Chapter 5

RECEIPT, INSPECTION, STORAGE, DISTRIBUTION AND

INVENTORY MANAGEMENT OF MATERIALS

 Introduction :
 Materials management and inventory control are one of the
modern management techniques.

 Alma Ata Declaration while listing the elements of Primary

Health Care has also identified provision of essential drugs.

 Materials management is a scientific technique which is

concerned with the planning, organizing and controlling the
flow of materials from their initial projects through internal
operations through the distribution to the service points.
Essential needs of the materials management around which district
health
care organizations / hospital focuses are:
 To have materials on hand when needed.

 Consistency of quality and value requirements of the drugs which

are costly.

 To minimize inventory investments, and avoid unnecessary

stocking of the medicines.

 To operate efficiently.

 The non-availability of materials only contributes towards delay in

implementing health programmes, non-achievement of targets and
reducing the operating effectiveness of health services, but it is also
a very potential area for increasing the cost of health services.
 the materials manager in a hospital set-up should ensure that materials
are available as and when required.

 it involves identification and selection of store items, demand

estimation or forecasting of material, procurement or purchasing,
inspection and receiving, inventory management, storage, distribution
and issue.

 The Elements in the Cycle of Materials Management :

 Proper functioning of each of the elements a(sub-systems) coupled

with interdependence of all the sub-systems to achieve the primary
objectives are the classical characteristics of the materials management
system.
 Demand
Procurement Receipt
Estimation

Maintenance Issue and

Condemnation Storage
and Repair Use

Disposal Accounting and Information system

 Demand estimation and Selection of
Pharmaceuticals :
 Realistic demand estimation forms the basis for all future
activities in materials management.

 over eighty thousand formulations of drugs are

manufactured and sold in the Indian market.

 while WHO says just 300 odd number of drugs are

sufficient even for a tertiary hospital of a developing
country.

 Less the number of brands of drugs, less will be the

problem of planning and management of the same.
 Selection :
What and how much to buy?
 Despite 30 to 40 per cent of health care budget being spent on
pharmaceuticals.
 The limited funds available are often ill spent on ineffective
duplication or unacceptable dangerous drugs.
 It therefore, becomes imperative to prepare a list of essential drugs
for a district health care organization.
 In fact every district and large hospital should have its own drug
formulary committee to periodically review and update this
formerly.
 The Medical Officer will then be asked to honor it and not prescribe
medicines outside the formulary (barring exceptional
circumstances).
 Once the list of drugs had been finalized, their demand
should be estimated.
 Trends in consumption pattern during last 2 years.

 Objective of the district health care organization

including hospital.

 Morbidity pattern of the community.

 Cyclic changes in epidemiological occurrence of diseases.

 The resource constraints.

 Procurement :
 Procurement is defined as the process of acquiring supplies.

 three procurement sources :

1. purchase

2. donation

3 .manufacturing may be used individually or in

combination.

4. to fill the entire range of drug needs of a hospital / district

health centre.
 The Procurement Cycle :
Procurement is a cyclic process which requires a
sequence of steps, the time table for which should be clearly
specified and closely followed. Steps in the cycle are :
1. Review drug selections by drug selection committee.
2. Determine the quantities of drugs needed
3. Reconcile needs and funds required for the drug
procurement
4. Choose procurement method
5. Select suppliers / vendors
6. Specify contract terms i.e. the legal aspect of the contracts
7. Monitor order status i.e. do the essential follow up.
8. Receive and inspect drugs supplied by selected vendor
Objectives of a well managed procurement system are to :
 Acquire needed suppliers as inexpensively as possible. i.e.
at optimum cost

 Obtain supplies of high quality.

 Assure, prompt, dependable delivery.

 Distribute the procurement workload to avoid period of

idleness and overwork.

 Optimizeinventory management through scientific

procurement procedures.
 Inspection and Receipt of Material :
 Inspection and receipt of material is basically an important
activity.

 It is at the receiving area that the officer flow up the flow of

purchased material.

 Thus any discrepancy, problem or error (shortage in quantity,

damaged material, wrong item supplied) in a specific
transaction, becomes evident during the receiving operation.
.
 The report completed by the receiving desk upon receipt of a consignment.

 The document is the basis for invoice payment, for continued purchasing
negotiations and for closing the order.

 Therefore, accuracy in this activity cannot be over-emphasized.

 Receiving is thus an important control point in the materials management
system.

