Inventory control

INVENTORY CONTROL
TECHNIQUES
Moderator
Dr. Pardeep Khanna
Sr. Professor & HOD
Presentor
Dr. Jai Parkash
Junior Resident
Department of Community Medicine, PGIMS, Rohtak

CONTENTS
 Introduction
 Objectives of inventory control
 Benefits of inventory control
 Inventory control techniques procedure
 Order points and service levels
 Online drug inventory & supply chain
management system
 Ware house Rohtak
 Ware house PGIMS Rohtak

INTRODUCTION
• The term inventory means the value or amount of
materials or resource on hand. It includes raw material,
work-in-process, finished goods , stores & spares.
• Inventory Control is the process by which inventory is
measured and regulated according to predetermined
norms such as economic lot size for order or production,
safety stock, minimum level, maximum level, order level
etc.
• Inventory control pertains primarily to the
administration of established policies, systems &
procedures in order to reduce the inventory cost.

INTRODUCTION..
• Lack of proper attention to the material management in the
health system in the country has been a major problem in
effective implementation of various health programs.
• Man fails to realize the fact that material represents money
and also there is a lack of perception about the inter-
relationship between money and the material.
• Non availability of drugs and materials supplies–
dissatisfaction among health personnel and also
community.

INVENTORY CONTROL
It costs money to hold stocks in terms of storage
space, personnel, insurance, security, deterioration
and obsolescence.
 Higher inventory levels saddle a hospital with
avoidable costs. It may be more economical to
purchase an item on demand than to maintain an
inventory.
At the same time, a certain minimum amount of
each item must be held to minimize the chances of
total stock-out.

Helps in maintaining an optimum level of all the
resources at least possible cost.
Determine appropriate levels of holding inventories, the
ordering sequence & the quantities, so that the total costs
incurred are minimized.
INVENTORY CONTROL…

Water Tank Analogy for Inventory
Supply Rate
Inventory Level
Demand Rate
Inventory Level
Buffers Demand
Rate from Supply
Rate

CONTENTS
 Introduction
 Online drug inventory & supply chain management
system
Objectives of inventory control

OBJECTIVES OF INVENTORY CONTROL
• To meet unforeseen future demand due to variation in
forecast figures and actual figures.
• To average out demand fluctuations due to seasonal or
cyclic variations.
• To meet the customer requirement timely, effectively,
efficiently, smoothly and satisfactorily.
• To smoothen the production process.
• To reduce loss due to changes in prices of inventory
items.

OBJECTIVES OF INVENTORY CONTROL..
• To meet the time lag for transportation of goods.
• To meet the technological constraints of
production/process.
• To balance various costs of inventory such as order cost
or set up cost and inventory carrying cost.
• To minimize losses due to deterioration, obsolescence,
damage, pilferage etc.
• To stabilize employment and improve labour relations
by inventory of human resources and machine efforts.

CONTENTS
 Introduction
system

BENEFITS OF INVENTORY CONTROL
• Ensures an adequate supply of materials
• Minimizes inventory costs & facilitates purchasing economies
• Eliminates duplication in ordering
• Better utilization of available stocks
• Provides a check against the loss of materials
• Facilitates cost accounting activities
• Enables management in cost comparison
• Locates & disposes inactive & obsolete store items
• Consistent & reliable basis for financial statements

CONTENTS
 Introduction
system

• A small number of items
represent a large % of the
cost value.
• Conversely, a large % of
the items represent only a
small portion of the cost
value.
• Procedure to determine
varying levels of control is
called the ABC analysis.
ALWAYS BETTER CONTROL (ABC)
ANALYSIS PRINCIPLE

• The origin of ABC analysis is PARETO’S 80 – 20 rule.
• This rule says that 80 % of country’s economy is controlled by
20% of the people.
• If we apply this rule to verify its correctness, the results say
that it is correct.
Example:
• List out all the expenses we do over a period of time and
arrange them in the order from highest to lowest. Find the
total of expenses and workout percentage of each with respect
to the total. We see that only 20 % of items consume 80% of
our expenses.
CONTD…..

