8 Best Practices for Hospital Inventory Management

A significant part of hospital budgets—at least 20%—goes toward pharmaceuticals and other medical supplies, so hospitals are urgently seeking ways to manage this inventory more cost effectively. But hospital inventory management isn’t just about the bottom line; it’s also about patient care. Effective efforts support patient safety, the affordability of treatment, and the overall quality of hospital care. Technological innovations, such as cloud-based platforms that work with Internet of Things (IoT) devices, promise real-time inventory visibility and automated replenishment of pharmaceuticals and other medical supplies—all enhanced with predictive analytics to make inventory management more proactive.

What Is Inventory Management?

Inventory management makes sure an organization has the materials it needs, in the right amount, when they’re needed to prevent stockouts, which can impair operational efficiency and customer service, while also avoiding overstocks, which can be costly. Outdated approaches to inventory management were manual, involving physical counts and spreadsheets, while today’s more modern approaches are automated, using technologies such as barcode scanners, radio-frequency identification (RFID) tags, and inventory management software.

What Is Hospital Inventory Management?

Hospital inventory management is a systematic approach to overseeing and controlling the entire life cycle of pharmaceuticals and other medical supplies, from procurement and storage to use and disposal. Hospitals have typically lagged behind companies in other industries in digitizing inventory management, but they’re looking to step up their IT investments to operate more efficiently, counteract supply chain disruptions, and improve patient safety.

Key Takeaways

• Inventory management can help hospitals improve financial health and patient safety at a time when both are under scrutiny.
• Hospitals must optimize inventory to control costs, prevent shortages, and ensure that clinicians have error-free access to life-saving supplies.
• Hospitals are increasingly adopting cloud-based inventory management systems, artificial intelligence (AI), and automation to improve visibility and forecasting.
• Best practices include data analysis, staff training, and security.

Why Is Inventory Management Important in Hospitals?

Hospital inventory management must address challenges common to most industries today, such as supply chain disruptions, inflated costs, and recalls, yet also take on challenges unique to the healthcare inventory, including drug safety and shortages. Only with efficient inventory management can hospitals deliver quality care while reducing costs and errors.

Recurring drug shortages illustrate the importance of inventory management in hospitals. According to the Brookings Institution, the unavailability of a particular drug can endanger patient health due to delays in treatment, rationing, substitution of less-effective alternatives, and higher risk of errors. In a mid-2023 survey by the University of Utah Drug Information Service, over 99% of pharmacists in hospitals and health systems reported that they’ve experienced drug shortages, which 33% characterized as critically impactful, and 63% labeled moderately impactful. Additionally, 2024 has seen ongoing spot shortages of critical medical supplies. Disruptions have prompted an FDA warning against using faulty imported syringes, plus the closure of a major U.S. IV fluid producer that experienced hurricane damage.

In response, some hospitals maintain costly buffer stocks of inventory to hedge against shortages. Or, they search for alternative drugs and medical supplies, which is also expensive, as staff scramble to find, procure, and learn how to administer them. Other responses include longer inventory planning horizons, diversified sourcing, closer relationships with vendors, and adoption of cloud-based inventory management systems and automation to increase visibility and reduce errors. Overall, the cost of managing shortages adds as much as 20% to hospital drug budgets, according to the American Society of Health-System Pharmacists.

Challenges in Hospital Inventory Management

Hospital inventories are fraught with complexity. Drugs expire, leading to waste and safety hazards. Demand for supplies fluctuates, as dramatically illustrated by shortages of personal protective equipment during the pandemic. Physician preferences vary, requiring a wider volume and assortment of instruments, implants, and pharmaceuticals. Medical devices are continually updated and can supersede those already in stock.

Additionally, these essential supplies are stored in a variety of locations throughout the hospital and beyond, complicating access. Locations include central storage facilities, operating rooms, hospital pharmacies, and point-of-care units, such as medication carts—not to mention outpatient facilities, such as ambulatory surgery centers. And each item may be subject to strict regulatory requirements for safe labeling, storage, and disposal—particularly of controlled substances and hazardous waste. Here’s a look at some of the most common challenges facing hospital inventory management.

