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First step in handling the problems of supply is that of determining requirement needs. it
involves three factors:-
Pre-requisites
Demand estimation depends on cost reduction; lay out proper specification and value analysis.
Cost Balance
Cost of the material has actual cost, carrying cost that includes storing to distribution cost.
Carrying cost has 20-30% of the cost it includes interest of capital (15) %, storage cost (Racks ,
Almirah, building) man power cost, deteriotion cost pilferage cost, obsolescence, insurance cost;
stock out cost; ordering cost; (staff, building, furniture, stationery). If stock increases carrying
cost automatically will increase. Similarly if ordering cost is increased, carrying cost
automatically will increase. Similarly if ordering cost is increased, carrying cost will increase.
Whereas:
A= Annual consumption
S= ordering cost
Material Specification
Character of the material required need to specify. The following are the advantages of material
specification:
I. Classification of material: it classifies the material in a precise and definite way, the exact
character of the articles required, their quality or grade, the nature of their constructing
and all other needed special attributes.
II. Facilitation of work: it facilitates the work of the service in calling for its supply of
articles, since, with the specification once made , reference thereafter can be made to
them by general title or number, thus avoiding the necessity of setting forth time in detail
the nature of article required.
III. Lessen the purchase procedure: it lessens greatly the work involved in the purchase of the
article and also make it possible accurately to check deliveries for the purpose of securing
assurance that the articles purchased correspond in character and quality to the onces
ordered.
Value Analysis
It is an organized approach to identified non essential cost is incurred. This process is essential
for cost reduction and is also related to standardization. It examines the facts of function and cost
of item used in order to determine whether the cost can be reduced without compromising on
quality.
PROCUREMENT
INTODUCTION
After determining supply requirement, the next step in the material management is securing or
procuring the needed articles. State governments have laid down detailed rules and regulations
regarding procurements of materials. Many states have medical stores which are centralized
agencies for procurement of drugs and supplies .State governments also use a system of fixed
rate contract or running rate contract. It has various operations like:
The process of buying goods or services from an external provider. It covers everything from
determining the need for new goods to buying, delivering and storing them.
DEFINITONS
“Procurement is defined as the process of obtaining goods and services from preparation and
processing of a requisition through to receipt and approval of the invoice for payment.”
“It is the act of buying goods and services for the government”.
OBJECTIVES OF PROCUREMENT SYSTEM
PROCUREMENT PROCESS
Management in any company must understand the art of obtaining products and services.The
procurement cycle follows specific steps for identifying a requirement or need of the company
through the final step of the award of the product or contract.Following a proven step-by-step
technique will help management successfully achieve its goals.
Step 6: Delivery
Step 7: Expediting
Step 8: Receipt and inspection of purchases
The business must know, when it needs a new product, whether from internal or external
sources. The product may be one that needs to be reordered or it may be a new item for the
company.
The right product is critical for the company. Some industries have standards to help and to
determine specifications. Past numbers help to identify these for some businesses. Other
industries have no point of reference. The company may have ordered the product in the past. If
not, then the business must specify the necessary product by using identifiers such as color or
weight.
The business needs to determine where to obtain the product. The company might have an
approved vendor list. If not, the business will need to search for a supplier using Pos or research
a variety of other sources such as magazines, internet or sales representatives. The company will
qualify the suppliers to determine the best product for the business.
The business will investigate all relevant information to determine the best price and terms for
the product. This will depend on the company if it needs commodities or specialized materials.
Usually the business will look into three suppliers before it makes a final decision.
The purchase order is used to buy materials between a buyer and seller. It specifically defines the
price, specification, and terms and conditions of the product or service and any additional
obligations.
Step 6: Delivery
The purchase order must be delivered usually by fax, mail, personally, email or other electronic
means. Sometimes the specific delivery method is specified in the purchasing documents. The
recipient then acknowledges receipt of the PO.Both parties keep a copy of file.
Step 7: Expediting
Expediting of the PO addresses the timeliness of the service or materials delivered. It becomes
especially important if there are any delays. The issues most often noted include payments dates,
delivery times and work completion.
