Inventory control techniques

Inventory control

Inventory control is the technique of maintaining size of

inventory at some desired level keeping in view economy of
hospital

Itemized list of goods with their estimated worth specifically

annual account of stock taken in any business
 Objectives of inventory control

■ To reduce investment in inventories and made effective

use of capital investments
■ To supply drugs in time
■ Efforts are made to procure goods at minimum price without
bargaining the quality
■ To avoid stock out and shortages
■ Wastages are avoided
■ Essential to maintain a large size inventory for efficient
and smooth production and also for sales operation
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
 Techniques of inventory control

■ Tool available for smooth running of the business enterprises

■ Inventories should be maintained at a level lying between the

excessive and the inadequate

■ This level is known as the “OPTIMUM LEVEL” of inventories.

The common and widely used techniques are:

❖ ABC ANALYSIS (Always Better Control)

❖ VED ANALYSIS (Vital, Essential, Desirable)
❖ EOQ (Economic Order Quantity)
❖ Lead Time
❖ Buffer stock
❖ Perpetual inventory control system
❖ SDE classification
❖ HML Classification
❖ FSN Classification
❖ SOS classification
❖ XYZ Classification
 ABC analysis

■ Materials are divided into 3 groups.

■ A,B,C according to the cost of the materials and money
value
■ A items - A few costly items come under this category
these items require proper storage and handling,
overstock is avoided
■ B items - These are neither costly nor cheap
■ C items - Cheaper in cost
■ It is also known as Selective Inventory Control
Method (SIM)
ABC analysis
A ITEMS B ITEMS C ITEMS

it covers 10% of It covers 20% of the It covers 70% of the

the total total inventories. total inventories.
inventories.
It consumes about It consumes about It consumes about 10%
70% of the total 20% of the total of the total expenditure
budget budget.
It requires very strict It requires moderate It may require low
control control. control.

It requires either no It requires low safety It requires high

safety stock or low stock. safety stock.
safety stock.
It needs maximum It requires periodic It needs close follow
follow up follow up up
It must be handled It can be handled by It can be handled by
by senior officers. middle management. any official of the
management
Procedure for ABC Analysis

■ Make the list of all items of inventory

■ Determine the annual volume of usage & money
value of each item
■ Multiply each item’s annual volume by its rupee
value
■ Compute each item’s percentage of the total
inventory in terms of annual usage in rupees
■ Select the top 10% of all items which have the
highest rupee percentages & classify them as “A”
items
■ Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items
■ The next 70% of all items with the lowest rupee
percentages are “C” items
ABC Analysis

A
Percent of annual dollar usage
80
Items
–
70
–
60
–
50
–
20 B Items
40
–
10
– C Items
–0 | | | | | | | | | |
30
10 20 30 40 50 60 70 80 90 100
–
–
Percent of inventory items
 VED analysis

Vital, essential, desirable

■ It is based on the importance of the item and its effects

Vital drugs
■ Such drugs are categorised as vital whose absence (no
stock) cannot be tolerated even for an single day

■ That means in their absence the work of hospital or

wards or patient care to come standstill
 VED analysis

Essential Drugs
■ Drugs without which a hospital can function but may
affect the quality of service to some extent but not to a
very serious extent

Desirable Drugs
■ These are the drugs whose absence will not affect the
functioning of hospital or ward or department or patient
care
 VED analysis

■ The motive of this system is to reduce investment in

inventories

■ The drugs which are fast moving , ie which are in great

demand should be stocked more

■ Lastly the drugs which are rarely demanded should be

stocked in minimum quantity
 Economic order quantity

■ It is the most effective technique for

determination of the quantity
■ Quantity of materials to be ordered at one time which
minimises the lost
■ Basic objective of EOQ is to have an ideal order
quantity for any item and to economise on the cost of
the purchase
Computation of EOQ

■ The widely used formula is

EOQ =√{2A×O/C}
Where ,
A=Annual or periodic requirement

O=Ordering cost

C=Carrying cost
 FSN Analysis

■ “Fast moving, Slow moving and Non moving”

