Basic Concepts of

Materials Management &

Inventory Control
 Specific Learning Objectives:

At the end of this session, the participants should

be able to
a. list the needs for materials management in health
care sector

b. list the techniques of inventory control

c. discuss principles of economics in inventory control

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A.Background

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 A. Background…

• What is Inventory?
– Usable but idle resource having an economic value
• Raw materials
• Work-in-progress and
• Finished goods
• What is Stock?
– When we deal with tangible items
– Drugs, Vaccines, Syringes, Cottons etc

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Inventory/ Material Management Cycle

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Aims of Material Management

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Why we should learn?

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 Why we should learn? …
• The Transaction Motive
– Outflows are not synchronized with inflows
• The Precautionary Motive
– One must maintain reserve stocks in order to
satisfy the demand while awaiting delivery
• The Speculative Motive
– If prices are expected to rise, it pays to keep
stocks on hand

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 B. Inventory Control Techniques

I. Eyeballing Technique

II. Double shelf method or A/B method

III. Modern techniques

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II. Double shelf method or A/B method

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 III. Modern Techniques

1. ABC analysis

2. VED analysis

3. SDE analysis

4. FSN analysis

5. HML analysis

6. ………………….
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 1. ABC Analysis
• Always Better Control

• Separating “critical few” from “trivial many”

S. No. Class A items Class B items Class C items

Items 10% 20% 70%

Cost 60-70% 15-20% 10-15%

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 Steps in Analysis
The following logical steps are followed for the analysis:

1. List all items purchased or consumed with the unit cost

2. Enter consumption quantities over a defined period
3. Calculate the value of consumption
4. Calculate the percentage of total value represented by
each item
5. Rearrange the list in descending order
6. Calculate the cumulative percentage of the total value
for each item
7. Choose cut off points for A, B and C categories
1. ABC Analysis…

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 1. ABC Analysis: Cycle Counting

– Class A items (@ month): Top level managers

– Class B items (@ quarter): Middle level managers

– Class C items (@six months): Lower level managers

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Hospital Management Course: AMU, Chidambaram
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 2. VED Analysis
Critical value: Effect on the functioning of the
institution
Vital - Heart, lungs, head (fundamental for life)
Emergency medicines, First aid, blood, ICU
Essential - Eyes, hands, ear (necessary functions)
Desirable- Hair, nails (decorative and protection)
Nutrients, food supplements

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 ABC-VED Combination

  V E D   ITEM COST

A AV AE AD CATEGORY 1 10-20 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 60-70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & HIGH CONTROL

CATEGORY 2 - MODERATE CONTROL
CATEGORY 3 - LOW CONTROL

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 3. SDE Analysis

• Based upon availability position of items in market

– S: Scarce in market – controlled by top Management

– D: Difficult to obtain but available – Middle

– E: Easily available in the market – Lower

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4. FSN ANALYSIS
– Based on utilization.
• Fast moving
• Slow moving
• Non-moving
– Non-moving items must be periodically reviewed to
prevent expiry & obsolescence
5. HML ANALYSIS
– Based on cost per unit
• Highest
• Medium
• Low
– This is used to keep control over consumption at
departmental level for deciding the frequency of physical
verification
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C. Economics in Inventory Control

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 Some Definitions
Lead Time (L)
Period between placing an order and receiving an item

Buffer or Safety Stock (Q0)

(Max consuptn rate/day – Av. consumptn rate/day) X L

Re-order Level
(Average consumptn rate/day X L) +Q0

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Av consumption
=10 pkts/day

Max
consumption =
25 pkts/day

(25-10)*30=450 1 month
pkts 28
Economic Order Quantity (EOQ)

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 EOQ Model
Annual Cost

Order Quantity

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 EOQ Model
Annual Cost

Holding Cost

Order Quantity

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 EOQ Model
Annual Cost

Holding Cost
Order (Setup) Cost

Order Quantity

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 EOQ Model
Annual Cost

Total Cost Curve

Holding Cost
Order (Setup) Cost

Order Quantity

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 EOQ Model
Annual Cost

Total Cost Curve

Holding Cost
Order (Setup) Cost

Optimal Order Quantity

Order Quantity (Q*)
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Economic Order Quantity

2 D S
EOQ 
H
D= Annual demand (units)
S= Cost per order ()
C= Cost per unit
I = Holding cost (%)
H= Holding cost = I x C

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 Example
The cost of Syrup Septran is Rs 40 per bottle. Average prescription
rate is 20 bottles per month at JIUHC, Kurusukuppam. Ordering
cost is Rs 50 per order. The carrying cost for each bottle of Syr
Septran is 10% of per unit cost. As a Medical Officer I/C of JIUHC
you don’t want interruption in service provision as well as don’t
want to over stock the Syp Septran.

Calculate the economic order quantity for Syp Septran at JIUHC,

Kurusukuppam?

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 Assumptions of EOQ
• Ordering cost is constant

• Rate of demand is constant

• Lead time is fixed

• The purchase price of the item is constant i.e. No discount

is available
• Alternatives
– Just in Time Concept

– Materials Requirement Planning

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 4. Summary

 Basic principles

 Inventory control techniques

 Economics in Materials management

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