Vendor managed inventory (VMI):

evidences from lean deployment

in healthcare
Cristina Machado Guimaraes and Jose Crespo de Carvalho
Lisbon University Institute, Lisbon, Portugal, and
Ana Maia
Vila Nova de Gaia Hospital Centre, Vila Nova de Gaia, Portugal
Abstract
Purpose Understanding how VMI benets serve lean purposes in healthcare and why its outcomes
can be difcult to achieve in healthcare settings is the main purpose of this study.
Design/methodology/approach An in-depth case study of VMI is presented in the perspective of
the downstream member, a public general multi-site hospital, operating as a small scale consolidated
service centre in terms of material management, exploring such dimensions as: VMI benets, risks,
barriers and enablers.
Findings Despite some unawareness of VMI benets in healthcare, it can present a waste reduction
solution not only in costs but in the quality of care for freeing clinical professionals to clinical tasks,
among other savings. The multiple benets are better explored, as in any relationship building, by
investing in partnership creation and overcoming the idiosyncratic barriers of the healthcare sector.
Research limitations/implications Although ndings of a single case study are difcult to
generalize, the protocol and methodology presented allow replication in other units of analysis with the
same inclusion criteria.
Practical implications This paper brings the lean deployment discussion out of the
organizations boundaries, showing the interconnections and pointing to the need for future work
that would allow healthcare managers to build a lean supply chain.
Originality/value By considering VMI an outsourcing alternative, this paper identies the lean
thinking intent behind such options and enhances the idiosyncratic difculties in full deployment in
the healthcare sector, a less studied setting.
Keywords New business or process or operations models, Process design, Service design,
Supplier or partner selection, Innovation, Design
Paper type Research paper
1. Introduction
Supply Chain Management (SCM) has, in last two decades, suffered the inuence of six
major shifts in business thinking: extension of cross-functional integration to
cross-enterprise; from physical efciency to market mediation; from supply focus to
demand focus; from single-company product design to collaborative, concurrent
product, process and supply chain design; from cost reduction to breakthrough
business models; and from mass-market supply to tailored offerings (Kopczack and
Johnson, 2003). The collaboration trend in SCM took several forms from Efcient
Consumer Response (ECR) to Vendor Managed Inventory (VMI) and Collaborative
Planning, Forecasting and Replenishment (CPFR) (Christopher, 2011, p. 94), all having
as support base the demand visibility (Holweg et al., 2005).
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1753-8297.htm
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6,1
8
Received 31 December 2011
Revised 25 May 2012
Accepted 30 October 2012
Strategic Outsourcing: An
International Journal
Vol. 6 No. 1, 2013
pp. 8-24
qEmerald Group Publishing Limited
1753-8297
DOI 10.1108/17538291311316045
Collaboration and information sharing is a combination well explored in the SCM
literature showing as result the performance improvements in supply chain (Sari,
2007). SCM presents a challenge in healthcare sector, not only for achieving around 40
per cent of a hospital costs (Haavik, 2000), but also for being a vast eld of waste
nding. However the topic has not been examined in a waste reduction end-to-end
perspective, the Lean analysis. In this paper we try to ll that gap exploring the VMI
practice as a Lean practice, showing the deliverables in terms of waste reduction and
ow optimisation in a less studied setting, healthcare. VMI studies gain pertinence in
sectors with high demand volatility, as healthcare, being one solution of demand
uncertainty mitigation (Waller et al., 1999).
VMI, a popular topic in logistics literature (Williams and Tokar, 2008) was
popularized in the 1980s in manufacturing settings as direct replenishment or
supplier managed inventory distinct from continuous replenishment planning (CRP).
In VMI partnership, the vendor makes the replenishment decisions (Yao and Dresner,
2008). When calling VMI arrangements partnerships, these authors (as others) stress
that VMI relationship represents more than electronic data interchange and
information system integration. Nevertheless, the information technology literature
particularly views collaboration as real time data exchange through electronic data
interchange (EDI) and vendor managed inventory (VMI) computer systems integration
(Haavik, 2000).
It has been applied to various industries, from consumer goods retails such as
Wal-Mart (Buzzell and Ortmeyer, 1995), automotive industry (Cooke, 1998), home
delivery services such as egrocery (Smaros and Holmstrom, 2000), electronic
components (Dong et al., 2010), agricultural services (Southard and Swenseth, 2008),
pharmaceutical industry (Danese, 2006) to healthcare systems such as a multihospital
integrated delivery system (Haavik, 2000). Among the most cited benets is the
possibility of better plan inventories and deliveries through VMI, but it remains at the
upstream member side. The benets overcome the risks for retailer and vendors in
different ways.
