Inventory management principles
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The document discusses inventory management principles including definitions, objectives, costs, and models. It summarizes key concepts like ABC analysis which categorizes inventory items into A, B, and C groups based on their value and usage. Group A items account for 20% of items but 80% of cost, requiring close control, while Group C items are less important with loose control. The document also covers economic order quantity and interval models to determine optimal reorder amounts and times.
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Inventory management principles
- 2. Definition • Usable but idle resource having an economic value • Can also be described in financial terms as the sum total value of raw materials; semi processed and finished goods at any given time • Stock: Tangible items such as materials
- 3. Inventory control: • Method of maintaining a stock at a level at which the purchasing and stocking costs are the lowest possible without interference with the supply • It is one of the modern management techniques of operations research Why we need inventory management • To have material in hand when needed • To minimise inventory investment • Consistency of quality • To operate efficiently
- 4. Aims and Objectives: • Maintain availability of materials • Minimise the ineffective stock • Optimise the various costs associated with inventories • To meet the health care requirement timely, effectively, efficiently, smoothly and satisfactorily. • To gain economy of purchase in lots. • To reduce loss due to changes in prices of inventory items.
- 5. Basic principles of inventory management • Definition of the context • Determination of the types of stock records and inventory reports needed • Selection of items • Maintenance of appropriate service levels • Determining when to reorder • Determining how much to reorder • Identification and control of inventory management costs
- 7. Purchase Cost • Actual cost of the materials whether it is drugs, chemicals, linen or other stores • The aim is to reduce this cost without compromising with the quality of supplies (drugs) • 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 • Negotiated rates by assuring future business over a reasonable period
- 8. a ) Cost of money b) Cost of space c) Cost of additional manpower d) Cost of obsolescence e) Cost of deterioration f) Cost of pilferage Carrying cost
- 9. Ordering Cost • It is the cost of placing an order, like cost involved in stationery, postage, telephone, fax, manpower etc. • This apparently is simple but can assume higher proportions because of the costs on manpower. 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. • The indirect costs in this element are related to the business that we loose, and public criticism etc.
- 10. • Context of an inventory management system. Two factors: • Independent versus dependent • Independent demand system: management of procurement and distribution of finished goods • Dependent demand systems: manage inventory requirements for raw materials and supplies based on what is needed for production in a manufacturing or repackaging operation • Pull system or push system • Pull system: operating units order medicines from a warehouse or supplier according to local determination of need • Push system: a central authority orders medicines from suppliers and determines the quantities that will be shipped to the operating unit
- 11. Stock records Primary source of information used in various reordering formulas Source of data used to compile performance reports Manual or computerized • Vertical file card • Kardex system • Bin cards • Ledger system
- 12. Balancing benefits and costs in inventory management
- 13. Lead Time :- • Length of time in between the decision to replenish an item, and its actual addition to the stock. Identification of need Supplier Receipt of item Internal lead time External lead time Lead time
- 14. Service level and safety stock • Safety stock: The minimum safety stock needed to avoid a stockout is the quantity of stock used on average during the average lead time from the supplier Safety stock = Lead time x Average consumption • Service level: Percentage of individual items ordered which can be fulfilled from stock on hand Service level = (No. of items issued No. of items requested) x 100
- 15. Safety stock requirements to maintain various service levels
- 16. Inventory control models and reorder frequency Qo = Quantity ordered , SS = Safety stock I (average inventory) = SS + Qo
- 17. Most common inventory control models: • Annual purchasing • Scheduled purchasing • Perpetual purchasing • Draw-downs from framework contracts