PROCEDURE FOR ABC ANALYSIS:
List all the materials used in the company
Work out their annual consumption value
Arrange items in the descending order
Add all & get the total annual inventory cost
Write cumulative consumption value in % of total
Draw a line at 70% and 90%
under 70%
between 70% and
90%
between 90% and
100%
A CB

Class % of Items % of value
(Annual
consumption )
A 10 70
B 20 20
C 70 10
ABC ANALYSIS- PROCEDURE…

Analysis of CHC Chiri Indent
Class % of items %of value
A 11.14 % 72.32 %
B 20.5 % 15.89 %
C 68.34 % 11.77 %

• Class A : High level control, low safety stocks, frequent
physical verification, close schedule control and review.
• Class B : Controls not as tight as for “A’, but more than
for “C”.
• Class C : Inexpensive items, purchase in large
quantities, at lesser interval, minimize clerical effort to
control, large safety stock.
ABC ANALYSIS- PROCEDURE…

VED ANALYSIS
In addition to the intrinsic or market value of materials, which
is invested in the materials, there is sometimes a nuisance value
to the materials.
In ABC analysis, we have seen that annual consumption value;
quantity of materials consumed and unit cost plays a vital role.
 This is to say that ABC analysis deals with the annual
consumption value of the item due to their presence and not
any other aspect such as the criticality of the material or the
nuisance value.

VED ANALYSIS
• Depending on their criticality, and thereby their value in
the operation of the hospital, most of the items of the
inventory of the hospitals can be classified, as Vital,
Essential, and Desirable .
• Those items the absence or shortage of which even for a
short period can seriously hamper the work of the hospital
are classified as vital items. E.g. Adrenaline injection,
steroid preparations.
• Essential items are those items, the shortage or absence
of which cannot be tolerated for more than a day or so or
which are likely to cause disruption of normal activity. E.g.
Life supporting items such as transfusion fluids.

VED ANALYSIS
• Desirable items which are definitely needed, but the
work can continue even without them for a substantial
period of time. E.g. Aspirin, other analgesics, vitamins,
enzymes.

COMBINATION OF ABC & VED ANALYSIS
• We can combine both and classify the materials
depending on both the consumption value and the
criticality; it will give us a fruitful result. This can be
done in nine ways

V E D
A AV
(90%)
AE
(80%)
AD
(70%)
B BV
(95%)
BE
(85%)
BD
(75%)
C CV
(99%)
CE
(90%)
CD
(80%)

CONTD….
• This type of classification helps the management to
decide the materials policy and what the service levels
are expected to see that no difficulty is faced.
• An item belongs to both A and V class is costlier, at the
same time higher criticality, the management should see
that it is available at any time the need arises and the
stock levels to be controlled properly to see that
inventory carrying cost are kept under control.

FSN ANALYSIS
• FSN: Fast moving, slow moving & non moving.
• Classification is based on the pattern of issues from
stores & is useful in controlling obsolescence.
• Date of receipt or last date of issue, whichever is later, is
taken to determine the no. of months which have lapsed
since the last transaction.
• The items are usually grouped in periods of 12 months.
• It helps to avoid investments in non moving or slow
items. It is also useful in facilitating timely control.

• For analysis, the issues of items in past two or
three years are considered.
• If there are no issues of an item during the period,
it is “N” item.
• Then up to certain limit, say 10-15 issues in the
period, the item is “S” item
• The items exceeding such limit of no. of issues
during the period are “F” items.
• The period of consideration & the limiting number
of issues vary from organization to organization.
Contd….

H-M-L Classification
• This method is similar to A-B-C classification. But in this case,
instead of the consumption value of items, their unit value is
considered for classification. As the name implies, the materials
are classified according to their unit value as:
▫ High,
▫ Medium
▫ Low.
• The cut-off point will depend on the individual user. The procedure
is to list out the items in descending order of unit value and invoke
management policy to fix the cut-off points. The management may
decide and delegate authority to various levels of officers
depending on the classification.

X-Y-Z Classification
• X-Y-Z has the value of inventory available on a particular date
in the stores as its basis. This study is taken up once in a year
during the annual stock-taking exercise.
▫ X items are those items whose stock value is high
▫ Y items fall between the two categories
▫ Z items are those whose stock values are low
• This classification helps in identifying the items which are
being extensively stocked. If the management is caught
napping, one can expect C items in the X category. Therefore,
controls should be developed for A-B-C items in conjunction
with X-Y-Z items.

G-O-L-F Classification
• In the G-O-L-F system, classification is based on the
availability and nature of suppliers. The nature of the
suppliers will determine the quantity and continuity of
supply, lead time payment terms and clerical processing cost
and time.
GOVERNMENT SUPPLIERS: Transactions with these
suppliers involve long clerical processing and the lead time
will also generally be long.
ORDINARY SUPPLIERS: Bulk of suppliers. The quality and
continuity of supply is good especially. Credit availability
from some of these sources may be available.

LOCAL SUPPLIERS: From whom cash purchases are
generally made. They are usually in the market areas of
cities.
FOREIGN SUPPLIERS: Foreign suppliers. Will involve
heavy clerical work—starting with government clearance,
e.g. obtaining an import license for customs clearance
before the foreign source of supply is contracted. After
orders have been placed, the shipping formalities must be
followed up and port clearance work done.