Once the sending company delivers the product, the recipient accepts or rejects the items.
Acceptance of the items obligates the company to pay for them.
Three documents must match when an invoice requests payment is done, i.e.the invoice it, the
receiving document and the original PO.The agreements of these documents provide
confirmation from both the receiver and supplier. Any discrepancies must be resolved before the
recipient pays the bill.Usually; payment is made in the form of cash, check, bank transfers, credit
letters or other types of electronic transfers.
In the case of audits, the company must maintain proper records. These include purchase records
to verify any tax information and Pos to confirm warranty information. Purchase records
reference and future purchases as well.
The following steps are taken for taking decision for procurement of materials.
Need assessment
Finding the budget
Prioritization of purchase of equipment , machinery etc
Standards and specification development
Placing of indent by the head of department
Consideration of indent
Choose procurement method
Receipt of tenders
Opening of tenders
Evaluation of tenders
Placement of orders
Follow up of orders
Receipt and inspection of material
Invoice approval and payment
Need Assessment: - Assess the need for having the equipment/item in the department.
Finding the Budget: -There should be specific budget provision for purchase of materials.
However specific indents can be made without specific budget provision for the current year
with approval of Head of Institution.
Prioritization of purchase of Equipment, Machinery, etc.:- Correctly assess the
requirement of equipment/material to be purchased including infrastructure requirement. A
committee can be formulated for this purpose. Depending on the cost of the
material/equipment, that can either be purchased by the department or sent indent to the
central store.
Standards and Specification Development: - Get a detailed specification and standard of
product as per the requirement before placing indent.
Placing of indent by the head of Department: - Place indent by specifying a detailed
description of equipment, specifications including whether the requirement is fresh or
additional or replacement, the estimated cost, its utility and approximate period of equipment
to become operational from the date of arrival.
Consideration of Indent:- The indent along with the enclosures will be sent to the store
department which will verify its stock and render a no-stock certificate wherever applicable.
The indent is sent to purchase department which will check it for its correctness of details
and place it before relevant standing Purchase committee. After getting the approval by the
purchase committee, the indent item is considered for purchase.
Choose Procurement Method: - There are various modes of procurement: open tender,
limited tender, negotiated procurement and single tender.
The Open tender method
This method is followed for all high cost items. The notice inviting tender should be short,
clearly worded. It should give a brief description of the item to be procured, the qualification
of suppliers, the date of receipt of tender, the date, time, venue of opening the tenders. This is
public bidding, resulting in low prices, published in newspapers. Term is usually of 4 weeks.
Quotations must be sent in the specific forms that are sold, before the time & date mentioned
in the tender form. In technical items, ‘two packets or two bins ‘system is followed. Offers
are given in two separate packets: technical bid and financial bid. Validity of tenders is
generally 90 days. Two % of the tender amount or as decided has to be paid along with all
quotations as earnest money. In case of default 1/5 is withheld.
The limited restricted tender method
The tenders are invited from limited suppliers. The lead-time is reduced in this type of
tenders.
Negotiated tender
Procurement by negotiation is a battle by both the buyer and the suppliers. It is an art of
arriving at common understanding through bargaining on the essential points for the contract
such as delivery, specification, price and payment terms, etc keeping in mind ethics and
objectives of negotiation. It should not be at the cost of quality. Maintain relation and try to
have win-win situation. Follow principle of negotiation as given below:-
Put yourself in supplier shoes.
Negotiation is essentially an artful communication.
Let the supplier do most of the talking.
Let the supplier save face.
Satisfy the supplier needs.
Talk to the proper person.
Build up confidence.
Always ask for discount.
Take one point at a time.
Negotiate bulk price.
Direct procurement
It is practical when purchase is done from single supplier at his quoted price. It is reserved for
proprietary materials, or low priced, small quantity and emergency purchases.
Rate contract
Firms are asked to supply stores at specified rates during the period covered by the contract.