- 18. • Advantages: • Single procurement is easier to manage • Prices per unit are lower when large volume purchases are made • Greater purchase volumes result in lower prices and can be accompanied by staggered deliveries to facilitate storage and distribution mangement
- 19. • Disadvantages: • Actual consumption is different from the annual forecast • Average stock levels and inventory-holding costs are higher • Local suppliers that win annual tender contracts may find coping huge, single deliveries difficult • More storage space is required, unless deliveries from suppliers can be spaced throughout the year • Necessary funds may be difficult to obtain • Workload in the procurement office and main receiving points is uneven
- 20. Scheduled purchasing • Advantages: • Estimated quantity rather than fixed quantity contract can be supported • Preferable to local suppliers • Inventory holding costs are less • Less space is needed • Items with variable demand can be purchased more frequently in smaller lots • Procurement unit can respond more rapidly to programme needs • Supports pooled procurement systems, where orders from all partners are joined and placed as a single order • Procurement and port clearing workload is fairly evenly spread over the year
- 21. • Disadvantages: • When orders are placed late in the fiscal year, the purchasing cycle will not be complete before the end of the year. This schedule may result in a conflict with regulations regarding spending time limits • Shortages caused by poor forecasting or changes in demand may occur with scheduled review periods three to six months apart
- 22. Perpetual purchasing • Perpetual inventory record is maintained for each item • Inventory position (stock on hand and on order) is reviewed on a regular basis (at least weekly) • Whenever stock position falls below a designated reorder point, an order is initiated Advantages: • Safety stock and average inventories are much lower • Ability to rapidly respond to sudden changes in consumption • Useful where lead time is very less, one or two days. E.g. developed countries
- 23. • Disadvantages: • Not suitable for developing countries because of governmental regulations and difficulty in employing suitable primary distributors • If lead times are less (one month or less), difficult to use without maintain large safety stocks • If supply system cannot maintain current and accurate stock records, because by the time transactions are posted, vital items may be out of stock • Frequent purchasing will drive up incremental purchasing costs and total purchasing costs • Difficult to fit into public health objectives and budgetary limits, because all the small purchases must be tracked for compliance with guidelines
- 24. Impact of reorder interval on average inventory
- 25. Drawing down from framework contracts • Establishes the essential terms and conditions of the procurement agreement such as time frame, product specifications, prices, quantitates and conditions of supplier performance • During the framework contract term, the supplier holds the stock until it receives orders for specific purchases • Each order itself is a separate contract that follows the broad framework terms with specific terms added such as delivery date
- 26. Factors to consider in calculating reorder quantity • Average consumption • Lead time • Safety stock • Reorder level • Maximum stock level • Stock position • Procurement period • Projecting demand • Projective • Causal • Judgemental • Morbidity
- 27. Components of the observed demand pattern • Base rate • Trend • Seasonality • Cyclic demand • Random noise
- 28. Standard reordering formula 1. Minimum and maximum stock level formula SMIN = (LT x CA) + SS SMAX = SMIN + (PP x CA) QO (order quantity) = (SMAX + SB) – (S1 + SO) • Average monthly consumption - (CA) • Supplier lead time - (LT) • Procurement period – (PP) • Safety stock – (SS) • Stock on hand in inventory - (S1) • Stock now on order from a supplier but not yet received - (S0) • Quantity of stock back-ordered to lower levels (SB)
- 29. • Lead time for tetracycline capsules is 2 months, the average monthly consumption is 1000 capsules and the additional safety stock allocated is 2000 capsules. Suppose procurement period is 6 months, 3,000 tetracycline capsules are in stock and another 2000 are on order. • SMIN = (2 X 1,000) + 2,000 = 4,000 • SMAX = 4,000 + (6 x 1,000) = 10,000 capsules • Q0 = (10,000 + 0) – (3,000 + 2,000) = 5,000 capsules
- 30. 2. Consumption based reordering formula QO = CA x (LT + PP) + SS + SB – (S1 + So) CA = Average monthly consumption, adjusted for stockouts LT = supplier lead time PP = procurement period, time until next order will be placed SS = safety stock S1 = stock in inventory SO = quantity of stock now on order from a supplier but not yet received SB = quantity back ordered to lower level