 Receiving records show which suppliers are consistently late in their

deliveries, which have the maximum number of rejects and which deliver
the greatest number of split consignments.

 Close coordination between the purchasing and receiving is thus essential.

 wherever possible in order to minimize opportunities for inappropriate,

collusive action between the purchaser and the receiver.
 Receiving Procedures :
 The storage materials are received at a central place the receiving section.

 Thus, a typical receiving procedure consists of four steps :

1. Unloading and Checking Supplied materials for :
a. The number of containers of consignments or units unloaded by the
supplier.
b. The number of containers or consignments or units on the freight bill.
c. Comparison of (a) and (b).
d. Inspection of containers or consignment or units for any external visible
damage.
e. Notifying the suppliers regarding any discrepancies or problem in the
above.
2. Unpacking and Inspecting the hospital Supplies :

 Verification of the materials received from the suppliers according to packing

slip.

 Verification of the quantity of supplies.

 Inspection of the general condition of the materials received like (broken)

leakage, date of expiry, substandard etc.)

3. Good Received Note :

 Copies of completion of the receiving report, or goods received note is sent to
the requisitioned – the ultimate user in some cases, but generally to the central
supply unit.
 This report indicates :

a. Items and quantities / received.

b. Items and quantities on purchase order not received.

 Delivery of Materials :
 The receiving unit must either direct or deliver the
materials to the proper stocking locations i.e., with in
the hospital premises.

 This may be a warehouse or a central supply unit or

the ultimate user location.
 Working Stock, Safety Stock and Service Level :
 The stock on hand consist of two components the working stock and the
safety stock.

 The safety stock, also called buffer stock, exists to protect against stock
outs.

 Thus, the safety stock is an additional inventory that is carried to cover for
unusual demand.

 The effect of safety stock can be measured in terms of the service level,
which is described by the per cent of requests which can be filled from
stock on hand.
 Lead Time :
 A certain amount of time that elapses between the moment
at which store is aware of a need for stock and the actual
replenishment of stock is known as the lead time.
 This time can be divided into two parts :
a. Internal lead time
b. External lead time
 Internal Lead Time :

 This time includes the time taken to review the demand,

trade enquires, tenders, quotations and final approval
from the competent authority.

 External Lead Time :

 It is the time to be taken by the supplier to supply the

materials after it receives the supply order from an
organization.
 Economics in Materials Management :
 Control of inventory is an important aspect of materials
management .

 if the level of inventory goes up, the carrying costs also

increase but the procurement costs decreases.

 On the other hand, if we have a smaller inventory, turnover

is greater requiring less carrying charge but more of
ordering costs.

 We have to strike a balance between these costs.

 By inventory control we can find out optimum quantity to

be stocked.
 Purchase Cost :
 It is the actual costs of the materials whether it is drugs, chemicals,
linen or other stores.

 It is an apparent type of cost, which is easily understood by all.

 The effort should be to reduce this as much as possible by following

the simple techniques like ‘bulk-buying’, buying under generic names
and Not Trade Names and at negotiated rates.

 While having discussions with a General Manger of a large Indian

Drugs Public Sector Undertaking, the author was told that the GM
shall be very happy to give substantial discount {up to 25 per cent}
over and above the hospital, rates if purchased in bulk quantities.
 Carrying Costs :
 This is hidden cost and not amenable to easy calculation.

 Carrying costs are composed of the following elements :

a. Cost of using or borrowing money ‘

b. Cost of storage space
c. Cost of additional manpower
d. Cost of obsolescence
e. Cost of deterioration
f. Cost of pilferage, breakage

 Taxes and insurance premiums may add to the above list.

Elements of the carrying cost :
1. Cost of money: When we purchase the drugs in bulk, we pay
also large proportion of the drug budget at one time.

 An efficient stores manager instead of purchasing in bulk would

divide it into small portions and stagger the supply at a
quarterly / monthly interval and release the payment only for
that small portion received.

2. Cost of space: If the annual requirements of drugs were

purchased in bulk, additional space / store rooms

 This would mean additional expenditure.

 Cost of additional manpower :
 This means more storekeeper / pharmacists, clerks, orderlies
etc.
 Their salaries / wages would add up to the cost.

c. Cost of obsolescence :
 Drugs also go out of fashion.

 If a drug’s requirement in to is purchased in bulk and right at

the beginning of the year, there is every like hood that a
better / newer alternative arrives in the market.

