchasing encourages.
“Freight charges are a killer,” he says. “If you forget something, you could be ordering every day on a onesy-twosy basis, and then your getting extra shipping charges because you didn’t meet your minimum — and that’s a big part of buying because shipping can add up in a hurry. There’s times in the past where I’ve seen shipping charges be almost as much as the product.”
At the end of the day, if a provider has a good inventory control system, it can keep well ahead of the costs that eat into its decreasing profit margins. Tools like software, barcoding, automatic purchasing and ensuring those tools are integrated into and HME business mean they can gain the item-by-item efficiency they need in a tough economy and funding landscape.
“If you need to order x product, but you want to get it for the best price and would prefer to combine that order with six other items that might be comparable in order to eliminate shipping charges, with a good inventory system you can monitor your price and shipping cost for each item,” Tracey says. “Without that, well, it’s old school.”
This article originally appeared in the April 2009 issue of HME Business.