- 31. • E.g. No tetracycline capsules are in stock, and 2.00 are back-ordered to lower level facilities at the time scheduled for reordering. One order is outstanding to the supplier for 3,000 capsules. The lead time for this supplier id 2 months, the average monthly consumption is 1,000 capsules, the safety stock calculated as 2,000 capsules and the procurement period is 6 months. • Qo = 1000 x (2+6) + 2,000 + 2,000 – (0 + 3,000) = 9,000
- 32. Mathematical models for reordering • Economic order quantity • Economic order interval • Exponential smoothing
- 33. Economic order quantity • One of the oldest classical method, more than 50 years old • Technique of reordering materials whenever stock reaches the reorder point • The point at which ordering cost and carrying cost balance out is the one in which total operating costs (working capital) are minimum Assumptions: • Lead time is constant • Consumption pattern is predictable • Orders are received instantaneously • Stockouts are not permitted
- 34. • Economic order quantity = 2*Q*C1 P*C2 Q= annual consumption ( in units ) C1= replenishment or procurement cost per order P= purchase cost per bottle (unit) C2= Inventory carrying cost per item
- 35. Economic order interval • Ideal interval for spacing orders placed for the EOQ. • ECONOMIC ORDER INTERVAL= 2*C1 Q*P*C2 Q= annual consumption ( in units ) C1= replenishment or procurement cost per order P= purchase cost per bottle (unit) C2= Inventory carrying cost per item
- 36. E.g. The district health office purchases a wide variety of life saving drugs out of which quite a few have limited shelf life. One of the drugs which cost Rs.35/bottle is required at an average rate of 50 bottles a month by the different PHCs which are serviced from this office. The cost to replenish the stock of an item per unit is Rs.50/order and the purchase price Rs.35/bottle respectively. The inventory carrying cost as calculated is 30%. What should be the economic order quantity and economic order interval of the drug? • Q= 50 X 12= 600 units per year • C1= Rs. 50 • P= Rs. 35 • C2= 30% (0.3) • EOQ= 2*Q*C1 = 2*600*50 = 60000 = 5714 = 75.4 P*C2 35*0.3 10.5 • ECONOMIC ORDER QUANTITY = 75 BOTTLES
- 38. • ECONOMIC ORDER INTERVAL= 2*C1 Q*P*C2 = 2* 50 600*35*0.3 = 100 6300 = 0.015 =0.125 YEARS = 1.5 MONTHS ( 45 DAYS)
- 39. Types of inventory control • ABC • VED • FSN • HML • SDE • GOLF • XYZ • SOS
- 40. ABC analysis • Always better control • PARETO’S LAW (Vilfredo Pareto) • 80/20 rule • Critical few, not the trivial many
- 41. Category Percentage of item Percentage of investment A 10-15% 70-80% B 20-25% 15-20% C 60-70% 5-15%
- 42. Item number Unit cost Annual demand (units) Total cost per year Usage as a % of total usage 101 5 48,000 240,000 32.5% 102 11 2,000 22,000 3% 103 15 300 4,500 0.6% 104 8 800 6,400 0.9% 105 7 4,800 33,600 4.6% 106 16 1,200 19,200 2.6% 107 20 18,000 360,000 48.8% 108 4 300 1,200 0.2% 109 9 5,000 45,000 6.1% 110 12 500 6,000 0.8% Total usage 737,900 100% Calculate the total spending per year
- 43. Sort the items by usage Item number Cumulative % of items Unit cost Annual demand Total cost per year Usage as a % of total usage Cumulative % of total 107 10% 20 18,000 360,000 48.8% 48.8% 101 20% 5 48,000 240,000 32.5% 81.3% 109 30% 9 5,000 45,000 6.1% 87.4% 105 40% 7 4,800 33,600 4.6% 92% 102 50% 11 2,000 22,000 3.0% 94.9% 106 60% 16 1,200 19,200 2.6% 97.5% 104 70% 8 800 6,400 0.9% 98.4% 110 80% 12 500 6,000 0.8% 99.2% 103 90% 15 300 4,500 0.6% 99.8% 108 100% 4 300 1,200 0.2% 100% Total usage 737,900 100%
- 44. Sort the items by usage Item number Cumulative % of items Unit cost Annual demand Total cost per year Usage as a % of total usage Cumulative % of total 107 10% 20 18,000 360,000 48.7% 48.7% 101 20% 5 48,000 240,000 32.5% 81.2% 109 30% 9 5,000 45,000 6.1% 87.3% 105 40% 7 4,800 33,600 4.6% 91.9% 102 50% 11 2,000 22,000 3.0% 94.9% 106 60% 16 1,200 19,200 2.6% 97.5% 104 70% 8 800 6,400 0.9% 98.4% 110 80% 12 500 6,000 0.8% 99.2% 103 90% 15 300 4,500 0.6% 99.8% 108 100% 4 300 1,200 0.2% 100% Total usage 737,900 100%
- 45. • Results of calculation Category Items Percentage of items Percentage usage (%) Action Class A 107, 101 20% 81.2% Close control Class B 109, 105, 102, 106 40% 16.3% Regular review Class C 104, 110, 103, 108 40% 2.5% Infrequent review
- 46. Activity Group A Group B Group C Monitoring Very strict Strict Moderate Safety stock to be kept Low Medium High Level of control for issue Tight Moderate Low Estimates of requirements Very accurate Moderately accurate May be low Frequency of purchase Most frequent Less frequent Least frequent Turnover Maximum Medium turnover Least turnover Management involvement Top level Middle level Lower level
- 47. VED Analysis • VED analysis is based on critical values and shortage costs of the Item. Based on the criticality, the items could be classified into three categories: • Vital (10%), • Essential (39%) • Desirable (51%)