■ Here in this analysis, the date of receipt or the last date
of issue, which ever is later, to determine the no. of
months which have lapsed from last transaction
■ FSN is helpful in identifying active items which need to be
reviewed regularly and surplus items and non- moving
items are examined
 SDE Classification

■ The SDE is based upon the availability of items

■ Here ‘S’ refers to ‘Scarce’ items

■ ‘D’ refers to ‘Difficult’ items

■ ‘E’ refers to ‘Easy to acquire’

■ This is based on problems faced in procurement
 SOS Analysis

■ ‘S’ stands for Seasonal items and ‘OS’- Off

Seasonal items

■ Merit to seller to buy seasonal items at lower price

and keep inventory and sell them at high price during
off seasons

■ If not the seller has to buy the goods at higher

prices during off seasons

■ Decisions are taken based on the fluctuations

and availability
 XYZ Analysis
■ Based on the value of inventory of materials actually
held in stores at given time

■ Helps to control the average inventory model value.

■ ‘X’ items which are 10% of [Link] items stored, but

accounting for 70% of the total inventory value

■ ‘Y’ items are 20% of [Link] items stored and account for
20% of total inventory value

■ ‘Z’ items are 70% of [Link] items stored and account for
10% of the total value
■ This analysis focuses on efforts to reduce the inventory
of these items
Lead time
■ Time taken between the placing of order and receipt
of drug to the department
■ Longer the lead time the larger is the safety stock
■ Resulting in excess of investment in inventories

Buffer stock
■ Quantity of stock kept as reserve to guarantee
against un fore seen demands
■ This stock protects against variation in demand and
procurement period
■ It is used in emergencies
Inventory Costs

Carrying cost

• cost of holding an item in inventory

Ordering cost

• cost of replenishing inventory

Shortage cost

• temporary or permanent loss of sales when

demand cannot be met
Qua Pric bud
 ▪A process that involves estimating—
What Is Quantification? ▪ Quantities of a specific item needed for a procurement
▪ Financial requirements needed to purchase the items
▪ Estimating needs within a given context—
▪ Finances
▪ Human resources capacity
▪ Storage capacity
▪ Capacity to deliver services

Objectives of Good Quantification

▪ Consistent availability ▪ Cost-effectiveness
▪ Adequate supplies ▪ Easy management
▪ Minimal wastage ▪ Meeting demand
▪ No overstocking ▪ Satisfied clients
 Applications of Quantification
Methods
▪ Calculate needs for—
▪ Procurement (for example, central bulk purchases)
▪ Forecasting (for example, for manufacturers)
▪ Plan for new or expanding programs
▪ Prepare and justify a drug budget
▪ Estimate storage needs
▪ Calculate emergency needs for disaster relief and epidemics
▪ Compare current medicines consumption with public health priorities and usage
in other health systems
 The Quantification Process

A. The Preparatory Phase

B. The Quantification Phase
▪ Data collection, quantification, costing, reconciliation to budget,
calculation of final quantities
▪ Feedback results to managers for placing orders & allocating drugs to
individual facilities
▪ Provide training in prescribing & stock management
▪ Evaluate the quantification process & make any necessary improvements
 Quantification Methods
▪ Based on past consumption records to estimate future needs, adjusted for stock-outs,
expiration of overstocked items and projected changes in utilization.
Advantages:
▪ Does not require detailed morbidity data or standard treatment schedules.
▪ Reliable if consumption is well-recorded & stable.
▪ Identifies stock management problems & encourages improvements.

▪ Based on the number of expected patients x the drugs and materials

consumed according to the standard treatment protocol.
▪ Does NOT require drug consumption data; useable for new services where such data are
NOT available.
▪ Reliable.
Quantification Methods
▪ Relies on past consumption records from other facilities or even other countries
▪ Data is extrapolated and adjusted to local circumstances like population coverage
or service level provided.
▪ Can be very accurate when based on accurate statistics and conformity to treatment guidelines.
▪ Less complicated, easy to calculate.

