The three levels of analysis for effective control over inventories are:
• Overall analysis
• Category analysis
• Individual item
analysis
The management should fix a target for each category
of items according to various conditions lead time; nature of item etc.
individual item analysis includes selective control of the items deserving
attention leads to better control. The commonest and most widely used tools and techniques which are applied for
planning, acquisition, storage movement, and
control of materials in a hospital store are
1. ABC analysis:
In gig drug stores, large inventory items are stocked. To maintain proper
control of inventories, the ABC (Always Better Control) technique is used. In
this technique, the materials are divided into three groups A, B, and C according to the cost of the materials and the
money value of consumption.
A Items: In the whole
inventory, there are a few costly items that come under this group. These items
may not be more than 10% of the total items, but these consume about 70% of the
total budget of inventory. So, these items require proper storage and handling.
Overstocking is avoided. Only necessary quantities of these inventories are
purchased and stocked.
B Items: The items coming
under this group are neither costly nor cheap. These items constitute 20% of
the total quantity of inventories and 20% of the total expenditure of
inventories is spend on these items.
C Items: These items are
comparatively cheaper and represent 70% of the total quantity of the
inventories. 10% of the total expenditures of inventories is spent on these
items.
2. Economic Order Quantity (EOQ): This
technique is used to find out how much of the inventory is to be ordered. The
correct quantity to buy is the quantity at which the ordering cost and the
inventory carrying cost will be the minimum. The ordering cost consists of the
cost of paperwork involved in placing an order, like the use of paper, typing,
posting, filling, etc. It also includes the cost of the salaries of staff
involved in this work, and the costs incidental to placing an order like a follow-up,
receiving, and inspection. The ordering cost is more or less fixed. The
inventory carrying cost is represented by items like rent of storage, cost of
insurance and taxes, salaries of store-keeper, and losses in stores due to
pilferage, wastage, breaking, etc.
Methods for determination of EOQ: The following methods are generally
used for the determination of economic order quantity:
• Tubular determination of EOQ:
A tubular arrangement of data relating to items of materials help in the
determination of an approximate EOQ. This arrangement may help the company to
find out the number of orders that need to be placed weakly, quarterly, monthly,
or yearly.
• Graphical presentation of EOQ:
Economic order quantity can also be determined graphically. If a graph is
plotted between order quantity and cost to order and carry, the ideal order
size is the point where the sum of both costs is the minimum.
• Determination of EOQ by the algebraic
formula: EOQ can also be computed by using the following formula:
Where,
a = annual consumption
b = buying cost per order
c = cost per unit of material
s = storage and other inventory carrying cost
EOQ determines the optimum quantity to order, in terms
of either money or physical units, and the optimum turnover rate.
3. VED analysis:
This system is based on the utility of the material. In a drug store, VED analysis is very useful in controlling and maintaining
the stock of various types of formulations of a particular group of drugs. VED
analysis is based on the importance of the item and its effect on the
functioning and efficiency of a hospital.
• Vital Drugs (V):
Such drugs are categorized as vital, whose absence (NO STOCK) cannot be tolerated even for a single day.
That means, their absence would mean the work of hospital/ ward/ patient care
to come to halt.
• Essential Drugs (E):
Essential drugs are those 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 (D):
Desirable drugs are those whose absence will not affect the functioning of
hospital/ ward/ department/ patient care and can be managed at lower level
managers.
4. Perpetual inventory system:
This is a method of recording the store balance after receipt and issue to
facilitate regular checking and to prevent closing down for stocktaking. After
every receipt or issue, the entry is made in the bin card and the balance is adjusted.
Thus, the bin card becomes a perpetual inventory record, and the store balance
is recorded continuously after every receipt and issue. All errors detected are
adjusted both in the bin card as well as in the store ledger under proper
authority. The perpetual inventory
system comprises:
• Bin card:
This is a document maintained by the store-keeper in his store to keep a record
of all items of materials and goods in his store. So, bin card serves the
purpose of providing ready references. It shows the quantity of each material
received, issued, and in stock. A Bin card is used for each material. Each
receipt, issue, or return is recorded on
a bin card in chronological order and the latest balance is shown after each
receipt and issue.
• Stores ledger:
It is kept in the cost accounting department. The store ledger is generally
maintained in the form of loose-leaf cards because they can be easily removed
and inserted.
• Continuous stock-taking:
Under this system, only a limited number of items are verified on a day. The
selection of the items of materials should be such that each item of material
gets checked up at least a certain number of times in a year and the checking
of a particular item is evenly distributed during the period. The selected
number of items is counted daily or at frequent intervals and compared with the
bin card and stores ledger by the storekeeper. The bin card and the store's
ledger record the balance and their correctness can be verified using physical verification.
In case of any difference between recorded and actual balances, it has to be
pointed out to the management.
5. Review of slow and non-moving items:
Inventory is an important constituent of total cost and as such a proper system
of inventory control leads to a significant economy in the total cost of
production. So the proper system must be enforced to detect and control slow-moving
items, obsolete items, and dormant stock. Slow-moving materials are those items
that are moving at a slow rate. Dormant materials are those items that are
moving temporarily because of seasonal production. Obsolete items are those which have become
useless due to changes in design, method
of manufacture, product or process, etc.
6. Input-Output ratio analysis (I-O
ratio): Input-output ratio is the ratio between the quantity
of material charged to the production process and the quantity of material in
the final output. It determines the efficiency of the manufacturing department.
It also helps in the comparison of the actual consumption of material with the
standard consumption. It indicates whether the use of the material is favorable
or unfavorable.
7. Setting of various levels: To
maintain inventory control, it is important to decide upon various levels of materials.
These are the maximum level, minimum level, and re-order level. These levels
are not permanent but need revision due to changes in the factors which
determine these levels.
• Maximum stock level:
Maximum stock level represents the upper limit beyond which the quantity of any
item is not normally allowed to rise. The maximum stock level for a particular
item is fixed after considering the rate of consumption of material, storage
space available, amount of capital needed and available, nature of the material, market trend, fashion
habits, government restrictions, the risk involved due to fire, obsolescence,
and deterioration. The formula for
computing the maximum level is as follows:
Maximum level = Re-order level
Re-order quantity – Minimum consumption
Minimum consumption = Mini. consumption per week × Mini. re-order
period
• Minimum stock level or safety stock:
This is the lower limit below which the stock of any item should not normally
be allowed to fall. This is also known as buffer stock. The main purpose of
determining this limit is to protect against the possibility of a particular
item going out of stock and there is a further danger of stoppage of its
products and supplies. This level is fixed taking into consideration the average
rate of consumption and lead time. Lead time is the total time consumed between
the recognition of the need for an item, till the time it is received for
use. Minimum level = Re-order level –
[Normal consumption per week × Average
delivery time]
• Re-order level:
Re-order level is fixed between the minimum and maximum stock level. When the stock
of an inventory, reaches this point, the process for the purchase of material
should be started. The re-order level is slightly more than the minimum stock
level. The formula for calculating the re-order level is: Re-order level = Mini. consumption during
period x Maximum re-order period.
• Danger level:
This is generally below the minimum stock level. A normal stock level should
never be allowed to fall below the minimum level. If it reaches the danger
level at any point in time, urgent action must be taken to prevent stock out.