• Perishable supplies: Medications nearing their expiration date are often destroyed, which can reduce patient access to drugs, inflate storage costs, and increase environmental pollution. It’s also challenging to maintain proper environmental conditions for perishable inventory, such as blood products, testing kits, and vaccines, which may need cold-chain storage or other special handling to avoid spoilage.
• High costs: Hospital expenses have been fueled by inflation in recent years. Although inflation rates have dropped, costs remained higher in 2024 than they were between 2021 and 2023. Looking ahead, hospital executives surveyed by Premier, a healthcare improvement company, ranked the cost of supplies as their biggest operational and financial challenge going into 2025.
• Supply chain disruptions: The Institute for Supply Management reported in October 2024 that hospitals’ supplies had experienced supply chain delays for 14 consecutive months. Hospitals have had to adjust their inventory management strategies to account for longer lead times, as well as sudden supply chain disruptions caused by extreme weather, international trade tensions, and other factors.
• Demand fluctuations: The pandemic presented one of the all-time, worst-case scenarios in hospital demand management, with supply chain disruptions and shortages leading to crisis conditions and a hiatus in elective surgeries. Still, hospitals have to deal with the shifting and often unpredictable nature of patient demand on an ongoing basis, given seasonal variations, public health emergencies, insurance coverage cycles, and other causes.
• Limited visibility: Many hospitals still track supplies manually, and outdated inventory management systems in different departments don’t talk to each another. Costly issues arise when hospitals don’t have real-time visibility into their stocks of pharmaceuticals and other medical supplies. These can include last-minute ordering, stockouts, overstocks, and, ultimately, operational inefficiency and compromised patient care.

Benefits of Hospital Inventory Management

Many hospitals experiencing financial pressures, such as declining days cash on hand, the high cost of capital, and slim operating margins, are upgrading their inventory management practices to increase efficiency, cost savings, and revenue capture. They know that better inventory management can also help improve patient outcomes and overall company operations by preventing treatment delays, reducing medical errors, and promoting efficiency. Here are eight specific benefits of hospital inventory management.

• Reduced costs: Industry observers say hospitals will continue to face high supply costs in 2025, with drug prices increasing in the mid- to high-single-digit percentage range. Hospital inventory management systems reduce spending on drugs and other medical supplies through more accurate tracking, streamlined processes, and data-driven decision-making—in turn, reducing wasted supplies, preventing revenue losses from unbilled items, and optimizing operational efficiency. In the Premier survey, 62% of respondents cited cost savings from investments in supply chain and inventory management technology.
• Improved patient care: One of the top 10 patient safety concerns for 2024 was caused by drug, supply, and equipment shortages, according to ECRI, a patient safety advocacy group. Better inventory management can reduce patient risks from delayed treatment, expired or recalled drugs, rationing, medical error, and the administration of less effective drugs.
• Clinical peace of mind: Burnout among healthcare workers has reached critical levels in recent years, and there’s a connection between inventory management and their peace of mind. For instance, clinicians have to make difficult decisions about how to ration care during drug shortages; nurses have reported having to leave procedures to hunt for supplies; and drug shortages are stressing hospital pharmacists. Better inventory management can alleviate anxiety, as it enables clinicians to perform their tasks efficiently, without the worry that a replacement drug may not be as effective as the original or that a medication might have expired.
• Enhanced efficiency: Efficient hospital operations create cascading benefits. Increased bed availability, prompt physician attention, and improved patient outcomes aren’t only positive for patients but also translate to significant advantages for the hospital itself. These include enhanced financial performance, streamlined regulatory compliance, greater employee satisfaction, and a stronger competitive edge in the healthcare market. Effective inventory management is a cornerstone of operational efficiency, ensuring that doctors and nurses know which resources are available at any given time, preventing stockouts that delay treatment, and providing valuable data for continuous operational improvements.
• Fewer stockouts: Effective inventory management helps hospitals avert stockouts by using advanced tracking systems and data analytics to monitor usage patterns, predict demand, and automatically trigger reorders before supplies run low. By maintaining optimal inventory levels of medical supplies, medications, and equipment, hospitals can ensure continuous patient care while minimizing the risk of critical shortages that could compromise healthcare delivery or patient outcomes.
• Better compliance: Inventory management helps hospitals comply with regulations governing everything from medication safety to controlled substances, medical device recalls, and hazardous waste disposal. For instance, the Drug Supply Chain Security Act, which mandates drug-tracking and -tracing to protect patients from counterfeit or contaminated drugs, requires hospital pharmacies to collect, store, and exchange transactional documentation with trading partners. Inventory management systems can be configured to monitor transaction information, generate reports, and facilitate verification processes.
• Optimized space utilization: Hospitals have limited space for supplies. Inventory management, often combined with RFID tags, can help make the best use of available space while also improving workflows. Real-time visibility of supplies, quantities, and locations boosts organization by placing frequently used supplies within easy reach of busy clinicians. And automation can reduce overstocking by analyzing usage patterns, lead times, and items on hand, then reordering only as existing supplies reach specific thresholds.
• Data-driven decisions: When integrated with enterprise resource planning (ERP), electronic health record (EHR), and other systems, inventory management systems can contribute to transforming hospital operations, improving patient care, and enhancing financial performance. For example, integrating data from all three systems provides valuable insights into costs, usage patterns, and operational efficiency, enabling data-driven decision-making for better financial management.

