INTRODUCTION

Inventory control is very essential in a developing country like India. India is a

country of scarce resources and it is the primary responsibility of each organization
whether it is a hospital, an industry, private enterprise (or) a government department to
ensure optimum utilization of available resources to provide good service (or) quality
patient care. Due to inflation, hospitals are faced with budgets that do not balance prices
that are not stable and costs that are not controlled. In this atmosphere, the hospital
management is faced with choosing the alternatives of either lowering the quality of care
(or) adopting ways to reduce the cost of inventories. It is estimated that thousands of
crores of rupees are bring blocked in inventories. ence there arises the need for
developing an efficient and effective inventory control system.
TERMINOLOGIES
Inventory:
It is the list of goods enters.
Cost:
It is the price for a thing.
Analysis:
It is the detailed e!amination.
Quantity:
It is the property of things that is measurable.
Obsolescent:
"he materials no larger used.
Shrina!e:
#rocess $ degree of shrinking% allowance for loss by theft $ wastage.
DE"INITION:
IN#ENTOR$:
&"he quantity of goods (or) materials on hands' ( )ebster.
IN#ENTOR$ CONTROL:
Inventory control is a tool of management which is used to maintain an economic
minimum investment in materials and products for the purpose of obtaining a ma!imum
financial return.
O&'ECTI#ES O" IN#ENTOR$ CONTROL
*. "o reduce the financial investment in inventories.
+. "o minimize idle time by avoiding stock outs and shortages.
,. "o avoid losses from inventory obsolescence.
-. "o improve quality of care.
.. "o make effective and efficient use of invested capital i.e. that balancing of unit
cost, operating cost and customer service with cost capital.
/. "o provide efficient customer service quantity purchases assured optimum
customer service and provides efficient scheduling of internal options.
0. 1uantity purchase permits lower unit cost.
2. 3ptimum purchase permits efficient use of man, machine and facilities.
"UNCTIONS O" IN#ENTOR$ CONTROL
4moothing out irregularities in supply.
5inimizing the production cost.
6llowing organization to cope with perishable materials.
CLASSI"ICATION O" IN#ENTOR$ CONTROL
"he inventory control is classified into.
i. 7aw material inventories.
ii. )ork process inventories.
iii. 8inished good inventories.
RA( MATERIALS IN#ENTOR$:
It removes dependency between suppliers and plants.
(OR) IN *ROCESS IN#ENTOR$:
"hey remove the dependency between the machines of a product line.
"INIS+ED GOODS IN#ENTOR$:
"hey remove dependency between plant and its customer (or) market.
*RINCI*LES O" IN#ENTOR$ CONTROL
"he main principle of inventory control is that items for which annual
consumption is high, orders are placed frequently so that the inventory level is as low as
possible. owever for items whose annual consumption is not high, sufficient stocks are
maintained and orders are placed less frequently.
"ACTORS IN"LUENSING IN#ENTOR$ CONTROL
*. "ype of service.
+. 9!pected number of patient
,. 3b:ectives of the hospital as they relate to inventories.
-. 1ualification of staff that design and coordinate the implementation of the system.
.. "he nature and size of inventories and their relationship to the other functions of
organizations.
/. "he current (or) potential availability of data that can be used for controlling
inventory and for making inventory decisions.
0. "he potential savings that might be anticipated from improved control of
inventories.
S$STEMS O" IN#ENTOR$ CONTORL
ORDERING S$STEMS
C$CLIC ORDERING
S$STEM
"I,ED ORDER
QUANTIT$ S$STEM
C$CLIC ORDERING S$STEMS:
"his is a time based system in which stock position is reviewed at definite
intervals of time with regard to availability consumption, rate etc in order to place orders.
"he quantity ordered each time will vary according to the stock position and its future
requirements based on part years rate of consumption. "he frequency of review varies
from organization to organization. "he stock levels may be monitored by physical
inspection, by a visual review of perpetual inventory cards (or) by automotive computer
surveillance.
AD#ANTAGES:
"his system suits well for materials whose purchases are planned months in
advance and also works well for materials which show an irregular (or) seasonal
variation.
DISAD#ANTAGES:
In this system, there is no provision for unforeseen demands, it does not admit the
adoption of ordering based on 9conomic order quantity formula and tends to peak the
purchasing work round the reviewing rates.
"I,ED ORDER QUANTIT$ S$STEM:
It is based on the quantity ordered rater than on time factor. "he order is placed
when stock reaches a predetermined level and not at definite intervals. "his system
permits ordering the optimum quantity required for each item, based on price and rate of
consumption. 6n e!ampled of fi!ed order quantity system is the "wo;< in system.