Spot Purchase
It is done by a committee, which includes an officer from stores, accounts and purchasing
departments.
Risk Purchase
If supplier fails, the item is purchased from other agencies & the difference in cost is recovered
from the first supplier.
Receipt of tenders
Tenders are received either by post or through courier or by hand. The tenders should be dropped
in the tender box. If received open within due date, may be accepted at the risk of bidder. The
tenders received late, shall be marked as late or delayed. These tenders are filed and not opened
at all and be returned to bidders in the original envelop without opening.
Opening of tenders
The tenders should be opened by the committee. A separate notice may be given to bidders
before opening the bid. The officer opening the tender will read out particulars of the tender.
Evaluation of tenders
Evaluation of tenders is made in a scientific and logical manner. A neat comparative statement of
the tenders opened shall be made. It should contain details like rate, delivery schedule,
make,taxes etc.The conditional tenders should not be accepted. Negotiations can be done only
with the lowest bidder wherever necessary.A separate evaluation can be made for technical and
financial bids.The tenders are also be called for discussion.The idea is to arrive at a threshold
level of acceptability above which all the bidders shall be treated on par.The bidders who
technically acceptable shall be allowed to withdraw their price bids and send again a revised bid
in a sealed envelope or to adhere to original price bid sent.These price bids are opened,evaluated
and the contract awarded to the lowest evaluated bidder.
Placement of Orders
Once the purchase proposal is approved, the purchase officer prepares the purchase orders and
arranges to send it to the vendor. The purchase order shall contain the make and model of the
item with description,rate,quantity ordered, amount and terms and conditions.
Follow up of Orders
The material received at the entry point is checked thoroughly for quantity, quality by the
indenter. The materials received are also verified against the supplier’s packing slip and purchase
order. Record in the receiving report all the discrepancies between the materials, incomplete
supply etc.The report should carry the signature of the receiver and the date. Enter the serial
number of the item in the receiving report.
After the approval of invoice the payment is done to supplier by the finance department of the
institute.
Procurement process for consumable items
PURCHASING
MEANING
Purchasing means to buy various materials by paying money or its equivalent from
suppliers/vendors. Purchasing is one of the important functions of administration. Purchasing
process is made up of several steps or activities. Each step takes information, processes it and
turns into output to feed into the next step.
The purchasing process may vary from organization to organization, but the major fundamental
remain the same. In this process, the materials are brought and acquired using some standardized
specification. The act of purchasing is a fundamental function in the supply cycle. Purchasing is
a store responsibility for the needed materials of the right time and at the right place in the most
economical manner. This also includes selection of sources of supply, finalization of terms of
purchase, placement of purchase order, follow up, maintenance of smooth relation with
suppliers, approval of payment of suppliers, evaluating and rating suppliers.
The inventory management system provides trigger points for material purchases. Inaccuracies in
the inventory quantities may result in ordering delays or over ordering materials for production.
The purchasing department orders materials when the quantity reaches a specific amount.
Vendor lead times are a factor in determining the quantity necessary to trigger a purchase.
KEY STEPS OF PURCHASING
The key steps of purchasing are request to purchase/requisition, supplier selection, purchase
order, fulfillment, order receipt, supplier invoice/payment:
1. Purchase/requisition: Identify the need; what to buy and how much of it and when it is
needed to delivery.
2. Supplier selection: Identify supplier, price and lead time.
3. Purchase order: Raise purchase order and send to supplier. The purchase officer identifies
the items to be procured, the quantity required and price being paid.
4. Fulfillment: Supplier procures the items and sends to buyer.
5. Order Receipt: Items are checked for quality and quantity as per the order placed.
6. Supplier invoice/payment: The supplier sends the invoice which is processed by the
finance department before supplier is paid.
PRINCIPLE OF PURCHASING
2]The ultimate aim of purchasing is right quality, right quantity, right price, right source and at
right time to the right place with right mode of transportation, right attitude, with right
techniques such as value analysis, material intelligence, purchase research, SWOT analysis,
purchase budget, lead time analysis etc.
