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ZXZ 264 Final Proof

The article describes a framework for improving inventory management in hospital pharmacies. It involves classifying inventory items into categories based on their monetary value, clinical importance, and consumption pattern. The framework was tested at a large public hospital, where it led to substantial improvements in key performance indicators and cost savings through reduced stockholding costs and better matching of inventory to demand.
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0% found this document useful (0 votes)
15 views8 pages

ZXZ 264 Final Proof

The article describes a framework for improving inventory management in hospital pharmacies. It involves classifying inventory items into categories based on their monetary value, clinical importance, and consumption pattern. The framework was tested at a large public hospital, where it led to substantial improvements in key performance indicators and cost savings through reduced stockholding costs and better matching of inventory to demand.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Improving hospital pharmacy inventory management using data


segmentation

Article in American journal of health-system pharmacy: AJHP: official journal of the American Society of Health-System Pharmacists · November 2019
DOI: 10.1093/ajhp/zxz264

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CASE STUDY

Improving hospital pharmacy inventory management


using data segmentation

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
Christos Bialas, PhD, University of
Macedonia, Thessaloniki, Greece Purpose. This case study describes the development and empirical vali-
Andreas Revanoglou, Papageorgiou dation of an easy-to-implement practical framework for improving hospital
General Hospital, Thessaloniki, Greece pharmacy inventory management.
Vicky Manthou, University of
Macedonia, Thessaloniki, Greece Summary. Research suggests various inventory optimization models,
which can lead to cost reductions while maintaining adequate service
levels; however, they are facing limited adoption in healthcare settings.
The main barriers appear to be the high effort and complexity of imple-
mentation, the dependence on data that are not available or might not
be in the right form, and the one-size-fits-all approach often followed
without addressing healthcare sector–specific particularities. A research
framework was developed by adapting relevant inventory models to the
healthcare context using the concept of data segmentation on the basis
of a three-dimensional classification of hospital pharmacy inventory items
based on their relative importance, clinical criticality, and consumption pat-
tern. Suitable replenishment policies were assigned to high-impact clas-
ses, and an integrated performance-measurement component assesses
the framework’s effectiveness. The suggested approach was implemented
and empirically tested at the pharmacy of a large public hospital using
longitudinal data. The results demonstrate substantial improvements with
respect to all of the selected key performance indicators and translate into
inventory cost savings due to reduced stockholding costs and better syn-
chronization of inventories to demand.

Conclusion. Use of standard software functionalities combined with tar-


geted data segmentation efforts significantly improves hospital pharmacy
inventory cost performance.

Keywords: ABC analysis, ABC-XYZ analysis, classification, cost perfor-


mance, inventory management, segmentation, VED analysis

Am J Health-Syst Pharm. 2020;77:371-377

H ospital supply-chain performance


has been seen by many health-
care organizations as an enabler for
addressing healthcare sector–spe-
cific particularities.2 Initial attempts to
apply these models in healthcare set-
improving operational efficiency and tings showcased the fact that devoting
reducing costs. Research suggests var- equal planning attention to all inven-
ious inventory optimization models, toried items proves inefficient, because
which can lead to cost reductions while hospitals carry different categories of
maintaining adequate service levels; items with varying characteristics.3 This
however, they are facing limited adop- can be counteracted by using data seg-
Address correspondence to Dr. Bialas tion in healthcare settings.1 The main mentation concepts, which divide and
(cbialas@bemail.gr).
barriers appear to be (1) the high ef- group together data based on selected
fort and complexity of implementa- parameters to process them more effi-
© American Society of Health-System tion, (2) the dependence on data that ciently.4 Some researchers argue that
Pharmacists 2019. All rights reserved.
For permissions, please e-mail: journals. are not available or might not be in the inventory control and planning efforts
permissions@oup.com. right form, and (3) the one-size-fits- should be based on the relative impor-
DOI 10.1093/ajhp/zxz264 all approach often followed without tance of these items, using techniques