For the downstream member, VMI is a way to outsource activities by shifting the
traditional burden of inventory management upstream in the supply chain, and it
presents more benet when there is high outsourcing cost (Fry et al., 2001). In this
paper, a case of VMI is presented in the perspective of downstream member, a public
general multi-site hospital, operating as a small scale consolidated service centre
(Parker and Delay, 2008) in terms of material management, exploring dimensions as:
VMI benets, risks, barriers and enablers. The next section presents a literature review
on these dimensions followed by VMI in healthcare literature framing that provides
ndings to be matched with Lean thinking literature in the fourth section. An in deep
case study is presented to understand how VMI benets serve Lean purposes in
healthcare and why its outcomes can be difcult to achieve in healthcare settings.
2. Vendor managed inventory benets and rsks
According to the Council of Supply Chain Management Professionals (CSCMP),
Vendor Managed Inventory (VMI) is dened as The practice of retailers making
suppliers responsible for determining order size and timing, usually based on receipt of
retail point of sale (POS) inventory data. Its goal is to increase retail inventory turns
and reduce stock outs. It may or may not involve consignment of inventory (supplier
VMI: evidences
from healthcare
9
ownership of the inventory located at the customer) (Vitasek, 2010). Pohlen and
Goldsby (2003) distinguish supplier managed inventory (SMI) from vendor managed
inventory (VMI) stating that the later involves the coordinated management of nished
goods inventories outbound a manufacturer, distributer or reseller to a retailer, while
the former involves the ow of raw materials and component parts inbound to a
manufacturing process. In this paper, we address to the two entities involved in this
research: the retailer and the vendor, although through the retailer perspective.
VMI arrangements can assume several forms. Fry et al. (2001) describe a type of
agreement based on their analysis of VMI systems in a newsvendor-type relationship
where the upper and lower limits of the contract is settled. In a consignment-inventory
VMI system, the vendor retains inventory ownership at the retailer and payment is
not made until the item is sold (Sui, 2010). Other (Bernstein et al., 2006) refer to VMI

when retailers continue to incur the inventory carrying costs and to VMI

when all the

carrying costs are transferred to the vendor. Holweg et al. (2005) present a theoretical
classication of VMI systems based on the degree of planning collaboration and
inventory collaboration. In certain VMI agreements, replenishment involves
cross-docking or direct store delivery (DSD) eliminating the need for warehousing
between vendor and retailer (Bowersox et al., 2007, p. 161). Danese (2006) presents an
extension of VMI to the whole supply network showing its potentialities above the
usual dyadic level.
Zammori et al. (2009), propose a standard structure of a VMI agreement, in
manufacturing setting, marking out the starting point of a relationship that leaves the
replenishment decisions to the vendor. The authors stress the fact of VMI agreements
are not regulated by any legal code of practice and defend that trust and partnership
promotion start when both parties are aware and agree on all the conditions so each
one knows what to expect from the relationship. This paradox between the need of
formalisation and exibility needed in a long-term relationship challenges the trust
levels between parties in the relationship construction.
The implementation of VMI programs can lead to signicant stock reduction (30 per
cent in pharmaceutical products, as described by Kim (2005)) and other benets.
Through VMI, the ow of information and, as result, the ow of materials become
seamless, improving service levels, inventory and transportation costs, the
coordination of supply process and transport optimisation (Waller et al., 1999).
The main goals of the VMI are to lower the inventory level and to improve the service
level at the same time (Levy and Grewel, 2000). These two goals are compromised since
both the retailer and the vendor hold a certain level of inventory in their own warehouses
to secure product availability. Keeping safety stock is a traditional way to minimize the
occurrence of stock outs. Inventory holding cost and customer service level are usually
negatively correlated. Thus, lowering the inventory level and increasing the service level
were not possibly achieved at the same time through any traditional management
techniques. VMI overcomes this limitation of traditional management. In the VMI
system, the retailer eliminates inventory holding costs. The vendor also reduces his or
her inventory holding cost and increases the service level by controlling the retailers
inventory according to his own best interest in scheduling production, delivery,
warehousing, and replenishment in a win-win relationship.