8 Best Practices for Hospital Inventory Management

A model solution for managing hospital inventory integrates cloud-based inventory management software with ERP, EHR, and other hospital systems. The overall system should collect data at receiving, dispensing, and usage points via barcode scanners, RFID readers, sensors, and tablets or smartphones. A system like this enables real-time tracking of inventory, automated ordering and replenishment, expiration date management, usage analysis, and other valuable processes.

Integration of inventory, clinical, and financial data is key to providing insights into relationships among supply usage, patient outcomes, and costs. Enhancement with AI further improves data analysis. For example, when stocking mobile medication carts and fulfilling physician preferences, AI can adjust to pick lists based on usage instead of relying only on historical data. The result is more efficient inventory management and improved patient care. In the Premier survey, 61% of respondents said they planned ERP enhancements for their supply chain and inventory management in the coming two years.

To derive the greatest value from inventory management systems, healthcare organizations can follow these eight best practices.

1. Organize Your Inventory

Organization is critical in an environment where life-saving supplies must be immediately available without error—one where medications might expire, devices could be recalled, and controlled substances must be secured. In each location, whether a central storage area, hospital pharmacy, or nursing unit, items should be clearly labeled and organized by frequency of use, expiration date, or other important attributes, to ease usage and avoid waste.

Hospitals should rely on an explicit organizational plan for inventory, based on a comprehensive assessment of existing inventory levels, item categories, and usage patterns. A basic guideline for such a plan might emphasize a first in, first out approach—or a first expired, first out approach—to ensure proper rotation of supplies. Another method is the periodic automatic replenishment (PAR) of items on hand, whereby each item is assigned a minimum and maximum PAR level to avoid stockouts and overstocking.

2. Tag Equipment and Supplies

Clear labeling of pharmaceuticals and medical supplies, including lot numbers and expiration dates, is a baseline requirement for safe handling, inventory rotation, and recall facilitation. Tagging each item with an RFID tag or barcode, for example, can promote central tracking of inventory, streamline workflows, and reduce manual errors. However, despite the benefits of these technologies, their implementation can present challenges. While essential for inventory visibility and error reduction, manually applying labels and tags remains a time-consuming pain point for hospitals. They would prefer that more of their suppliers pretag items with wireless devices containing standardized information, akin to the unique device identifiers mandated for medical devices by the Food and Drug Administration. The healthcare industry is increasingly adopting emerging technologies, such as advanced RFID, near-field communication, and Bluetooth tags, to automate identification and tracking for better inventory management and patient safety.

3. Collect and Analyze Data

Modern hospitals leverage data-driven insights captured by their inventory management systems to improve operational efficiency. These systems often include features such as metrics reporting, real-time tracking of PAR levels, and demand forecasting. Analyzing key performance indicators, including stock turnover, stockouts, and carrying costs, can better predict supply needs, minimize waste, and leverage volume pricing to reduce costs. Mapping such information against EHR data on usage and patient outcomes can deliver improvements hospitalwide, and integrating it with financial systems can enhance financial results.

4. Leverage Advanced Technology

Advanced technologies, such as AI and process automation, are taking inventory management to the next level, moving beyond basic tracking and reporting toward proactive and predictive systems. AI algorithms can analyze vast amounts of data, including historical usage patterns, patient demographics, and even real-time clinical data, to generate highly accurate demand forecasts. This enables hospitals to optimize stock levels, proactively address potential shortages, and minimize waste. Process automation further streamlines inventory management by automating repetitive tasks, such as order placement, invoice processing, and data entry, thereby reducing the administrative burden on staff and curtailing human error.

5. Forecast Demand

Demand forecasting can alleviate many hospital inventory management issues by analyzing seasonal demand, patient demographics, natural disasters, and the introduction of new medical treatments. ERP software enables analyses of historical data from within the hospital system, the community it serves, and peer organizations, with statistical modeling delivering predictive and prescriptive input for decision-making. The rise of AI is further enabling such advanced analytics to optimize inventory. These elevated models feature continuous learning, so they can update themselves with new data as it becomes available, in real or near-real time.