AM J HEALTH-SYST PHARM | VOLUME 77 | NUMBER 5 | MARCH 1, 2020  371


CASE STUDY DATA SEGMENTATION

such as the ABC analysis, which classi- applications that allow organizations to
fies items into A (high priority/impact), KEY POINTS manage their businesses and automate
B (medium priority/impact), and C (low • A unique methodology that their back office functions and are in-
priority/impact) categories according classifies materials adminis- creasingly used in hospitals and their
to their usage (consumption) value.5 tered in hospital pharmacies in pharmacies for various strategic and

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
However, ABC analysis is one-dimen- a three-dimensional way based operative tasks, including the handling
sional, because it is based on a single on their monetary value, clin- and management of inventories.12 The
metric, and may not capture different ical importance, and consump- concentration on a few critical KPIs and
aspects of criticality. Especially in hos- tion pattern is introduced. their availability as part of standard ERP
pital pharmacies where drug adminis- system reports is expected to contribute
• The methodology involves
tration is complex and drug shortages significantly to the ease of implementa-
focusing on the few items that
can have an impact on human lives, tion of the proposed framework and to
are expected to produce the
ABC classification alone cannot ad- facilitate benchmarking analysis against
maximum results while re-
equately support inventory manage- other hospital pharmacies.
quiring low optimization effort,
ment functions because it imposes the The shaping of the framework’s
leaving out the many items
risk of assigning a low priority to an performance metrics dimension was
where no significant improve-
item because of its low consumption followed by the selection of the meth-
ments are expected.
values, despite its critical importance odologies and supporting techniques
for human lives. Addressing this issue, • Use of standard software func- that were expected to lead to lower hos-
some scholars propose to apply mul- tionalities combined with tar- pital pharmacy inventory costs. As de-
tiple criteria for inventory classification geted data segmentation efforts picted in Figure 1, the foundation of the
by incorporating drugs’ clinical im- significantly improves hospital proposed framework was laid by com-
portance, using the vital, essential and pharmacy inventory cost perfor- bining data segmentation schemes to
desirable (VED) items or vital, essen- mance. filter out the materials that look prom-
tial, and nonessential categorization.6 ising toward generating high impact
Furthermore, an additional influencing while entailing low optimization effort,
factor that has been found to impact with suitable inventory replenishment
the selection of appropriate inventory policies consisting of selected material
management strategies is the con- metrics. Although many detailed pub- requirements planning (MRP) and lot-
sumption pattern of an item, which can lications related to several inventory sizing strategies. MRP strategies deter-
be taken into account by performing an management metrics are available, mine how a material is being managed;
XYZ analysis, where items are distin- they are mainly conceptual or literature whether its replenishment is based on a
guished based on their consumption based rather than supported by field- reorder point logic or whether it is fore-
fluctuation.7 The current case study work, making the development of a set of cast based, with historical data taken
aims at synthesizing these dimensions practical guidelines challenging.8,9 After into account; and whether it includes a
of data segmentation to develop and evaluating various performance meas- safety stock logic.7 Lot-sizing procedures
empirically validate a practical, easy- urement frameworks with respect to the are methods used for the calculation of
to-implement framework that lowers research goals and the context of the the adequate procurement quantities
hospital pharmacies’ inventory costs study, the use of key performance indi- (lot sizes) and dates that will effectively
and improves overall inventory man- cators (KPIs) was favored, most impor- cover the anticipated demand. The key
agement performance. tantly because of their ability to provide aspect is that these methodologies and
quantifiable measures based on several tools share a common enabler; they are
Analysis and resolution criteria. A review of current industry supported through standard function-
For the purpose of meeting the case standards and best practices in supply- ality of hospital ERP systems.
study’s goals, a conceptual framework chain performance measurement sug- Conceptual framework imple­
was developed and validated within gests that companies should focus on mentation. Based on the conceptual
a hospital pharmacy of a major Greek a small list of KPIs that are critical for framework outlined, an initial list of
public hospital (700-bed capacity). their operations management.10 For approximately 50 KPIs gathered from
Conceptual framework devel- KPIs to be widely accepted and meas- literature and industry reports was
opment. A conceptual framework urable, scholars suggest identifying filtered with the input of 3 hospital
that would serve as the foundation for KPIs embedded in best practices ap- supply-chain experts and 2 hospital
meeting the above research objective proaches of major enterprise resource pharmacists and was narrowed down
should incorporate techniques for in- planning (ERP) systems.11 ERP systems, to the following 5 KPIs suitable for
ventory management improvement such as SAP (Walldorf, Germany) and measuring hospital pharmacy inven-
complemented by cost-performance Oracle (Redwood City, CA), are software tory performance:

