Understanding Safety Stock in Supply Chain Management

• Kara L. Nadeau, Healthcare Industry Contributor

Healthcare inventory management strategies have shifted over the decades from "just-in-case inventory" to "just-in-time inventory" to now perhaps something in the middle given the ongoing supply chain disruptions and shortages of medical supplies and pharmaceuticals.

A healthcare organization needs enough inventory items on hand to meet customer demand (e.g., clinicians and patients), but given the high cost of supplies and drugs, doesn't want the expense of excess inventory levels with items expiring on shelves before they can be used.

And it is not just healthcare that has been leveraging safety stock as part of its inventory management resiliency efforts. A 2021 Gartner survey of 1,328 supply chain professionals across industries found 43% were investing in safety stock with another 11% planning to do so within the next two years. Furthermore, 21% of 1,339 respondents considered the availability of safety stock to be a top-three indicator of supply chain resiliency.

Let's take a look at some of the factors supply chain can take into consideration to answer the questions:

• How much safety stock is enough?

• How does safety stock management factor into my overall healthcare inventory management strategy and processes?

• What can I do to optimize safety stock management to meet customer demand while minimizing extra stock and unnecessary costs?

   

Table of contents

1. What is healthcare safety stock?

2. Benefits and drawbacks of safety stock

3. Strategies for optimizing safety stock

Understanding Safety Stock

The Association for Supply Chain Management (ASCM) defines safety stock (aka buffer stock, reserve stock) as:

1. In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.

2. In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Overplanning can be used to create safety stock.

Given the role of medical/surgical supplies and drugs in delivering patient care, a certain level of healthcare safety stock is critical. If a retailer runs out of an item, they risk loss of a sale. If a hospital runs out of a life-saving or life-sustaining medical product or pharmaceutical formulation, a patient's health or life could be at risk.

Benefits and Drawbacks

"A zero safety-stock level, in which the last of the available items go out the door as a new shipment arrives, suggests lean-inventory principles on steroids."

Dan Zeiger, The Monthly Metric: Safety-Stock Level, ISM (June 2021)

With widespread supply shortages continuing to this day, it is obvious why healthcare organizations would want to accumulate a safety stock of medical equipment in their medical facility inventories.

On one hand, safety stock as part of a healthcare inventory management strategy can help prevent stockouts, maintain patient continuity of care, and lower costs (e.g., discounts from bulk purchasing contracts).

On the other, excess safety stock can result in added costs and waste, complicate inventory management, challenge medical facilities with limited supply/drug storage space, and threaten patient safety when expired products are not identified and removed from the supply chain.

It is not uncommon for healthcare providers to build their own safety stock stashes in healthcare facilities - in closets, drawers, even in ceiling tiles - to avoid stocking out of critical patient care items. In these cases, because these items fall outside hospital inventory management systems, supply chain lacks inventory visibility across these hidden multiple locations, can't track inventory items or gauge actual inventory levels. Hospitals where clinicians engage in this practice will likely order more inventory than needed because they cannot account for these invisible supplies, leading to higher inventory costs.

Eight strategies for optimizing safety stock

Safety stock is in a category of its own and requires a specific safety stock formula for effective inventory management of these items. But in many cases, existing healthcare inventory management software solutions and general inventory management best practices can be applied to help manage and optimize safety stock within the walls of a hospital or health system.

Don't leave safety stock inventory management to chance. Here are some strategies to manage inventory in this category.

1. Leverage contracts and other purchasing agreements: Some suppliers will offer a discount for safety stock purchased in bulk. Supply chain professionals should collaborate with their contract management teams to take advantage of bulk purchasing contracts when available.

2. Gain visibility: Use an enterprise-wide healthcare inventory management system to gain visibility into safety stock, including inventory levels and storage locations.