- 48. VED ANALYSIS-CATEGORIZATION PLAN FACTOR FIRST DEGREE SECOND DEGREE THIRD DEGREE 1. Stock out cost Below Rs. X (30) Between Rs. X & Y (60) Above Y (90) 2. Lead time for procurement 1-4 weeks (30) 4-8 weeks (60) Over 8 weeks (90) 3. Nature of items Produced to commercial std. or off the shelf (20) Produced to suppliers design (40) Produced to buyers design or proprietary items (60) 4. Source of supply Availability Local ( 20 ) Outstation ( 40 ) Imported supply (60)
- 49. Typical categorization plan POINTS CLASSIFICATION 100 – 160 161 – 230 231 - 300 DESIRABLE ESSENTIAL VITAL
- 50. ABC &VED MATRIX: CRTICALITY Vs COST V E D A AV AE AD Cat I 15 % B BV BE BD Cat II 40 % C CV CE CD Cat III 45 %
- 51. • Category I: includes all vital and expensive items, Requires close monitoring and strict control. • Category II: covers item of essential category and they are less expensive. • Category III: comprises the desirable and cheaper group of items. Control of Items by A-B-C and V-E-D Combination
- 52. FSN analysis • Based on the consumption figure of items. • F ( fast moving ) • S ( slow moving ) • N ( non moving ) • To conduct this analysis the last date of receipt or the last date of issue whichever is later taken into account and the period, usually in terms of no. of months, that has elapsed since the last movement is recorded.
- 53. Importance of FSN analysis • It helps to identify: • active items which require to be reviewed regularly • surplus items whose stocks are higher than their rate of consumption • non moving items which are not being consumed
- 54. Other types of inventory control • HML - • High, Medium, Low • Based on unit price • SDE - Scarce, Difficult, Easy to obtain • Based on purchasing terms with respect to availability • GOLF – Government, Ordinary, Local and Foreign • Based on source of supply from which material is procured • XYZ – Based on the value of Inventory stored • SOS - Seasonal, Off seasonal • Based on seasonal requirements
- 55. THANK YOU
Editor's Notes
- Maintain availability of materials whenever and wherever requires in optimal quantity Maintain availability of materials Minimise the ineffective stock Optimise the various costs associated with inventories 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 facilitate intermittent production of several products on the same facility. To gain economy of production or purchase in lots. To reduce loss due to changes in prices of inventory items. 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 balance the stock out cost/opportunity cost due to loss of sales against the costs of inventory. To minimize losses due to deterioration, obsolescence, damage, pilferage etc. To stabilize employment and improve lab our relations by inventory of human resources and machine efforts.
- Seve Definition of the context in which the inventory management system must function Determination of the types of stock records and inventory reports needed Selection of items to be stocked as standard items Maintenance of appropriate service levels for different classes of items Adoption of a decision rule or a model for determining when to reorder Adoption of a decision rule or a model for determining how much to reorder Identification and control of inventory management costs using product classification systems such as ABC analysis, VEN analysis n basic issues must be carefully considered when an inventory management system is being initially designed or upgraded
- The purchase cost is the direct cost of the material, which is inclusive of taxes and freight. We can reduce this cost without compromising with the quality of the supplies. The techniques followed are bulk buying, rate contract, and combined buying, negotiating purchase prices by assuring long-term business. The carrying cost which consists of costs incurred on money invested storage space, additional manpower, obsolescence, deterioration, breakage and pilferage is difficult to calculate. It can be generally about 30% of the actual cost of inventory. To control this cost we have to strike a balance between purchase cost and carrying cost by procuring the items in optimum quantity, known as the economic order quantity (EOQ) The shortage cost covers the loss of hospital revenue due to the non-availability of critical items other than the extra cost, which has to be paid to procure this item from an alternate source. To contain this cost it is advisable to have two to three suppliers of good reputation for all the critical and vital items. The ordering costs both direct and indirect will go up with more frequent orders. The technique to control this cost is again by effecting economy in materials management
- But there are some inherent problems, which are associated with bulk purchasing i.e. it may lead to huge stocks inventory, which in turn increases the 'carrying cost'.
