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Inventory control

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Crucial part in hospital management- Inventory control

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Inventory control

  1. 1. INVENTORY CONTROL TECHNIQUES Moderator Dr. Pardeep Khanna Sr. Professor & HOD Presentor Dr. Jai Parkash Junior Resident Department of Community Medicine, PGIMS, Rohtak
  2. 2. CONTENTS  Introduction  Objectives of inventory control  Benefits of inventory control  Inventory control techniques procedure  Order points and service levels  Online drug inventory & supply chain management system  Ware house Rohtak  Ware house PGIMS Rohtak
  3. 3. INTRODUCTION • The term inventory means the value or amount of materials or resource on hand. It includes raw material, work-in-process, finished goods , stores & spares. • Inventory Control is the process by which inventory is measured and regulated according to predetermined norms such as economic lot size for order or production, safety stock, minimum level, maximum level, order level etc. • Inventory control pertains primarily to the administration of established policies, systems & procedures in order to reduce the inventory cost.
  4. 4. INTRODUCTION.. • Lack of proper attention to the material management in the health system in the country has been a major problem in effective implementation of various health programs. • Man fails to realize the fact that material represents money and also there is a lack of perception about the inter- relationship between money and the material. • Non availability of drugs and materials supplies– dissatisfaction among health personnel and also community.
  5. 5. INVENTORY CONTROL It costs money to hold stocks in terms of storage space, personnel, insurance, security, deterioration and obsolescence.  Higher inventory levels saddle a hospital with avoidable costs. It may be more economical to purchase an item on demand than to maintain an inventory. At the same time, a certain minimum amount of each item must be held to minimize the chances of total stock-out.
  6. 6. Helps in maintaining an optimum level of all the resources at least possible cost. Determine appropriate levels of holding inventories, the ordering sequence & the quantities, so that the total costs incurred are minimized. INVENTORY CONTROL…
  7. 7. Water Tank Analogy for Inventory Supply Rate Inventory Level Demand Rate Inventory Level Buffers Demand Rate from Supply Rate
  8. 8. CONTENTS  Introduction  Benefits of inventory control  Inventory control techniques procedure  Order points and service levels  Online drug inventory & supply chain management system  Ware house Rohtak  Ware house PGIMS Rohtak Objectives of inventory control
  9. 9. OBJECTIVES OF INVENTORY CONTROL • 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 reduce loss due to changes in prices of inventory items.
  10. 10. OBJECTIVES OF INVENTORY CONTROL.. • 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 minimize losses due to deterioration, obsolescence, damage, pilferage etc. • To stabilize employment and improve labour relations by inventory of human resources and machine efforts.
  11. 11. CONTENTS  Introduction  Objectives of inventory control  Inventory control techniques procedure  Order points and service levels  Online drug inventory & supply chain management system  Ware house Rohtak  Ware house PGIMS Rohtak  Benefits of inventory control
  12. 12. 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
  13. 13. CONTENTS  Introduction  Objectives of inventory control  Benefits of inventory control  Order points and service levels  Online drug inventory & supply chain management system  Ware house Rohtak  Ware house PGIMS Rohtak  Inventory control techniques procedure
  14. 14. • A small number of items represent a large % of the cost value. • Conversely, a large % of the items represent only a small portion of the cost value. • Procedure to determine varying levels of control is called the ABC analysis. ALWAYS BETTER CONTROL (ABC) ANALYSIS PRINCIPLE
  15. 15. • The origin of ABC analysis is PARETO’S 80 – 20 rule. • This rule says that 80 % of country’s economy is controlled by 20% of the people. • If we apply this rule to verify its correctness, the results say that it is correct. Example: • List out all the expenses we do over a period of time and arrange them in the order from highest to lowest. Find the total of expenses and workout percentage of each with respect to the total. We see that only 20 % of items consume 80% of our expenses. CONTD…..
  16. 16. PROCEDURE FOR ABC ANALYSIS: List all the materials used in the company Work out their annual consumption value Arrange items in the descending order Add all & get the total annual inventory cost Write cumulative consumption value in % of total Draw a line at 70% and 90% under 70% between 70% and 90% between 90% and 100% A CB
  17. 17. Class % of Items % of value (Annual consumption ) A 10 70 B 20 20 C 70 10 ABC ANALYSIS- PROCEDURE…
  18. 18. Analysis of CHC Chiri Indent Class % of items %of value A 11.14 % 72.32 % B 20.5 % 15.89 % C 68.34 % 11.77 %
  19. 19. • Class A : High level control, low safety stocks, frequent physical verification, close schedule control and review. • Class B : Controls not as tight as for “A’, but more than for “C”. • Class C : Inexpensive items, purchase in large quantities, at lesser interval, minimize clerical effort to control, large safety stock. ABC ANALYSIS- PROCEDURE…
  20. 20. VED ANALYSIS In addition to the intrinsic or market value of materials, which is invested in the materials, there is sometimes a nuisance value to the materials. In ABC analysis, we have seen that annual consumption value; quantity of materials consumed and unit cost plays a vital role.  This is to say that ABC analysis deals with the annual consumption value of the item due to their presence and not any other aspect such as the criticality of the material or the nuisance value.
