INVENTORY CONTROL
The procedure of handling inventory of medicines, chemicals or drugs so as to fulfill the
demand of the customers at comparatively lower prices and with less amount of investment
is called inventory control.
Objectives
it ensures constant delivery of materials, spares, and finished goods, so that
production should not suffer and the public demand should is also met.
It avoids over-stocking and under-stocking of inventory.
It diminishes losses due to deterioration, pilferage, wastages, and damages
To reduce investment in inventories and made effective use of capital investment
Methods Used for the Analysis of the Drug Expenditure
1) ABC analysis,
2) Economic order quantity,
3) VED analysis,
4) Perpetual inventory system,
5) Review of slow and non-moving items,
6) Input-output ratio analysis (I-O ratio),
7) Setting of various levels, and
8) Scrap and surplus disposal
1) ABC Analysis
ABC analysis is a method used in material management to classify drugs in a store according
to their cost. It helps identify which drugs need strict control and attention. The drugs are
divided into three categories based on annual expenditure:
Category A: Drugs with the highest cost and largest share of total expenditure (about 70%).
These drugs need strict supervision and careful management to reduce purchasing, storage,
and issuing costs.
Category B: Drugs with moderate cost (about 20%). These require less supervision, and
orders are usually placed quarterly or semi-annually.
Category C: Drugs with the lowest cost (about 10%). These are usually bought in large
quantities and need minimum control.
In ABC analysis, annual expenditure is calculated by:
Annual Expenditure = Annual Consumption x Unit Cost
After calculating the Annual Drug Expenditure (ADE), the drugs are arranged from highest to
lowest cost. Based on the percentage of total expenditure, they are grouped into A, B, and C
categories.
Examples of ABC class are
•'A' items - 20% of the items accounts for 70% of the annual consumption value of the items
•'B' items - 30% of the items accounts for 25% of the annual consumption value of the items
•'C' items - 50% of the items accounts for 5 % of the annual consumption value of the items
Classes of items
A B C
Close control Moderate control Loose control
Order size of drugs is based Order size of drugs is based Order size of the drug is
on the calculated on the usage based on the level of
requirement inventory
Chemicals are procured Chemicals are procured Chemicals are procured
from different sources from a few sources from very few source
Record of receipt and usage Record of receipt and usage No such records ae kept
are kept are kept
Frequent ordering Less frequent ordering Bulk ordering
High consumption rate Average consumption rate Low consumption rate
Steps to perform ABC analysis
1. List the drugs purchased along with their unit cost.
2. Record the quantity of drugs consumed in one year.
3. Calculate the annual consumption value of each drug.
4. Find the percentage of total cost for each drug.
5. Arrange the drugs in descending order, starting from the highest value.
6. Calculate the cumulative percentage of total drug cost by adding percentages one after
another from the top of the list.
7. Select the cut-off points to divide the drugs into categories A, B, and C.
Advantages of ABC Analysis
1. Better Level of Control: Category A drugs need strict control, while category C drugs need
less control. This helps save resources and reduce unnecessary control costs.
2. Careful Accounting: Since category A drugs are costly, their records and accounting should
be done very carefully. Less strict accounting may be used for categories B and C.
3. Safety Stock Maintenance: Safety stock is maintained for all categories to meet sudden
demand or delays in supply.
4. Quantity Discount Benefit: Purchase managers can check and use discount offers
available on costly category A drugs.
5. Improved Store Layout: Fast-moving and costly drugs (mostly category A) are kept in
easily accessible places. Category C drugs are stored in less accessible areas, while category
B drugs are kept in moderate locations.
Disadvantages of ABC Analysis
1. In large industries, recording and calculation become difficult because of the large
number of drugs.
2. Only the cost of drugs is considered; their importance in production is ignored.
3. Price changes, seasonal variation, and consumption patterns are not properly considered.
4. Large stock of category C drugs may lead to deterioration or obsolescence.
5. Some category B drugs may still be very important even though their value is moderate.
2) VED Analysis
Ved analysis is a inventory management technique that classifies inventory based on its
functional importance.
Vital (V): This category contains medicines/drugs that are necessary for the life of patients
and needs to be present all the time in the hospital. These medicines/drugs are like oxygen
that is very important for the working of the health care formation. If there is a shortage of
these drugs it will hamper the daily working of the drug store.
Essential (E): This category contains medicines/drugs which are comparatively less crucial.
Categorisation of these drugs is done according to the urgency of the stock.
For short period of time, the scarcity of drugs can be managed like scarcity of intravenous
sets & IV fluids in a hospital. However, it will badly influence the working of hospital if this
scarcity sustains for a longer time period.
Desirable D): This category contains medicines/drugs which are not crucial.
Shortage of these drugs does not cause any harm to the life of the patient. If the scarcity of
these drugs is for a long time, then also this would not influence the working of the hospital.
For example, Vitamin E capsules or sun screen lotions in a hospital's medical store.
Ved analysis of medical instruments
V E D
Defibrillator X-ray machine Air contains
Ventilator Electric cutlery Ultrasonic machine
Oxygen regulator Patient trolley Electronic bp apparatus
3) Perpetual Inventory System
A perpetual inventory system is a method of continuously recording stock after every
receipt and issue of materials. It helps in daily stock checking without stopping store
activities. Entries are made in the bin card and stock balance is updated regularly.
Components of Perpetual Inventory System
1. Bin Card:
A record maintained by the storekeeper for each material. It shows quantities
received, issued, and remaining in stock.
2. Store Ledger:
Maintained by the cost accounting department to keep detailed stock records.
3. Continuous Stock-Taking:
Selected items are physically checked regularly and compared with bin cards and store
ledger records. Any difference is reported and corrected.
Advantages of Perpetual Inventory System
1. Helps detect and correct errors quickly.
2. Allows regular stock checking without disturbing daily work.
3. Helps identify shortages in time.
4. Reduces chances of dishonesty among staff.
5. Helps prepare profit and loss accounts and balance sheets when needed.
6. Prevents overstocking and under-stocking by monitoring stock levels.
4) Review of Slow and Non Moving items
Inventory is a major part of production cost, so proper inventory control is important to
reduce waste and expenses.
Slow moving items: Materials used very slowly.
Dormant items: Materials temporarily unused due to seasonal production.
Obsolete items: Materials that are no longer useful because of changes in design,
process, or manufacturing methods.
Steps to Detect Slow and Non-Moving Items
1. Periodic Report:
Monthly or quarterly reports are prepared showing purchase, consumption, and stock
balance of non-moving items.
2. Identification of Obsolete Items:
A proper information system helps identify unusable items so their purchase can be
stopped.
3. Moving Ratios:
Moving ratios are calculated regularly to identify slow moving, dormant, and dead
stock items and report them to management.