Methods of Inventory Control

Methods of Inventory Control

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: 

Determination of EOQ by the algebraic formula


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.

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