- Carrying Costs This is hidden cost and not amenable to easy calculation. The cost of carrying an inventory can be large if one is not conscious of its implications. a ) Cost of money: When we purchase the drugs in bulk, we pay also large proportion of the drug budget at one time. Imagine if you were to borrow this money from a financier how much interest would accrue to the hospital. You can look at it in a different way also. 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. b) Cost of space: If the annual requirements of drugs were purchased in bulk, additional space/store rooms with fittings and furniture would be required. This would mean additional expenditure. d) Cost of obsolescence: Drugs also go out of fashion. If a drug's annual requirement in toto is purchased in bulk and right at the beginning of the year, there is every likelihood that a better/newer alternative arrives in the market. As and when it happens the ' demand or prescriptions for the old drug purchased in bulk will either cease or reduce considerably. Such dead stocks of medicines are a net loss to the 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. That is, we are not getting the right value for our investment. 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). Pilferage is directly related to the level of stock/inventory of a drug. A large stock of a drug will result into more pilferage and vice versa. Conservative estimates are that the carrying cost may be 25 per cent to 35 per cent of the actual inventory cost. To reduce this cost one should buy in small quantity. But this may increase the purchase cost.
- For example, you are suddenly told that oxygen is out of stock in the hospital. The functioning of the operation theatre and other sensitive areas of the hospital will be seriously disrupted. The patients will suffer and there will be a public criticism. Arrangements will have to be made to procure oxygen or for that matter another such vital drug, at a premium from market thereby, increasing the cost. If tablets B complex, antacid or cough syrup is out of stock hardly anything will happen. Therefore, the shortage cost would vary according to the nature of an item.
- Independent demand system are applicable to the management of procurement and distribution of finished goods. Dependent demand systems manage inventory requirements for raw materials and supplies based on what is needed for production in a manufacturing or repackaging operation Pull system: operating units order medicines from a warehouse or supplier according to local determination of need. Push system: a central authority orders medicines from suppliers and determines the quantities that will be shipped to the operating unit, based on the annual distribution plan and on information transmitted to the warehouse about need at the operating unit
- Vfc-file cards are stored vertically in alphabetical or numerical order in a card file or drawer Kardex-file cards are stored in a visible-edge record-tray system, with names and stock numbers on the lower edge,overlapped to provide an index Bc-file cards are physically kept with the stock. this system makes a visual check easy, serves as a reminder to keep records, and serves as a backup to records previously described. If a product have two different batches with two different batch numbers and expiry dates, two sets of bin cards should be maintained. However only one stock card containing information on both batches needs to be used. Ls- records are kept on ledger heets in a bound or loose-leaf book. Stock must be held for several reasons: To ensure availability To maintain confidence in the system To reduce the unit cost of medicines To avoid shortage costs To minimise ordering costs To minimise transport costs To allow for fluctuations in demand Stock must be held for several reasons: To ensure availability To maintain confidence in the system To reduce the unit cost of medicines To avoid shortage costs To minimise ordering costs To minimise transport costs To allow for fluctuations in demand
- The lead time consists of internal element (time elapsing between decision making and communication of the order) and external element (time elapsing between the receipt of order by the supplier and actual receipt of the material). We can control internal lead time to an appreciable extent but have no control over the external lead time.
- Service level: it measured by counting the total number of items issued and dividing by the total number of items requested. for e.g. 95 percent service level means these specific drug are in stock 95% of the time on an average. It twenty products are listed on a request and ten units of each product are requested, 200 items are on the order; if only 170 items are issued, the service level is 85%. Safety stock: for e.g. if the average lead time is three months and the average monthly consumption is 1000 units, the minimum safety stock would be 3000 units.
