Strategic inventory management of externally sourced medical devices

Abstract

The purpose of this research was to determine inventory strategies for externally sourced medical devices. In the medical device industry, the desire for high levels of customer service often results in less than optimal inventory levels. In this study, we analyzed the details of the current inventory model utilized by the medical device company. In assigning appropriate inventory levels, we determined that key inputs were not regarded. When evaluating inventory levels, it was determined that pipeline inventory should be removed from the target on hand inventory levels if inventory ownership occurs upon receipt. When calculating safety stock, we determined that supply variability should be incorporated into the safety stock formula and extra buffers currently in place should be removed. In addition, a more robust measure of demand variability such as the Root Mean Squared Error (RMSE) or the Mean Absolute Percent Error (MAPE) should be incorporated into the formula instead of the use of the maximum of standard deviation of demand and standard deviation of forecast. Also, a gap was identified between the customer service safety factor used in the safety stock formula and the measurement of customer service by the company. Following the analysis of the current inventory modeling approach, we segmented the medical device SKU's based on key factors that drive inventory: demand, lead time, criticality and customer service. We also redefined the model used to determine slow moving inventory levels by incorporating the lead time of the part in setting cycle and safety stock levels and simulating the results to validate the relationships between the various inventory drivers. The application of the methodologies, concepts and findings in this research covering externally sourced medical devices can be extended to other subsidiaries and other industries.