T(O-&IN S$STEM:
"he distinguishing feature of this system is the absence of perpetual inventory
record. In this system, the stocks are separated into two bins (or) parts. "he first bin
contains stocks to satisfy the demand between the arrival of one order and the placing of
the ne!t order. )hen the stock in first bin is published a reorder in placed for a fi!ed
quantity based on the 931 formula. "he second bin supplies the requirements of the
items during the lead time. "he total stock in the second bin, which represents the reorder
level is equal to the mean e!pected demand during the lead time plus the safety stock.
"he latter ensures that even if the lead time varies transiently, there will be no stocks out.
"he ma!imum = minimum stocks are determined and an order point is then
established between the two levels. "he order points is so fi!ed that by the time the
supplies against new orders are received the stock will decline to the minimum and when
the receipt is accounted the stock will rise to the ma!imum.
AD#ANTAGES
*. 5aterials can be procured in the most economical quantity.
+. #urchase and inventory control personnel automatically devote attention to items
they need only when required.
,. #ositive control can easily be e!erted to maintain total inventory investment at the
desired level simply by estimated planned ma!imum and minimum values.
DISAD#ANTAGES:
It functions correctly only if lead time and usage are stable. )hen these change
order points and order quantities have to be accordingly ad:usted.
IN#ENTOR$ CONTROL COSTS:
"here are three cost factors associated with inventory systems.
4hortage costs (>s)
Inventory carrying cost (>a)
Inventory acquisition cost (or) replacement cost (>r)
./ S+ORTAGE COST 0Cs1:
"his is by far the most important cost factor. It is the cost of non availability of
and item = it includes.
a. >ost of cost good will.
b. 3vertime special effort to obtain an item.
c. 4pecial effort caused by interrupted supplies.
d. ?ost revenue e.g. in private profit making health care institutions the patients
may go to another institution if a product like @;ray films are not available in
a particulars hospital $ diagnostic centre.
2/ IN#ENTOR$ CARR$ING COST 0Ca1:
"his is the cost associated with keeping the materials in the stores. "his comprises
storage, handling costs, cost of insurance, physical deterioration = obsolescence. 6s the
amount = items of drug increases, the cost of maintaining the inventory also increases,
the cost of maintaining the inventory also increase. It is estimated that these charges total
upto about +A percent of the total amount invested in the inventory. "his cost includes.
a/ O33ortunity Cost:
?oss of interest in money invested in the stock of materials of hospitals which
could be invested elsewhere e.g. fi!ed deposits in banks, raising additional facilities in
hospitals.
b/ Insurance Cost:
It is the cost of insurance charges on stores = buildings paid as premium.
c/ (ealth Ta4 5 *ro3erty Ta4es:
#roperty ta!es are levied on the assessed value of assets. Breater the value,
greater are the ta!es to be paid.
6/ Stora!e Cost:
"his includes cost on account of salaries, cost of fringe benefits, buildings
maintenance, repairs, utilities, depreciation e!penses on facilities and equipment.
e/ Cost o7 Obsolescence an6 Deterioration:
Due to technological advances, innovations (or) when order quantity is not
correlated with usage pattern (or) when appropriate steps for preservation are not taken
obsolescence and determination of products (or) equipment may occur.
7/ Inventory Shrina!e Cost:
It represents the cost of pilferage. It may be as high as .;0 percent in some
organizations.
8/ IN#ENTOR$ ACQUISITION COST OR RE*LACEMENT COST 0Cr1:
It is the cost incurred in placing and order (ordering cost). Inventory acquisition
cost includesC
a. 4alaries = wages of staff working in purchase department.
b. 7ent for the space = electricity used by purchase department.
c. Depreciation on the equipment $ furniture.
d. #ostage, telegrams = telephone bills.
e. 4tationery = other consumables.
f. 6ny traveling e!penditure incurred.
g. ?awyers and court fees due to any legal matters arising out of purchase.
TOTAL IN#ENTOR$ COST 0OR1
TOTAL ANNUAL IN#ENTOR$ COSTS/
"he total inventory cost ("c) is the sum of all the three costs.
i.e. ".> D >s E >a E >r.
6s one cost decreases one (or) both of the other cost increases e.g. as
replenishment cost decreases the cost of possession generally increases. "hese three costs
help in determining the 9conomic order quantity.