3. Take control: Apply the same best practices used with general supply chain strategies and processes to safety stock inventory management, whether your healthcare organization uses a perpetual inventory system (defined as leveraging "utilization data to update inventory on hand continually with this information linked to purchasing and restocking") or a periodic inventory system (defined as counting inventory at some regular intervals and using average utilization to set par levels).

4. Consider a consolidated service center (CSC) model: Health systems and hospitals are notoriously challenged with supply storage issues, particularly those built when the volume of stock keeping units (SKUs) were far lower than they are today. For large health systems responsible for keeping large volumes of safety stock on hand for their facilities, a consolidated services center (CSC) could serve as a centralized storage space for safety stock inventory management and distribution.

5. Automate inventory management processes: Enterprise resource planning (ERP) system integration with the electronic health record (EHR) system and automated inventory tracking of safety stock (via barcode or RFID scanning) can enable supply chain teams to monitor items from receipt through use. This includes expiration date tracking to prevent medical staff from using expired items in procedures and jeopardizing quality patient care. Automating manual processes is key to optimizing healthcare inventory, reducing human error, and driving cost savings in the supply chain.

6. Regularly turn and replenish safety stock: Medical supplies have expiration dates so it is critical that hospital inventory management strategies take into account safety stock inventory turns. With today's advanced healthcare inventory management solutions, supply chain can identify items set to expire and take action for clinicians to use them before they are wasted, for example, moving excess supplies in one location to a hospital or department that needs them.

7. Engage in forecasting and demand planning: Inventory management solutions with real-time safety stock inventory data capture - from receipt through use - can generate insights into item purchase and usage trends over time. Select a hospital inventory management system that features advanced analytics and reporting for demand forecasting and plan for demand. Leverage supplier and item specific metrics, such as average lead time and maximum lead time, to guide decision making.

8. Collaborate with clinicians: Leverage safety stock inventory management insights with clinical leaders to adjust items and levels as needed. Perhaps the decision was initially made to establish safety stock of a specific personal protective equipment (PPE) product but analysis shows this item is not often used (low inventory turnover), while another item is used frequently but not contained within safety stock inventory. Collaborate with clinicians to adjust your safety stock formula, item choices and inventory management techniques.

Conclusion

Healthcare inventory management is a challenge even when supply chain leaders and clinicians are operating in "normal" circumstances. In the event of widespread healthcare logistics disruptions and supply shortages, inventory management becomes even more critical.

Hospital administrators, medical personnel, suppliers, and the healthcare industry as a whole recognize the risks of running out. Therefore, calculating safety stock, managing inventory and replenishing stock has become a healthcare facility priority.

Inventory management system solutions featuring advanced software to manage and monitor the procurement and use of supply chain safety stock are cornerstones of successful inventory management in healthcare.

In the healthcare sector, look for inventory systems that automate processes, including the tracking of items from receipt through use, consolidate complete and accurate data from connected systems (e.g., ERP, EHR), and generate actionable insights for safety stock calculation to meet customer demand.

Supply chain optimization of all hospital inventory - safety stock and otherwise - is key to delivering high quality care in a cost-effective manner.

Common FAQs about healthcare safety stock

Q. What are the benefits of having safety stock in healthcare?

A. In today's environment of continued supply disruptions and shortages, safety stock helps to ensure healthcare organizations have the medical supplies they need when and where they need them.

How do you calculate safety stock in healthcare?

A. Start by leveraging item procurement and usage data of inventory items from medical inventory management software to get baseline usage, track trends and forecast demand.

What are the strategies for optimizing safety stock in healthcare?

A. Key strategies for safety stock optimization include ERP/EHR integration, inventory management process automation, collaboration with clinicians on item usage trends, and harnessing the power of advanced analytics to replenish stock based on demand and forecasting.

Kara L. Nadeau

Healthcare Industry Contributor

Kara L. Nadeau has more than 20 years of experience as a writer for the healthcare industry, working for clients in fields including medical device/supply manufacturers and distributors; software, solution and service providers; hospitals and health systems; and industry associations.