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Case Study

American Red Cross (ARC)blood services

Student Name: Shaheen SardarCourse Name: Logistics Management

Regional blood center in Cleveland, Ohio

Dr. Amy Croxton, the medical director

of American red cross (ARC)

regional blood center for the northern Ohio region located in Cleveland

was in low spirit.

• In March, she observed a severe outdating (out of date).

• In April, she faced an extreme shortage of blood.

• Result was high cost of outdating and shortage.

• She was interested in a better inventory management program to: Reduce the operating costs for ARC. Increase the availability of blood to the hospitals.

Regional blood center in Cleveland, Ohio

What is American Red Cross (ARC)?

• Nonprofit organization in United States (US).

• 48% of the total blood supply in US.

• 2,000,000 patients each year.

• 6000 hospital blood banks.

• Product nature: perishable.

• Collection unit: One pint per donor.

Blood supply chain (steps)

Step 1: Blood collection• Churches, factories, schools, and regional blood centers (e.g.

regional blood center in Cleveland, Ohio).

Step 2: Blood testing and processing• Series of tests in testing facilities.• Separate a blood unit into components (processing) and

store.

Step 3: Blood distribution• To various hospital blood banks.

Relative frequency of blood type in the US

Factors affecting the inventory decisions

• Demand: Number of blood units of any one type (1 unit = 1 pint).

• Shortage: When the demand exceeds.

• Shortage rate:

• Outdate: Blood exceeds its shelf life (e.g. 35 days for whole blood).

• Outdate rate:

Relationship between outdating and shortage

ARC inventory management

• Compromise between shortage rate and outdating rate.

• Blood is stored in the form of components which are separated during blood processing.

• Blood consists of several components (i.e. Red cells, plasma, platelets, and cryoprecipitate).

ARC inventory management

• Shortage cost per unit (I) = cost of acquiring one unit from another source.

• Outdating cost per unit (P) = cost of processing one unit.

• Number of units that can be processed and outdated to cover the acquisition cost of one unit = .

ARC Inventory management

• Cost of acquiring one Platelets unit from another source (I) = $30.

• Cost of processing one (P) = $3.

• Ratio of acquisition cost to processing cost is .

• 10 Platelets can be processed (i.e. outdated) for the cost of acquiring just 1 unit from another source.

Hospitals Inventory management(Reserve demand from physicians)

• Specific patients.

• Demand arrives randomly during the day.

• Demand quantity is highly fluctuating.

• After the demand information is available, the required units are selected from inventory according to a first in, first out (FIFO) selection rule and put on reserve.

• In the next day, unused units from reserved area are returned to inventory.

Ideal blood distribution system (From ARC to Hospitals)

Ideal blood distribution system should be:

• Hospital requests accurate quantity of blood from ARC.

• ARC fulfils the requests as it occurs.

ARC “Key problem”• High degree of uncertainty in blood availability.

• Inefficiencies in utilizing blood resources, personnel and facilities.

• Blood shortage results in high cost of emergency procurement.

• Outdated blood causes the increase in procuring, processing, and storing costs.

• Adverse effects of blood shortage on patients is difficult to measure.

ARC “Solution to problem”

• Centralized management of blood.

• Prescheduled deliveries.

• A distribution system to facilitate blood rotation among hospitals.

Whole blood and its components

• Whole blood: Blood drawn directly from the donor (lifetime is 35 days).

• Blood components are extracted from the whole blood using several procedures including centrifuging or spinning.

Red cells can remain refrigerated for 42 days. Platelets are stored separately and must be used within 5 days of

the donation. Plasma is often frozen for later use (lifetime is 1 year). Cryoprecipitate is frozen blood prepared from plasma (lifetime is 1

year).

Whole blood and its components

Problems with Platelets

• Random Platelets and Pheresis Platelets have same purpose.

• Pheresis Platelets are costly but safe to use.

• Trade-off between cost and safety triggers the competition between these two products.

• Deciding inventory levels, with a 5 days lifetime, is a critical problem faced by regional blood banks.