Dong and Xu (2002) examine impacts of VMI on the performance of a supply
channel, including buyers and vendors prots. As expected, the analytic models show
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that VMI improves the buyers prot in any case but the vendors benets vary
depending on the duration of VMI implementation. The short-term effect of VMI is
harmful to the vendors prot due to increased inventory costs under certain cost
conditions. However, the vendor can achieve favourable outcomes from VMI due to
increased buyers demand levels in the long term. Therefore, this result implies that it
is necessary to provide certain rewards, as raising the purchase price at the beginning
of VMI implementation in order to compensate for the suppliers loss due to increased
inventory cost.
Another VMI benet to SCM disruptions, which result from lack of communication
between channel members, is halving the bullwhip effect. Disney and Towill (2003a, b)
examine the impact of VMI on various sources of the bullwhip effect, the scenario
where the orders to vendor have larger uctuations than sales to the buyer, a distortion
that propagates upstream increasingly. The bullwhip effect is classied into four
categories depending on its sources (Lee et al., 1997a, b): the Forrester effects (rogue
seasonality and demand amplication) caused by nonzero lead-time and demand
signal processing; the Burbidge effect caused by order batching; the Houlihan effect
caused by rationing and gaming, and the Promotion effect caused by price variations.
Disney and Towill (2003a) claim that VMI, as a practical exercise of echelon
elimination, reduces the bullwhip effect by removing delays in information and
material ow and by eliminating upstream ows. The VMI system dened in their
research represents the supply chain, in which the supplier receives inventory
information and point-of-sales data directly from his or her customers. Based on the
actual sales and inventory information, the supplier dynamically determines the
reorder point by exponentially smoothing the sales signal and settling appropriate
customer service levels at each distributor. The results also show that the bullwhip
effect caused by price variations or the promotion can be signicantly reduced by
using VMI.
Disney and Towill (2003b) address the question of who should control inventories,
the retailer who fears stock outs or the vendor that supplies the stock point and wants
to feed it economically. The authors divide the responsibility between the retailer, for
specifying the maximum and minimum stock levels, and the vendor for replenishing
within those limits without overloading.
A summary of benets and risks of VMI (for retailer and vendor) found in the
literature review is presented in Table I.
Some authors, through studies in a two stage supply chain with one vendor and one
retailer, showed that retailers benets are much less than vendors benets and
retailers have to be encouraged to participate in information sharing (Lee et al., 2000;
Yu et al., 2002). By exploring the benets for both parties, Lee and Chu (2005) ndings
indicate that VMI is benecial for both parties if the stock level desired by the vendor
at the retailer is higher than the one desired by the retailer, which apparently leaves the
decision of entering in VMI to the vendor by determining the stock level at the retailer.
According to Dong and Xu (2002), the main benet is on the retailer side, only if
VMI condition is the short term. On the other hand, long-term VMI benets the vendor
as in the true VMI setting, the vendor would use past demand records to calculate the
scheduling of delivery routes.
All above benets can be better explored in certain conditions: when there is high
outsourcing cost; when demand variance increases, leading to greater savings (Fry
VMI: evidences
from healthcare
11
et al., 2001); when demands are correlated; when demand information sharing occurs
(can improve in 42 per cent the ll rate) (Angulo et al., 2004) and for items with high
variance when prioritising items to be covered by VMI (Dong et al., 2010).
From the two components of VMI (information sharing and decision-making) it is
the information sharing component that produces the performance benets
(e.g. inventory reductions, stock out reductions), rather than the transfer of
decision-making component (Dong et al., 2010). Then, the distributor can receive
these benets by only adopting information sharing programs and technologies, while
maintain control over its inventory management. Disney et al. (2004) posit that the
simpler the information system used in VMI, the more effective it may be.
Nevertheless, poor decision-making regarding the VMI risks prevent both parts from
enjoying the benets of VMI.
3. Vendor managed inventory in healthcare settings
Healthcare systems have, traditionally, paid little attention to inventory management.
In fact, this concern occurs, in this sector, as result of budget pressures or, in a more
positive perspective, continuous improvement programs. It is common to nd high
levels of safety stocks in several points of healthcare units due to poorly implemented
inventory management practices and personal judgement in determining safety stock
levels in silo-structured organisations.
