Mayo Medical Clinic 1
Mayo Medical Clinic
Benjamin W. Kratz, Sr.
Dr. Ronald L. Rhames
BUSN 6110 Operations Management
Webster University at Fort Jackson
December 17, 2009
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The Mayo Medical Center was one the leading health institutes of the late 1970's that
implemented the use of bar code technology used to track medical supply inventory. As Mayo
expanded the use of bar codes in the surgical supply area, financial managers began realizing the
savings created. The use of a computer system to track inventory made restocking easier and it
created a lower demand for large inventories. Additionally, this system freed up patient care
personnel from having to inventory on hand stock. As a result, the night staff could easily
conduct a daily inventory using bar code scanners during a lull in clinic hours. In addition,
inventories of all supplies used in surgery could be accounted for prior to and after a surgical
operation was performed. The use of bar codes not only reduced the on hand inventory, it also
reduced care costs by allowing patients to know the actual cost of an operation with supplies, as
well as free up caregiver time to see more patients. The benefits also reach the suppliers by
gathering usage data, helping predict future requirements for goods sold.
1. What are the main purposes of inventory? Explain.
Chapter 17 of Operations and Supply Management, 12th Edition (Jacobs, Chase, and
Aquilano (2009) textbook states that there are five reasons for the purposes of maintaining
inventory. The five reasons are: “to maintain independence of operations; to meet variation in
product demand; to allow flexibility in production scheduling; to provide safeguard for variation
in raw material delivery time; and to take advantage of economic purchase order size.”
Inman states that there are six reasons for keeping inventory. First is to meet the demand
of the consumer when wanting the product. If the demand is high, the greater the on-hand
inventory must be.
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The second reason is to keep operations running. The manufacture must have the right set
of materials on hand to create the product. He states that when you have successive dependent
operations, inventory can act as a decoupling process to lower the dependency of the operations
(Inman, Anthony R. (2009).
The third purpose to have inventory is to control the production process through lead-time.
When the customer places an order, the amount of time customers must wait before the
production of the product and actual receiving of the finished goods known as lead-time.
Inventory helps to lessen the lead-time by ensuring the resources to produce are on hand. Some
companies use a just-in-time (JIT) process so that businesses do not have to maintain large
amounts of inventory in stock. Companies that use this must manage product demand closely
since suppliers may have long lead times of up to three months long. To eliminate this stress,
companies may keep a larger quantity of material with long lead times on hand versus those with
short lead times.
The fourth aspect of having an inventory is as a hedge; to lock in the cost factor of
materials and protect from inflation. Businesses sometimes keep close monitoring of the cost of
precious materials in the event that an increase in cost is projected. Supply managers would call
up purchasing agents before the price increase goes in effect and buy excess material beyond
current need (eNotes.com. 2006).
The fifth reason is to act as a quantity discount. If the company is getting a discount by
purchasing in bulk versus in the current needed quantity, companies may buy the bulk amount to
save. What makes this even more relevant is if the discount given is significant enough to offset
the cost of having to hold the inventory.
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The final reason Inman gives is to smooth out requirements. If the market demand is
erratic, an inventory can act as a way to maintain a steady rate of output that eventually builds up
the inventory needed when demand peaks. This aids the company in managing the workforce
needed over the long run and eliminate having to outsource production.
2. What inventory policy do you think Mayo is using. Explain.
Mayo is using the cycle counting system to count small subsets of inventory frequently on
any given day using bar code readers. According to Carol Casper, the Mayo clinic started
running the "4D" customized inventory management program in 1993, which changed out
having people inventory stock by hand to using a barcode reader and a computer database
(Casper, 1996). As the program improved, Mayo began using the "Lawson System" as an
internal ordering system and SIMS (Supply Inventory Management System) to automatically
reorder supplies (Pieper, Stephen, 2004). With an automated systems implement an inventory
control methodology, the clinic is able to automatically identify items and enter inventory counts
using barcode scanners and a mobile computer. Automated systems also increase the accuracy
of inventory and it helps keep stocks filled by identifying how item frequency to create the count
3. What are the benefits of bar-coding inventory in a hospital environment?
The benefits of having a bar-coding inventory in hospitals include improvement in
operational efficiency, saving time, and decreased costs. Operational efficiency increases for
collecting inventory data from using the barcodes, which increases the accuracy of inventory
records resulting in a decrease in costs associated with error reports. A timesaving occurs by
eliminating the physical aspect of writing down the inventory items individually. The workers
only have to use a scanner and the computer does the rest.
