INVENTORY

MANAGEMENT
Praveen S, CRRI
• Inventory: a stock or store of goods
• Inventory control: Organization and supervision of the supply,
distribution, storage, and recording of materials in order to maintain
suitable quantities

• Developed in USA during second world war which helped them to

make a spectacular progress in improving their productivity
• Introduced in India in sixties
Why Inventory management is important?
• Financially: Large proportion of health expenditure(25 – 40%) is on
inventory
• For better availability: Supply of right material at right time
• Complex requirement: Technical and non-technical items
• To maintain cold chain for vaccines
• Contraceptives supply
• Social marketing is to be supported
AIM
• Right quality
• Right quantity of supplies
• At the Right time
• At the Right place
• At the Right cost
OBJECTIVES
• To obtain correct quality of materials at lowest possible cost
• High inventory turn over
• Low storage cost( reduce capital and recurring expenditure)
• Maintain continuous supply
• Maintain quality of purchase
• Cordial relationship with suppliers
• Good records
• Avoid wastage
Elements
• Identification of items
• Estimating demand
• Forecasting the materials
• Purchase and procurement
• Inspection and quality control
• Storage
• Inventory control
• Issue procedure
• Maintenance, repairs, condemnation
• Information system
Inventory control
• “Stock of goods”
• To ensure that adequate amount of raw materials are available to
meet the demand of the organization, so that health care to the
patients does not suffer

• IMPORTANT TERMS???

• How much should be ordered?

• When should it be ordered?
Important terms
• ORDER COST
• PURCHASE COST
• INVENTORY CARRYING COST
• COST OF BORROWED MONEY
• COST OF SPACE
• COST OF ADDITIONAL MANPOWER
• COST OF OBSOLESCENCE
• COST OF DETERIORATION
• COST OF PILFERAGE
• COST OF INSURANCE
Lead time
• Time required between placing the order and receiving the same

• Delays may be at administrative level, production level, transportation

level & finally inspection and storage of received items

• Internal LT : time gap between the moment at which someone is

aware of the need for additional stock and the order is placed
• External LT : time taken by the supplier to supply the materials after it
receives the supply order from an organization
• BUFFER or SAFETY STOCK : Stock that must be maintained as
emergency supplies for unforeseen demands

• REORDER LEVEL : the stock level at which fresh orders have to be

placed. It is calculated as average consumption per day multiplied by
the lead time plus the buffer stock

• STOCK TURNOVER : use the items before their warranty or shelf life
expiry date, use the items on a first in first out (FIFO) basis.
Economic Order Quantity
• Ordering materials whenever stock reaches the reorder point
• It tells how production to be scheduled

• Two types of cost:

• Ordering cost
• Carrying cost
Ordering cost
• Entire cost to acquire the raw material (supplies)

• It includes
• - Requisitioning
• - Order placing
• - Transportation
• - Receiving, inspecting and storing
• - clerical and staff
Carrying cost
• Cost incurred to maintain the given level of inventory

• It includes
• - Warehousing
• - Handling
• - clerical and staff
• - Insurance
• - Deterioration and obsolescene
Trial and error approach
• Known annual requirement
• Steady usage
• Ordering and carrying cost to be constant through the entire period
Order formula approach
• More easier way
• A – Total annual requirement
• C1- Replenishment/procurement cost per order
• C2- inventory holding cost/item

• EOQ = √2*A*C1/C2
Method of inventory control
• ABC analysis (always better control)
• Method for dividing A, B, C based on annual consumption unit

• “A” items: money value is highest 70%, represent only 10-15% of items
• procured frequently, quantity per occasion being small
• “B” items: money value is medium 20%, represent about 20-25% of items
• control need not be rigid or detailed as A items
• “C” items: money value is lowest 5-15%, represent about 70% of items
• exactly reverse of A items i.e. C items may be procured infrequently and
in large quantity
Advantage of ABC analysis
• Helps to exercise selective control over such items , which are having
sizable investment
• Helps to point out obsolete stocks easily
• Provides sound basis for allocation of funds & human resources
• Enables the maintenance of high inventory turn over rate
Disadvantages
• Considers only money value of items & neglects the importance of
items for the production process or assembly or functioning

• It does not categorize the items based on their critical needs, hence
sometimes the purpose of ABC categorization may be defeated
Steps in ABC analysis
• Classify, determine expected use & price of the inventories
• Determine total value of item (expected unit * unit price)
• Rank the items (according to total value)
• Compute the ratios (no. of unit/total unit) & (each value of item/total
value of all item)
• Combine on the basis of relative values (A,B,C)
VED analysis
• Based on criticality and importance of consumables

• Vital (V) : The medicines that are critically needed for the survival of
the patients, which must be available in the hospital all the times
• Essential (E) : Medicines with lower critical need, which may be
available in the hospital
• Desirable (D) : The remaining medicines with lowest criticality, the
absence of which will not be detrimental to the health of the patients
ABC-VED Matrix Analysis
• In hospital inventory management, ABC analysis should be coupled with VED analysis
to narrow down the group of medicines requiring greater managerial monitoring

• Category I : AV + BV + CV + AE + AD
• Category II : BE + CE + BD
• Category III : CD
• Category I : High priority group, requires greatest attention. It contains all the vital
and costly items, whose shortage may adversely affect the functioning of of the
hospital or whose over stocking/pilferage may lead to financial loss to the hospital

• Category II : It is under moderate management and moderate attention is devoted.

Here items are essential but are less costly and can have lesser stringent controls

• Category III : It is under simple management and receives loose attention. Here items
are the stores and medicines which are desirable but would not affect the functioning
of the hospital even if they are nit available for a long time. In addition this category
would also include least costly medical stores which need not be kept under strict
control.
Other systems
• HML : High cost, Medium cost, Low cost

• SDE : Scarce, Difficult to obtain, Easy to obtain

• GOLF : Government source, Ordinary, Local, Foreign

• FSN : Fast-moving, Slow moving, Non-moving

• SOS : Seasonal, Off-seasonal

Maintenance, repair and condemnation
• Preventive maintenance of sophisticated expensive equipment, with
training of users

• Repair to medical equipment is another area where better

management practices are needed

• Criteria for condemnation – non-functional and obsolete item,

beyond economical repair, functional but obsolete/ hazardous/ no
longer required.
Information system
• Records maintenance

• Bin card – record of receipt, issue and stock on hand

THANK YOU