▪ Used for estimating budget needs

▪ Does not estimate quantities of medicines needed
▪ Uses the average medical supply procurement cost per attendance or bed-day in
different types of health facilities in one system to project needs for similar types
of facilities in another system
 Consumption Method
▪ Step 1. Selection of Essential Medical Supplies.
▪ Step 2. Total Consumption in a period.
+ Drugs Received - Closing stock
• Consumption = Opening
▪ Step 3. Number of days outSotofcsktock.
▪ Step 4. Average monthly consumption.
▪ Step 5. Lead Time.
▪ Step 6. Safety Stock:
• For calculation: SSstock,
Where SS=Safety = LT LT=Lead
X CA Time, CA=Average Consumption.
▪ Step [Link] for avoidable wastage and losses.
Consumption Recorded Avoidabl
= -
adjusted for consumption e
wastage
▪ Step [Link] o f s t o c k
a v oi d a b l e
w as ta g e
on h a n d.
 Price
▪ The price of an item in India is in Rupees ₹.
▪ Ideally the price list mentioned in District Guidelines should be used.
▪ If the price of an item is not on the list, then another reputable source of price should be
used. Examples are previous invoices, price lists and local price lists.
▪ Care should be taken to check that the price used corresponds to the pack size used
in quantification. If there is a discrepancy, an adjustment should be made.
DPCO 1995 CEILING PRICE FORMULA

Retail Price = (M.C + C.C. + P.M. + P.C.) X (1+MAPE/100) +

E.D.

MC - material cost including drug

cost CC - conversion cost
PM - packing material cost
PC - packing cost
MAPE - Maximum Allowable Post-Manufacturing
Expenses which includes trade margin
ED - excise duty.
 Price Formulas/Calculations:
▪ To calculate the selling price or revenue R based on the cost C and the desired
gross margin G, where G is in decimal form:
▪ R = C / ( 1 - G)
▪ The gross margin is the Profit divided by the selling price or revenue R
▪G = P / R
▪ So, the gross profit P is the selling price or revenue R times the gross margin
G, where G is in decimal form :
▪P = R * G
▪ The mark up percentage M, in decimal form, is gross profit P divided by cost C.
▪ M = P/ C
▪ M * 100 will change the decimal to a percentage.
 Budgeting

▪ Proactive approach, rather than a reactive approach to manage money

▪ Basically, it's making sure that we spend less than we bring in
▪ Planning for both the short- and long- term
▪ Budgeting helps to make conscious decisions about how to allocate
money
 Drug Budgeting

▪ Annual drug budgeting is a challenging. Unanticipated situations that result

in extreme increases in drug expenditures may occur

▪ Pareto Principle, applies to drug budgeting

▪ A relatively small number of drugs typically account for 80% of most

hospital drug budgets
 Drug Budgeting
▪ Better data and more experience will improve a department’s ability to forecast
institutional drug expenditures.
▪ Data must underlie all types of planning to manage medication expenditures.
▪ Systems should be established to have ready access to the data and
continually review and monitor these data
 Drug Budgeting
▪ ABC/VED-analysis used for the investigation
▪ The use of which, when improved, may provide the greatest clinical and economic
impact.
▪ VEN/ABC-analysis helps to prioritize between various medicines in their selection
for procurement and use within a drug supply system.

Investment

Order quantity
▪ The drug is link between the patient and healthcare system
▪ The Quantification of drug requirement is necessary estimating the
requirement budget, fund, total cost, for effectively running of drug
procurement, supply chain and logistics.
The success of quantification can be improved by—
▪ A team approach to making assumptions and decisions and share
information on—
▪ Potential changes in demand and prescribing practices
▪ Potential changes in rate of scale-up or roll-out
▪ Market intelligence—availability of product
 ▪ Epidemiological data sets and consumption data sets
▪ New science
▪ Successful problem-solving approaches (and failures)
▪ Cross-checking data, information, and projected needs
▪ Using ongoing monitoring of projected vs. actual needs to adjust assumptions
 Q1 Describe in brief about BMP
Q2 Write in brief about monitoring of patient medication
adherence
Q3 Discuss in brief about Drug Information skills
Q4 Discuss in brief about stages of patient counselling

28-Oct-20 PCTE GROUP OF INSTITUTES 38