Managing Purchasing, Receiving and Inventory of Materials and Supplies

• San Francisco General Hospital has inadequate safeguards over its medical supplies and lacks sufficient control over the purchasing, receiving, and inventory process. Our review found deficiencies in authorization procedures, segregation of duties, and securing supplies.
  
  
• Our sample of 20 purchasing requisitions showed three requisitions, or 15 percent, without adequate authorization, for equipment ranging in price from $427 to $1,182 in value. Interviews with operating room staff indicated that requisitions from this unit are not regularly authorized before they are submitted to Materials Management.
  
  
• We identified seven purchase orders that were received by the same staff person responsible for purchasing the items. Review of the subject purchase orders showed that the purchasing staff person who ordered a number of higher priced office products, with total costs of $6,309, also received the goods when delivered. Upon further inquiry, the receiving staff could not verify that they had actually received the goods, even though they entered the goods as received in the inventory management system.
  
  
• Also, San Francisco General Hospital needs to develop a long-term plan to adequately secure the Materials Management Central Distribution. Although the Department corrected many of the weaknesses in San Francisco General Hospital’s Storeroom security which the Sheriff’s Department identified, during the course of this audit, we observed that some entries and exits were unlocked during normal business hours and that access to the Main Storeroom was readily available to persons in the area, including patients.

Purchasing, Receiving and Maintaining Inventory

The Main Storeroom acts as a purchasing, receiving, and storage center for most hospital inventory and some other Community Health Network departments. The Main Storeroom stores medical and surgical supplies (intravenous solutions, baby formula, diapers, syringes, needles, bed liners, tubing etc.) in one of two stockrooms, Central Supply and Perpetual Inventory. Additionally, each Hospital clinical unit has one or more supply areas within the unit to store medical and surgical supplies. The Materials Management receiving staff receive most goods before they are transferred to the Hospital units.

Internal Controls Over Purchasing and Receiving

During the course of our audit, we reviewed the internal controls over medical and surgical supplies by:

1. reviewing policies and procedures,
   
   
2. interviewing hospital officials and Materials Management staff, and
   
   
3. observing transactions concerning medical and surgical supply acquisitions, from the intake distribution procedures at the receiving dock to inventory stocking in the cost center supply rooms.

Authorization

Strong internal controls require that transactions, particularly requisitions have appropriate authorization. According to Policy Procedure No. 1.1, "Requisitions must be signed by authorized personnel". Authorization of requisitions ensures that a product control mechanism is in place, permitting only authorized personnel to order supplies. The San Francisco General Hospital Materials Management department does not consistently require that authorized personnel sign requisitions. Most daily supply requisitions can be automatically approved by the automatic purchase order function of the inventory management computer system. Special supply requisitions must be manually requisitioned and cannot be automatically approved. The Hospital has multiple requisition forms for different departments, making it difficult to determine if consistent requisitioning information was provided. In a random sample of 20 special order supply requisitions for the seven-month period from February 1, 2001 through August 1, 2002, three requisition forms for equipment with values ranging from $460 to $1,182 either lacked or had questionable authorization. Interviews with operating room staff indicated that requisitions from this unit are not regularly authorized before they are submitted to Materials Management.

Inventory Security

Another important element of strong internal controls is the physical security of assets and records. Central Supply, one of a small group of areas that stores and handles the most valuable supplies within the Hospital, lacks adequate security, rendering the area vulnerable to pilferage and theft. We observed that entries and exits, including the main double central corridor entry/exit doors were unlocked during normal business hours. Given the value of the assets within this area, these supplies should receive special security considerations, and non-departmental visitors should not be allowed access without an escort.

