HOSPITAL INVENTORY

MANAGEMENT
Dr A Prakash

Sr Professor, Health Management

National Academy of Indian Railways
Vadodara

MANAGEMENT

Men

Machine

Money

Minutes

Material

MATERIAL MANAGEMENT

Capital Goods
Consumables Inventory Management
- Medical Items (Drugs & Consumables)
- House keeping Items

INVENTORY

Inventory A physical resource that a firm holds in

stock with the intent of using or selling it or
transforming it into a more valuable state.

Inventory System A set of policies and controls that

monitors levels of inventory and determines what
levels should be maintained, when stock should be
replenished, and how large orders should be.

WHY INVENTORY

To avoid stock out

To hedge against future

Uncertainities of demand

Uncertainities of supply

Uncertainities of cost

Economies of scale

Ordering cost

Transportation cost

Purchase cost

Independence of planning

HOW WE GET INVENTORY

Drugs & Consumables

Annual Medical Indent

Bulk Purchase at Divisional Level

Local Purchase (Retail Purchase)

Capital Goods

M&P

DF-II & DRF

Works Programs

COST OF INVENTORY
Ordering Cost
Acquisition Cost
Carrying Cost
Storage Cost
Pilferege
Wastage
Expiry
Shortage Cost

FINANCIAL IMPLICATIONS

12% - 15% of Hospital Budget

Upto 40% in Superspeciality Hospitals

Carrying Cost 15% to 30%

Hence
Hospital Inventory Management
is essential

OBJECTIVES
INVENTORY MANAGEMENT
1. Maximise the level of customer service by
minimising out of stock situations (under
stocking)
2. Promote efficiency in purchasing by minimizing
the cost of providing an adequate level of
customer service.

OBJECTIVE

Right Material

Right Quality

Right Quantity

Right Price

Right Source

Right Time

Right Place

ORDERING METHODS

Economic Order Quantity

Bulk Ordering with Time-phased Delivery

Fixed Order Quantity

Fixed Order Period System

Probability based Trade-off Matrix

Speculative Considerations

Just in time System

Basic Economic Order Quantity

(EOQ):
Principles

Assumptions of the basic EOQ model

Only one product is involved

Annual demand requirements are known

Demand is spread evenly throughout the year

(constant demand rate)

Lead time does not vary

Each order is received in a single delivery

There are no quantity discounts

EOQ: cycle inventory levels

(graphical)
Inventory Level
Order
Quantity
(large Q)

Time

Inventory Level
Order
Quantity
(small Q)

Smaller Q more orders, but lower inventory

Time
14

Total (Annual) Ordering Cost

Annual
Ordering
Cost
Number of
Orders

Number of
Orders

Cost per
X
Order

Annual Demand
Lot Size

D
OC
xS
Q

Annual Holding (Carrying) Cost

Holding cost = Average Inventory x Annual Holding Cost per Unit

Average CYCLE inventory = Lot Size
2
Holding cost per unit = % Holding Cost X Unit Cost

Q
HC
x H
2

Basic Economic Order Quantity :

Model
Total Annual Cost

Q
D
TC H S D C
2
Q
Annual Holding Cost

TC : Total annual cost

D : Total annual demand
Q : Quantity ordered
H : Unit holding cost
S : Order or set-up cost
C: Unit cost (price)

Order of set-up cost

Total acquisition cost

Basic Economic Order Quantity :

Principles
TOTAL COST
Costs $
TOTAL ANNUAL
HOLDING COSTS
TOTAL ANNUAL
ORDER COSTS

EOQ

QUANTITY (UNITS)

E.O.Q. = Minimum Total Cost

The total cost curve reaches its minimum where

the carrying and ordering costs are equal.

2DS
2(Annual Demand)(Or der or Setup Cost)
EOQ =
=
H
Annual Holding Cost

REORDER POINT

When to place the order?

Introducing Lead Times

Profile of Inventory Level Over Time

Demand
rate

Quantity
on hand

Reorder
point

Receive
order

Place
order

Receive
order

Lead time

Place Receive
order order

Time

SAFETY STOCK

Changing Lead Time

Changing Demand

MAGNITUDE OF INVENTORY

Average Hospital 6000-8000 items

Multispeciality Hospital may have upto 35000

INVENTORY ANALYSIS

A-B-C Analysis Value of consumption

H-M-L Analysis Unit price

X-Y-Z Analysis Value of items in store

V-E-D Analysis Criticality of item

F-S-N Analysis Consumption pattern

S-D-E Analysis Procurement problems

S-O-S Analysis Seasonality

G-O-L-F Analysis Source of supply

A-B-C ANALYSIS

Pareto's Law (Selective Management Principle)

Significant value in a group of items normally

constitute a small portion of the total number of
items in the group and that the majority of items, in
the aggregate, will be of small significance.

