Consignment inventory shrinkage in general and physician preference medical supplies: An empirically-grounded analytical investigation

The cost of medical supplies represents a significant portion of hospital spending. Hospitals manage different types of medical supplies, such as general medical supplies and physician preference items. General medical supplies tend to be numerous and relatively low cost, while physician preference items tend to be less numerous and more expensive. Strong physician preference for certain medical supplies can limit the options available to reduce inventory costs. The use of consignment inventory is one way in which hospitals seek to reduce inventory costs for both general supplies as well as physician preference items. However, the use of consignment reduces the level of oversight that hospitals have on consigned inventories, thereby potentially increasing the likelihood of shrinkage. The impact of consignment on shrinkage cost has received limited attention. We investigate this issue by drawing upon the precepts of agency theory and by analyzing hospital data that span multiple years. Our results suggest that the use of consignment increases shrinkage and spend. We develop empirically informed analytical models to better understand the impact of an unforeseen increase in shrinkage on the cost associated with general and physician preference items. The analytical investigation suggests that the impact on general and physician preference items differ depending on the type of consignment contract negotiated between a hospital and a vendor. We discuss the theoretical and managerial implications of our findings.