CONCE*TS 9 TEC+NIQUES O" IN#ENTOR$ CONTROL/
*. ?ead time.
+. <uffer stock (4afety stock (or) reserve stock)
,. 7eorder level.
-. 3ptimum safety stock.
.. 9conomic order quantity.
/. 3rdering cost.
0. 4tock turn over.
LEAD TIME:
It is the average duration of time in days between the placing or order and the
receipt of materials. )hen determining the quantity of any items to be ordered. )e have
to take into considerations the &?ead time' so that orders could be placed at a time. )hen
the e!isting stocks are sufficient for the needs of the hospital during the lead time.
"he lead time to procure any items can be divided into two parts namely.
a. Internal lead time (I>")
b. 9!ternal lead time (9>")
INTERNAL LEAD TIME:
It is the time required for organizational formalities to be completed. 9.g.
placement of requisition from the user department to the procurement department, tender
notification, tender opening = soon.
E,TNERAL LEAD TIME
It is the time taken in placement of order and receipt of goods.
"he total lead time can be computed by working out the time taken in internal and
e!ternal procurement processes.
It is a common belief that e!ternal lead time should be reduced but in actual
practice, the internal lead time constitutes a considerable part of total lead time = offers
ample scope for reduction. "he internal lead time is within the preview of administration.
<y streamlining the procedures = reducing red tapism, this can usually be reduced by
atleast .A percent. "he e!ternal lead time cannot be avoided but it may be minimized byC
"imely reminders and follow up.
Fudicious e!pediting.
5aintaining good relations with the suppliers.
#enalty for delayed supplies.
&U""ER STOC):
<uffer stock is the quantity of stores set apart as a safeguard against the variation
in demand and procurement period. "his quantity should be used only at the time for
emergency for unseen demands. It is calculated by multiplying the difference between
ma!imum = average consumption rate per day multiplied by the lead time for the item.
REORDER LE#EL:
"he term is used to denote the stock level at which fresh order has to be placed.
"his is equal to the average consumption per day multiplied by the lead time plus the
buffer stock. "he same is depicted in figure 7eorders when placed scientifically avoid
Gstock out situationsH.
O*TIMUM SA"ET$ STOC):
If the safety stock maintained is adequately low then the inventory carrying
charges on the safety stock would low but stock outs will be frequently e!perienced
hence stock out costs would be very high. 4tock out may affect the hospital functioning
in following waysC
1uality of patient care is affected adversely.
#atient dissatisfaction.
9mergency purchase of stores at high cost.
ECONOMIC ORDER QUANTIT$ 0OR1 EOQ:
931 is the size of order which minimizes total cost of carrying inventories and
cost of ordering.
931 is the fi!ed quantity of materials for which order is to be placed each time.
In the cyclic system, it is the requirement of review period and lead time places buffer
stock minus stock in hand. In + bin systems, it is calculated by using a formula which
takes into consideration, the annual demands (6), for the item, procurement cost of an
items per order (4) unit cost of the item required (c) carrying cost per year (I). "he
formula is.
1 D + 64
I>
1 D 1uantity to be ordered.
3nce the order quantity is known, the frequency for placing the order can be
calculated by dividing the annual consumption with the order quantity.
8igure, depicts the relationship of carrying cost and ordering cost vis;I;vis the
order quantity. 6s the quantity of order increases, the ordering cost decreases whereas the
carrying cost increases. 6 point at which equilibrium occurs between order quantity and
carrying cost so that the total cost is lowest is the 931.
AD#ANTAGES:
*. 9ach item of the store can be procured in most economical quantity.
+. "he item is purchased only when it required to purchase.
,. >ontrol can easily be increased to maintain inventory investment at the desired
level.
DISAD#ANTAGES:
"his system functions correctly only of each of the items e!hibit reasonable stable
usage and lead time. )hen these factors change significantly, new quantity and new order
point is required to be determined and in such cases, system becomes e!tremely
cumbersome to operate.
ORDERING COSTS:
"he cost of process, issue and control of an order is many a times hidden as
&overheads'. "hey are the cost incurred to get the materials into the inventory of the
hospital. 3rdering costs may include variables is not easily measurable. "his cast
comprises ofC
a) 4alaries = wages of #ersonnel involved.
b) #ostal, telephone, tele! = other similar bills.
c) 6dvertisements
d) 4tationary
e) 9ntertaining the vendors $ suppliers =
f) "ravel of stores personnel.
