INVENTORY CONTROL

Definition

What is Inventory?

Quantity of goods or material on hands

What is Inventory Control?

Tool of management which is used to maintain an economic minimum investment in materials &for the purpose of obtaining a maximum financial return.

Objectives of Inventory Control

To reduce financial investment in inventories To minimize idle time by avoiding stock out and shortages.

To avoid losses from inventory obsolescence To improve patient care service

Classification of Inventories
1. 2.

Official Unofficial

Official

Central stores

Medical & surgical items, lab supplies, linen ,X-Ray supplies ,Housekeeping items Pharmaceutical items like Drugs & fluids Dietary items like cereals etc

Classification of Inventories cont

Unofficial

Nursing units Lab Casts room Anesthesia Emergency room Radiology Disaster storage Maintenance Special care unit

Basic Concepts

Lead Time Buffer Stock Reorder level Economic order quantity/EOQ

Lead Time

It is the average no. of days between placing of order & receipt of material.

Two parts:

External lead time-Time required for placement of

order & receipt of goods

Internal lead time-Time required for the organizational formalities to be completed

Buffer Stock

Synonym-Safety/Reserve Stock Definition-It is quantity set apart as a safeguard against the variation in demand & procurement period.

Formula(Maximum-Average Consumption/day)x lead

time

Reorder Level

Definition-The stock level at which fresh order has to be placed. Formula-Avg consumption/day x lead time + Buffer Stock

Economic Order Quantity

EOQ is the size of the order which minimizes total cost of carrying inventories &cost of ordering.

EOQ=

2AS IC

Where, A=annual demand of items S=procurement cost per order I=carrying cost per yr C=unit cost of item required

Frequency of ordering = Annual Demand/EOQ

Carrying cost

cost

Ordering cost

EOQ

Order quantity

Inventory Control Cost

There are three cost factors:

A.)Shortage cost

Cost of good will Special effort to obtain an item Special effort caused by interrupted supply.

B.)Inventory carrying cost

Opportunity cost Insurance cost, wealth tax Shortage cost, cost of obsolescence/ deterioration, shrinkage cost

Inventory control cost cont

C.) Inventory acquisition cost/replacement cost

Salaries & wages, rent for space

Depreciation,
Postage, telephone, stationary etc.

Inventory Carrying Costs

Opportunity cost Insurance Cost

Taxes
Storage Cost Cost of Obsolescence/deterioration Shrinkage cost

Inventory carrying costs Cont

Total annual Inventory cost Carrying cost + Cost of Material +Ordering Cost

Tools & Technique of Inventory Control

Inventory analysis Inventory costs Ordering system Inventory control system

Inventory Analysis

Overall analysis

Inventory carrying index Compare-Purchase & consumption with receipt & issue Analyze the stock of each category Fix target for each category of item

Category analysis

Individual item analysis

ABC=Always Better Control VED=Vital essential desirable HML=High medium &low cost item SDE=Scarce difficult & easily available item FSN=Fast slow & non moving item Combination

ABC Analysis
100 90 70

% of annual consumption

A 0 10

B 30

C 100% % of cost involved

ABC and VED analysisCombination

V E D

AV

AE

AD

CATEGORY 1

BV

BE

BD

CATEGORY 2

CV

CE

CD

CATEGORY 3

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL CATEGORY 2 - MODERATE CONTROL. CATEGORY 3 - NO NEED FOR CONTROL

Ordering System

Basic

What quantity of item to be ordered When should it be ordered Fixed ordering system Cyclic ordering system

Types

Cyclic ordering system

Time based system in which stock position is reviewed at definite intervals of time The quantity ordered each time will vary according to the stock position Future requirements based on past years rate of consumption Stock levels may be monitored by physical inspection, by a visual review of perpetual inventory cards, or by automatic computer surveillance

Cyclic ordering system (cont)

Advantages : suits well for materials whose purchases are planned months in advance and works well for materials which show on irregular or seasonal variation. Disadvantages : No provision for unforeseen demands

Fixed Order Quantity System

In it order is placed when stock reaches a predetermined level and not at definite. Two Bin System

Stocks are separated into two bins. The first bin contains stocks to satisfy demand between the arrival of one order and the placing of the next order. When the stock in first bin is finished, a reorder is placed for a fixed quantity based on EOQ formula.

Fixed Order Quantity System (cont)

Advantages

Materials can be procured in the most economical quantity Purchase and Inventory control personnel automatically devote attention to items Positive control It functions correctly only if lead time and usage are stable.

Disadvantages

CONCLUSION

An effective inventory control system balance to

reduce

the

investments

in

inventories

and

simultaneously avoid stock-out situations.