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.