 Scarce in market,
 Difficult to procure,
 Easy to procure.
SDE ANALYSIS

CONTENTS
 Introduction
system

Economic Order Quantity
ORDERING COST
The cost incurred to get
the materials into the
inventory of the hospital.
Ordering costs include
many variables and are
not easily measurable.

These costs comprise of:
1. salaries and wages of involved personnel,
2. postal, telephone, telex and other similar bills,
3. advertisements,
4. stationary,
5. entertaining the vendors, suppliers, and
6. travel of stores personnel.

INVENTORY CARRYING COST
• Costs incurred for holding the volume of inventory and
measured as a percentage of unit cost of an item.
• It includes-
▫ Capital cost
▫ Obsolescence cost
▫ Deterioration cost
▫ Taxes on inventory
▫ Insurance cost
▫ Storage & handling cost

IMPORTANT TERMS
• Minimum Level – It is the minimum stock to be
maintained for smooth production.
• Maximum Level – It is the level of stock, beyond which a
firm should not maintain the stock.
• Reorder Level – The stock level at which an order should
be placed.
• Safety Stock – Stock for usage at normal rate during the
extension of lead time.
• Reserve Stock - Excess usage requirement during normal
lead time.
• Buffer Stock – Normal lead time consumption.

• For keeping the inventory and inventory cost low, it is
necessary to procure the item in as small consignments
as possible.
• But this can mean placing larger number of orders at
intervals and higher overall ordering cost.
• This conflicting situation is solved by the EOQ method.
• The EOQ method helps in finding appropriate levels for
holding inventories.
• It facilitates the fixation of ordering sequence and the
quantities so as to minimize the total materials costs.
ECONOMIC ORDER QUANTITY

• The EOQ Formula
• If stock-outs are not permitted, the total inventory cost
per year is depicted by the following formula:
Total annual cost = (purchase cost) + (order cost) +
(holding cost)
TC=RP +RC/Q +QH/2
R = annual demand in units
P = purchase cost of an item
C = ordering cost per order
H = holding cost per unit per year
Q = lot size or order quantity in units.
Q =√2CR/H
ECONOMIC ORDER QUANTITY...

• Example ABC Hospital purchases 1,600 pairs (units) of
surgical gloves each year at a unit cost of Rs. 15.00. The
order cost is Rs. 100.00 per order, and the holding cost
per unit per year is computed at Rs. 8.00. The EOQ will
be:
• Q=√2CR/H=√2x100x1600/8
=200 units
• TC=RP +RC/Q +QH/2= 1600 x 15 +(1600 x100)/200+
(200 x 8)/2= Rs. 25,600/
• Number of orders to place in one year=1600/200=8
ECONOMIC ORDER QUANTITY...

No. at
orders
per year
Order
size
Average
Annual
inventory
carrying
50%
order Qty
cost
Annual
ordering
cost
Total cost
1 1,600 800 64,00 100 6500
2 800 400 32,00 200 3400
3 540 270 2160 300 3460
4 400 200 1600 400 2000
5 320 160 1280 500 1780
6 270 135 1080 600 1680
7 230 115 920 700 1620
8 200 100 800 800 1600
9 180 90 720 900 1620
10 160 80 640 1000 1640
11 146 73 584 1100 1684
12 132 66 528 1200 1728

Relationship between cost and quantity.Costperperiod
43
100 200 300 400 500
10
20
30
40
50
Procuring costs
Min
cost
Order quantity
EOQ

• LEAD TIME: The period that elapses between placing an
order and receiving the stores.
Important in determining the average inventory need.
• MINIMUM STOCK HOLDING
• SAFETY BUFFER STOCK:
This is the quantity of stores that one must set apart as an
insurance against the variations in demand and procurement
period, for unforeseen reasons, and to avoid stock-out.
FACTORS WHICH INFLUENCE ORDER TIMING

• Safety buffer stock:
It is calculated by multiplying the difference between maximum
and average consumption rate per day/week/month with the
lead time for the item. It is the level at which fresh supply should
normally arrive.
• REORDERING POINT
Is the predetermined stock level at which an order is initiated.
The reorder level is equal to the minimum stock plus
requirement during lead time.

• The reorder point is obtained by determining the demand that
will occur during the lead time period.
• When the stock position reaches the reorder point, an order
will be placed for Q units, the EOQ The following formula
gives the reorder point in units when the lead time L is
expressed in months:
• B = RL/12 reorder point in units.
= RL/52 when L is in weeks
FACTORS WHICH INFLUENCE ORDER TIMING

illustration
.
• If the lead time is 20 days, daily consumption 300 units and buffer
stock 400, the ROL
20 x 300 = 6000 + 400 = 6,400.
• If the review time is every 30 days, the stock in hand should
be (6000) + (300 x 30) = 6000 + 9,000 = 15,000.
• If the buffer stock is say 400, adding the buffer stock to the
above quality gives a ROL of 15,400.