  21. 21. VED ANALYSIS • Depending on their criticality, and thereby their value in the operation of the hospital, most of the items of the inventory of the hospitals can be classified, as Vital, Essential, and Desirable . • Those items the absence or shortage of which even for a short period can seriously hamper the work of the hospital are classified as vital items. E.g. Adrenaline injection, steroid preparations. • Essential items are those items, the shortage or absence of which cannot be tolerated for more than a day or so or which are likely to cause disruption of normal activity. E.g. Life supporting items such as transfusion fluids.
  22. 22. VED ANALYSIS • Desirable items which are definitely needed, but the work can continue even without them for a substantial period of time. E.g. Aspirin, other analgesics, vitamins, enzymes.
  23. 23. COMBINATION OF ABC & VED ANALYSIS • 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
  24. 24. V E D A AV (90%) AE (80%) AD (70%) B BV (95%) BE (85%) BD (75%) C CV (99%) CE (90%) CD (80%)
  25. 25. CONTD…. • This type of classification helps the management to decide the materials policy and what the service levels are expected to see that no difficulty is faced. • An item belongs to both A and V class is costlier, at the same time higher criticality, 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.
  26. 26. FSN ANALYSIS • FSN: Fast moving, slow moving & non moving. • Classification is based on the pattern of issues from stores & is useful in controlling obsolescence. • Date of receipt or last date of issue, whichever is later, is taken to determine the no. of months which have lapsed since the last transaction. • The items are usually grouped in periods of 12 months. • It helps to avoid investments in non moving or slow items. It is also useful in facilitating timely control.
  27. 27. • For analysis, the issues of items in past two or three years are considered. • If there are no issues of an item during the period, it is “N” item. • Then up to certain limit, say 10-15 issues in the period, the item is “S” item • The items exceeding such limit of no. of issues during the period are “F” items. • The period of consideration & the limiting number of issues vary from organization to organization. Contd….
  28. 28. H-M-L Classification • This method is similar to A-B-C classification. But in this case, instead of the consumption value of items, their unit value is considered for classification. As the name implies, the materials are classified according to their unit value as: ▫ High, ▫ Medium ▫ Low. • The cut-off point will depend on the individual user. The procedure is to list out the items in descending order of unit value and invoke management policy to fix the cut-off points. The management may decide and delegate authority to various levels of officers depending on the classification.
  29. 29. X-Y-Z Classification • X-Y-Z has the value of inventory available on a particular date in the stores as its basis. This study is taken up once in a year during the annual stock-taking exercise. ▫ X items are those items whose stock value is high ▫ Y items fall between the two categories ▫ Z items are those whose stock values are low • This classification helps in identifying the items which are being extensively stocked. If the management is caught napping, one can expect C items in the X category. Therefore, controls should be developed for A-B-C items in conjunction with X-Y-Z items.
  30. 30. G-O-L-F Classification • In the G-O-L-F system, classification is based on the availability and nature of suppliers. The nature of the suppliers will determine the quantity and continuity of supply, lead time payment terms and clerical processing cost and time. GOVERNMENT SUPPLIERS: Transactions with these suppliers involve long clerical processing and the lead time will also generally be long. ORDINARY SUPPLIERS: Bulk of suppliers. The quality and continuity of supply is good especially. Credit availability from some of these sources may be available.
  31. 31. LOCAL SUPPLIERS: From whom cash purchases are generally made. They are usually in the market areas of cities. FOREIGN SUPPLIERS: Foreign suppliers. Will involve heavy clerical work—starting with government clearance, e.g. obtaining an import license for customs clearance before the foreign source of supply is contracted. After orders have been placed, the shipping formalities must be followed up and port clearance work done.
  32. 32.  Scarce in market,  Difficult to procure,  Easy to procure. SDE ANALYSIS
  33. 33. CONTENTS  Introduction  Objectives of inventory control  Benefits of inventory control  Inventory control techniques procedure  Online drug inventory & supply chain management system  Ware house Rohtak  Ware house PGIMS Rohtak  Order points and service levels
  34. 34. Economic Order Quantity ORDERING COST The cost incurred to get the materials into the inventory of the hospital. Ordering costs include many variables and are not easily measurable.