 Such dead stocks of medicines are a net loss to the district
health care organization including hospital.
e. Cost of deterioration : Drugs are sensitive and thermolabile items.
 When purchased in bulk, they are likely to be stored for a very long period
and get exposed to hot, humid and hostile weather and storage conditions.
This may lead to disintegration, colour changes, growth of fungus in
glucose-saline bottles etc.

f. Cost of pilferage : Pilferage is directly related to the level of stock /

inventory of a drug. A large stock of a drug (following bulk purchase) will
result into more pilferage and vice-versa.

 That the carrying cost may be 25 per cent to 35 per cent of the actual
inventory cost. As mangers we have to be acutely aware of the carrying
cost.

 The purchase cost and the carrying cost oppose each other. But there is a
point / quantity at which both are minimum / optimum.

 This quantity is known as economic order quantity (EOQ).

 Ordering Costs :

It is the cost of placing an order like cost involved in stationary,

postage, telephone fax, manpower etc.

 Shortage Cost :

 It deals with the cost of not having a particular material.

 The direct cost is the higher price we pay for procuring a substitute
from an alternate source.
 Basic Principles of Materials Management :
Housley, has identified seven basic principles that
must be practical religiously :
1. Effective management
2. and supervision
3. Sound purchasing methods
4. An efficient purchase system
5. A simple inventory control programme
6. Result oriented requisition and distribution system ‘
7. Written policies and procedures
8. A practical receiving programme
 Effective management and Supervision :

 The entire materials management trust may be built on

managerial functions of planning, organizing, directing,
controlling and staffing.

 Sound Purchasing Methods :

 Sound purchasing methods accentuate the art and skill for

ethical, hard poised negotiations.

 District health care organizations and hospital can

generally obtain better prices by negotiations with the
suppliers.
 Efficient Purchases System :
 If the purchasing system adds subsequently to the price
of the commodity being bought,
 then it is highly inappropriate.

 Simple Inventory Control Programme :

 The inventory should be small enough to keep it
replenished without relying on computerization.

 Result Oriented Requisition :

Materials manager must develop a sound and
credible requisition and distribution procedures which
result in having the right supply, at right place in right
time in right quantity.
 Written Policies and Procedures :

 It provides the foundation for the building of materials management structure.

 A practical Receiving Programme :

 It denotes the need of accountability and responsibility.

 A good receiving programme will have an internal control built directly into it.

 For the best results, the purchasing, receiving and paying of invoice should be
done by separate persons.
 Who is a Materials Manager?

 As per housley, the materials manager is not just a purchaser of goods

and services, a stuffer of papers, or an interviewer of persons.

 Today’s, materials manager manages people, system, money, policies,

proper negotiations, and materials.

 He is a thinker, planner, controller, organizer, director and coordinator.

 His rightful place is not just in a line responsibility, but also in a staff or
advisory relationship within the organization.

 He should take decisions that cross inter-departmental links of authority

to permeate the entire institution.
 Monitoring of Expiry Drugs :
 Firstly, the drugs should be purchased quarterly instead of
in bulk.
 While receiving drugs, it should be ensured that there is
sufficiently long span of time to consume it before the
expiry date.
 These should also be an agreement with the supplier to
replace the drugs expired by fresh supplies. The expiry date
chart as suggested by Evelyn R. Weigand
 .It shows a simple way of keeping check on expiry date of
drugs.
 Hospitals / health care institutions can also maintain a
separate register for expiry date drugs.
 As the drugs are received in the stores, they should also be
entered on this chart.
 The entry should be by date of expiry. For example, if some
drugs are going to expire in September in a particular year, they
should be listed in the chart. A sign of X (Cross) is entered in
the month of expiry against each drug. Further, sign ‘o’ (dot)
indicates approaching expiry date.
 The later sign should be put at least 6 months before the sign of
X (cross). Storekeeper should be trained to take necessary
actions for the utilization of drugs as a drug reaches sign ‘o’.
 The Two-Bin or Double-Shelf System :

 This is a kind of no-paperwork system for stock control.

 The stock of each item is physically separated into two bins
the working bin and the reserve bin.
 When the working bin is empty, the storekeeper changes to
the second bin and is alerted that new supplies are needed.
 The reserve bin should contain enough stock to cover the
expected lead time and a small safety stock.
 A checklist of all item in stock can be used to indicate in
advance the items for which the first bin is empty and,
therefore, replacement is needed.
 The quantities in each bin could be established in such a way
that each new delivery would be placed in the reserve bin and
the old reserve stock moved to the working stock bin.
END OF CHAPTER 5