the director of University Operations, Drew

Hardy Hospital Case StudyCaroline Highgrove, Hardy’s director of Materials Management, glanced at the papers spread across herdesk. She wondered where the week had gone. On Monday, the director of University Operations, DrewParis, had asked Caroline to look into the purchasing and supplies systems for the hospital. Drewspecifically wanted Caroline to evaluate the current materials-management system, identify ways toreduce costs, and recommend a final plan of action. Drew explained that the university was underpressure to cut expenses, and hospital inventory did not seem to be under control.As Caroline reviewed her notes, she was struck by the variations in order sizes and order frequencies forthe hospital’s stock-keeping units (SKUs). For some SKUs, inventory ran out before new orders came in,whereas for other SKUs, excessively high stock levels were being carried. The university and hospital’scomputerized materials-management system was about a decade old and generally worked well;however, employees often ignored or did not update key information. Thus, data integrity was a majorproblem in this information system.Hospital and university supply orders were classified as either regular stock or special order. The hospitalwas the originator of almost all special orders. Regular stock items, such as bed sheets, uniforms, andsyringes, were characterized by their long-standing and frequent use throughout the university andhospital, and by a low risk of obsolescence. When a department needed a regular stock item, thatdepartment generally ordered (requisitioned) the item. If the item was in stock, it would be delivered tothe department by the next delivery date.When the university did not normally stock an item, individual hospital departments could special-orderthem. Special-order items were supposed to be those of an experimental nature or critical to patienthealth care, but not used frequently. Hospital departments requiring these special items bypassed theuniversity purchasing system. Once a special order Hardy Hospital Case Study was placed, the hospitaldepartment informed university purchasing so that it could eventually authorize payment on thevendor’s invoice. Hospital department coordinators, doctors, or head nurses were responsible forinitiating and/or authorizing special orders. In total, these special orders required a significant amount ofwork that took department coordinators and head nurses away from their duties. University purchasingkept no records on the hospital’s special-order inventories or for the 215 secondary hospital stockingpoints such as exam rooms and moveable carts.One department’s head nurse explained that many departments were afraid of running out of regularstock items. University purchasing didn’t understand the importance and nature of hospital inventory,and they were slow to respond. The nurse cited the months-long period university purchasing processneeded to place new items on the regular stock list, and the long lead times sometimes involved inreceiving orders requisitioned from the university’s approved vendor list.Because the university was a state institution, strict bidding and purchasing procedures had to befollowed for both regular stock and special orders. For example, three written bids were required for anindividual order of $2,000 or more. The processing of these bids often took up to two months. For ordersbetween $800 and $1,999, three telephone bids were necessary. In these situations, purchases could bemade only from the lowest bidder. Orders under $800, or items on the state contract list, could beordered over the phone, without any bids. State contract list items were those for which statewideneeds had been combined and one contract left to cover all of them.Caroline had gathered information on the costs of ordering and storing hospital supplies. For order costs,she estimated that, on average, the purchasing, account payables, and receiving personnel spent threehours processing a single purchase order. A single purchase order typically included four SKUs (i.e., eachSKU on a purchase order was called a line item). The average hospital storeroom’s wage was $16 anhour; with employee benefits and associated overhead, the cost of one worker-hour came to $20.For inventory-holding costs, the university warehouse and hospital storeroom used 36,750 square feet ofstorage space. The university stored an average of $4.15 million in hospital supplies in this space.Records indicated that the average annual variable and semivariable cost for storage space this yearwould be $4.60 per square foot. Five warehouse workers and storeroom associates were required tohandle the hospital’s supplies. These individuals each earned $32,000 a year; benefits and overheadrates for these employees were the same as for other personnel, about 20 percent. Other warehousecosts, including obsolescence and taxes, were expected to reach $200,000 this year. The hospitaloperated 52 weeks per year. Also, the state recently had floated a bond issue at 8.9 percent, and Carolinethought that might be a good estimate of the cost of money to finance inventory, but she wasn’t surewhat other costs to include in inventory-holding cost.After reviewing her notes on the hospital’s materials-management situation, Caroline decided to take acloser look at some individual regular stock items. She sorted through the papers on her desk and found30 SKUs of interest. She wanted to analyze all 30 SKUs but decided to begin with one SKU widely used inthe hospital—Strike Disinfectant. Data on this SKU are shown in Exhibits 12.16 and 12.17.Hardy Hospital Strike Disinfectant DataCase SizeOrder Lead Time4 gallonsStrike Disinfectant1Cost per Case$84.202 weeksBeginning SKU Balance96Week1Receipt200Week7Ending Balance110Week16Hardy Hospital Aggregate Strike Disinfectant Weekly Demand as Measured by Hospital RequisitionsExhibit 12.17Hardy Hospital Aggregate Strike Disinfectant Weekly Demand as Measured by HospitalRequisitionsHardy Hospital Aggregate Strike Disinfectant Weekly Demand as Measured by Hospital Requisitions2. What are good estimates of order cost and inventory-holding cost? (State all assumptions and showall computations.)It takes 3 hours per order – average of 4 SKU’s per order and total cost with benefits of $20/hr inworkers’ wages.$20/hr. x 3 hrs. / 4 SKUS = $15 per order36750 Sq. feet * 4.6 per ft. = $169,05032,000 wage, 6400, 20% benefits = $38,4005 people = $153,6005*32000-6400=153600other $200,000$561,050 /52=$10,789, weekly +$960, financing= $11, 750, total weekly *52 =$610,983, annualized$4,150,000, inventory14.72%, inventory holding cost



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