How to Stop Losing Money Through Inefficient Supply Chain and DME Inventory Management
Offering durable medical equipment (DME) at your orthopaedic practice is a great way to introduce another revenue stream to your business. However, by mismanaging your inventory you risk not having the products to fulfill patient needs or a negatively affected bottom line.
To make the supply chain and DME inventory management at your practice more efficient you’ll need to know:
- The role DME inventory plays in increasing or decreasing your profit margins
- How to figure out how much inventory you should have on your shelves
- The root of supply chain management issues
- How to pinpoint and fix your current DME supply chain management issues
What Should be Included in Inventory Management
In simple terms, inventory management is a calculated approach to finding, storing, and selling inventory. It’s having the right amount of the right stock, at the right price, and the right cost.
DME supply chain management also includes ensuring DME compliance throughout the purchasing and selling process.
The Importance of Efficient DME Inventory Management
- Ensures that the most up-to-date equipment is on the shelf without having to throw away any outdated items
- Keeps you from running into “out of stock” situations
- Helps prevent losses from theft, damages, etc.
- Ensures that you’re not overstocked and that you’re not paying rent just to hold items that you don’t need at the moment
- Allows you to provide great customer service to your patients, as they know they can count on you to quickly fulfill their DME needs
- Keeps you from spending too much on inventory right now, which could cause cash flow issues later on
How to Determine the Proper DME Inventory
To figure out what you need to have on your shelves, you first need to know your current DME inventory levels.
- Step 1: Take inventory of all DME you have at your locations
- Step 2: Determine how much purchasing and storing this inventory costs.
- Step 3: Use an inventory management model such as the economic order quantity costing (EOQC) formula to figure out how to most cost-effectively purchase, store, and sell your DME.
The EOQC Formula: What It Is and How to Use It
The EOQC formula is an accounting formula that calculates the point at which the combination of ordering costs and inventory carrying costs is the least expensive and the inventory is the most profitable, which is the goal of any DME provider.
The EOQC formula is based on three assumptions:
- Revenues (inventory sales) are constant
- Cost per order of DME is relatively unchanging
- New orders are set to arrive when your current inventory runs out (otherwise known as “just in time delivery)
To calculate EOQC, you need three pieces of information: the use of DME units that were purchased in the last year, the cost per order, and the carrying costs of each unit per year.
It’s important to note that “cost per order” is the sum of the fixed costs of the physical activities that add up each time someone orders one piece of DME. These may include the cost to enter the purchase order, print out the ordering receipt, deal with vendor invoices, etc.
Also, carrying costs often include rent, utilities, insurance, taxes, and the cost of holding DME as opposed to having inventory space utilized for your practice in other ways.
The actual EOQC calculation itself is as follows:
EOQC = √ 2 * S * O / C
S = Annual usage/purchase of units
O = Cost per order
C = Carrying costs per unit per year
This translates to multiplying 2 by the annual purchase of units and the cost per order. Then, divide that product by the carrying costs per unit per year. Finally, take the square root of that quotient, and you have your EOQC.
EOQC Formula Case Example
Let’s say that you run a podiatry clinic with an active surgical division. You estimate that your practice uses about 10,000 self-absorbing bone fixation pins per year. Each pin itself is $200, and you determine that the carrying cost is $10 per pin.
To calculate EOQC:
2 * (10,000 pins) * ($200 per pin) / $10 (carrying cost per pin) = $400,000
EOQQ = √$400,000 = 632
This means that there should be 16 orders per year, since 10,000 units/632 EOQC = 16. The time between each order is 3.3 weeks, since 52 weeks/16 orders = 3.3.
To keep the optimal amount of inventory available, have the same order amount delivered every 3.3 weeks. That way, you’ll have just enough (and not too much) equipment at the ready.
While calculating your EOQC is a good starting point, since the formula is based on the idea that your purchase costs and the number of units sold every year remain the same, you cannot just go off of this calculation entirely.
Inventory Turnover
It’s also important to determine inventory turnover as practices shouldn’t have money sitting on the shelf.
To calculate inventory turnover:
COG Sold/Average Inventory
To calculate Average Inventory:
(Beginning Inventory + Ending Inventory)/2.
Once you get the inventory turnover you can take 365/turnover to see how frequently a product is sold.
Inventory Turnover Case Example
Beginning Inventory: $2,500
Ending Inventory: $3,350
COG Sold: $14,700
Avg Inventory = ($2,500+$3,350)/2 = $2,925
Inventory Turnover = $14,700/$2,925 = 5.03 turns/year
Frequency = 365days/5.03 = 72.6 days
SOH goal is 5-6 turns per year and 60 days in inventory
The Real Root of Revenue Loss
The real reason behind why most practices lose money through their DME department isn’t actually because of the inventory itself. It’s because of the management—namely, how your practice handles the supply chain process.
For example, many smaller practices do not have the bandwidth to go over their inventory every day, nor can they take advantage of bulk ordering. They also may not have built partnerships with the best DME suppliers out there, nor do they have the knowledge to efficiently order items.
Instead, a smaller practice might be swimming in paperwork and operational costs that might just dry up a DME revenue stream.
Bridging the Gap: How to Go From Losing Money to Efficiently Managing Your DME Inventory
The root of DME management issues often comes from breakdowns in supply chain management. These can be complex challenges to overcome for many practices and why SelectOrtho exists.
Our proprietary DME management software and combined 50 years worth of knowledge in supply chain management allow you to collect on 95-98% of insurance claims, and never risk overstocking or under ordering.
Over the years, we have also vetted and built partnerships with some of the finest DME suppliers out there and give you the freedom to choose which ones you want to work with.
Instead of losing money through supply chain management issues, or trying to decipher when and how much DME you should order from which vendor, lean on SelectOrtho’s metric-driven inventory management software and expert supply vendor knowledge as a single point of contact for all your DME supply needs.
We also offer an entire suite of services, including filling and billing insurance claims, collections follow ups, and payment entries—among others.
Lose the headache and invest in a DME inventory management system that works, by partnering with SelectOrtho.