  35. 35. These costs comprise of: 1. salaries and wages of involved personnel, 2. postal, telephone, telex and other similar bills, 3. advertisements, 4. stationary, 5. entertaining the vendors, suppliers, and 6. travel of stores personnel.
  36. 36. INVENTORY CARRYING COST • Costs incurred for holding the volume of inventory and measured as a percentage of unit cost of an item. • It includes- ▫ Capital cost ▫ Obsolescence cost ▫ Deterioration cost ▫ Taxes on inventory ▫ Insurance cost ▫ Storage & handling cost
  37. 37. IMPORTANT TERMS • Minimum Level – It is the minimum stock to be maintained for smooth production. • Maximum Level – It is the level of stock, beyond which a firm should not maintain the stock. • Reorder Level – The stock level at which an order should be placed. • Safety Stock – Stock for usage at normal rate during the extension of lead time. • Reserve Stock - Excess usage requirement during normal lead time. • Buffer Stock – Normal lead time consumption.
  38. 38. • For keeping the inventory and inventory cost low, it is necessary to procure the item in as small consignments as possible. • But this can mean placing larger number of orders at intervals and higher overall ordering cost. • This conflicting situation is solved by the EOQ method. • The EOQ method helps in finding appropriate levels for holding inventories. • It facilitates the fixation of ordering sequence and the quantities so as to minimize the total materials costs. ECONOMIC ORDER QUANTITY
  39. 39. • The EOQ Formula • If stock-outs are not permitted, the total inventory cost per year is depicted by the following formula: Total annual cost = (purchase cost) + (order cost) + (holding cost) TC=RP +RC/Q +QH/2 R = annual demand in units P = purchase cost of an item C = ordering cost per order H = holding cost per unit per year Q = lot size or order quantity in units. Q =√2CR/H ECONOMIC ORDER QUANTITY...
  40. 40. • Example ABC Hospital purchases 1,600 pairs (units) of surgical gloves each year at a unit cost of Rs. 15.00. The order cost is Rs. 100.00 per order, and the holding cost per unit per year is computed at Rs. 8.00. The EOQ will be: • Q=√2CR/H=√2x100x1600/8 =200 units • TC=RP +RC/Q +QH/2= 1600 x 15 +(1600 x100)/200+ (200 x 8)/2= Rs. 25,600/ • Number of orders to place in one year=1600/200=8 ECONOMIC ORDER QUANTITY...
  41. 41. No. at orders per year Order size Average Annual inventory carrying 50% order Qty cost Annual ordering cost Total cost 1 1,600 800 64,00 100 6500 2 800 400 32,00 200 3400 3 540 270 2160 300 3460 4 400 200 1600 400 2000 5 320 160 1280 500 1780 6 270 135 1080 600 1680 7 230 115 920 700 1620 8 200 100 800 800 1600 9 180 90 720 900 1620 10 160 80 640 1000 1640 11 146 73 584 1100 1684 12 132 66 528 1200 1728
  42. 42. Relationship between cost and quantity.Costperperiod 43 100 200 300 400 500 10 20 30 40 50 Procuring costs Min cost Order quantity EOQ
  43. 43. •When to order ?
  44. 44. • LEAD TIME: The period that elapses between placing an order and receiving the stores. Important in determining the average inventory need. • MINIMUM STOCK HOLDING • SAFETY BUFFER STOCK: This is the quantity of stores that one must set apart as an insurance against the variations in demand and procurement period, for unforeseen reasons, and to avoid stock-out. FACTORS WHICH INFLUENCE ORDER TIMING
  45. 45. • Safety buffer stock: It is calculated by multiplying the difference between maximum and average consumption rate per day/week/month with the lead time for the item. It is the level at which fresh supply should normally arrive. • REORDERING POINT Is the predetermined stock level at which an order is initiated. The reorder level is equal to the minimum stock plus requirement during lead time.
  46. 46. • The reorder point is obtained by determining the demand that will occur during the lead time period. • When the stock position reaches the reorder point, an order will be placed for Q units, the EOQ The following formula gives the reorder point in units when the lead time L is expressed in months: • B = RL/12 reorder point in units. = RL/52 when L is in weeks FACTORS WHICH INFLUENCE ORDER TIMING
  47. 47. illustration . • If the lead time is 20 days, daily consumption 300 units and buffer stock 400, the ROL 20 x 300 = 6000 + 400 = 6,400. • If the review time is every 30 days, the stock in hand should be (6000) + (300 x 30) = 6000 + 9,000 = 15,000. • If the buffer stock is say 400, adding the buffer stock to the above quality gives a ROL of 15,400.
  48. 48. REORDER METHODS • CYCLIC SYSTEM • TWO-BIN SYSTEM. CYCLIC SYSTEM • At fixed intervals. • The size of the order will vary with fluctuation in consumption. Orders are placed depending on the stock on hand and rate of consumption, • i.e. the ordering interval is fixed, but the quantity ordered varies each time.
