Inventory management from counting supplies to analyzing expenses

Reagents, disposables and equipment are critical to operations of the medical laboratory. Overall, these supplies constitute close to 50% of a lab’s operating budget—which can range from $50,000 to $10,000,000 per year—and are an asset that needs to be managed.^1,2 Inventory control is important for a number of reasons. Labs need to:

1. Maintain sufficient reagents and supplies for patient testing;
2. Track dates when a lot number was in use and be sure that none of the reagents and supplies have expired;
3. Improve operating budget by limiting the on-hand inventory and associated costs;
4. Know when to order reagents and supplies, and in what quantity;
5. Operate within established regulatory guidelines and good laboratory practice; and
6. Analyze usage and expenses, coordinate the distribution of reagents and supplies to off-site laboratories, and calculate the value of the reagent, supply, and equipment inventory.

The inventory management system used can take various forms, including a manual card system, a spreadsheet, or a software system which automates some of the tasks. While the system used may vary in structure, there are a range of functions in addition to the actual inventory count which should be available:^1,2

– Vendor selection, with a copy of the agreement to purchase identified reagents and supplies at a defined price

– The ability to produce a purchase request or purchase order for reagents and supplies

– The accurate receipt and storage of reagents and supplies

– The recording of lot numbers, current package insert and/or performance criteria

– Maintainance of the inventory (either periodic counting or a perpetual system)

– Controlling expiration-dated reagents and supplies

– Distributing reagents and supplies to satellite laboratories

– Analysis and reporting of the usage, purchase history, lot number receipt, and other metrics

Let’s look a little more closely at each of these functions.

Vendor selection and agreement to purchase reagents and supplies: The selection of a vendor is often based upon the range of reagents and supplies available, the instrument platform used, and the price. Typically the reputation of the vendor, quality data for the reagents and supplies, availability of sales, and technical support personnel are also taken into account. Once the vendor is selected, an executed contract should be maintained which lists the reagents and supplies to be purchased, volume commitments if any, the price to be charged per item, the time frame of the agreement, freight charges if any, return policy, minimum shelf life details, and associated terms and conditions. Ideally this document is readily available for laboratory staff to reference.

The ability to produce a purchase request or order for reagents and supplies: Regardless of the system used, any lab staff should be able to determine, with limited time expended, when reagents and supplies need to be ordered and in what quantity. A card system (Kanban) can be used; so can software which prompts users when reagents and supplies are at their reorder point (ROP). A formal purchase order may be produced by the laboratory system from an accounting system used by the facility. Ideally a system is used which will prompt the laboratory staff person to order the right reagent, at the right time, in the right amount.

Receipt and storage of supplies: Shipments should be linked to the originating purchase order, and any back-ordered items should be identified for tracking purposes. Ideally the reagents and supplies can be rapidly checked into the inventory and stored appropriately. A system that indicates the storage location and storage conditions will expedite the proper storage of reagents and supplies. Documentation of any deviation from an acceptable shipment should be recorded. Deviations may include a damaged shipping container, incorrect storage temperature, or delivery to an incorrect address.

Recording lot numbers, current package insert and performance criteria: Most reagents and supplies have a lot number assigned by the vendor.^3,4,5 Ideally the lot number and expiration date are recorded upon receipt of the shipment. The current package insert or performance data sheet, ideally in electronic format, which accompanies the reagent and supply, should also be saved for review. Every laboratory should be able to review all lot numbers received and when they were in use.

Maintaining the inventory (either periodic counting or a perpetual system): Most laboratories periodically determine the quantity on hand (QOH) by counting reagent and supply containers. This periodic counting system works well and can be expedited by categorizing reagents and supplies and automating the system using methods such as product barcode scanning.

A perpetual system can also be used wherein reagents are placed into the QOH when received and checked out of the QOH when used. This system generally requires either an automated software system or much staff time to track the inflow and outflow of reagents.