372 AM J HEALTH-SYST PHARM | VOLUME 77 | NUMBER 5 | MARCH 1, 2020


DATA SEGMENTATION CASE STUDY

Figure 1. Research framework for improving hospital pharmacy inventory costs. ERP = enterprise resource planning;
KPI = key performance indicators; MRP = material requirements planning; VED = vital, essential, and desirable.

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
• Average stock value, which provides the framework to be applied, which in- the widely used 70-20-10 rule (A items
information on the value of the stocks cluded 588 materials in total: representing approximately 70% of the
held in inventory and the resulting usage value, B items representing ap-
carrying and holding costs. proximately 20% of the usage value,
• Refrigerated drugs (e.g., insulin, bot-
• Average inventory turnover, which in- and C items representing approxi-
ulinum toxin, oxytocin)
dicates how many times the stock has mately 10% of the usage value).14 The
• Medical imaging supplies (e.g.,
been replaced during a given period. analysis resulted in classifying 3.2% of
Gastrografin [diatrizoate meglumine
Lower turnover rates imply increased materials as A items, 6.3% of materials
and diatrizoate sodium, Bracco
costs as items are stored for longer as B items, and 90.5% of materials as C
Diagnostics], Omnipaque [iohexol,
periods. items, as shown in Figure 2.
GE Healthcare], ioversol)
• Stock range of coverage, which pro- Segmentation based on VED
• Surgical supplies (e.g., caps, gowns,
vides information on the stock level analysis. Consequently, a VED anal-
gloves)
in relation to demand and on how ysis was performed, where 2 hospital
• Chemical reagents (e.g., immuno-
long a stock amount will last given a pharmacists decided on the clinical
assays, blood test kits, sensitivity
specific average daily requirement. criticality of items, categorizing them
discs)
• Dead (excess) stock value, which is according to the definition of vital
• Wound care supplies (e.g., gauzes,
the value of the part of the warehouse (critical for life and patient care), es-
antiseptics, wound irrigants)
stock that has not been used for a cer- sential (critical but alternatives ac-
tain period of time. ceptable), and desirable (low critical
• Service level, which is the percentage Segmentation based on ABC value) items. The VED analysis results
of material requests that could be analysis. Initially, the selected ma- were incorporated into the ABC anal-
serviced from stock in hand. This KPI terials were categorized using ABC ysis by adjusting the initial classifi-
was included to ensure that improving analysis. The ABC analysis can be ap- cation (vital drugs were classified as
inventory management cost perfor- plied using a number of parameters; A materials regardless of their usage
mance would not result into delayed however, the usage (or consumption) value and essential items were up-
servicing of patients’ needs. value of items stands out as the tradi- graded one class in the ABC analysis).
tional base for calculations.13 Based This resulted into upgrading 30 addi-
on this technique, inventory items tional items to the A class and 56 items
Following KPI selection, to initially can be divided into the following 3 to the B class.
apply and validate the suggested frame- classes according to their consump- Segmentation based on XYZ
work, a characteristic subset of materials tion value (value per unit multiplied Analysis. Next, the VED-adjusted
managed by the hospital pharmacy had by the consumption quantity): A (very ABC analysis was expanded by an XYZ
to be selected, because the total number important items), B (moderately im- analysis to distinguish between items
of materials was large (>6,000 items). portant items), and C (marginally im- according to their fluctuations in con-
Using a preexisting classification of the portant items). An ABC analysis based sumption as follows15:
hospital pharmacy materials divided on past years’ consumption values
into 10 material classes, the following 5 was performed on all materials of the • X: Relatively constant consumption,
representative classes were selected for 5 selected material groups by applying fluctuations are rather rare

AM J HEALTH-SYST PHARM | VOLUME 77 | NUMBER 5 | MARCH 1, 2020  373


CASE STUDY DATA SEGMENTATION

Figure 2. ABC analysis of the selected material groups.