Proper specification
Invite quotations from reputed suppliers
Comparison of offers based on basic price, freight & insurance, taxes and levies
Quantity & payment discounts
Payment terms
Delivery period, guarantee
Vendor reputation
Short listing for better negotiation terms
Seek order acknowledgement
Latest technology
Availability of maintenance & repair facility, with minimum down time.
Post warranty repair at reasonable, cost.
Upgradeability
Reputed manufacturer
Availability of consumables
Low operating costs
Installation
Proper installation as per guidelines.
It is done when the stores orders are received in the store. Material inspection is necessary to
ensure quality of materials received. Whenever an item is delivered the same is verified in
the presence of the store incharge, representative of the supplier and representative from the
purchase committee of the hospital. Verification is done to ensure that the item is as per the
order placed, etc.
Receipt of supply in
specific locations
Is verification
cleared? Yes/No
INVENTORY
INTRODUCTION
Inventory control in hospitals is more than just procurement and usage.The proper controls and
processes can save millions in healthcare costs by enabling a hospital to efficiently order and
store just the right amount of supplies needed for patient cases while tracking cost,tier pricing
and patient charges associated with supplies.
MEANING
Inventory is defined as the blocked working capital of an organization in the form of materials,
as this is the blocked working capital of organization, ideally it should be zero. But we are
maintaining Inventory.
It is the stock to ensure uninterrupted supplies, the idle resources which have future economic
value and cushion between estimated and actual demand of materials.
Inventory means all the materials, parts, suppliers, expenses, and in process or finished products
recorded on registers/books by an organization and kept in its stocks for some period of time.
MEANING
Inventory control is the process by which inventory is measured and regulated according to
predetermined norms such as economic lot size, for order, safety stock, minimum level,
maximum level, maximum level, order level etc.
Inventory control means stocking adequate number and kind of store, so that the materials are
available whenever required and wherever required. Scientific inventory control results in
optimal balance. It is a scientific system which indicates what to order, when to order, how much
to order, how much to stock.
Inventory control means keeping a track of inventory, so that the materials are available when
needed.
Inventory control measures and regulates to predetermine the size for order, safety stock,
minimum level of order, and maximum level of order.
INVENTORY SYSTEM
A set of policies and controls that monitors levels of inventory and determines way levels should
be maintained, when stocks will be replenished and how large orders should be.
Inventory management system provide information to efficiently manage the flow of materials,
effectively utilize people and equipment, coordinate internal activities and communicate with
coustomers.Inventory Management does not make decisions or manage operation; they provide
the information to managers who make more accurate and timely decisions to manage their
operations.
ORDERING COST
It is the cost of ordering the item and securing its supply. It includes the expenses for raising the
indents, purchase requisition by user department till the execution of order, and receipt and
inspection of item, the salaries and wages of store personnel employed, the rent of store
,stationery and other consumables used by the store ,etc.
This is the cost incurred for holding the volume of inventory and measured as a percentage unit
cost of an item. It includes capital cost, obsolescence cost, deterioration cost, tax on inventory,
insurance cost, storage and handling cost, the salaries and wages of store personnel employed,
the rent of store, stationery and other consumables used by the store, etc.
OTHER COSTS
Other costs include capacity cost: overtime payments, layoffs and idle time; set up cost and over
stocking costs.
Planning
Procurement
Receiving and inspection
Storing and issuing the inventories
Recording the receipt and issuing of inventories
Physical verification
Follow up functions
Material standardization and substitution
There are three main factors in inventory control decision making process;
3. The cost of shortage i.e., what is lost if the stock is insufficient to meet the demand.
1. Items quality
2. Quantity
3. Price
4. Source
5. Delivery
6. Methods
7. People
INVENTORIES CLASSIFICATION
The following analysis and classification techniques are available for inventory control:-
ABC Analysis
ABC analysis helps us in segregating the items from one another and tells us how much valued
the items are and controlling it to what extent is in the best interest of the organization.