Product Price

Random Platelets $60/unit

Pheresis Platelets $408/unit

Whole blood $169/unit

Blood collection

1. Scheduled visits to organizations (signed up to give blood). Key source of the supply.

2. Regional blood centers: Walk-in donors (e.g. regional blood center in Cleveland, Ohio)

3. Invited donors: emergency calls.

Scheduled visits to organizations

• Churches, factories, schools.

• Collection sites are selected from a few months to up to a year in advance of visit.

• Final scheduling: At least 3-4 weeks in advance.

• These longer lead times result in uncertainty in collecting the expected amount of blood.

Scheduled visits to organizations

• Number of sites and amount of blood are variable throughout the year.

• Often, demand for blood is highest when the few sites are available.

• For example: In summer, there are more accidents, but schools and factories are closed for vacation.

Invited donors

• When demand exceeds the supply, emergency calls are made to donors.

• Collection schedules are not easily adjustable to reduce the supply.

• If blood type for some donors is unknown, the estimation of blood for each type is affected.

• Often, the number of donors is less than the number of people who originally signed up.

• Nearly, 14% of people are not allowed to donate blood on that day, and are deferred (i.e. postponed).

Regional blood centers(e.g. regional blood center in Cleveland, Ohio)

• Some reasons of postponement are:They have donated blood within the last 56 days.They are anemic.They are unhealthy.They have abnormal blood pressures.

Regional blood centers(e.g. regional blood center in Cleveland, Ohio)

Scheduling collections

Processing blood derivatives

Inventory policy

Demand by hospitals

Overview of the planning process

Demographics of blood donors

• Blood donation in every year: 5% of the total US population • First time donors: 15%• Average age of blood donor: 35 year• Lower age limit: 17 year• Upper age limit: no• Gender: 52% are males• Average number of donations per year per donor: 1.9• VIP donors: commit to donate blood at least 4 times a year.• Average number of donations per year per VIP donor: 2.9

Demographics of blood donors

A complex distribution system• Perishable nature of blood.

• Uncertainty in availability to the regional blood centers.

• Demand variability at each of the hospital blood banks.

• Large variation in size of the hospital blood banks.

• Incidence of the different blood groups.

• Fulfil requirements of blood from individual hospitals.

• Competition from other blood banks.

A general approach to blood inventory management

1. Some form of blood rotation is required: Freshly processed blood is sent to hospital blood banks. From hospital, the blood may be returned some time later for

redistribution.

2. In order to reduce outdating, certain products can be converted into others with a longer shelf life.

Whole blood may be converted into plasma.

3. Blood products may be sold to other regions of the ARC.4. Some products may be sold to research laboratories5. Blood products may be sold for a reduced price.

ARC “regional blood center in Cleveland, Ohio”

• It supplies: Blood components to 60 hospitals in northern Ohio region. 200,000 units of red blood cells per year. 40% units are consumed by six largest hospitals.

Hospitals Red blood cells (units) TotalA 30,000 15%B 14,500 7.25%C 10,000 5%D 9,000 4.50%E 8,500 4.25%F 8,000 4%Others 120,000 60%Total 200,000 100%

ARC “regional blood center in Cleveland, Ohio”

ARC “regional blood center in Cleveland, Ohio”(What inventory level should be at the hospitals?)

Option 1: Chosen by hospitals with usage of few hundreds to couple of thousands units per year.

Maintain normal inventory based on past usage.Bear the risk of outdating.Refill depleted quantities.Rebuild inventory to normal levels.

Option 2: Chosen by hospitals with usage of couple of thousands to tens of thousands units per year.

Hospital has a contract for predetermined units of each blood component, to be delivered to it every day.

Predetermined number of units is adjusted quarterly, based on past usage .

ARC “regional blood center in Cleveland, Ohio”(What inventory level should be at the hospitals?)

(Inventory management)(regional blood center in Cleveland, Ohio)

• Inventory management approach involves planning collection for the next year down to managing shortages and outdates that occur on a particular day.