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
• Y: Fluctuations in consumption, pattern that enables their low-effort was completed during the course of 2
usually for trend-related or seasonal optimization. weeks because the ABC and XYZ anal-
reasons Assignment of inventory re- ysis were conducted using standard re-
• Z: Irregular consumption pattern plenishment policies. In the final porting functionality of the hospital’s
step, the materials within the high- ERP system and the effort involved for
The classification of materials into the lighted segments were assigned to suit- the VED adjustments and the reviews
categories X, Y, and Z was supported able inventory replenishment strategies of suggested lot sizes was relatively low.
by the automated analysis of the daily as depicted in Figure 3 (colored areas). The suggested methodology drasti-
consumption values patterns by the Appropriate MRP strategies and lot- cally reduced the effort and complexity
hospital’s ERP system. As the accuracy sizing procedures were assigned to the involved by (1) narrowing down the
increases with the amount of histor- materials belonging to the highlighted items to be optimized to 17.2% of the
ical data available, a 10-year time ho- areas of the ABC-XYZ matrix. Items sample data and (2) using MRP strat-
rizon was defined to use all historical within the AX and BX classes (14.2% egies, lot-sizing procedures, and data
data available in the hospital’s ERP of total items) were assigned a simple available within the hospital’s ERP
system and to select the forecasting MRP strategy based on a reorder point system (such as economic order quan-
procedure that produced the best (minimum/maximum) logic combined tities and reorder point [min/max]
forecast accuracy for each material. with a fixed lot size. For these me- planning).
All materials were included in the dium- to high-usage items, the reorder Observations. To assess the im-
analysis; however for newer drugs points were calculated automatically pact of the applied methodology on the
with less than a year of historical data, by the ERP system and were reviewed hospital’s inventory management per-
consumption trends and seasonalities and, in some cases, adjusted by the formance, the new parameters were ap-
might not have been accurately de- planners to incorporate their experi- plied to the respective materials of the
tected as part of the analysis. The ence and judgement. Items within the selected material groups at year end,
results showed that approximately AY and BY classes (3% of total items) and the predefined KPIs were moni-
60% of materials could be character- were assigned a simple trend or sea- tored throughout the following year to
ized as items with relatively constant sonal forecast model combined with allow for year-to-year comparisons.
consumption, approximately 10% of an economic order quantities lot-sizing
materials as items with fluctuating procedure. The materials belonging to • The average stock value was cal-
consumption, and approximately 30% the nonhighlighted areas of the ABC- culated for the year before and the
as items that could not be assigned XYZ matrix (totaling 82.8% of items, as year after implementation. Because
to a forecasting pattern. Figure 3 shown in Figure 3) were not optimized two points do not always accurately
highlights the data segments with due to their low-usage values and ir- represent changes in inventory over
materials expected to have signif- regular consumption patterns as out- different time periods, the inven-
icant impact on cost performance lined in the proposed methodology. tory values at the end of each month
while having a predictable demand The process of applying the framework were counted and added together,

374 AM J HEALTH-SYST PHARM | VOLUME 77 | NUMBER 5 | MARCH 1, 2020


DATA SEGMENTATION CASE STUDY

Figure 3. Data segmentation through ABC-XYZ analysis (VED adjusted) with suitable material requirements planning
(MRP) strategies and lot-sizing procedures for the relevant segments. Items within the colored segments were included in
the methodology. VED = vital, essential, and desirable.