ABC classification is a system categorization of items/inventory in three classes with each class
having a different management control associated and is based on cost factor or on their annual
consumption value.
ABC analysis popularly known as “Always Better Control” or alphabetical approach,is a very
useful approach to material management based on Pareto’s principle of “Vital few and trivial
many “based on the capital investment of the item and on cost criteria or in simple term it is
based on annual consumption value of said item.( Annual Consumption value=Quantity
consumed X Cost of the item).
Pareto’s Theory
According to Pareto’s theory 10% items consume about 70% of budget(Group A).The next
20%consume 20% of financial resources (Group B) and remaining 70% items account for just
10% of budget (Group C).
Based on ABC analysis average pattern of percentage of items and percentage of their respective
values may work out approximately as follows:-
‘A ‘Items
These are small in number, but consume large amount of resources and are managed by top
management. These items must have tight control, rigid estimate of requirenments,strict & closer
watch and require low safety stocks. These items consume major portions of funds.
‘B’ Items
There have moderate control. These items are purchased based on rigid requirements and
reasonably has strict watch and control. Safety stocks are maintained moderately. For these items
the management is done by middle level managers.
‘C’ Items
These items are larger in number, but consume lesser amount of resources and must have
ordinary control measures. The purchase is based on usage estimates but require high safety
stocks.
This analysis is depends on its annual consumption values other than unit cost.
The limits for ABC categorization are not uniform but depend on the size of organization,
its inventory as well as number of items controlled.
The analysis does not depend on the importance of items rather based on material price,
material credibility, and available status of material, material physical characteristic and
frequency of material usage.
It also depends on degree and characteristics of controls to be exercised by the
management: the necessity of control, the necessity of which material to be placed under
control and the particular characteristics of material.
PROCEDURAL STEPS
Collect all the data of inventory and prepare a list of all the items of stores indicating the
unit price of each item and annual consumption.
Calculate their annual usage in Rs. (Annual consumption in units x unit costs in
RS=annual consumption value).For stores, it will be Quantity issued x unit rate of each
item.
Arrange all these items in the descending order of total value of annual consumption of
each item in rupees.
Mention the item numbers against their annual consumption.
Calculate cumulative annual consumption value.
Calculate cumulative annual consumption value percentage.
Categorize items as per the consumption value(cost) percentage.
Those items which together form 70% of the total annual usage value or select the top
10% of all the items have the highest rupee percentage may be categorized as
‘A’items.These are item number 7 & 5.
Items that fall under 20% of the total annual-usage value or select the next 20% of all the
items
ADVANTAGES
Provides a mechanism for identifying items that will have a significant impact on overall
inventory cost
It helps in economizing ones effort to achieve greater results.
It helps to segregating those items which ought to be given priority to maximize results.
The usefulness of this management tool is that, by focusing on the ‗A‘category items,
70% results can be achieved with just 5% effort.
Once A category items are identified, it is possible to devote more attention to these
items to minimize purchase costs and exercise control over consumption in a more
effective manner.
Proper use of valuable time of store personnel.
Simple no confusing formulas are involved
LIMITATION
When number of items runs into several thousands, it is not convenient to compute and
carry out this analysis.
More chances of deterioration in storage exist since class c items are purchased in bulk
and inventory on these piles up.
Loose control on C may result in shortages.
ABC focuses on money value and not on functional importance of such items, resulting
in shortages of critical items.
ABC does not take into account variation of prices of items as time goes.
ABC ignores market conditions, market availability, competitions, seasonal variations
etc.
VED analysis
In VED Method (vital, essential and desirable), each stock item is classified on either
vital, essential or desirable based on how critical the item is for providing health services. The
vital items are stocked in abundance; essential items are stocked in medium amounts and
desirable items we stocked in small amounts. Vital and essential items are always in stock which
means a minimum disruption in the services offered to the people.
In VED analysis, the inventory is classified as per the functional importance under the
following three categories:
Vital (V)
Essential (E)
Desirable (D)
Vital:
Items without which treatment comes to standstill: i.e. non- availability cannot be
tolerated. The vital items are stocked in abundance, essential items and very strict control.