6. Optimize Ordering and Replenishment

Hospital inventory management systems can set automated triggers for reordering drugs and other medical supplies as they reach preset thresholds or approach their expiration dates. AI can further refine this inventory replenishment process. For example, if usage of a particular item is high, or the item is experiencing frequent stockouts, the system could recommend a higher PAR level as the trigger for reordering. On the other hand, a lower PAR quantity could be set for slower-moving items, to reduce the burden of unnecessary inventory costs.

7. Assign Responsibilities and Train Staff

Assigning inventory management responsibilities ensures that all aspects are covered, including supplier relationship management, clinician relationship management, ordering, tracking, and the review of purchase orders for any discrepancies. Investing in continual staff training also helps reinforce the most cost-effective management of medical supplies.

Training equips all staff, including clinicians, with the knowledge and skills to follow standardized procedures for handling, storing, and using supplies. This facilitates efficient workflows, minimizes time wasted searching for items, and lessens the potential for errors arising in critical clinical settings. Clear guidelines on supply usage and proper disposal methods can also help reduce waste and contribute to cost savings. Training also nurtures a culture of accountability and responsibility among staff. When employees, including clinicians, understand the importance of proper supply management and are confident in their abilities, they are more likely to adhere to best practices. Healthcare companies should also take care to provide appropriate staff training for inventory management systems and other technologies as needed.

8. Secure Sensitive Data

Hospital inventory management systems often contain personal health information—for example, in medication-dispensing cabinets or in connection with blood products and biological tissues. In these situations and others, hospitals must comply with long-standing Health Insurance Portability and Accountability Act rules, such as role-based access, to protect patient privacy. Cybersecurity also presents a growing risk, as dramatically illustrated in 2024 in New York State by what is considered the largest healthcare data breach ever, affecting 100 million Americans. New York has since issued new cybersecurity regulations requiring regular tests for system vulnerabilities, reviews of access privileges, and rapid reporting of incidents. Other states are expected to follow suit. In a 2024 survey by the Guidehouse consultancy, healthcare providers identified cybersecurity infrastructure as the highest priority for digital and IT investments.

Take Control of Hospital Inventory With NetSuite

NetSuite Inventory Management provides a centralized, real-time view of hospital inventory, such as pharmaceuticals and other medical supplies, in all locations, helping to avoid stockouts and overstocks, and contributing to overall operational efficiency, better patient care, and regulatory compliance. Its Item 360 dashboard graphically shows all information related to an item in a single, centralized view. Integrated with NetSuite ERP and tools such as Compliance 360, NetSuite Inventory Management can help hospitals adapt to the changing healthcare landscape, while shaving costs and refining decision-making.

Hospitals face mounting pressures to manage pharmaceutical and medical supply costs effectively while ensuring optimal patient care. By adopting modern inventory management practices and leveraging technological advancements, including cloud-based systems, AI and automation, hospitals can tackle challenges, such as drug shortages, supply chain disruptions, and rising expenses. Ultimately, efficient inventory management contributes to improved operational efficiency, reduced costs, enhanced patient safety, and better clinical outcomes.

Hospital Inventory Management Best Practices FAQs

How do hospitals keep track of inventory?

Hospitals are continuing to transition from manual inventory practices to digitized systems that offer real-time tracking, automated ordering, and data-driven insights. Leaders in the field have implemented cloud-based platforms—combined with smart Internet of Things devices, such as radio frequency identification tags and sensors—to provide a constant, up-to-the-minute view of inventory levels, automatic reordering of supplies when needed, and even the ability to predict future demand to prevent shortages.

What is the simplest way to manage inventory?

Cloud-based inventory management software can simplify processes that otherwise require time-consuming, error-prone handling of supplies via manual counts and spreadsheets.

What is a system of inventory control in a hospital?

A system of inventory control in a hospital is a comprehensive approach to managing medical supplies, medications, and equipment using technology and standardized processes to track usage, maintain appropriate stock levels, and ensure timely replenishment. This typically includes automated inventory management software, barcode or scanning systems, and centralized data collection to enable real-time visibility into stock levels across different departments. The system helps healthcare facilities maintain adequate supplies for patient care while preventing stockouts or excess inventory that could lead to waste or expired products.