- Annual purchasing: Disadvantages: Actual consumption is different from the annual forecast, leading to shortages and surpluses; expensive emergency orders are required to cope with shortages and surplus stock may spoil or expire Average stock levels and inventory-holding costs are higher Local suppliers that win annual tender contracts may find coping huge, single deliveries difficult More storage space is required, unless deliveries from suppliers can be spaced throughout the year Necessary funds may be difficult to obtain Workload in the procurement office and main receiving points is uneven
- Advantages: Estimated quantity rather than fixed quantity contract can be supported Preferable to local suppliers because it allows then to spread their demand over the year Inventory holding costs are less Less space is needed in warehouses Items with variable demand can be purchased more frequently in smaller lots, reducing overstocking and costly emergency orders Procurement unit can respond more rapidly to programme needs and make better use of a limited pharmaceutical budget Supports pooled procurement systems, where orders from all partners are joined and placed as a single order Procurement and port clearing workload is fairly evenly spread over the year
- They are most effective when consumption patterns are relatively stable
- Safety stock and avg inventory are much lower.
- It applied appropriately, it produces an even workload for procurement, warehousing and port clearing.
- When the basic inventory control model has been established, the final question is how much should be ordered at each order interval Average consumption: sometimes called the demand, the average consumption expected in the next purchasing cycle is the key variable that determines how much stock should be ordered. Future consumption is a great unknown of inventory management. However other factors are equally imp. Even if consumption is accurately predicted, stockouts will occur if the lead time is badly underestimated or if another factor is overlooked or miscalculated. Lead time- it is the time between initiation of a purchase order and receipt at the warehouse from the selected supplier. If a distinct trend exists in that supplier’s performance, the average should be weighted toward recent performance with a moving average. However if the pattern fluctuates- for example, two months, six months, it is best to apply lead time analysis or calculate SD Safety stock: It is the stock that should always be on hand to prevent stockouts. When lead times and consumption are predictable and stable, the reorder level does not necessarily include safety stock, however when consumption patterns and lead times are highly variable, additional safety will be needed. Reorder level: the reorder level is the quantity of remaining stock that should trigger a reorder of the item. In the minimum-maximum ordering system, this level is called minimum stoxk level. The standard way to set the reorder level in a basic purchasing formula is to multiply the average lead time by the average consumed during the lead time. This stock may or may not be the same as the safety stock and in fact may include a separate quantity of stock as a safety stock. Maximum stock level; in most reordering formulas, this level is the largest stock level, which is the stock needed to satisfy demand until the next order after the current one is received. Stock position: stock position is the sum of stock on hand (working and safety stock) and stock on order, minus any stock back-ordered to clients. Overstocks may occur if several months worth of stock are on hand or on order when a new order is placed. Stockouts may result if significant quantitites form an upcoming from an upcoming order are on back-order to lower level facilities and this amount is not factored into the reorder quantity. Procurement period: it covers the time until next regular order will be placed. In a scheduled system, the period might be in multiples of one month; in a perpetal system, it could be counted in days or weeks for the purposes of forecasting. Note that the quantity ordered plus the safety stock must cover the time until the next order is received, which is the procurement period plus the lead time. Stock levels are dependent on accurately estimating medicine demand. If estimates are not based on accurate stock-keeping records, then stock level computations will also be inaccurate, and health institutions will run the risk of mismanaging procurements, resulting in overstocking or stockouts. Projecting demands: ordering rationally requires forecasting future needs, the least predictable variable in a reordering formula. 1- projective: forecasts using past consumption to predict demand (in pharmaceutical supply systems, the method most likely to produce reasonably accurate forecasts) 2- causal: based on external factors such as market conditions, epidemics, changes in health system size or structure 3- judgemental: based on subjective estimates of purchasing staff and advice from other staff (the least demanding method, and often the least accurate) 4- morbidity: based on incidence of disease and the use of standard treatment guidelines
- Base rate: demand may be fairly stable from month to month. Trend: a steady pattern of increasing or decreasing demand, for eg, increased usage caused by gradually increasing patient attendances. Seasonality: predictable changes, for eg, increase in demand for malaria drugs during the rainy season Cyclic demand: demand that ebbs and flows, for eg, with a country’s economic cycle Random noise: unexplained variations in demand, for eg, in 1 month, 100 bottles of amoxicillin suspension were consumed, with a pattern of 30, 10, 8 and 20 bottles in succeeding months, with no obvious reason for the variation. Among all these. Random noise is the real problem as in many consumption series at the item level, it is the dominant component.