Outsourcing inventory decisions is becoming a current practice in healthcare
(Nicholson et al., 2004). The authors underline benets of inventory costs and service
levels when shifting from an in-house three-echelon distribution to an outsourced
two-echelon distribution network. However, these authors research focus is in
non-critical supplies, which are not the main inventory investment when compared
with critical supplies, typically expensive, with a short shelf-life and expensive storage
facilities on site (e.g. injectable medical supplies, pharmaceutical supplies and surgical
Retailer Vendor
VMI benets VMI risks VMI benets VMI risks
Reduce inventory and
cost
Fewer stock outs
Increase service levels/
product availability
Fill rates improvement
Increase inventory
turns
Reduce transactional
costs
Reduce ordering and
planning costs
Information visibility
allows opportunistic
behaviour
Dependency on vendor
Switching costs
Increase inventory
exibility
Reduce lead time
variability
Consistent ordering
pattern
Reduce transportation
costs
Optimize physical
distribution
Warehouse efciency
Real time access to
information
Competitive advantage
relationship
Order process is not
abandoned by customer
Initial technology
investment
Difculties in
technology integration
Source: Dong et al. (2010); Kulp et al. (2004); Sari (2007); Sui (2010); Waller et al. (1999); Yao and
Dresner (2008)
Table I.
VMI benets and risks
for both parties
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supplies). One of the difculties of managing inventory in healthcare settings lies in the
fact of these levels tend to reect the desired inventory levels of the patient caregivers
rather than the actual inventory levels needed in a department and in most cases, these
product activity records (PAR) levels are experience-based and politically driven,
rather than data-driven (Nicholson et al., 2004). It is common to nd reports of secret
inventory stashes kept for fear of stock outs in closets for years of supply (Oliveira
and Nightingale, 2007).
Healthcare sector seems to be rather idiosyncratic in implementation of SCM best
practices. Some authors (McKone-Sweet et al., 2005) point some barriers as the lack of
executive support, misaligned or conict of interest, need for data collection and
performance measurement, limited education on supply chain and inconsistent
relationships between group purchasing organisations and supply chain partners.
Despite the dynamic behaviour observed in healthcare supply chains (Samuel et al.,
2010) barriers to best practices towards efciency in supply chain still prevail such as:
conicting goals; lack of SCM skills and knowledge; technology evolving; physician
preferences; lack of standardised codes; and limited information sharing (Callender and
Grasman, 2010). These authors study suggests that the high reluctance of healthcare
providers to VMI adoption is due to lack of training and information about the benets.
Clearly assuming as a good practice in SCM, Haavik (2000) describes a VMI
program recurring to VMI software able to forecast a hospitals demand for supplies. In
this model, orders are generated in an economic order quantity calculation basis taking
into account the safety stock, lead time, seasonality and exceptional demand. The
information ows through electronic data interchange (EDI) reducing costs in data
collection and communication. By transferring the purchase order creation activity to
the distributor, purchase order costs and errors of creating it manually were
eliminated. Errors were frequent when matching purchase orders to invoices manually,
such as out-of-date pricing in matching invoices, generating unnumbered purchase
orders, allowing direct ordering from various departments instead of centralizing, and
having different ordering methods in various departments.
Pan and Pokharel (2007) identied four methods for supplies distribution in
healthcare setting: direct delivery to medical department for use; direct delivery to
medical departments storage for later use; direct delivery to central warehouses and
then delivery to medical department for use; and direct delivery to central warehouse
and then delivery to departments storages. In these authors study, hospitals
generally keep two weeks of stocks in their warehouses, lowering to one week only
when suppliers understand specic needs, trust is established allowing alliances, VMI
and other outsourcing practices. Their study showed that in medical supplies
inventory management is through periodic reviews and weekly basis replenishments
(only two in eight hospitals use daily replenishment) while non-medical items are
replenished after generating an order. The authors also describe the motivators and
barriers to the use of information and communication technologies, underlining the
integration difculties with the legacy systems, the incompatibility with customer or
suppliers, the long implementation time, the rapid obsolescence of technology and the
great deal of industry standards to follow.
VMI seems to be easier to implement in pharmaceutical products, partly due to
pharmaceutical suppliers knowledge on material management, familiarity with
information technologies (IT) and SCM best practices (Petersen, 2003; Kim, 2005). In
VMI: evidences
from healthcare
13
fact, pharmaceutical sector has been strategically adopting IT solutions in SCM from
logistics processes as cross-docking to VMI, streamlining the replenishment process
(Shih et al., 2009). In the case presented by Oliveira and Nightingale (2007), a major
vendor in America healthcare industry executes VMI handling the replenishment
beyond the hospital dock, delivering to the point of care.
4. Serving Lean intent through VMI
Applying Lean (Womack and Jones, 1996, 2003; Hines et al., 2004) in healthcare
services has been the most visible and recent trend in services industry (Brandao de
Souza, 2009; Holm and Ahlstrom, 2010; Jones, 2006). Lean thinking was coined by
Womack et al. (1990) as a ve principle improvement philosophy: specify value,
identify the value stream, make the value creating steps for specic products ow
continuously, let the customers pull value from the enterprise, and pursue perfection.
