INVENTORY CONTROL

What is inventory?

Inventory is defined as the quantity of goods or materials on hand.

Inventory control

Inventory control is defined as a tool of management which is used to maintain an economic minimum investment in materials and products for the purpose of obtaining a maximum financial return.

Goal

To support the attainment of the organization primary objective i.e. Patient care with the optimum investment in inventories. Optimum investment may or may not be a minimum investment. It depends on various factors.

· The number of patients

· Patient mix

· Type of services provided

Aim

· To ensure that there is adequate stock of items when required and there is a continuous supply but at the same time not to have too much.

· To ensure that the resources available are most effectively and efficiently used.

Objectives

v To reduce financial investment in the inventories

v To facilitate organization operations

v To avoid losses from inventory obsolescence

v To improve patient care services

Main principle of inventory control

o The item for which annual consumption is high, orders is placed quite frequently so that the inventory level is as low as possible. The items whose annual consumption is not high, sufficient stocks are maintained and the orders are placed less frequently.

o Control is exercised by fixing a minimum and maximum for each item. An item is recorded in such a way that the stocks level, at any given time, never goes beyond the minimum level fixed for it.

o The quantity to be reordered is so adjusted that the stocks does not exceed its maximum level.

Criteria for inventory control

Ø TIME AND EXTENT OF PROBABLE USE

Ø OBSOLESCENCE

Ø STORAGE COSTS

Ø SHRINKAGE

Ø TRANSPORTATION COST

Ø INVESTMENT COST

Ø COST TO PURCHASE

Ø QUANTITY PRICE DIFFERENTIAL

Ø MARKET CONDITIONS AND PRICE TRENDS

Ø TIME REQUIRED FOR DELIVERY

Ø AVAILABILITY OF A SUBSTITUTE

Ø CASH FLOW

Ø ALTERNATE INVESTMENT POTENTIAL

Ø AVAILABLE SPACE

Ø WHETHER IT IS MORE ECONOMICAL TO MAINTAIN AN ITEM THAN TO PURCHASE IT ON DEMAND

Reasons for INVENTORY INBALANCE

I. Failure to review and revise, as necessary, inventory policies on a regular basis

II. Failure to participate in a program of long range planning and policy determination

III. Failure of the system to react to rapid changes in usage or to accurately forecast future needs and requirements.

IV. Failure to develop adequate services of supply break downs in transportation etc.

V. Failure to give the cooperation and assistance to using departments and to properly determine their needs and direction of operation.

VI. Lack of standardization

VII. Failure to base buying on actual needs or scientific facts.

VIII. Failure to obtain and train appropriate personnel

IX. Inability to comprehend and to utilize the mathematical and scientific tools of inventory control such as reorder points, economic order quantity (EOQ), ABC, VED. FSN, SDE, HML ANALYSIS

Inventory analysis

1) Over all analysis

2) Category analysis

3) Individual item analysis

Over all analysis

· Bird eye view of total inventory over a period of time to find out the trends if any

· Important for keeping the track of inventory behavior

· Monthly holding of inventory in monetary terms calculate and compared to that of average monthly consumption. This is inventory carried index. This should be 3 in health organizations i.e. three months requirement should be available in hospital stores.

Category analysis

§ Stocks - category (group of similar items) wise analyzed

§ Targets fixed for each category according to various conditions like lead time, nature of items and source of supply etc.

§ Category with low stocks may need a revision and those with higher stocks may require examination for reduction in inventory.

Individual item analysis

Individual item can be classified

According to their

· USE

· CONSUMPTION PATTERN

· VALUE

· SOURCE OF SUPPLY

· LEAD TIME

Classification

1. ABC ANALYSIS

2. VED ANALYSIS

3. SDE ANALYSIS

4. HML ANALYSIS

5. FSN ANALYSIS

ABC ANALYSIS

Always better control

Analysis of stores on cost criteria

Cost of each item is multiplied by the number in a given period of time tabulate the numerical value in descending order

ü 10% of items account for the 70% of the budget

ü 20% of items account for the 20% of the budget

ü 70% of items account for the 10% of the budget

ABC ANALYSIS

ABC ANALYSIS

A large number of items consume only a small percentage of resources and vice versa.

