Up to £200m excess stock could be held in acute trusts in England.
The government’s recent spending review highlights the need for all public services to save money. Finnamore’s recent review of published accounts has identified that acute trusts hold up to £200m in excess stock, much of which can be saved or converted to cash for other uses.
The review highlights that, in a time of unprecedented spending cuts, a review of supplies management within acute trusts offers opportunities for significant savings.
By far the biggest ongoing cost in the NHS comes from employing the staff required to deliver services, so it is reasonable expect the bulk of the £15-20bn efficiency savings to come from staff efficiencies.
However, savings can come from other areas as well. For acute trusts, a significant percentage of expenditure is dedicated to supplies. Clearly, any savings from the supply chain can then reduce the pressure to save money elsewhere in the system.
The NHS has always been cost conscious regarding supplies. A number of developments, such as the introduction of NHS Supply Chain and the use of competitive tendering through OJEU, have all helped to drive costs down.
Supply chains also need to consider efficient distribution of materials, however. It is not unusual for hospitals to procure over 25,000 different items, making the distribution process extremely complex. Efficient distribution practices are therefore essential to effectively manage these complex supply chains.
Information presented in the published annual accounts for acute trusts across England shows total expenditure of around £45 billion each year. Of this, 61 per cent is spent on staff, while just under 20 per cent is spent on supplies.
Most supplies only take a few days to arrive once ordered, yet due to inefficient inventory control practices many trusts have more than 40 days worth of stock on their books. Reducing this inventory over a twelve-month period could reduce spend by up to £200 million (1 per cent of the £15-20bn NHS target).
Based on annual accounts reviewed by Finnamore, stock held by acute trusts totalled £642 million. However, there were significant inconsistencies in reporting information, with 16 trusts not reporting any stock figure at all in their publically available accounts (11 of whom were from the London SHA region).
Of the 150 trusts that reported inventory, 117 are likely to be overstocked, and 25 are likely to be understocked. Understocking is just as serious as overstocking, since a lack of supplies can lead to quality issues for patients.
By way of example to show how these numbers were arrived at, in the South East SHA region the average acute trust has £3.7 million in reported inventory (or work in progress). Based on their annual spend this inventory would last the trust 30.4 days.
Given that supplies can be delivered in a matter of days to the trust - should the processes be designed appropriately - it seems entirely reasonable for the trust to manage on 20 days worth of inventory, should they optimise their stock replenishment processes. Indeed some trusts are able to manage on levels significantly below 20 stock days.
Using the target level of 20 stock days to calculate the value of overstock we found that on average, trusts were overstocked by 29 per cent. This is a net figure, however. Trusts that reported an inventory figure greater than 20 stock days showed a potential excess stock value of £196.9 million. Those trusts that were under 20 stock days showed a value of £12.6 million. The net potential overstock is the difference between both figures, which is £184.3 million, as shown above. Assuming the trusts that did not report sufficient information are performing at an average basis, the net level of overstock is likely to be £203 million.
It seems reasonable that acute trusts could recover a significant portion of this overstock, which would significantly reduce the strain on NHS resources as they look to save that £15-20 billion target over the coming years.
Finnamore’s review also revealed that some regions perform better than others with regard to supply management. The best performing region seemed to be the North West SHA area, while the area with the greatest inventory reduction opportunities per trust was the North East SHA region.
The causes of excess inventory are numerous, but from our experience the commonest reasons for excess inventory include:
- Stock replenishment based on the judgement of staff rather than being data driven. We find that material services or nursing staff often reorder stock if there is space for it on the shelf.
- Multiple locations for the same item, creating additional stock holding. Some duplication of stock is inevitable but can be minimised when reviewed at an organisation level.
- The management of supplies frequently occurring at a departmental or divisional level instead of at an organisational level. This complexity can lead to some inventories being missed for the annual accounts.
- A PAR level (Periodic Automated Replenishment) approach is often used. When scanning for replenishment, staff must assess every product to decide what supplies need ordering to bring the stock back up to the PAR level. This wastes time and potentially creates hundreds of unnecessary replenishment trips.
- Poor levels of communication can exist between material services and nursing staff so supply chain problems can go unresolved.
- Consignment stock not managed well, or not used.
- A lack of regular reviews on inventory levels.
- Such practices lead to:
- Stock outs of key supplies due to insufficient quantities.
- Overstocked items leading to products expiring on the shelf.
- Fire fighting by staff to cope with frequent supply problems.
- Hording behaviour by staff due to lack of trust in their supply chain.
It should be noted that insufficient stock or expiring products have potential patient safety implications.
To help manage inventory, automated dispensing cabinets (such as those provided by PYXIS and OMNICELL) are available and used by many hospitals. While expensive, they can be an effective tool for managing supplies if used correctly. However, in many cases inventory levels are set at the time the equipment is installed and are not adjusted, except when there is a particular stocking problem.
When optimising the supply chain within a hospital it is important to consider replenishment processes and redesign them to reduce inefficiencies. Optimal stock levels are based on usage and lead times - though it is important to consider safety stock during this process. In hospitals, successful supply chain interventions often have a strong stakeholder engagement element. This helps to build staff belief that supplies will be there when they need them, reducing hording behaviour.
By applying simple process changes as above, NHS acute trusts could potentially save over £100 million in combined costs. In addition, smoother supply chains will reduce problems encountered by staff and ensure there are fewer distractions when treating patients.
Duncan Harper and Lucy Reynolds are consultants at Finnamore.