STOC) TURN O#ER:
It has to be ensured that items are used up before their dates of e!piry (or)
estimated shelf;life by proper turnover of stocks. 6 stock detail register (or) dated drug
register containing the date of e!piry will help in guarding against keeping outdated
material on the shelves and a control on turnover of stocks especially of items with short
shelf life. 6s a rule, the principle of first;in first out should be followed by the store and
strict vigil by the sister incharge of the ward$departments.
It is district from turnover of inventory which is the number of items the total
inventory value is issued (or) replaced, i.e. turned over. Inventory turnover rate is
calculated by dividing the total annual value of stores in rupees issued by the stores by
the value of closing stock at the end of the year. Inventory turnover rate may be increased
by eliminating surplus stocks, reducing slow moving items, reducing the amount of safety
stock, increasing the turn over of &6' items and reducing lead times.
ANAL$SIS O" IN#ENTOR$ CONTROL
Inventory analysis is a systematic analysis of all items in stores for achieving the
ob:ectives of inventory control.
8or effective control over inventories the three levels of analysis areC
i. 3verall analysis.
ii. >ategory analysis
iii. Individual item analysis.
O#ERALL ANAL$SIS:
"his analysis takes a birdHs eye view of total inventory over a period of time of
find out e!istence of trends. "his type of analysis is very useful for the top management
for analyzing inventory behavior.
CATEGOR$ ANAL$SIS:
"his is the second level of analysis where in stocks of each category of similar
items are analyzed. It has been found that even if the overall position of stocks is
satisfactory, stores carry higher inventory of some categories = low of some other
resulting in locking up of capital in high inventory categories. In order to achieve
optimum stock levels and effective controls, the management should fi! levels for each
category of items according to various conditions like lead time, nature of items = so on.
INDI#IDUAL ITEM ANAL$SIS:
It is desirable to classify (or) group the items and sub:ect each class (or) group of
items to control, commensurate with its importance. "he item may be classified
according to their use, consumption, value, lead time etc. "he various types of analysis
are done depending upon the characteristics of an item and each analysis has a specific
ob:ective.
A&C ANAL$SIS:
"his analysis is at times nomenclature as &6lways <etter >ontrol'.
"he intention is to control the best, then better and lastly the good. 6<> analysis
is the analysis of stores on cost criteria. <y analysis of total cost of various inventories of
total cost of various inventories it has been found out that inventories can be divided into
three groups known as 6, < and >. "he analysis has revealed that inventory costs of
stores in most organizations of *A percent items of inventory are attributing nearly 0AJ
of monetary value of the inventory. Ke!t +A percent of the items attribute to +A percent of
the monetary value of inventory and remaining 0A percent of items of inventory attribute
to :ust *A percent of the monetary value of the inventory.
<ased on 6<> analysis an average pattern of percentage of items and percentage
of their respective monetary values may be worked out as follows.
Item #ercentage of Item #ercentage of 5onetary
value
6 *AJ 0AJ
< +AJ +AJ
> 0AJ *AJ
It is thus been that a large number of items consume only a small percentage of
resources and vice versa. "his is also known as pareboHs law which states that, &In any
series of elements to be controlled% only a small fraction in terms of elements will usually
account for a large fraction in terms of results'. 6 items represent high cost centre, <
items intermediate cost centre and > items are low centers.
It must be noted that in 6<> analysis it is the annual value of consumption which
is taken into consideration. It has nothing to do with the unit value of the item.
"or A cate!ory o7 ite:s; the 7ollo<in! are essential/
4trict control
6ccurate estimates of requirements.
>lose monitoring
4afety stocks should be low.
5anagement of items should be done by top management.
"or & ite:s the 7ollo<in! are essential/
5oderate control.
#urchase based on e!act requirement.
7easonably strict monitoring and control.
4afety stocks moderate.
5anagement done at middle level.
"or C ite:s; the 7ollo<in! nee6 consi6eration/
3rdinary control measure.
#urchase based on usage estimates.
>ontrols e!ercised by store keeper.
4afety stocks high.
5anagement done at lower levels.
AD#ANTAGES
*. #references for storing inventory and their purchasing can be done appropriately
after 6<> classification.
+. 6fter analysis, the stores personnel are in better position in utilizing = issuing the
items.
,. "he storing, handling = delivery of material to the service department become a
systematic process.
#ED ANAL$SIS:
"his analysis is based on the critically of the items in relation to the functioning of
the hospital. "he items can be classified into vital, essential and Desirable.
=#> ITEMS:
"hese are essential items without which the hospital can function for a short
period but may affect the quality of patient care to a limited e!tent. "hese items can be
controlled by middle level managers.