Sheriff’s Department Report

The Sheriff’s Department has compiled prior security evaluations, performed by the University of California at San Francisco University Police, the private firm Gibbs and Associates, and the California State Highway Patrol. These evaluations noted a number of significant security issues within the Main Storeroom, and made a series of recommendations, including:

1. ensuring that all entries and exits have access-controlled doors which only permit entry to authorized personnel;
   
   
2. repairing rolling gates within the fenced storage area to facilitate locking; and
   
   
3. installing an intercom system and a remote release for the electrified door that can be used by visitors requesting entrance from the rear lobby.

Although San Francisco General Hospital implemented the Sheriff’s Department security recommendations noted above, a number of significant Sheriff’s Department security recommendations have not been addressed. The Sheriff’s Department has made further recommendations, including:

1. San Francisco General Hospital should install a card access system in the main entry/exit doors, which currently have electrified magnetic locks. According to the Sheriff’s Department, personnel do not keep these doors closed and locked at all times.
   
   
2. San Francisco General Hospital should modify or install additional closed circuit television cameras to improve monitoring of the loading dock and entry/exit doors to the Materials Management area. A CCTV monitor, VCR and sequential switcher should be added to the office of the area manager to monitor cameras that view the main entry/exit door.
   
   
3. San Francisco General Hospital should install an electrically operated double door that is card controlled for card-in and free-out operation which would allow for use of material transfer carts and pallet movers.

Management stated that Sheriffs’ Department recommendations noted above were not implemented due to insufficient funding and thus far, there are no long-term implementation plans.

Patient Clothing Storage Area

In June of 2002, the Hospital installed a new fence, enclosing approximately 30 feet by 15 feet of space, to store patient clothing and belongings in the Main Storeroom. This new space shares the Main Storeroom with Perpetual Inventory, which stores valuable supplies. During the first few days of the new space location, the storeroom staff reported that unauthorized and unsupervised individuals entered the Main Storeroom in search of their belongings. To solve the unauthorized entry problem, management subsequently implemented a procedure requiring the Messenger Services staff to retrieve patient belongings for patients.

Given the relative ease in which patients previously entered the Main Storeroom to obtain their belongings and the observed lack of control of the main entrance and exit, a security weakness remains. Despite the new procedure, the Main Storeroom is still a high-risk area. Materials Management needs to implement the recommendations compiled by the Sheriff’s Department to control access to the Main Storeroom via additional CCTV cameras and access cards.

Segregation of Duties

The proper segregation of duties should prevent the commitment and then concealment of an error or irregularity within the purchasing and receiving cycle. We identified seven purchase orders that were received by the same staff person responsible for purchasing the items. Review of the subject purchase orders showed receiving signatures indicating that the purchasing staff ordered a number of high priced office products, and also received the goods when delivered. Upon further inquiry, the receiving staff could not verify that they had actually received the goods, even though they entered the goods as received in the inventory management system.

Materials Management staff committed two major errors. First, staff purchasing the good also received the good. Second, receiving staff entered the good into the inventory management system without verifying that the good had been received. Although we did not identify any actual theft, these two errors could contribute to the concealment of theft.

Maintaining Inventory

Materials Management is responsible for the maintenance and restocking of inventory in the Central Supply and Perpetual Inventory areas of the Main Storeroom, and in the Hospital’s clinical units. Central Supply, Perpetual Inventory and the clinical units receive their inventories daily via the Just-In-Time (JIT) system. The JIT system delivers supplies on a daily basis to reduce and rotate inventories, decreasing potential loss due to expiration dates. Materials Management staff order supplies daily by electronic data transfer. The JIT inventories arrive from the prime vendor every morning at 6:00 a.m. These goods are transferred to four sites within the Hospital: (a) OmniCell units in the clinical areas, (b) materials and supplies exchange carts in the clinical areas, (c) Perpetual Inventory, or (d) Central Supply.