REORDER METHODS
• CYCLIC SYSTEM
• TWO-BIN SYSTEM.
CYCLIC SYSTEM
• At fixed intervals.
• The size of the order will vary with fluctuation in
consumption. Orders are placed depending on the stock on
hand and rate of consumption,
• i.e. the ordering interval is fixed, but the quantity ordered
varies each time.

TWO BIN SYSTEM:
• An order for the appropriate quantity is placed as soon as the
first bin becomes empty.
• The other bin contains stocks sufficient to meet probable
consumption during the period of replenishment, i.e. before
the actual receipt of the order.
• Frequency of ordering is determined by fluctuation in
consumption.

ISSUE/DISTRIBUTION
Three systems of issue and distribution are possible.
1. Each ward/department keeps track of its inventory levels.
When the ward or department stock becomes low, a
requisition for the required materials is forwarded to
stores, which issues
2. Topping-up system, the maximum stock level for each item
for each ward/department is predetermined based on their
usage. At specified intervals, the stores personnel visits the
ward/department, checks the stock in balance, and replace
the depleted stock.
3. A modification of the above is duplicate cart system

DISPOSAL/CONDEMNATION
• In case of non-consumable like capital equipment,
instruments, linen, furniture, etc. excess stock may be
returned to the stores as soon as it is detected.
• Many items have a scrap value. Bottles, IV bags, used linen
can be sold as scrap.
• Some other items are required to be destroyed by burning or
destroyed beyond recognition, to prevent reuse.
• It may be possible to use some parts of condemned
equipment.

EFFECTIVENESS OF THE MATERIALS MANAGEMENT
DEPARTMENT
• Supply performance review
• Overall review by management audit
• Material cost per patient day (MCPPD)
It is arrived at by dividing the total material cost per day by the
total hospital cost per day.

CONTENTS
 Introduction
system

SPECIFIC FEATURES OF INVENTORY SOFTWARE
a)Tracks monthly consumption
b) Keeps track of stock out periods
c) Calculates average monthly consumption, taking into
consideration past consumption and stock out periods
d) Calculates minimum and maximum stock levels
e) Calculates optimum reorder level, taking into consideration
minimum stock, actual stock balance, lean time, procurement
and for casting periods and outstanding orders, as well as use-
defined maximum and minimum stock levels

f)Monitors expiry dates by lot
g) Generates lists by location
h) Manages distribution according to expiry date and/ or
location
i)Monitors clients consumption and budget
j) Allows multiple purchase and selling prices, as well as
the possibility to enter discounts, surcharges and taxes.
k) Generates audit report
Contd…

CONTENTS
 Introduction
system

• Medical Superintendent- Dr. Ashok
Chauhan
• Dy. M.S.- Dr. Sukhbir
• Chief Store Officer- Sh. V.S. Dalal
• Staff- 1 Store Officer, 6 Pharmacists, 1
Senior store keeper, 4 Store keepers
• 1 computer operator, 12 class IV
• Yearly demand is asked from all
departments.
• 3 months buffer stock is set up as reorder
point.
• EOQ technique is being used.
• Supply from Rohtak ware house and by
purchase.
CENTRAL WARE HOUSE, PGIMS ROHTAK

Purchase section
Incharge: Dr. V. K. Katyal, Sr. Professor, Department of
medicine
JSSK, NPCDS, Arogya Nidhi Kosh incharge: Dr. R.B. Jain
Superintendent: Sh. Chanderpal
Pharmacist: Mr. Pankaj
Issue of some budget constraints
Bills of agencies are pending so supply of medicines is
delayed

CONTENTS
 Introduction
system

WARE HOUSE, ROHTAK
Total 7 ware houses in Haryana: Ambala, Bhiwani,
Gurgaon,Hisar, Kaithal, Karnal, Rohtak
Districts Rohtak, Sonipat, Jhajjar, PGIMS Rohtak, Medical
College Khanpur Kalan are attached to Rohtak ware house.
Staff-
Dr. Sonal Dogra (M.D. Pharmacology)- Incharge
1 Pharmacist
1 contractual pharmacist post lying vacant
4 Multitask workers
12 Guards
1 Sweeper part time
Red- Non pass stock
Blue- Batch failed
Roster is prepared for PHC, CHC, Civil Hospital, PGIMS for
their supply date.
Facility have to send indent online before their delivery date.

Efforts are important
But knowing where to make an effort
Makes all the difference
THANK YOU

Inventory control

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