Yearly planning

Monthly planning

Weekly planning

Daily planning

Top-down planning approach to inventory management

• Blood collections for next year are planned as: Estimated usage for next year is obtained from all 60

hospitals. Using historical data of demand and estimated usage. Deferred donors (will be postponed due to some

reason) are taken into account. Blood units destroyed during testing are taken into

account. Unsatisfactory donations are taken into account.

(Yearly planning)(regional blood center in Cleveland, Ohio)

Recruitment and collection analysis

• Plan for next one month FOR EACH DAY (in advance).

• Make sure that on EVERY WORKDAY in the next month (Monday-Friday), the estimated collection will exceed a predetermined number of units.

• If estimated collections FOR A DAY in the coming month are less than predetermined units, then ARC tries to recruit donors for THAT DAY (in the next month).

(Monthly planning)(regional blood center in Cleveland, Ohio)

• Also, collections are planned for Saturday and Sunday for next month (but less units than Monday to Friday).

(Monthly planning)(regional blood center in Cleveland, Ohio)

• Planning production of blood components.

• Planning the distribution to various hospitals.

• A projection of demand is made at the beginning of a week. Then, collections and production are planned based on projected demand.

(Weekly planning)(regional blood center in Cleveland, Ohio)

• Taking appropriate actions in case of:Shortages.Expiration date.

• An inventory equal to at least 3 times the daily demand, is maintained for each product and blood type. If it is less than 3 times, it is called a shortage.

• If inventory falls below the average daily demand, it is called an emergency, or a critical shortage.

• Products having excess inventory or nearing their expiration dates are sometimes reduced in price. Discount on red cells of blood type A+ is $20. Discount on platelets is 50%.

(Daily planning)(regional blood center in Cleveland, Ohio)

Daily inventory report of each product by blood type (in units)

Product O+ A+ B+ AB+ O- A- B- AB- Total

Red cells 472 1349 99 539 142 91 83 105 2,880Random platelets

77 67 16 17 13 14 2 9 215

Plasma 185 398 246 217 46 85 45 50 1,272Pheresis platelets

4 7 5 0 1 3 0 0 20

Cryo 478 346 106 22 119 72 25 11 1,179

Inventory report of products by blood type and expiration date (in units)

ProductExpiration

date O+ O- A+ A- B+ B- AB+ AB- Total

Random platelets 02/15 - - 4 - 2 - - - 6

Random platelets 02/16 48 7 5 3 35 11 4 2 115

Random platelets 02/17 - - - - - 2 - - 2

Random platelets 02/18 6 1 4 - 6 3 2 1 23

Random platelets 02/19 84 16 65 19 34 5 11 1 235

Random platelets 02/19 3 1 3 3 2 - - - 12

Report on the number of daily units of each blood product shipped to the ARC’s various customers

Time ordered

Time shipped

Customer number

Red cells/ whole blood

Random platelets

Pheresis platelets

Frozen Plasma

Cryo

12:28 A.M. 01:06 a.m. 19 0 12 0 0 0

01:33 A.M. 02:24 a.m. 31 57 0 0 0 0

02:16 A.M. 03:12 a.m. 31 1 0 0 0 0

01:38 A.M. 03:28 a.m. 5 94 0 0 0 0

02:19 A.M. 04:19 a.m. 5 1 0 0 0 0

01:32 A.M. 05:48 a.m. 20 25 0 0 0 0

07:06 A.M. 08:06 a.m. 6 12 0 0 0 0

Assessing customer service at American red cross

• Assessment of customer service:By computation of customer fill rate.

Order fill rate:

Items fill rate:

Assessing customer service at ARC

• Standards for fill rate are developed by:Product category.Blood type.

• Monitoring fill rates provides valuable information for continuous improvement of service level.

