Hardy Hospital Case Study
Caroline Highgrove, Hardy’s director of Materials Management, glanced at the papers spread across her
desk. She wondered where the week had gone. On Monday, the director of University Operations, Drew
Paris, had asked Caroline to look into the purchasing and supplies systems for the hospital. Drew
specifically wanted Caroline to evaluate the current materials-management system, identify ways to
reduce costs, and recommend a final plan of action. Drew explained that the university was under
pressure to cut expenses, and hospital inventory did not seem to be under control.
As Caroline reviewed her notes, she was struck by the variations in order sizes and order frequencies for
the hospital’s stock-keeping units (SKUs). For some SKUs, inventory ran out before new orders came in,
whereas for other SKUs, excessively high stock levels were being carried. The university and hospital’s
computerized materials-management system was about a decade old and generally worked well;
however, employees often ignored or did not update key information. Thus, data integrity was a major
problem in this information system.
Hospital and university supply orders were classified as either regular stock or special order. The hospital
was the originator of almost all special orders. Regular stock items, such as bed sheets, uniforms, and
syringes, were characterized by their long-standing and frequent use throughout the university and
hospital, and by a low risk of obsolescence. When a department needed a regular stock item, that
department generally ordered (requisitioned) the item. If the item was in stock, it would be delivered to
the department by the next delivery date.
When the university did not normally stock an item, individual hospital departments could special-order
them. Special-order items were supposed to be those of an experimental nature or critical to patient
health care, but not used frequently. Hospital departments requiring these special items bypassed the
university purchasing system. Once a special order Hardy Hospital Case Study was placed, the hospital
department informed university purchasing so that it could eventually authorize payment on the
vendor’s invoice. Hospital department coordinators, doctors, or head nurses were responsible for
initiating and/or authorizing special orders. In total, these special orders required a significant amount of
work that took department coordinators and head nurses away from their duties. University purchasing
kept no records on the hospital’s special-order inventories or for the 215 secondary hospital stocking
points such as exam rooms and moveable carts.
One department’s head nurse explained that many departments were afraid of running out of regular
stock items. University purchasing didn’t understand the importance and nature of hospital inventory,
and they were slow to respond. The nurse cited the months-long period university purchasing process
needed to place new items on the regular stock list, and the long lead times sometimes involved in
receiving orders requisitioned from the university’s approved vendor list.
Because the university was a state institution, strict bidding and purchasing procedures had to be
followed for both regular stock and special orders. For example, three written bids were required for an
individual order of $2,000 or more. The processing of these bids often took up to two months. For orders
between $800 and $1,999, three telephone bids were necessary. In these situations, purchases could be
made only from the lowest bidder. Orders under $800, or items on the state contract list, could be
ordered over the phone, without any bids. State contract list items were those for which statewide
needs had been combined and one contract left to cover all of them.
Caroline had gathered information on the costs of ordering and storing hospital supplies. For order costs,
she estimated that, on average, the purchasing, account payables, and receiving personnel spent three
hours processing a single purchase order. A single purchase order typically included four SKUs (i.e., each
SKU on a purchase order was called a line item). The average hospital storeroom’s wage was $16 an
hour; with employee benefits and associated overhead, the cost of one worker-hour came to $20.
For inventory-holding costs, the university warehouse and hospital storeroom used 36,750 square feet of
storage space. The university stored an average of $4.15 million in hospital supplies in this space.
Records indicated that the average annual variable and semivariable cost for storage space this year
would be $4.60 per square foot. Five warehouse workers and storeroom associates were required to
handle the hospital’s supplies. These individuals each earned $32,000 a year; benefits and overhead
rates for these employees were the same as for other personnel, about 20 percent. Other warehouse
costs, including obsolescence and taxes, were expected to reach $200,000 this year. The hospital
operated 52 weeks per year. Also, the state recently had floated a bond issue at 8.9 percent, and Caroline
thought that might be a good estimate of the cost of money to finance inventory, but she wasn’t sure
what other costs to include in inventory-holding cost.
After reviewing her notes on the hospital’s materials-management situation, Caroline decided to take a
closer look at some individual regular stock items. She sorted through the papers on her desk and found
30 SKUs of interest. She wanted to analyze all 30 SKUs but decided to begin with one SKU widely used in
the hospital—Strike Disinfectant. Data on this SKU are shown in Exhibits 12.16 and 12.17.
Hardy Hospital Strike Disinfectant Data
Case Size
Order Lead Time
4 gallons
Strike Disinfectant1
Cost per Case
$84.20
2 weeks
Beginning SKU Balance
96
Week
1
Receipt
200
Week
7
Ending Balance
110
Week
16
Hardy Hospital Aggregate Strike Disinfectant Weekly Demand as Measured by Hospital Requisitions
Exhibit 12.17Hardy Hospital Aggregate Strike Disinfectant Weekly Demand as Measured by Hospital
Requisitions
Hardy Hospital Aggregate Strike Disinfectant Weekly Demand as Measured by Hospital Requisitions
2. What are good estimates of order cost and inventory-holding cost? (State all assumptions and show
all computations.)
It takes 3 hours per order – average of 4 SKU’s per order and total cost with benefits of $20/hr in
workers’ wages.
$20/hr. x 3 hrs. / 4 SKUS = $15 per order
36750 Sq. feet * 4.6 per ft. = $169,050
32,000 wage, 6400, 20% benefits = $38,400
5 people = $153,600
5*32000-6400=153600
other $200,000
$561,050 /52=$10,789, weekly +$960, financing
= $11, 750, total weekly *52 =
$610,983, annualized
$4,150,000, inventory
14.72%, inventory holding cost