- Average monthly consumption, adjusted for stockouts - (CA) PP- time until the next order will be placed Safety stock – additional stock to cope with variability in consumption and lead time (SS)
- Quantity at which the cost of ordering the annual requirements and the cost of carrying the inventory are equal
- It can also be said that EOQ is “ the square root of two times a guess, times a scientific guess, divided by a precise guess, times management’s guess”
- Vilfredo Pareto (1848 -1923) In 1906, he made the famous observation that twenty percent of the population owned eighty percent of the property in Italy This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-items). First important step in inventory management is to have a selective approach to fix up inventory levels, order quantities & the extent to which the control can be exercised. ABC ( Always Better Control ) analysis is an effective tool for such selective control. ABC analysis is a basic tool which helps the management to place their efforts where the results would be useful to the greatest possible extent. This technique involves the classification of inventory items into three categories A,B and C in descending order of annual consumption and monetary value of each items.
- The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules: A-items are goods whose annual consumption value is the highest; the top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items. B-items are the interclass items, with a medium consumption value; those 15-25% of annual consumption value typically accounts for 30% of total inventory items. C-items are, on the contrary, items with the lowest consumption value; the lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
- The annual consumption value is calculated with the formula: (Annual demand) x (item cost per unit) Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.
- The higher the usage, the more activity an item is likely to have; to ensure accurate record balances higher priority items are counted more frequently Avoiding stockouts on A items is priority, should have tight inventory control, more secured storage areas and better sales forecasts: reorders should be frequent, with weekly or even daily reorder. Greater impact on investment and purchasing spend. B-items; an important aspect of class B is the monitoring of potential evolution toward class A or in the contrary toward class C C- items; rordering is made less frequently, a typical inventory policy for C items consist of having only 1 unit on hand and of reordering only when an actual purchase is made; this avoids stock-out situation after purchase which can be an acceptable situation. The bottom of the C category is the best place to start when performing a periodic obsolescence review
- VED Analysis The limitation of ABC analysis is that it is based only on monetary value and the rate of consumption of the items. Sometimes, particularly in a hospital, and item of low monetary value and consumption (e.g. Injection Adrenaline, Anti-Snake Venom etc.,) may be very vital or even life saving. Their importance cannot be overlooked simply because they do not appear in A category of inventory. Therefore, another parameter of the materials is their "criticality' '. This could be in terms of the therapeutic value of a drug or intrinsic value of the material in achieving the objectives of hospital system. VED analysis is based on critical values and shortage costs of the Item. Based on the; criticality, the items could be classified into three categories: Vital, Essential and Desirable. 1) Vital Items: There are several vital items in the inventory of a hospital, which could make difference between life and death. There can be serious functional dislocation of patient care when such items are not available even for short period adversely effecting the image of the hospital. Such items should always be stocked in sufficient quantity to ensure their constant availability. Top management should control this group of items. - 2) Essential Items: The shortage of such items can be tolerated for a short period. If these items are not available for a few days or a week, functioning of the hospital can be adversely affected (drugs like Antibiotics etc.). Top/middle level management should preferably control these items. 3) Desirable Items: The shortage of these items will not adversely affect the patient care or hospital functioning even if the shortage is prolonged (items like Vitamins). Middle/lower level management should control desirable items.
- As against the cost criteria in ABC analysis the VED analysis is based on subjective analysis by a group of physicians. Such an analysis enables the administrator to give more attention to vital and essential items. A combination of ABC and VED analysis can be gainfully employed to evolve a meaningful control over the material supplies particularly in a hospital system. 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
- An item belonging to both A and V class is costlier, at the same time highly critical, 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.
- The items under this analysis are classified into three groups :
- The last two categories are viewed further to decide on disposal action to deplete their stocks & thereby release managements’ productive capital
- 3) HML :- - Commonly used for management of consumable items. High, Medium, Low Based on unit price Does not depend on consumption 4) SDE - Scarce, Difficult, Easy to obtain Based on purchasing terms with respect to availability ' 5) GOLF - Government Ordinary, Local and Foreign Based on source of supply from which material is procured 6) FSN' - Fast moving, Slow moving and Non moving Based on issues from stores 7) XYZ – Based on the value of Inventory stored 8) SOS - Seasonal, Of seasonal Based on seasonal requirements