The 80 20 rule!

In A-B-C classification

A 10% => 70%

B 20% => 20%
C 70% => 10%

METHOD FOR A-B-C

CLASSIFICATION

All items listed in descending order by total order value.

Two columns added - % of total budget & cumulative
percentage

Lines drawn at 70% & 90%

OR

Total Budget / Total no. of items = Average Usage Value

Av Usage Value X 2.25 => A/B cut off line

Av Usage Value X 0.50 => B/C cut off line

ADVANTAGE - DISADVANTAGE

Equal attention to all

items will be

Has to be carried out

with standardization &
codification

Very expensive

Diffuse control

Only money value

Misalign priorities

Criticality not seen

Periodic review

H-M-L CLASSIFICATION

Unit cost

High Medium Low

Decides ordering / issuing authority

X-Y-Z CLASSIFICATION

Value of inventory available on date

X stock value high

Y stock value medium

Z stock value low

Method same as A-B-C

Helps to control stock / obsolescence

Shows how stock values are distributed

amongst the material in store

A-B-C & X-Y-Z COMBINATION

CLASS

X Items

Y Items

Z Items

A Items

Critical
Attempt to
analysis to
convert to Z
reduce stock category

Within
control

B Items

Review of
Further
stock control action not
&
necessary
consumption
more often

Review twice
a year

C Items

Disposal of Tighten
surplus stock control

Review once
a year

V-E-D CLASSIFICATION

Vital must for functioning e.g. Oxygen

Essential required for functioning e.g. Antibiotics

Desirable may be kept e.g. Tonics

Equipment can also be classified

V-E-I-N
Vital
Essential
Important
Normal
V-E-I-N / V-E-D matrix for spare parts

V-E-D & A-B-C COMBINATION

CLASS

V Items

E Items

D Items

A Items

Constant
control &
regular
follow up

Moderate
stocks

NIL stocks

B Items

Moderate
stocks

Moderate
stocks

Very low
stocks

C Items

High stocks

Moderate
stocks

Low stocks

V-E-D & X-Y-Z COMBINATION

CLASS

V Items

E Items

D Items

X Items

Control

Dispose

Dispose

Y Items

Review

Control

Dispose

Z Items

No Action

Review

Control

F-S-N CLASSIFICATION

Fast Moving at least once in a week / month

Slow Moving at least once in a month / year

Non-moving nil in a year

Useful in controlling obsolescence, spoilage &

deterioration

F-S-N & X-Y-Z COMBINATION

CLASS

F Items

S Items

N Items

X Items

Tight control Reduce

stock to low
level

Dispose at
best price

Y Items

Normal
Control

Keep low
level stock

Dispose
quickly

Z Items

Increase
stock

Keep low
level stock

Dispose
even at low
price

S-D-E CLASSIFICATION

Scarce to obtain

Difficult to obtain

Easy to obtain

G-O-L-F CLASSIFICATION

Source / Suppliers

Government

Ordinary

Local

Foreign

S-O-S CLASSIFICATION

Seasonal Items

Off season Items

USES OF ANALYSIS

My AMI Budget 1 crore

1000 items
HQ supplied only 300 items (30%)
?

PRIORITY WAS MINE

I got all the items in categories A & B.

Categories C items (70%) will cost only 10% i.e.
100000 which will be managed by LP

UNCONVENTIONAL CASE

AMI has 1000 items

HQ has capacity to process only 600 700 items

in a year

Buy all the A & B category items

Buy half the C category items for two years
Average inventory level of category C items will
increase from 500000 to 1000000 i.e. An
inventory increase of 5% of total budget will solve
the problem!

COMBINED ANALYSIS

An item is in category A and Z

Look at VED
V useful & popular drug
D a lot of wasteful expenditure

The item falls in categories A, X & V

Look up SDE
Category S or D Stock-pile (expiry permitting)

MBASIC SYSTEM

Multiple Basic Approach to Selective Inventory Control

A-B-C / X-Y-Z / H-M-L / V-E-D / F-M-S / G-O-F

Selective Control Techniques 6

Categories in each 3

Total Classification 36 = 729

Out of which 483 can not occur (invalid combinations)

Remaining 327 combinations to be analysed critically

& coded.
Each will have a line of action.

DISTRIBUTION

Ensure FIFO vs LIFO

SUB-INVENTORY CONTROL

At distribution counterr / ward / ICU / OT level

The safety stock adds up

Methods of distribution

Requisition Method

At par Method

Unit dose Method

ORGANISATION OF STORE

Location

Infrastructure

Man power

Administrative control

Computerisation
Bar Coding
RFID

Annual Medical Indent

Price Negotiation

3PL

Third Party Logistics Management

THANK YOU