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The cost for implementing the automated inventory system is low since the clinic only
needs to purchase the computer program and IR readers since companies already have a
computer network present. In fact, the implementation of an automated inventory system has
decreased the responsibility of a supply clerk allowing managers to increase employee
responsibilities or decrease the workforce size.
Since most supply companies also use bar coding on products, the Mayo clinic can also use
the same bar codes within surgical operations. For example, supply clerks can collect shipping
manifest information in less time and with greater accuracy. There also are cost savings for the
patients by increasing the accuracy of material usage during surgery and hospitalization and
insuring that doctors and staff have materials when needed.
4. Discuss inventory control in services.
Inventory control represents the heart of effective supply management. Businesses have
many items for sale and require an intricate means of managing large quantities with accuracy.
With the proper inventory control doctors, nurses and administrators are able to provide medical
services when needed with the right supplies.
Rick Barlow states that, "Smart inventory control is as simple as the acronym IOU--
identify your needs and opportunities, optimize your data and information management tools and
understand the nuances of the supply and demand chains" (March, 2005). So what can hospitals
use to ensure supply IOU is clear enough to keep services at the highest level of quality?
Chapter 17 of Operations and Supply Management, 12th Edition textbook provides two
business examples, department store and automobile service agency, which demonstrate how to
conduct inventory control in service organizations. The first is a department store that uses
stockkeeping unit (SKU) to identify each inventory item. By using the SKU, the department
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store is able to track and control over 6,000 items for sale. Such large quantities make it
impossible to calculate the economical order quantities for each item. Department stores
organize house wares stock into two categories, staple and promotional as a means to create sub
categories that ease the tracking process of inventory. Within the two categories, the managers
are able to classify items by price, use, and distributors. If the department store classifies the
stock by brand names and uses a distributor that handles multiple manufacturer products sold,
the store management can lessen the lead-time for replenishment of stock. As an added bonus,
the distributor visits the store on a set schedule to inventory floor the floor stock the store sells to
provide replenishment orders leaving the store clerks free to provide better service to the
customers. Most distributors have a 2 to 3 day lead-time to provide replenishment stock. Since
the lead time is low, the amount of warehouse stock is diminished to support the lead time it take
to replenish allowing more space for sales items versus warehousing.
How then do department stores determine inventory levels? Even though the use of
distributers aids in resupply and tracking inventory, what is the mechanism used to fund the
inventory levels. Since the traditional method of estimating floor stocks and safety stocks cannot
keep up with such large quantities, the total value of items in the store is monitored and
resupplied based on value. Each department receives a monthly value for inventory by which to
maintain. Management computes the monthly value by taking the inventory balance, monthly
sales, and items on order to create the "open-to-buy" figure. The department receives the value
amount calculated for the following month. When demand is increase or decreased, the financial
manager adjusts the figures. Departments tend to spent the "open-to-buy" funds in the beginning
of the month and provide sales towards the end to ensure demand maintained on a high level.
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The second example is the automobile service agency where the general public and internal
departments create demand. Such demand creates a problem for determining the order quantities
for the several thousand items carried. What adds to the complexity is the nature of the industry
to have alternate uses of funds causing opportunity costs to be very high. To limit the effect,
dealers may branch out into different services resulting in more pressure to maintain a very low
inventory level of parts and supplies but still needing to maintain a high level of service quality.
How does the automobile service agency manage inventory? Most have turned to
automation with software packages the work with an ABC classification. Automation manages
the inventory by having expensive and high-turnover supplies counted and ordered frequently
while having low-cost items ordered in large quantities infrequently.