Essential:
Items whose non availability can be tolerated for 2-3 days, because similar or alternative
items are available. Essential items are stocked in medium amounts; purchase is based on rigid
requirements and reasonably strict watch.
Desirable:
Items whose non availability can be tolerated for a long period. Desirable items are
stocked in small amounts and purchase is based on usage estimate.
Although the proportion of vital, essential and desirable items varies from hospital to
hospital depending on the type and quantity of workload, on an average vital items are 10%,
essential items are 40% and desirable items make 50% of total items available.
PURPOSES
In a manufacturing organization, there are number of items which are very vital or
critical in production.
Their availability must be ensured at all times for smooth production, so need to
be strictly controlled.
Essential items follow vital items in their hierarchy of importance.
Desirable items are least importance in terms of functional considerations, which
are loosely controlled at the lower level.
There can be combination of these two categories like a matrix combining ABC and VED
categories. This matrix is more relevant in the hospitals. The AV category becomes the most
important for inventory control because the items are very much cost consuming being a
category and also vital for uses. These items can be controlled by the top-level management. The
CD category items are not very costly and at same time of desirable category. These items can be
controlled at the lower level.
V E D
A AV AE AD
B BV BE BD
C CV CE CD
1. It is useful for monitoring and conrol of stores and spares inventory by classifying
them into 3 categories viz, vital, essential and desirable.
2. Determine the criticality of an item and its effect on production and others
services.
3. It is used for classification of spare parts/items.
4. It is useful in controlling and maintaining the stock of various types.
FSN analysis
Method
Date of receipt or last date of issue whichever is later, is taken to determine the number of
months which has lapsed since the last transaction
Analysis
For analysis, the issuing of items in past two or three years are considered
No issuing of item during that period- labeled ‘N’
Item
ADVANTAGES
SDE ANALYSIS
E’ easy items
Easy to acquire
Readily available in the local markets
ADVANTAGES
Useful in the context of scarcity of supply.
Vital to the lead time analysis.
To determine the method of buying and to fix up the responsibilities of buyers.
HML analysis
The basic criterion of HML classification is the unit value of the item.
Value is the basis of this analysis and not the annual consumption value.
Unit value is the basis of this analysis and not the annual consumption value.
H- unit value> 1000 (sanctioned by higher officials)
M- unit value 100 to 1000
L- unit value< 100
Advantages
XYZ Analysis
Criteria
Advantages
Identify those few items which account for large amount of money locked up in
the stock.
Helps to take steps for liquidation/reduction.
GOLF analysis
Method
A special procedure followed for procuring items, the ordinary procedure may not work
in respect of these items.
SOS ANALYSIS
‘S’ stands seasonal and OS stands for off seasonal items. The analysis identifies items
into:
Seasonal item which are Procure and stock for meeting the
available only for a limited needs of the full year
period
Organization may use either the perpetual system or the periodic system to record the
transaction involving inventory or account for inventory. So Inventory records are kept using
either one of these systems.
Features
Parts:-This system comprise of three parts: Bin card, store ledger, and continues stock taking.
Bin Card: - Bin card is a quantitative record of receipts, issues and closing balances of items of
stores.
Store Ledgers:-Store ledgers are very useful inventory control system. It consists of leaf card for
easy removal and insertion and useful in maintaining all costly items.
Continues Stock Taking: - In this method limited items are verified. The items are selected based
on their utility. Selected numbers of items are collected everyday and matched with the ledger
book and bin card.
Periodic means at certain points in time. A periodic inventory system implies when the quantity
of inventory on hand is determined on periodically such as once a month, quarterly or at the
beginning and end of each year, and does not have an accurate record of the inventories in
between these points. This system does not keep continuous, moment-to-moment records of
inventories.
Features
All acquisitions of inventory during the accounting period are recorded by debits to a
purchases account.
Inventory subsidiary ledger is not updated after each purchase of inventory.
Inventory quantities are not updated continuously rather updated on a periodic basis.