=D> ITEMS:
"hese are desirable items, the non availability of which for a considerable period
may not affect the functioning of the hospital. 4uch items can be controlled at the lower
management level.
SDE ANAL$SIS:
"his analysis is based upon the availability of an item. In developing countries
where resources are scarce, this analysis is very useful.
=S> ITEMS:
"hese are &scarce items' especially imported items and those which are in short
supply.
=D> ITEMS:
"hese are &Difficult' items which are available in indigenous market but cannot
be procured easily for e!ample, items which have to be managed from far off cities (or)
for which reliable suppliers are difficult to find.
?E@ ITEMS:
7efer to items which are easily available (mostly local items).
+ML ANAL$SIS:
"he unit cost of items is considered for this analysis and items are classified as
igh cost (), 5edium cost (5) and ?ow cost (?) items. "his type of analysis is useful
for keeping control over consumption at department level and for determining the
frequency of physical verification.
"his must be differentiated from the 6<> analysis where total annual
consumption is taken into consideration for inventory classification.
"SN ANAL$SIS:
ere the quantity and rates of consumption are analyzed to classify the items as
fast moving (8), slow moving (4) and Kon moving items (K). "hese classifications aids
in arrangement of stocks in the stores and in deciding the distribution and handling
methods. )henever there is huge stocks of stores in hospitals the following steps should
be taken.
>irculate a list of not moving drugs to different wards = departments.
"he drugs which cannot be sued in hospital should be sent to all similar
organizations. "his may prove fruitful especially in government health care
institutions.
'UST-IN TIME IN#ENTOR$ S$STEM:
3ne reason for FapanHs high manufacturing productivity is the cost reduction it
achieves through itHs :ust in time (FI") inventory method. In this system the supplier
delivers the components = parts to the production line &Fust in "ime' to be assembled.
3ther names for this (or) very similar methods are zero inventory = stockless production.
"he FI" method was successfully used after )orld )ar II by the "oyota
automobile company. In the L4, Beneral motors, ford, >hrysler = 6merican motors use
more advanced versions of FI". <ut other which produces among other things. 4mall
appliances such as coffee makers = irons. )hen its plant in worth >arolina switched to
FI", inventory was reduced by -AJ = ,AJ fewer fort left trucks were required. 5oreover
quality losses were reduced /AJ = labour productivity increased by *.J.
8or the FI" method to work, a no of requirements must be fulfilled.
*. "he quality of the parts must be high a defective part could hold up the assembly
line.
+. "here must be dependable relationship = smooth cooperation from suppliers.
,. Ideally, the suppliers should be located near the company with dependable
transportation available.
IN#ENTOR$ CONTROL MODEL
#erhaps in the history of operation research more attention has been directed to
inventory control than to practical area of operation. "he essential systems relationship
can be seen a little &black bo!'.
In mathematical form, these conceptual relationships are e!pressed by the
equation.
1+ D + 64
I>
)here 1+ D 931
D D Demand $ year
4 D 4et up cost
D Inventory holding (carrying) cost $item $year
"his model illustrates several things. It forces consideration of the goals desired =
of the need for placing values on outputs = inputs. It also furnishes a manager with the
basis for plan = withstands by which measures performance. owever, with all its
advantages, this is a sub system, such as production planning, distribution, planning =
sales planning.
"he 931 approach to determining the inventory levels has been used by firms for
many years. It works reasonably well for funding order quantities when demand is
predictable = fairly constant through out the year. owever for determining inventory
level of parts = materials used for some production processes, the 931 approach does
not work well for e!C poor quality of parts may increase the demand for these production
inputs. "hus demand is likely to be intermittent resulting in inventory shortage at
sometimes = e!cesses at other times. 8irms determining inventory levels in these
manufacturing settings have found that inventory control approaches such as material
requirement planning (57#) = FI" systems perform better than 931.
#urchasing
5anufacturing
>ost$Lnit
Inventory
>ost$unit
Demand for
#roduction
Distribution of
#roduct
)ithdrawals
7eorder
?ead time
4hipping cost
= ?ead time
B36? 3ptimum "otal >ost for
#urchasing $ 5anufacturing inventory
holdings $ shortages.
Inputs (may
be variable$
constant)
Inputs (may
be variable$
constant)
#urchasing $
5anufacturing
4chedule
4hipping
4chedule
Inventory
4chedule
4hortage
#robabilities
Inventory
5odel
Boal
Inputs
8eedback
5easures