Some Lean applications to services are claimed to be Lean service but are just
applications of Lean production to material processing tasks in service companies.
However, Lean management is not a goal itself, but a journey. From analysing the
literature on Lean in healthcare, this journey beginning is frequently the material ow,
not the patient ow. In fact, some translations of the seven Ohnos (1988) muda
(overproduction, transportation, inventory, processing, waiting, motion, and defects) to
healthcare are based on material management as in Jimmerson (2010, p.4) that
presents: confusion; motion/conveyance; waiting; over processing; inventory; defects;
and overproduction, as healthcare seven wastes illustrated by material ow examples.
Lean management implies using less effort, investment, hours, inventory and space to
achieving greater efciency and fewer defects and errors (Womack et al., 1990).
Through Lean management the operational performance is improved also by
removing complexity from processes (Womack et al., 1990; Womack and Jones, 1996,
2003). Consonantly, the VMI cases in healthcare cited in previous section are reported
in a Lean tone enhancing value added creation and redundant activities elimination by
introducing best practices and Lean practices, as VMI, in hospitals SCM. Some posit
that there are imperatives as the need for Lean inventory systems and rapid-response
supply systems that lead to consider the advantages of inventory practices as VMI as a
SCM ow coordination mechanism (Fawcett et al., 2010; Fugate et al., 2006).
Lean management is more than just a method of delivering goods just in time
( JIT). Rather, the true operational efciency comes from understanding that the
nancial benets of operating with smaller buffer stocks can only be achieved in a
system that is simplied to prevent problems from inltrating and is structured with
feedback mechanisms to allow rapid adjustment in response to disturbances (Spear,
2002). In fact, there is a literature stream that defends developing a strategic stock of
inventory in a central location to mitigate supply chain disruptions (Lee and Wolfe,
2003; Chopra and Sodhi, 2004; Tang, 2006) and also in that sense, VMI presents a
solution for reducing complexity and disruptions in supply chain.
However, some steps towards JIT are already taken in healthcare. As showed by
Heinbuch (1995), employing a JIT inventory management system in clinical areas of
hospital materials management and adopting a win-win managerial philosophy is
consonant with Lean higher achievements in other industries settings. Stockless
initiatives in Canadian healthcare sector are explored in Rivard-Royer et al. (2002)
showing the need of continuous information ow to allow replenishment
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synchronisation and demand and obtain on-hand inventory reductions of 70 per cent,
in some cases. Introducing the unit of use delivery method instead of bulk, the
stockless replenishment change the delivery frequency from once a week to daily,
reduced the number of suppliers from over 35 to one or two, almost eliminated the need
of clinical staff involvement in daily materials-related tasks, simplied receiving
procedures, reduced hospital storeroom size from 6,000 to 300sq. ft, storeroom
inventory from six to eight weeks supply to one to three days supply and full time
equivalents managing materials from 31 to 13. Similar experiences have taken place in
European hospitals (Riley, 2001), illustrating integration of both internal and external
healthcare sector supply chain. Similarly, stockless inventory management in
American hospitals seems a recent research topic (Oliveira and Nightingale, 2007). The
reference to this studies seam useful to address VMI concept in its broader extension.
In a perfect synchronized VMI system it is possible to match stockless purposes and
reduce process complexity, as there is no benet associated with adding or reducing
inventory if the processes in a system remain complex.
Moreover, the literature on supply chain management integration (Power, 2005) is
consonant with Lean management. Taking for instance, the purpose of supply chain
management described by Kaufman (1997) of to remove communication barriers and
eliminate redundancies through coordinating, monitoring and controlling processes.
Also, the integration of supply chains has been described by Clancy (cited in Power,
2005) as . . . the attempting to elevate the linkages within each component of the chain,
(to facilitate) better decision making and get all the pieces of the chain to interact in a
more efcient way and thus create supply chain visibility and identify bottlenecks.
Also, the Lean idea of creating ow means to deliver products and services in the
right amounts, and at the right quality levels at the right place. This implies that
products and services are produced and delivered only when pull is exerted by the
customer through a signal or order. The pull system in VMI programmes is assured
in the sense that is the consumption in the point of use/patient care that triggers
vendors deliveries in a perfect demand visibility basis.