OmniCell unit and the exchange carts supplies are ordered daily from the prime vendor via electronic data transfer or are obtained from the Central Supply area. OmniCell units are the hospital’s new automated dispensing cabinets, capable of simultaneously dispensing and tracking inventory. OmniCell units are currently located in a limited number of clinical units. Exchange carts are alternative vehicles for dispensing inventory, located in most clinical units. They are blue supply carts with inventory that must be physically counted and stocked daily. Supplies in Central Supply and Perpetual Inventory are either ordered from the prime vendor on a daily basis or ordered from other vendors once a week.

Establishing Par Levels

A par level is a target quantity of a supply, based on historical use over a certain period of time, established to maintain sufficient levels of inventory. Inventory levels should always be replenished to established par levels to ensure sufficient available supplies without overstocking. The Receiving division of Materials Management is responsible for maintaining par levels for approximately 70 percent of the total inventory, and the Purchasing division is responsible for maintaining par levels for the remaining 30 percent. On a daily basis, staff from the Receiving division will assess inventory levels of supplies purchased from the prime vendor and stored in the Central Supply and Perpetual Inventory areas. A requisition is then sent to the Purchasing Department to order supplies from the prime vendor. On a weekly basis, staff from the Purchasing division will assess the inventory stock for supplies purchased from other vendors and stored in the Central Supply and Perpetual Inventory. Supplies will then be reordered from other vendors.

Nurse managers in the clinical units determine the par levels for the blue carts and the OmniCell units. Although Receiving staff send a "no movement" report to the clinical units every three to six months, to show which blue cart stock items are under-utilized, Materials Management does not follow up on these reports. Also, the automated OmniCell system can generate "par vs. usage" reports, but Materials Management staff do not provide the reports to the clinical units on a regular basis. The Materials Management division does not currently have a formal, written policy for evaluating par levels and needs to establish more formal procedures for evaluating supply usage and matching par levels to actual usage.

Supply Shortages

Materials Management staff in the Main Storeroom stated that shortages in Central Supply and Perpetual Inventory supplies have occurred. During our observation, we walked through the Perpetual Inventory area of the Main Storeroom, which stores primarily non-prime vendor supplies, and noted that of approximately 200 supply items stored in the area, seven were out of stock. Although most of the supplies were paper and office supplies, one of the seven supplies was a Peep Valve, used with ventilators, anesthesia machines, and resuscitators. Management needs to ensure compliance with the Materials Management policies to maintain sufficient supply levels in Central Supply and Perpetual Inventory.

Conclusions

San Francisco General Hospital Materials Management needs to improve its controls over the purchasing, receiving and inventory process. Our review found deficiencies in authorization procedures, segregation of duties, and maintaining inventories.

Our sample of 20 purchasing requisitions showed three requisitions (or 15 percent) without adequate authorization. Interviews with operating room staff indicated that requisitions from this unit are not regularly authorized before they are submitted to Materials Management.

We identified seven purchase orders that were received by the same staff person responsible for purchasing the items. These purchase orders showed that the purchasing staff ordered a number of high priced office products, with total costs of $6,309 and also received the goods when delivered. Upon further inquiry, the receiving staff could not verify that they had actually received the goods, even though they entered the goods as received in the inventory management system.

Our walk-through the Perpetual Inventory area of the Main Storeroom, which stores primarily non-prime vendor supplies, showed that seven out of approximately 200 supply items were out of stock. Although most of the supplies were paper and office supplies, one of the seven supplies was a Peep Valve, used with ventilators, anesthesia machines, and resuscitators.

San Francisco General Hospital also needs to develop a long-term plan to adequately secure the Main Storeroom’s Central Supply and Perpetual Inventory areas. Prior evaluations compiled by the Sheriff’s Department have found weaknesses in San Francisco General Hospital’s Storeroom security. During the course of this audit, we also observed that entries and exits, including the main double central corridor entry/exit doors were unlocked during normal business hours and that patients had access to the Main Storeroom.

Recommendations

The San Francisco General Hospital Department of Support Services should:

Costs and Benefits

Our recommendations should result in increased control over the purchasing, receiving, and inventory process and reduce the risk of loss through waste or theft.