PEOPLE & OPINIONS
• implementing an accurate forecasting system; improving predictive demand planning for high dollar items.
• reviewing contract payment terms. Supply Chain should consider these strategies if inventory is not turning effi- ciently and is greater than the average or benchmarked leading practices for the healthcare industry—12 inventory turns in a year for cardiac catheter labs and seven to 12 inventory turns for operating room or surgical services. These strategies can assist in the facilitation of a faster turn rate for all inventories and therefore a reduction of the days inventory on hand, which can lead to a decrease in days for the cash cycle to be completed. The next area for developing a strategy is DPO, and one of the areas for your sup- ply chain team to review, is contract pay- ment terms. These terms can be extended to improve the CCC. If you are at 30 days for payment, you could try to extend to 45, or even 60 days.
However, if you overreach by asking for an overly long extended timeframe for payment, it could impact the orga- nization’s relationship with these same suppliers, send a mixed message and eventually drive up costs or threaten their ability to ship. Supply Chain must strategize with the accounts payable department to determine what would be beneficial for the organization in payment terms, days to pay and discounts. Strate- gies include: • structure accounts payable, sourcing and purchasing functions and policies for improvement.
• develop new guidelines for payment terms.
• review payment terms for discounting. This remains a precarious balancing act for Supply Chain, which must have inventory available for use at any given time, maintaining a fill rate at target levels for critical items with a turn ratio that decreases the days of inventory on hand. An organization will do itself a disser- vice if they look at DIO, DSO and DPO as standalone metrics. The CCC metric incorporates them all, and measures and evaluates management effective- ness when calculated quarterly, trended and tracked consistently. Organizations experiencing an increasing CCC should investigate their metrics to determine the root cause, and correct it. Other industries such as automotive and retail have used the CCC metric for many years. It is now time for hospitals and healthcare organizations to look at their cash conversion cycle and com- parisons within the industry. Supply
Chain can assist with this. Given what hospitals have been through during the past 19 months, there is a need to reassess strategy on working capital and look for a better methodology for evaluating the effectiveness of management and finan- cial wellbeing. The cash conversion cycle is a good place to start. HPN
Judi Proctor is a senior consultant with Vizient and brings more than 30 years of
experience exclusively in health care supply chain. She leads initiatives in supply chain assessment and optimization, supply and inventory automation, strategic sourcing, value analysis and operational cost improve- ments. Proctor holds the designation of certi- fied materials resource professional (CMRP) from AHRMM and is a master instructor in process management. Her educational back- ground is in finance with a Master of Business Administration and Health Law.
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