From all stated previously and shown in Table I, reducing inventory levels is only
one of the benets of VMI having a signicant cost impact because the amount of
capital tied in inventory can be used in more efcient ways. Also, it frees up capacity of
resources. Floor space and time can be better utilized for other value added activities
and workers managing the inventory can be reallocated. Thus, looking at the benets
just described in this and previous sections, one can posit that VMI is a Lean practice.
5. Methodology
Understanding how VMI benets serve Lean purposes in healthcare and why its
outcomes can be difcult to achieve in healthcare settings are the main purposes of this
study. Therefore the explored dimensions were: VMI benets, risks, barriers and
enablers.
According to Yin (2009), case study method is appropriate to How and Why
questions and to investigate a contemporary phenomenon in its real-life context when
the boundaries between phenomenon and context are not evident recurring to several
data collection techniques and different evidence sources. This qualitative method,
allowing a deeper understanding of phenomena (Flyvbjerg, 2006), has been frequently
used in management studies, namely in operational management (Voss et al., 2002) and
VMI: evidences
from healthcare
15
logistics (Ellram, 1996). Holweg et al. (2005) used case studies to identify weaknesses in
VMI implementations. Case studies are also used for building theory.
Being more idiosyncratic than a generalising method, it was chosen by its
descriptive and exploratory character, not to produce causality statements but to
achieve a logical sequence of connection between empirical data, problem/research
questions and ndings/conclusions. Though, the unit of analysis was chosen according
to the research objective, a public general multi-site hospital practicing VMI.
Concurrent to the choice of this unit was the fact of this unit has been implementing
new Lean practices in materials management and also because the Logistics Director
had a strong back ground in logistics and SCM, rst as a consultant and then as a
healthcare manager, which contradicts some literature.
As recommended by Yin (2009) in data collection and analysis, a study protocol was
followed. Multiple sources data triangulation was given special attention during data
collection. For data collection (from January 2011 to November 2011) we have
conducted in-depth semi-structured interviews to the Logistics Director, operating
staff, the hospital CEO, the COO, the Pharmacy Director, two services chief nurses
(some interviewees were listened in more than one occasion). Also we recurred to
document analysis (stock analysis, structural charts, written procedures) (Saunders
et al., 2007). The open-ended questions covered the VMI implementation in a before
and after perspective in order to collect evidence on benets, risks, barriers and
enablers. Interviews had an average duration of one hour and a half and were tape
recorded and fully transcribed. Data analysis followed Miles and Huberman (1994)
recommendations on data codication, reduction and categorisation techniques. Data
gathered from different informants and sources was reduced to precise categories in
common tables (Miles and Huberman, 1994), and then systematically interrogated (Yin,
2009) comparing and noting patterns (Miles and Huberman, 1994).
6. The case study: VMI at a general hospital
A is a public general multi-site hospital (three units around 12 km distant from each
other), operating as a small scale consolidated service centre in terms of material
management, serving a population of approximately 300,000. With 580 bed capacity,
an annual average discharges of 22,000 and annual outpatient average of 335,000, in a
seven building structure in the central unit, this hospital also serves academic teaching
purposes. In February of 2007, along with the inclusion of the third healthcare unit,
were identied as priority areas for massive improvement the logistics and supply
chain department. Among the main problems and clinical services claims were:
distribution problems, delivering errors, stock outs, excess of bureaucracy, difculties
in distribution routes optimisation, paper-based information exchange (internal
requisitions and between units), lack of stock visibility (internal and external), high
inventory levels and secret safety inventory in each clinical service.
A structured intervention plan was designed to implement a new logistics model
having as main goal the visibility of the whole supply chain and elimination of
redundancy. The objectives included the shifting and simplifying clinical staff tasks
(from managing inventory management, placing orders to only consume register)
freeing them to clinical tasks, create accountability in material usage and inventory
levels, creation of conditions to patient cost imputation and stock management
information system integration and centralisation.
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Thus, four new pillars were restructured:
(1) Processes all material management processes were mapped and redesigned in
order to resource optimization and waste reduction.
(2) Organizational structure process orientation actions involving all material
management staff, adjusting skills and providing adequate training.
(3) Information systems (IS) a big effort to implement and adjust systems to the
redesigned processes.
(4) Infrastructures lay-out redesign towards ow optimization.
The new logistic model implications on material replenishment comprised the
reinforcement of the already adopted practice of material consignation and
vendor-management inventory implementation. VMI was claimed to be, according to
the Logistics Director, also an alternative to outsource activities without assuming
outsourcing costs, following new board strong cost constraints directives. This cost
pressure increased every year achieving in 2011 drastic measures and unprecedented
government budget cuts and VMI implementation cost were conned to information
sharing technology adjustments.