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
and the result was divided by 12 to improvement efforts were concen- of the suggested methodology from
determine the average stock value trated on only 17.2% of the items within other general trends in the hospital’s
for each year. these groups (Figure 4). inventory management because of
• The average inventory turnover was It is important to note that the re- factors such as decreasing overall de-
calculated by dividing the average sults showed substantial improvements mand or lower inventory costs due to
total usage value per day with the av- for these 4 KPIs without negatively budget cuts and deteriorating service
erage stock value of each year. impacting service levels, indicating that levels, the changes in KPI values were
• The range of coverage was calculated the proposed methodology consider- also calculated for the rest of the ma-
as the ratio of the opening stock to ably improves a hospital’s inventory terial groups that were not included in
the average daily usage of the mater- management cost performance. The the suggested framework (red areas in
ials for each year. stockholding costs were reduced due Figure 4). The fact that, contrary to the
• The dead stock was calculated as to the lower average stock value, the material groups included in the pro-
the part of the warehouse stock inventories were better synchronized posed methodology, the other material
that had not been used for each to the demand because the stock range groups faced marginal changes with
year, and the dead stock value was of coverage decreased and the turnover respect to all KPIs measured further
calculated by multiplying the dead increased, and excess inventories were strengthens the validity of the findings
stocks with the valuation prices of reduced because the dead stock de- and highlights the effectiveness of the
the materials. creased. The results also showed that applied framework.
despite lower inventories, the service Moreover, the application of a
The results showed substantial im- levels were not negatively impacted. In straightforward methodology com-
provements regarding the measured fact, the service level slightly increased bined with readily available tools also
KPIs for each of the 5 material groups from 93.3% to 93.9% for the drugs in- proved advantageous regarding other
included in the framework, indicating cluded in the study, whereas it slightly aspects. Based on the hospital phar-
the value of the proposed approach decreased for all other drugs from 92.2% macists’ feedback, a major improve-
with respect to improving a hospital’s to 91.3%. With respect to the vital items ment was that it led to a reduction of
inventory management cost perfor- in particular, of which a stockout could the daily processing times in the areas
mance. The KPIs on material group have severe consequences, the service of planning, procurement, and in-
level showed improvements of ap- levels remained constant at a 100% ventory management by streamlining
proximately 15% to 25% for all 5 ma- level before and after the framework the relevant processes, because it im-
terial groups selected, whereas the implementation. To isolate the impact proved transparency and allowed a

AM J HEALTH-SYST PHARM | VOLUME 77 | NUMBER 5 | MARCH 1, 2020  375


CASE STUDY DATA SEGMENTATION

Figure 4. Year-to-year comparison of key performance indicators by material group.

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
focus on specific measurable targets. suggested by some academics, although on monetary considerations. Finally, it
The pharmacists pointed out that the theoretically sound, are not found to be considers past consumption patterns
proposed framework reduced the time applied in the healthcare supply chain.1 because they influence the planning
wasted on non–value-added activi- Attempting to address this gap, the study specifics of a material. This unique
ties and allowed them to devote more extends prior research by developing combination of these 3 criteria for data
time to solving real business problems. and empirically testing a framework segmentation serves as the backbone of
Consequently, the effectiveness of the that focuses on ease of implementation the proposed framework for inventory
framework proposed in the current re- while encompassing the major relevant management cost improvement. It al-
search paper is fully supported by the parameters identified in literature, such lows for a targeted application on the
empirical results. as the application of suitable MRP pro- few items that are expected to produce
cedures, lot-sizing methods, demand the maximum results while requiring
Discussion and future forecasting techniques, and service- low optimization effort, leaving out the
research level considerations as well as human many items where no significant im-
Research efforts devoted to judgement and experience. provements are expected.
investigating hospital pharmacy inven- Secondly, this article introduces The methodology has high practical
tory management are very sparse. As a unique methodology that classifies relevance because it allows healthcare
a result, there are no widely accepted materials administered in hospital practitioners to address real business
frameworks to support hospital phar- pharmacies in a three-dimensional supply-chain problems they are facing
macists and healthcare practitioners way. Initially, it takes into account the in their day-to-day operations. Supply
in their decision-making process re- monetary value of the consumption chain management (SCM) within typical
garding efficient inventory control. of the materials to identify where the healthcare settings is often characterized
However, managing healthcare costs real optimization potential lies. Then, by resource scarcity, and the key decision
is crucial to maintaining an adequate it incorporates the aspect of clinical makers regarding the procurement and
yet affordable level of patient care in importance of a material, because this inventory management of drugs, such as
today’s challenging environment. The is crucial to servicing patients’ needs. hospital pharmacists, are sometimes less
current study highlights the disconnect Distinguishing between VED sup- proficient with SCM concepts. Therefore,
between academia and best industry plies represents a necessity, because it is crucial to provide them with low-
practices in this field, because sophisti- the relative importance of an item in a complexity, low-effort tools that enable
cated inventory models and algorithms healthcare setting is not solely based them to improve inventory management