Category A items

· Ordered more frequently

· Procured on a planned basis

· Estimate the expected future consumption in advance

· Annual contracts with scheduled deliveries

· Revise frequently the quantities, reorder points and safety stocks for items not covered by long term contracts

· Purchasing department should make maximum effort to expedite the delivery of these items as these are to be stocked as minimum

· To be looked by top executive in purchase department

Category B items

· The policies for b items are generally intermediate between a and c items

· Order quantities, reorder points and safety stocks should be fixed for b items barring exceptions and revision only once in a year

· Annual or six monthly contracts with scheduled deliveries can be used to an advantage for b items

· Should be ordered less frequently than a items

Category C items

· Liberal quantities can be kept in stock.

· Less orders to reduce paper work.

· Take advantage of quantity discount for bulk purchases.

· Authority could be delegated to junior executives.

· Stocks and issue records can be minimized to the extent the rules allow.

VED analysis

Analysis based on their criticality

Classified into

Ø Vital

Ø Essential

Ø Desirable

Use of ABC AND VED analysis

Findings of ABC AND VED analysis can be coupled to evolve the priority system.

Grouping will depends on

Strategy of management

Environment of functioning

FSN ANALYSIS

Items can be classified on the basis of consumption of each item

· Fast moving

· Slow moving

· Non moving

An understanding of movement of items helps to keep the proper level of inventories by deciding a rational policy of reordering.

FSN ANALYSIS (NON MOVING ITEMS)

· When ever there is huge stock of non moving items in store the following action can be taken

· Circulate the store information bulletin to all dispensaries and other similar organizations for their probable use or for sale or for exchange.

· Supplier can also be contacted for exchange.

· Study the reasons for accumulations of items and the remedial measures

SDE ANALYSIS

Based on the availability position of an item

§ S items scarce in the market

§ D items difficult to get

§ E items easily available

HML ANALYSIS

Cost per item of per unit is the criteria

o High cost items

o Medium cost items

o Low cost items

Keep control at dispensary level and for deciding the frequency of physical verification

LEAD TIME, BUFFER STOCK, REORDER LEVEL

Lead time

Lead time is the average duration of time in days between placing of an order and the receipt of materials

Orders can placed at a time when the existing stocks are sufficient for the needs of the organization during the lead time.

Internal lead time

External lead time

Reorder level

· It is the stock at which fresh order has to be placed.

· It is equal to the average consumption per day multiplied by lead time plus the buffer stock.

· It ensures that chances of stock out are practically nil.

Inventory cost

· Basic problems

· What quantity of item should be ordered

· When should an order be placed

· Three cost factors are important for deciding the above problems

· Cost of materials

· Inventory carrying cost: for keeping the items in stock is around 20 % of total cost

· Ordering cost: cost on staff salaries, depreciation, traveling etc.

Buffer stock

· It is the quantity of stores kept apart as a safeguard against the variations in demand and procurement period.

· It can be used only at time of emergency for unforeseen demands.

· It is the difference between the maximum and average consumption rate per day multiplied with the lead time for the item.

ECONOMIC ORDER QUANTITY SYSTEM (EOQ)

Material are purchased in predetermined economic quantity taking into consideration the different cost factors

At particular quantity of item to be ordered, the inventory carrying cost and ordering cost will be equal and the total of the two will also be the lowest

The formula is eoq = √2ua/ic

u: expected annual usage of the item

a: ordering costs per order of material

i: inventory carrying cost as percentage of average value of the material

c: unit cost of the item

ECONOMIC ORDER QUANTITY SYSTEM (EOQ)

· In this system reorder levels for each item have to be worked out

· Advantage is that inventories can be kept at optimum levels

· Disadvantage is detailed calculations for working out order quantities and reorder levels are required

· This system can be put into operation for items which show reasonably stable usage rate and lead time

DR MARWAH