The only drawback from a frequent order process is restocking the shelves and log items in.
Computerized systems come in to play to assist in the reordering process and calculating usage
rates increasing the accuracy in reordering and carrying safe-stock to keep up with large
The automobile service agency plays close to how a hospital operates under demand from
the public however; the hospital can take aspects of the department store to classify individual
service departments that specialize in procedures. Hospitals can use the ABC system in
conjunction with JIT supply replenishment through distributors to ensure resources are on hand
at a moment's notice. Remember that hospitals are in the business of saving lives and
management of inventory is clearly as sub-concern but vital to service efficiency. By
understanding what is redundant and what each department's true usage is, hospitals can match
up requirements with services to determine inventory management effectiveness are and the need
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5. What are the natural extensions of the type of inventory system within the hospital?
The natural extensions that come from using this type of inventory system within the
hospital are accurate charges to patient bills for the material used to treat and care for patients.
There is also a smaller need for large stocks of items due to the decreased time it takes to
inventory and order resupply. With an increase in inventory oversight, there is the added benefit
of reducing pilferage from staff, resulting in increased profits from not having to pay for the
6. What are the natural extensions of this type of inventory system to the supply chain?
Natural extensions exist in the inventory system of the hospital and in the supply chain.
With the reduction in shortages of supplies, the inventory system links into the patient database,
which then helps with forecasting demands on material based on inventory use and the type of
service rendered to the patients. The resupply process becomes faster from rapid data collection
and shortages identified on a daily basis versus monthly.
The supply chain can now use blanket ordering, establishing long-term order with the seller
for specific goods during a known period or for a specific quantity from verified inventory
accuracy. With the ability to do blanket purchases, the clinic can now enter into contracts with
suppliers that allow for quantity discounts.
The implementation of a Just-in-time inventory strategy works on reducing in-processing
inventory and the associated carrying costs. To make the process work, the hospital will need to
identify key signals between different points in the process. The signals will tell the supply
managers when to request the next supply shipment. The great part of automation is the
programmability of signals to respond when reaching a specific level of supply and the order
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request compiled and transmitted automatically to the supplier reducing the need for additional
staff to perform these tasks.
With the automation system implemented, the skill set needed by employees to run the
program increases, so the reduction in inventory can be minimized and remain accurate as trends
change with treatment of patients. The employees also must understand the mechanism for
making the process work. Therefore, trend analysis must be a continual action for supply
managers to allow JIT to work properly. Failure to adjust to trends can create a shortage or
excess, especially trends based on seasonal injuries or illnesses.
7. What are the benefits to patient, hospital, and supplier when such inventory systems
are tied together through the Internet?
Electronic Data Interchange (EDI) and Internet connections reduce costs for purchaser and
supplier as well as reducing communication delay. Use of an EDI helps to transfer electronic
documents from the hospital to the distributer such as inventory listing, requests vouchers, and
order receipts. With the institution of internet, the supply management system has greatly
reduced the lead-time for reordering, allowing hospitals to send daily order requests resulting in
ever shrinking on-hand-inventories needed. The reduction in inventory levels allows hospitals to
use the additional space for other needs increasing capacity in services. With increased services
and space, the patient wait time decreases and addition of new services to increase the types of
treatments the hospital can provide. Additionally, a reduction in the billing process results in an
increase of cash flow. With an increase of cash flow, hospitals can take on projects of improving
all medical and technical services, which help Mayo compete with other hospitals.
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Inman, Anthony R. (2009). Reference for Business, Encyclopedia of Business, 2nd ed.
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"Inventory Management." Encyclopedia of Management. Ed. Marilyn M. Helms. Gale Cengage,
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Jacobs, Chase, and Aquilano (2009). Operations and Supply Management, Twelfth (12th)
Edition, Chapter 17.
Pieper, Stephen (2004). The Mayo clinic. Chem Lab Digest, vol 12, issue 11. Retrieved
November 16, 2009, from: http://www.cathlabdigest.com/article/3278