One key issue of VMI implementation was the success of IS adjustments. Therefore,
actions were deployed as data-base integration and standardisation, wireless, PDA
(personal digital assistant) and optical reader devices implementation in clinical
departments and software development for integration of inventory management
information system.
VMI was rst implemented in pharmaceutical products supply chain due, according
to the interviewees, to supplier willingness and awareness of the full process. Also,
service-levels in pharmaceutical products were considerably higher and IS were more
easily integrated comparing to clinical products suppliers. The only clinical supplies
vendor, a multinational organisation, took almost year to adapt IS and start VMI. Other
multinational suppliers do not even considered the possibility to have a local structure
for VMI, having only local key account without any material management knowledge.
Another reason to have less VMI in clinical supplies is that this kind of material was
already subject to consignation, which was the priority, with very satisfactory results
as it involved the products with higher prices.
One of VMI conditions is the application to exclusive supplies one product could
not be supplied by two vendors for simplifying inventory visibility by product instead
of by batch.
In transferring the inventory control of hospitals central warehouse to the vendor, a
major issue was setting product activity record (PAR) levels for various items as these
levels tended to reect the desired inventory levels of the patient caregivers rather than
the actual inventory levels needed in a department over a certain period. In most cases
these levels were, according to interviewees, experience-based and politically driven,
rather than data-driven. The PAR levels were daily sent to the vendor (pharmaceutical
and clinical supplier) and when the decision on replenishment was made, one advance
delivery notice was sent to the logistics department. Deliveries management should
follow the minimum and maximum inventory levels settled and occur without
frequency constraints. It has been satisfactory not only in terms of inventory reduction
as showed in Table II, especially from 2009 onwards, but in terms of improving the
VMI: evidences
from healthcare
17
2
0
0
7
2
0
0
8
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3
2
Table II.
VMI in numbers
SO
6,1
18
partnership with the only clinical supply vendor. There is a declared intention of
Logistics Department in extending VMI practices to other products as housekeeping
ones. The next section gives a more detailed description of this cases VMI outcomes.
Table II shows the evolution in VMI in pharmaceutical and clinical supplies.
It also presents the consignment values as, in a way, it worked as a VMI constraint.
7. Discussion
The satisfaction with VMI implementation was present in all interviews, although in
different perspectives. In fact, the real effect of VMI was from 2009 onwards, as the PAR
levels of pharmaceutical supplies were increased before to solve stock out problems. With
VMI application the workload of hospital pharmacists and nurses who are very busy in
doing their specialized jobs, was relieved. Staff trained in the eld of material handling and
inventory management perform the job and clinical services gained more time for patient
care. The results stressed by the logistics department interviewees were improvements of
inventory management such as reduction of inventory costs, keeping proper inventory
level, and decrease of emergency orders and no stock out episodes, so far.
On the other hand, information integration and optimized supply chain
management has been achieved with the information sharing system based on a
strong partnership. However a long work is still to be done in the use of electronic
documents to improve speedy order processing and error minimisation. Also, some
information ow can still be improved as hospital access to information provided by
the vendor such as item list of contracted products, price history, information about
new drugs and insurance codes when necessary.
Also, the consignment has been increasing signicantly and the negotiation efforts
are priority in that area. Nevertheless, pharmaceutical and clinical supplies VMI
number increased, mostly by inclusion of high turn items.
The inventory level reduction has been also helped for the continuous level
revisions and redenitions of minimum and maximum stock levels by a Lean mind-set
department.
The most cited outcomes in the interviews were: better and quicker logistics
response enabled by stock visibility and need anticipation; time optimisation improved
quality of care; accuracy in cost allocation; improved efciency and service quality of
replenishment; patient care quality improvement through better expiring date control
and availability of drugs and materials.
Table III summarises the evidence extracted from data codication and
triangulation on the dimensions: VMI benets, VMI risks, VMI enablers and VMI
barriers.
The economic and nancial instability affects partnership creation and
maintenance and is obstructive to new VMI solutions. It has contradictory effects on
inventory levels: if, on one hand the cost pressure forces to keep low inventory levels,
on the other, the generalised instability and future uncertainty has led to keep safety
inventory in higher levels than desirable.
To maximize and keep the major benets described above, it seems necessary to
evaluate and improve the developed system continuously. The most signicant factor
in the successful implementation of the integrated supply chain management system is
collaboration between partners and information sharing in the supply chain.
