HOSPITAL INVENTORY MANAGEMENT

Dr A PrakashSr Professor, Health ManagementRailway Staff CollegeVadodara

THE MEDICAL OFFICER

Medical – Technologist

Officer – Administrator/Manager

MANAGEMENT

Men Machine Money Minutes Material

MATERIAL MANAGEMENT

Capital Goods

Consumables – Inventory Management

- Medical Items (Drugs & Consumables)- House keeping Items

INVENTORY

Inventory – A physical resource that a firm holds in stock with the intent of using or selling it or transforming it into a more valuable state.

Inventory System – A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.

WHY INVENTORY

To avoid stock out To hedge against future

Uncertainities of demand Uncertainities of supply Uncertainities of cost

Economies of scale Ordering cost Transportation cost Purchase cost

Independence of planning

TYPE OF INVENTORIES

1.Cycle Inventory

2.Movement Inventory

3.Buffer Inventory

4.Anticipation Inventory

5.Decoupling Inventory

COST OF INVENTORY

Ordering Cost

Acquisition Cost

Carrying Cost

Storage Cost

Pilferege

Wastage

Expiry

Shortage Cost

FINANCIAL IMPLICATIONS

12% - 15% of Hospital Budget Upto 40% in Superspeciality Hospitals

Carrying Cost – 15% to 30%

Hence

Hospital Inventory Management

is essential

OBJECTIVES – INVENTORY MANAGEMENT

1. Maximise the level of customer service by minimising out of stock situations (under

stocking)

2. Promote efficiency in purchasing by minimizing the cost of providing an adequate level of

customer service.

OBJECTIVE

Right Material Right Quality Right Quantity Right Price Right Source Right Time Right Place

ORDERING METHODS

Economic Order Quantity Bulk Ordering with Time-phased Delivery Fixed Order Quantity Fixed Order Period System Probability based Trade-off Matrix Speculative Considerations Just – in – time System

Basic Economic Order Quantity (EOQ):

Principles Assumptions of the basic EOQ model

Only one product is involved Annual demand requirements are known Demand is spread evenly throughout the year

(constant demand rate) Lead time does not vary Each order is received in a single delivery There are no quantity discounts

15

EOQ: cycle inventory levels (graphical)

TimeTime

Inventory LevelInventory LevelOrder Order QuantityQuantity(large Q)(large Q)

TimeTime

Inventory LevelInventory Level

Order Order QuantityQuantity(small Q)(small Q)

Smaller Q more orders, but lower inventory

Total (Annual) Ordering Cost

Annual Number of Cost perOrdering = Orders X OrderCost

Number of = Annual DemandOrders Lot Size

S x Q

D OC

Annual Holding (Carrying) Cost

Holding cost = Average Inventory x Annual Holding Cost per Unit

Average CYCLE inventory = Lot Size 2

Holding cost per unit = % Holding Cost X Unit Cost

H x 2

Q HC

CDSQ

DH

QTC

2

Basic Economic Order Quantity : Model

Total Annual Cost

TC : Total annual cost

D : Total annual demand

Q : Quantity ordered

H : Unit holding cost

S : Order or set-up cost

C: Unit cost (price)

Annual Holding Cost Order of set-up cost Total acquisition cost

TOTAL COSTTOTAL COST

QUANTITY (UNITS)

Costs $

EOQEOQ

TOTAL ANNUAL ORDER COSTS

TOTAL ANNUAL HOLDING COSTS

Basic Economic Order Quantity : Principles

E.O.Q. = Minimum Total Cost

The total cost curve reaches its minimum where the carrying and ordering costs are equal.

Cost Holding Annual

Cost) Setup or derDemand)(Or 2(Annual =

H

2DS = EOQ

REORDER POINT

When to place the order?

Introducing Lead Times

Profile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receive order

Placeorder

Receive order

Lead time

Reorderpoint

Demand rate

Time

23

Centura health example (1) Delivery network with 9 hospitals Currently each hospital manages its own

inventory IV starter kit

Weekly demand: 600 units Cost: $3 Yearly Holding cost per unit: 30% = $0.9 Fixed order cost: $130 Lead time: 1 week

Current policy: each hospital orders 6000 units What happens if the frequence of ordering is

changed? What happens if the order process is organized

from a single warehouse?

24

Centura Health Example (2)

R = 31.200 units per year Yearly cost of the current policy (Q = 6000)

Annual Fixed Order Cost: $130 * 31.200/6000 = $676

Total Annual Holding Cost : $0.9 * 3.000 = $2.700 Total annual cost of material: $3 * 31.200 = $93.600

Total batch-dependent costs : $3.376 Total annual cost: $96.976

25

Centura Health Example (3) Optimal order quantity:

Total batch dependent cost: $2.702 Total cost: $96.302 Time between orders = 4.86 weeks

002.39.0$

200.31*130$*22* H

SDQ

SAFETY STOCK

Changing Lead Time

Changing Demand

MAGNITUDE OF INVENTORY

Average Hospital – 6000-8000 items

Multispeciality Hospital may have upto 35000

INVENTORY ANALYSIS

A-B-C Analysis – Value of consumption H-M-L Analysis – Unit price X-Y-Z Analysis – Value of items in store V-E-D Analysis – Criticality of item F-S-N Analysis – Consumption pattern S-D-E Analysis – Procurement problems S-O-S Analysis – Seasonality G-O-L-F Analysis – Source of supply

A-B-C ANALYSIS

Pareto's Law (Selective Management Principle) Significant value in a group of items normally

constitute a small portion of the total number of items in the group and that the majority of items, in the aggregate, will be of small significance.