Order fill rate

Red Blood Cells

Frozen Plasma Cryo Random

plateletsPheresis platelets

Total number of orders received

704 236 175 325 266

Number of orders filled at 100%

651 233 175 306 252

Percent filled at 100% 92.47% 98.73% 100% 94.15% 94.74%

Item fill rate

Frozen Plasma

CryoRandom platelets

Pheresis platelets

Units requested 345 325 285 517Units shipped 326 325 267 495Fill rate, % 94.49 100 93.68 95.74Regional standard for fill rate, % 100 100 95 98Percent difference -5.51 0.00 -1.32 -2.26

Red Blood Cells O+ A+ B+ AB+ O- A- B- AB- TotalUnits requested 2673 2988 2058 - 2425 270 247 56 10,717Units shipped 2461 2752 1864 - 1801 234 202 46 9,360Fill rate, % 92.07 92.1 90.57 - 74.27 86.67 81.78 82.14 87.34Regional standard for fill rate, %

90 100 95 100 75 85 80 85 88.75

Percent difference 2.07 -7.9 -4.43 - -0.73 1.67 1.78 -2.86 -1.41

Competition

• ARC Guarantees 97% fill rate to customers.

• Smaller local blood banks are not capable of competing with the ARC.

• Local blood banks have lower fixed costs and provide no service level guarantees to customer. They compete with ARC on price.

Summary

• Dr. Croxton realized that she needed to make some appropriate strategy.

• Blood outdating in March disturbed her.

• In April, she tried to reduce outdating, extreme shortages occurred resulting in loss revenue and loss goodwill.

Summary

Managing the blood inventory is quite difficult because: Supply-driven inventory management. Inventory management techniques are different from those for

typical consumer products. Forecasting demand is not particularly accurate. Planning horizon can be up to one year long with uncertain

collections. Life of blood products ranges from 42 days to as short as five days. Once scheduled, blood donors are never turned away except for

medical reasons. There is a limited opportunity to sell blood outside of the local

region if too much is on hand.

Questions

Questions 1: Describe the inventory management problem facing blood services at the American Red Cross.

Questions 2: Evaluate the current inventory management practices in light of ARC’s mission.

Questions 3: Can you suggest any changes in ARC’s inventory planning and control practices that might lead to cost reduction or service improvement?

Questions 4: Is pricing policy an appropriate mechanism to control inventory levels? If so, how should price be determined?

Questions 1: Describe the inventory management problem facing blood services at the American Red Cross.

Answer:• Collection quantity is random.

• Often, different blood types are unknown.

• Even the demand is less, the excess blood is kept in inventory because the blood is drawn from all qualified donors as they arrive at collection sites.

• Emergency blood needs are uncertain.

• Processing quantities are unknown.

• The usage of blood fluctuates from day to day and between hospital facilities.

Questions 2: Evaluate the current inventory management practices in light of ARC’s mission.

Answer:• Order fill rate and item fill rate is inefficient for many items.

• There are not the clear cost management strategies.

• Profit analysis for different products is not present at all.

• There are not clear pricing strategies for individual products.

• Fixed days for inventory stock results in shortage or overstock issues.

Questions 3: Can you suggest any changes in ARC’s inventory planning and control practices that might lead to cost reduction or service improvement?

Answer:• Key focus should be given to manage the overstocking, because sources

of supply are difficult to control.• For the products that are near the expiration dates. A discount rate

should be offered.• The excessive quantity should be sold to other regions of the ARC.• The excessive quantity should be sold to the customers other than ARC’s

customers. • Hospitals should be allowed to return excessive quantity or rotate the

blood between different hospitals.• Try to transform the excessive blood into other components of blood

which have excessive demand.• The products which face the shortage should be provided in excess

supply to the hospitals.• Strengthen the quality and service levels.

Questions 4: Is pricing policy an appropriate mechanism to control inventory levels? If so, how should price be determined?

Answer:• Yes.

• Make the pricing strategies based on quality because the quality is decreasing as the number of days are passing.

• Increase the prices of blood products which are rarely available to competitors.

• Fresh products should have more prices than those products which are near the expiration dates.

References

• Ballou, Ronald H. (2004). “Business Logistics/ Supply Chain Management: Planning, Organizing, and Controlling the Supply Chain.” (5th Edition).

• http://www.redcrossblood.org/.• http://

www.carterbloodcare.org/Bloodfacts/BloodProcessing.

• http://en.wikipedia.org/wiki/Cryoprecipitate.