  49. 49. TWO BIN SYSTEM: • An order for the appropriate quantity is placed as soon as the first bin becomes empty. • The other bin contains stocks sufficient to meet probable consumption during the period of replenishment, i.e. before the actual receipt of the order. • Frequency of ordering is determined by fluctuation in consumption.
  50. 50. ISSUE/DISTRIBUTION Three systems of issue and distribution are possible. 1. Each ward/department keeps track of its inventory levels. When the ward or department stock becomes low, a requisition for the required materials is forwarded to stores, which issues 2. Topping-up system, the maximum stock level for each item for each ward/department is predetermined based on their usage. At specified intervals, the stores personnel visits the ward/department, checks the stock in balance, and replace the depleted stock. 3. A modification of the above is duplicate cart system
  51. 51. DISPOSAL/CONDEMNATION • In case of non-consumable like capital equipment, instruments, linen, furniture, etc. excess stock may be returned to the stores as soon as it is detected. • Many items have a scrap value. Bottles, IV bags, used linen can be sold as scrap. • Some other items are required to be destroyed by burning or destroyed beyond recognition, to prevent reuse. • It may be possible to use some parts of condemned equipment.
  52. 52. EFFECTIVENESS OF THE MATERIALS MANAGEMENT DEPARTMENT • Supply performance review • Overall review by management audit • Material cost per patient day (MCPPD) It is arrived at by dividing the total material cost per day by the total hospital cost per day.
  53. 53. CONTENTS  Introduction  Objectives of inventory control  Benefits of inventory control  Inventory control techniques procedure  Order points and service levels  Ware house Rohtak  Ware house PGIMS Rohtak  Online drug inventory & supply chain management system
  54. 54. SPECIFIC FEATURES OF INVENTORY SOFTWARE a)Tracks monthly consumption b) Keeps track of stock out periods c) Calculates average monthly consumption, taking into consideration past consumption and stock out periods d) Calculates minimum and maximum stock levels e) Calculates optimum reorder level, taking into consideration minimum stock, actual stock balance, lean time, procurement and for casting periods and outstanding orders, as well as use- defined maximum and minimum stock levels
  55. 55. f)Monitors expiry dates by lot g) Generates lists by location h) Manages distribution according to expiry date and/ or location i)Monitors clients consumption and budget j) Allows multiple purchase and selling prices, as well as the possibility to enter discounts, surcharges and taxes. k) Generates audit report Contd…
  56. 56. CONTENTS  Introduction  Objectives of inventory control  Benefits of inventory control  Inventory control techniques procedure  Order points and service levels  Online drug inventory & supply chain management system  Ware house Rohtak  Ware house PGIMS Rohtak
  57. 57. • Medical Superintendent- Dr. Ashok Chauhan • Dy. M.S.- Dr. Sukhbir • Chief Store Officer- Sh. V.S. Dalal • Staff- 1 Store Officer, 6 Pharmacists, 1 Senior store keeper, 4 Store keepers • 1 computer operator, 12 class IV • Yearly demand is asked from all departments. • 3 months buffer stock is set up as reorder point. • EOQ technique is being used. • Supply from Rohtak ware house and by purchase. CENTRAL WARE HOUSE, PGIMS ROHTAK
  58. 58. Purchase section Incharge: Dr. V. K. Katyal, Sr. Professor, Department of medicine JSSK, NPCDS, Arogya Nidhi Kosh incharge: Dr. R.B. Jain Superintendent: Sh. Chanderpal Pharmacist: Mr. Pankaj Issue of some budget constraints Bills of agencies are pending so supply of medicines is delayed
  59. 59. CONTENTS  Introduction  Objectives of inventory control  Benefits of inventory control  Inventory control techniques procedure  Order points and service levels  Online drug inventory & supply chain management system  Ware house PGIMS Rohtak  Ware house Rohtak
  60. 60. WARE HOUSE, ROHTAK Total 7 ware houses in Haryana: Ambala, Bhiwani, Gurgaon,Hisar, Kaithal, Karnal, Rohtak Districts Rohtak, Sonipat, Jhajjar, PGIMS Rohtak, Medical College Khanpur Kalan are attached to Rohtak ware house. Staff- Dr. Sonal Dogra (M.D. Pharmacology)- Incharge 1 Pharmacist 1 contractual pharmacist post lying vacant 4 Multitask workers 12 Guards 1 Sweeper part time Red- Non pass stock Blue- Batch failed Roster is prepared for PHC, CHC, Civil Hospital, PGIMS for their supply date. Facility have to send indent online before their delivery date.
  61. 61. Efforts are important But knowing where to make an effort Makes all the difference THANK YOU