How to strengthen your surgical implant supply chain and cash conversion cycle
March 14, 2021
Optimizing effective cash and working capital management is critical to the sustainability and success of any business’ infrastructure. This is especially important when it comes to the procurement and finance management for implantable surgical devices between medical device manufacturers, medical device reps, and healthcare facilities. One strategic process that addresses this is known as the Cash Conversion Cycle (CCC), which accounts for 1. Days Inventory Outstanding (DIO), plus 2. Days Sales Outstanding (DSO), minus 3. Days Payables Outstanding (DPO).
CCC = DIO + DSO - DPO
Let’s take a look at how this equation works, and how it can elevate procurement, billing, and cash-flow management related to the supply chain for implantable surgical devices.
What is the Cash Conversion Cycle?
The lifeblood of any business is how efficiently they are managing the balance between their assets and liabilities to generate revenue. The cash conversion cycle ties together ratios that represent accounts receivable, accounts payable, and inventory turnover. Accounts receivable and inventory, are considered short-term assets, while accounts payable is a liability.
Variables of the cash conversion cycle, like DSO (Days Sales Outstanding) are typically controlled by Sales or Accounts Receivable (AR). So, while Procurement can influence DIO (Days Inventory Outstanding) and DPO (Days Payment Outstanding), it can really only control DIO, as AP (Accounts Payable) ultimately controls DPO.
However, Procurement can give AP the information it needs to make invoice payments at the right time by making sure that terms of the contract or Purchase Order (PO) are aligned with the goals and objectives of the organization. Also, it can facilitate early payment discount programs with the right supplier partners, provided there is flexibility on agreement conditions.
How to minimize Days Inventory Outstanding (DIO)
In order to optimize the cash conversion cycle variable of Days Inventory Outstanding, Procurement needs to be able to accurately analyze, predict, and report on surgical implant ordering and billing trends. An automated, AI-driven solution that enables seamless management of implantable surgical devices is able to facilitate that quickly and easily. This is critical to prevent tying up cash-flow, getting inflated and inaccurate demand projection of Sales, or rendering certain surgical implant devices obsolete. The opposite scenario, device procurement projections being too low, can also pose a significant problem, risking limited stock or potential issues in production lines.
When it comes to Days Payment Outstanding (DPO), Procurement needs to have a comprehensive understanding of payment time frames and standard procedures of different implantable surgical device suppliers and vendors. Early payment and/or dynamic discounting can vary across suppliers, so it’s important that Procurement teams also align discount programs to the healthcare facilities’ financial and organizational goals.
Understand the true cost of implantable surgical device inventory
Procurement must understand the true costs of carrying inventory of implantable surgical devices within the organization in order to accurately model the total cost of ownership. It’s about more than just the cost that’s locked up in the device inventory itself. It can also include the carrying cost, transportation costs, and the capital required to avoid any disruption in surgeries and medical procedures. Sometimes the shipment and logistical costs can tally up to more than the cost of the medical device alone.
Balancing procurement needs to avoid stock-out, with maintaining extra stock can be a challenge. There can be scenarios where maintaining a surplus inventory of implantable surgical devices can outweigh the opportunity cost of from a single day stock-out.
Having an AI-driven solution to manage surgical implant billing, purchase orders, and inventory enables Procurement to have an accurate account of all costs associated with surgical implant devices. Whether for maintaining extra inventory, or navigating a shortage of stock, an automated, cloud-based software allows healthcare facilities’ billing and procurement teams to develop accurate cost models, optimize inventory replenishment cycle, balance logistics costs, and make sure that capital is available when needed.
Understand the cost of paying suppliers early
Although the additional savings incentive associated with early payment programs or dynamic discounts from suppliers can be beneficial, it can also be a detriment when it comes to cash-flow management, and result in opportunity cost for the healthcare facility or network.
An AI-driven surgical implant billing and inventory management solution can help Procurement accurately calculate the value of early payment discounts, and what benefits the facility can stand to gain with other financial incentives, like dynamic discounting.
Having a comprehensive cash-flow analysis, and access to consistent reports helps Procurement and billing teams to see the true cost of having capital tied up in inventory, or paid out early through different payment programs. This data can equip Procurement teams to make better informed decisions when it comes to contracting and making purchase ordering on implantable surgical devices.
A clearer understanding and more refined process, facilitated through smart, automated software, can minimize Days Inventory Outstanding and Days Sales Outstanding, and maintain a healthy Days Payment Outstanding to improve the overall cash conversion cycle of a healthcare facility or organization.
To learn more about the benefits of automating surgical implant billing and invoicing at your healthcare facility, contact us for more information.