VMI: evidences
from healthcare
19
8. Conclusions and future research
The best way to look for enablers and barriers to any project implementation is to
follow the root causes for benets and risks. The reported case shows that some
benets of VMI are still hindered by healthcare sector strong implementation barriers.
VMI has proved to be a Lean solution for material management in several ways: by
transferring an in-house activity to an existent supply chain partner resulting in less
inventory costs, increased efciency in replenishment and improving quality of care
without having outsourcing costs; streamlining the material and information ow in a
crescent seamless basis by introducing visibility to supply chain; and prevailing the
pull trigger for replenishment leading by consumption.
However, when studying Lean practices in healthcare, it is important to stress that
Lean must be seen as a journey not always easy to course and the barriers to its
implementation should be explored.
Despite some unawareness of VMI benets in healthcare (Callender and Grasman,
2010), it can present a waste reduction solution not only in costs but in the quality of care
for freeing clinical professionals to clinical tasks, among other savings. The multiple
benets are better explored, as in any relationship building, by investing in partnership
creation and overcoming the idiosyncratic barriers of healthcare sector. Literature claims
that VMI improves the buyers prot in any case but the vendors benets vary depending
on the duration of VMI implementation. It would be worth to explore the vendors
advantages of this particular (as in other) case in future work and study the duration of
VMI relations as a construct and its relation with Lean practices sustainability.
This study also suggests that the continuous improvement in material management
areas cannot happen apart from a holistic view of Lean deployment in the whole
supply chain. Thus, issues as material standardisation, waste reduction in
consignment (also in vendor perspective), stakeholder collaboration to seamless
material, information and patient ow are subjects to future research.
Retailer CHVNG//E
VMI benets VMI risks VMI enablers VMI barriers
Reduce inventory and
cost
Fewer stock outs
Free clinical staff for
clinical tasks
Free logistics staff for
procurement and other
added value tasks
Fill rates improvement
Increase inventory
turns
Reduce transactional
costs
Reduce ordering and
planning costs
Information visibility
allows opportunistic
behaviour, but it did not
occurred so far
Dependency on vendor
was delimited by public
contract regulation and
new calls to tender
Products of difcult
consignation (packs for
unit consumption, low
unitary cost)
Partnership
relationship with
vendor
Supplies reception
bureaucracy in non
VMI items
Purchase volume/
critical dimension
Waste reduction
orientation/holistic
Lean projects going on
Supplier SI integration
constraints/dependency
Instability in
partnership
maintenance due to
sector regulation and
budget cuts
Generalization of the
idea of complete range
stock availability for all
sorts of patient needs at
all times healthcare
complexity as an excuse
Lack of activity
planning
Lack of exibility in
public sector contracting
Table III.
Case ndings
SO
6,1
20
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About the authors
Cristina Machado Guimaraes has a degree in Business Administration and Management from
Catholic University of Porto, and an MSc in Healthcare Management from ISCTE-IUL Lisbon
University Institute where she develops leading research on lean healthcare. Having worked 15
years in industry and services as supply chain manager, she has, more recently, dedicated herself
to consultancy projects in both industry and services settings such as healthcare. She is also
Invited Lecturer in Post-Graduation Programs on Lean Operations Management. Additionally, she
is a regular speaker in workshops and conferences. Cristina Machado Guimaraes is the
corresponding author and can be contacted at: [email protected]
Jose Crespo de Carvalho has a degree in engineering from IST Technical University of
Lisbon an MBA and MSc in Management Information Systems and Logistics Areas and a
PhD in Management from ISCTE IUL Lisbon University Institute where, after doing his
aggregation, he is Full Professor (since 2003). He has signed and coordinated more than 50
consultancy projects in the areas of supply chain management and strategy. He has also
published widely in books (he has already published 22 books and one specially on healthcare
logistics) and in journal papers, both professional and academic. He has received, also, several
prizes for his career in supply chain management and strategy and has been rewarded several
times with the best professor of the year award by the Management School of ISCTE IUL.
Ana Maia is the Logistics Manager and the Building, Infra-structures and Equipment
Maintenance Coordinator at Vila Nova de Gaia Hospital Centre. She implemented in 2007 at this
hospital a reorganisation project regarding the logistics of pharmaceutical and
non-pharmaceutical products, after an experience of management consultancy in the
University of Porto Business School in many projects of logistics and supply chain
development in retail and healthcare. She was also co-author of the chapter Pharmacy/logistics
information systems in Pereira, D., Nascimento, J.C. and Gomes, R. (2011), Healthcare
Information Systems, Edicoes Silabo.
SO
6,1
24
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