376 AM J HEALTH-SYST PHARM | VOLUME 77 | NUMBER 5 | MARCH 1, 2020


DATA SEGMENTATION CASE STUDY

performance and reduce related costs should be considered as part of opti- 3. Frontini R, Miharija-Gala T, Sykora J.
while not impacting the hospital’s ser- mizing inventory management effi- EAHP 2010 survey on hospital phar-
macy in Europe: part 2 procurement
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and distribution. Eur J Hosp Pharm.
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segmentation, replenishment policies, was met, a more comprehensive study

Downloaded from https://academic.oup.com/ajhp/article/77/5/371/5637559 by OUP Restricted Live University Test, Johnny McAdmin on 26 October 2020
4. Rossetti MD, Achlerkar AV. Evaluation
and performance measurement) are including additional KPIs might lead to of segmentation techniques for inven-
built around data and tools that are even better results. tory management in large scale multi-
item inventory systems. Int J Logist Syst
readily available within common ERP Overall, the implementation of the
Manage. 2011; 8:403-24.
systems. Because the pharmacists of the proposed framework and the resulting 5. Liu JC, Wu Y. Application of ABC anal-
case study hospital were using these sys- quantifiable improvements of the KPIs ysis in inventory management. Adv
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study confirmed that they had a posi- the case that simple methods, tools, 6. Vaz F, Ferreira AM, Kulkarni MS,
Motghare DD, Pereira-Antao I. A study
tive stance toward exploring and using and techniques, rather than com-
of drug expenditure at a tertiary care
the tools that are provided to improve plex algorithms, should be adopted hospital: an ABC-VED analysis. J Health
the efficiency and effectiveness of their within hospital pharmacies to im- Manage. 2008; 10:119-27.
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evidenced positive impact of the pro- the pressure for healthcare organi- SAP. Bonn: Galileo Press; 2008:446-57.
8. Cuthbertson R, Piotrowicz W. Supply
posed framework on inventory manage- zations to provide quality of care at a
chain best practices – identification and
ment performance mitigates concerns lower cost increases, the current study categorisation of measures and bene-
that have been voiced regarding the provides hospital pharmacists with a fits. Intl J Prod Perform Manage 2008;
transferability of SCM concepts from framework to methodically analyze the 57:389-404.
other industries to healthcare delivery wealth of relevant data; to complement 9. Chae B. Developing key performance
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perspective. Supply Chain Manage J.
for their limited adoption. The current rience with readily available tools and 2009; 14:422-28.
study exemplifies that many of the prob- techniques; and to enhance overall 10. Birhanu D, Lanka K, Rao AN. Supply
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Intl J Supply Chain Manage. 2016;
supply-chain concepts that have been
Conclusion 1:185-211.
around for years and are widely used in 11. Cai J, Liu X, Xiao Z, Liu J. Improving
other business sectors. It demonstrates Use of standard software function- supply chain performance manage-
that using standard ERP system func- alities combined with targeted data ment: a systematic approach to ana-
tionalities combined with data segmen- segmentation efforts improves hospital lyzing iterative KPI accomplishment.
Decis Support Syst. 2009; 46:512-21.
tation efforts targeted toward identifying pharmacy inventory cost performance.
12. Nielsen L. APOTO: a new joint ERP
high-impact items can improve hospital system. Eur J Hosp Pharm. 2012;
pharmacy inventory cost KPIs by as Disclosures 19:385-8.
much as 25%. The authors have declared no potential con-
13. Thongmal Larsson M. A model for
Although the study’s findings sup- material handling improvements when
flicts of interest.
using automated storage systems: a case
port the suggested framework’s ef-
study. Kalmar: Linnaeus University;
fectiveness in improving hospital
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