The 80 – 20 rule! In A-B-C classification

A – 10% => 70% B – 20% => 20% C – 70% => 10%

ABC Analysis

1010 2020 3030 4040 5050 6060 7070 8080 9090 100100

Percentage of itemsPercentage of items

Per

cen

tag

e o

f d

oll

ar u

sag

e va

lue

Per

cen

tag

e o

f d

oll

ar u

sag

e va

lue

100 100 —

90 90 —

80 80 —

70 70 —

60 60 —

50 50 —

40 40 —

30 30 —

20 20 —

10 10 —

0 0 —

Class C

Class A

Class B

ABC Classification : Guidelines

A B CPercentage of total number of items

10 to 20 % 30 to 40 % 40 to 50 %

Percentage of total annual value ($)

70 to 80 % 15 to 20 % 5 to 10 %

Inventory control Rigourous Normal Simple

Purchasing process

Precise with constant revisions

Normal Periodical

METHOD FOR A-B-C CLASSIFICATION

All items listed in descending order by total order value.

Two columns added - % of total budget & cumulative percentage

Lines drawn at 70% & 90% OR Total Budget / Total no. of items = Average Usage

Value Av Usage Value X 2.25 => A/B cut off line Av Usage Value X 0.50 => B/C cut off line

ADVANTAGE - DISADVANTAGE

Equal attention to all items will be – Very expensive Diffuse control Misalign priorities

Has to be carried out with standardization & codification

Only money value Criticality not seen Periodic review

H-M-L CLASSIFICATION

Unit cost High – Medium – Low Decides ordering / issuing authority

X-Y-Z CLASSIFICATION

Value of inventory available on date X – stock value high Y – stock value medium Z – stock value low Method – same as A-B-C Helps to control stock / obsolescence Shows how stock values are distributed

amongst the material in store

A-B-C & X-Y-Z COMBINATION

CLASS X Items Y Items Z Items

A Items Critical analysis to reduce stock

Attempt to convert to Z category

Within control

B Items Review of stock control & consumption more often

Further action not necessary

Review twice a year

C Items Disposal of surplus stock

Tighten control

Review once a year

V-E-D CLASSIFICATION

Vital – must for functioning e.g. Oxygen

Essential – required for functioning e.g. Antibiotics

Desirable – may be kept e.g. Tonics

V-E-D & A-B-C COMBINATION

CLASS V Items E Items D Items

A Items Constant control & regular follow up

Moderate stocks

NIL stocks

B Items Moderate stocks

Moderate stocks

Very low stocks

C Items High stocks Moderate stocks

Low stocks

V-E-D & X-Y-Z COMBINATION

CLASS V Items E Items D Items

X Items Control Dispose Dispose

Y Items Review Control Dispose

Z Items No Action Review Control

F-S-N CLASSIFICATION

Fast Moving – at least once in a week / month Slow Moving – at least once in a month / year Non-moving – nil in a year

Useful in controlling obsolescence, spoilage & deterioration

F-S-N & X-Y-Z COMBINATION

CLASS F Items S Items N Items

X Items Tight control Reduce stock to low level

Dispose at best price

Y Items Normal Control

Keep low level stock

Dispose quickly

Z Items Increase stock

Keep low level stock

Dispose even at low price

S-D-E CLASSIFICATION

Scarce to obtain Difficult to obtain Easy to obtain

G-O-L-F CLASSIFICATION

Source / Suppliers

Government Ordinary Local Foreign

S-O-S CLASSIFICATION

Seasonal Items Off season Items

USES OF ANALYSIS

My AMI Budget 1 crore1000 items

HQ supplied only 300 items (30%)

?

PRIORITY WAS MINE

I got all the items in categories A & B.Categories C items (70%) will cost only 10% i.e.

100000 which will be managed by LP

UNCONVENTIONAL CASE

AMI has 1000 itemsHQ has capacity to process only 600 – 700 items

in a year

Buy all the A & B category itemsBuy half the C category items for two years

Average inventory level of category C items will increase from 500000 to 1000000 i.e. An

inventory increase of 5% of total budget will solve the problem!

COMBINED ANALYSIS

An item is in category A and Z

Look at VED

V – useful & popular drugD – a lot of wasteful expenditure

The item falls in categories A, X & V

Look up SDE

Category S or D – Stock-pile (expiry permitting)

MBASIC SYSTEM

Multiple Basic Approach to Selective Inventory Control A-B-C / X-Y-Z / H-M-L / V-E-D / F-M-S / G-O-F Selective Control Techniques – 6 Categories in each – 3 Total Classification – 36 = 729 Out of which 483 can not occur (invalid combinations) Remaining 327 combinations to be analysed critically

& coded. Each will have a line of action.

DISTRIBUTION

Ensure FIFO vs LIFO

SUB-INVENTORY CONTROL

At distribution counterr / ward / ICU / OT level The safety stock adds up Methods of distribution

Requisition Method At par Method Unit dose Method

ORGANISATION OF STORE

Location Infrastructure Man power Administrative control

ComputerisationBar Coding

RFID

Annual Medical Indent

Price Negotiation

3 P L

Third Party Logistics Management

THANK YOU