The scanning of reagent barcode labels can greatly reduce staff time. The benefit of the barcode label is that it can include the vendor, product identifier (catalog #), ordering unit or unit of measure (e.g., 100 test kit), and in some cases the lot number and expiration date. Unfortunately barcode scanning is complicated due to the lack of standardization in labeling. The two most common barcode labeling systems in use are Health Industry Bar Code Standard (HIBC) and GS1, both of which can be used to help automate inventory management. Their use is not universal, however.

In addition to reagents and supplies, the instrumentation and equipment used in the laboratory are an important part of the inventory. There are numerous reasons for a periodic equipment inventory, including a valuation of the capital assets, a reconciliation of all equipment to match with service records and maintenance contracts, and the demonstration of useful life and depreciation of equipment for accounting purposes.

Controlling expiration dated reagents: Most reagents and supplies have expiration dates which are assigned by the vendor as part of the FDA approval process for all in vitro diagnostic reagents.^3,4 The expiration date is a firm date which cannot be extended. As such, a system to track expiration dates to reduce wastage is needed. Some systems provide for an alert to the lab staff that some reagents and supplies are about to expire. There may be instances when an expiration date can be extended, such as the use of rare blood bank antisera or cells.

Distributing reagents and supplies to satellite laboratories: Provision of reagents and supplies to satellite laboratories, clinics, physician offices, or other facilities is a common practice for the laboratory. Each location should be identified in a database with its standard order of items. Every new request can edit the standard order as needed. This order then serves three functions: it is a pick list to select the supplies to send, a packing list for the satellite laboratory, and an invoice if prices for supplies are included and the supplies are charged.

Analysis and reporting: The purchase of reagents and supplies represents a significant operating expense for the laboratory. One benefit of having much of the inventory and purchasing data in a database or software system is the ability to review expenses, usage, lot number expiration, and other metrics. The periodic determination of the value of the reagents and supplies in stock is an important step in the accounting practices in most laboratories. The simplest process to determine the value of the inventory is to have a current inventory count and multiply that by the purchase price for each reagent and supply. Ideally, laboratory management staff will be able to determine the value of reagents and supplies on hand by a number of criteria, such as by reagent and supply, by department, by vendor, by instrument or by another category (e.g., STAT, cardiac markers, and so on).

While reagents and supplies constitute a significant portion of the laboratory operating budget, they can be an overlooked expense. If storage space is plentiful, overstocking of reagents and supplies can occur, and wastage due to out-dating can be significant. While not prevalent in healthcare, the concept of Cash Conversion Cycle (CCC) is of interest. The definition of CCC is the number of days between when the laboratory purchases reagents and supplies and when those reagents and supplies are used for testing, the responsible party is billed, and reimbursement is received. The CCC is a representation of cash flow for many businesses, and a low CCC minimizes the outflow of cash (purchase of reagents and supplies) and maximizes the inflow of reimbursement. While CCC is not a commonly used metric for the laboratory, it is important to recognize that proper inventory management can reduce the laboratory’s operating budget.

Laboratory managers routinely review workflow and work practices to improve operations. Inventory management of reagents, supplies, and instrumentation is required for patient testing and can contribute significantly to the operating budget. Profitability can be improved by proper management of these important resources.

References

1. McHugh TM. Computerized inventory management systems help labs stay in control. MLO. 2011;(43)7:38-40.
2. World Health Organization International Health Regulations. Laboratory Quality Management System (LQMS) Training Toolkit. 2009. Published by WHO on behalf of U.S. Centers for Disease Control and Prevention. Clinical and Laboratory Standards Institute.
3. Code of Federal Regulations, Title 21 part 809. In vitro diagnostic products for human use. Sec. 809.10. Labeling for in vitro diagnostic products.
4. CLIA Subpart K sec. 493.1252.
5. Code of Federal Regulations, Title 21 part 58. Good laboratory practice for nonclinical laboratory studies. Sec. 58.83. reagents and solutions.

Thomas M. McHugh, MS, MLS(ASCP), is director for Laboratory and Pathology for St. Joseph Health System, Queen of the Valley Medical Center, in Napa, CA, and a member of APICS—The Association for Operations Management.