Supply Chain Best Practice Series: Back Order Vendor Performance

As healthcare systems across the country continue to implement Supply Chain Management “Best Practices,” many are now focusing on their supply chain vendor performance via Key Performance Indicators (KPI). As such, let’s focus on one key operational KPI: Back Orders to illustrate how to leverage your SCM solution.

Figure 1 – Healthcare Supply Chain Model

fig1-hc-scm

  • The requesting department selects a needed item from an on-line catalog. This catalog includes all contract items from the health system’s Group Purchasing Organization (GPO).
  • The requesting individual may conduct a search of the catalog using a specially designed search via the Item Master. This search will return all items, their prices, and their vendors based on search parameters.
  • If line items in the request are in inventory or within Item Master, they will be filled from internal inventory.[i] Most defined items are on contract, but not stored in inventory.
  • If not in local stores and if the on-line purchase request exceeds the pre-determined authority of the requestor and/or it cannot be purchased using a purchasing card (with strict limits on purchases), it is automatically routed to the appropriate level of authority for review and approval.
  • If not in local stores and if the on-line purchase request is within the pre-determined approval authority, the system generates an electronic Purchase Orders (PO) (EDI 850) and sends the request to the supplier/vendor. POs are electronically available to Accounts Payable. Other stakeholders, including Shipping and Receiving, can access the PO.
  • If the vendor system accepts the order, the vendor system automatically generates a pick list for the vendor and an electronic confirmation (EDI 855) of order, with an expected ship date for both first-time fill items and backordered items. Vendors are expected to have a fill rate performance KPI goal (e.g., 95% or better line item first time fill rate).
  • When the vendor ships, the vendor system generates an electronic confirmation (EDI 856) of shipment for Shipping & Receiving.
  • The shipper’s system (if different than the vendor) allows tracking of the shipment.
  • When the shipment arrives on the loading dock, Receiving checks the packing slip and notes the shipment content in the system. The system electronically matches the PO.
  • If the shipment is complete, Receiving may trigger electronic payment to the vendor (EDI 810). The requesting department may also check the shipment in detail, and if the shipment matches the PO (on-line matching), the department may authorize Receiving to send electronic payment to the vendor (EDI 810) to allow for payment terms rebates.
  • The entire cycle from request to delivery to the department should be 24 hours or less and usually 2–3 hours for inventory items. Note: exception is typically created for “expedited items.”
  • Inventory Demand Sourcing Problem: when creating an electronic requisition of an inventory item, the inventory demand process will source a requirement to a warehouse that does not carry the item. The process will stage a pick that will reside in perpetual backorder status if item is configured to allow or cancel backorders.

This model leverages a “Fill Rate performance KPI goal 95% or better line item first time fill rate” as many health systems are now making a concerted effort to share demand forecast data with their suppliers to reduce backorders and move to a “100 percent increase in inventory turns.” Backorder Rate as defined here is the opposite of the fill rate. For example, if the fill rate is 95%, then the backorder rate is 5%. Consider using a backorder rate not from the perspective of the end user or clinician, but from the central store (warehouse) point of view. If the distributor cannot meet the “order,” then there is a backorder. The art to achieving an optimal KPI is minimizing the impact of a backorder so the clinical customer doesn’t have to wait. To do this, leverage the following healthcare best practice SCM KPIs:

  • Open-Order Inventory/Pipeline Inventory = the number of units that have been ordered but have not been received
  • On-hand Inventory = the number of units physically in inventory ready to serve demand
  • Backorder = the total amount of demand that has not been satisfied, e.g., all backordered demand is eventually filled, i.e., there are no unavailable items due to a process where the order will be held until available and automatically shipped to the party placing the order, unless canceled. Backorders are typically communicated in response to specific lines of a purchase order that are not shipped with the original order and can be communicated in the Purchase Order Acknowledgment (855) or as appropriate.
    • This supply chain KPI is closely related to the inventory accuracy KPI and percentage of out of stock items KPI. Monitor this KPI to identify why certain items are not in stock and to deal with trends (such as seasonal demand) that may affect your performance.
  • Inventory Level = On-hand inventory – Backorder
  • Inventory Position = On-order inventory + Inventory level
  • Order up-to level
    • Maximum inventory position allowed
    • Sometimes called the base stock level
    • This is the target inventory level desired for each period before starting to deal with that period’s demand

Considerations:

  • Four basic types of incomplete (entire purchase order is not completely received and/or not received at the same time) orders, one of which should be communicated with each unfilled line on an incomplete order:
    • Split Shipment
    • Backorder
    • Canceled Line Item
    • Discontinued
  • Reservation and backorder rules can be set up to allow exceptions at line or order levels to release, reserve, or backorder an order. These can be based on partial percentages of inventory availability rather than all or none choices.
  • Canceled Line Item: referring to a line item on a purchase order, this occurs when the manufacturer or distributor is unable to ship the product, projected availability exceeds a certain threshold (often 60 days), the item is not backordered, and the item will need to be reordered. Usually, the manufacturer will notify the healthcare distributor and the distributor will notify the end customer when the product is again available and can be reordered.

Best Practices include the implementation of electronic advanced shipping notices (EDI 856), Purchase Order Acknowledgment (EDI 855) and Invoices (EDI 810), which all can increase efficiency for receiving staff and decrease manual, back-order management processes. By combining automated catalog updating (EDI 832), advanced shipping notices (EDI 856), and electronic invoices (EDI 810), time spent resolving account payable discrepancies can be significantly reduced. In turn, buyers will have more time to concentrate on contract negotiation and a specific product’s availability is limited and supply is being managed, or allocated, by the manufacturer per the health systems vendor performance KPI goals.

Figure 2 – Oracle’s PeopleSoft Update Unfulfilled or Partially Fulfilled Requests Flow

fig2-requests_flow

[i] This is a variable number based on facility or system size typically, there are ~1000-~1200 items in inventory and another ~1000+ in OR.

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