Materials Management

Dr. Mitasha Singh

Department of Community Medicine

DRPGMC, Kangra at Tanda

Definition

• Material may be defined as equipment, apparatus and supplies procured, stocked and utilized by an organization

• Management is a process which is applied to convert inputs into outputs (goods or services) or a process of planning, organizing, staffing, directing and controlling, usually by a manager

Material Management

• A scientific technique concerned with planning, organizing & control of flow of materials from their initial purchase to destination

MM in health care Institutions

• Developed in USA during second world warwhich helped them to make a spectacularprogress in improving their productivity.

• MM in India was introduced in sixties.

• Hospital organizations are an idealsituation for application of this concept as25-40 % of budgetary expenditure is doneon accomplishing the store function.

Why material management is of

importance?• Financially: Large proportion (25-40%) of health

expenditure is on materials• For better availability: Supply of right material at

right time• Complex requirement: Technical and non-technical

items • To maintain cold chain for vaccines• Contraceptives supply• Social marketing is to be supported• There is need and potential for increased efficiency

and effectiveness

Aim

To ensure

1. The Right quality2. Right quantity of supplies3. At the Right time4. At the Right place5. At the Right cost

Objectives

• Most important aspect of MM is to obtain correct quality of materials at lowest possible cost (economic order quantity)

• High inventory turn over

• Low storage cost (reduce capital and recurring expenditure)

• Maintain continuous supply

• Maintain quality of purchase

• Cordial relationship with suppliers

• Good records

• Avoid wastage

Elements of MM

• Identification of items• Estimating demand• Forecasting the materials• Purchase and procurement• Inspection and quality control• Storage• Inventory control• Issue procedure• Maintenance, repairs, condemnation• Information system

Material planning

• Identification of items for eg: drugs.

• WHO has published a guideline list of basic or essential drugs, which are indispensable and necessary for health needs and updated time to time.

• For finalization of drugs to be purchased for hospitals or health centers , a committee is formed of clinicians, pharmacologists, administrators, medical stores etc. to make short lists.

• the lists contain the non-proprietary generic names, which helps in lowering the cost

• Estimate future demands:

• Time trend over a period of 2-3 years is seen, requirements may be estimated for different items, fluctuations, unusual occurrences in past, stock out positions, excess stock .

• Selection of sources of supply:

• Most important responsibility of purchasing

• Supplier must be motivated, assisted and periodically evaluated

• Two evaluation techniques: the weighted point method and the cost ratio method (adopted by health services dptt.)

Forecasting

• A process of estimating the relevant events of future, on the basis of their past and present analysis.

• Sales forecasting is to be done first and then should be converted into material requirement.

Methods for forecasting

Four basic types-

• Qualitative- subjective/ judgemental and are based on estimates and opinions.

• Time series analysis- data relating to past demand can be used to predict future demand.

• Simulation models allow the forecaster to run through a range of assumptions about the condition of the forecast.

Indenting and Purchasing

• Purchase is a strategic activity, directed towards acquiring materials, supplies, equipments and services for the purpose of consumption and rendering services by organization in an efficient manner.

Centralised purchasing

enables quality control, improved negotiating capacity, hence minimizes the cost.

may be delay in supply and in distribution of the stores, possibility of consumer dissatisfaction

Advantage: Disadvantages :

Decentralized purchasing

• The peripheral units are responsible for purchase and distribution hence top authority can get more time for other organization activity. Will be faster to needs in emergencies, better liaison and tight control as purchase officer will have more depth knowledge of requirements.

• Can be expensive as replication by each dept, increases manpower consumption since they have to spare time for other than their regular work. If purchase is not managed well, inspection and quality control can suffer, inferior goods may be supplied and out of stock situations is common

Advantages Disadvantage:

• Tender system is a form purchasing materials at competitive price, without compromising the quality to be transparent and accountable to people.

• Single tender- where only one firm is asked to submit its rates in writing

• Limited tender- where bids are called for only from reputed / prequalified parties

• Open tenders - through advertisement in media

• Global tenders -in case of large purchases tenders are often invited from within India and abroad

• Indent: An internal company document used in the purchasing process to authorize the requisition of materials prior to initiating a purchase order.

Problems faced

• Inadequate delegation of financial power at appropriate level to meet responsibilities assigned.

• Prolonged lead time between placement of indent and receipt of goods.

• Inaccurate estimates of demand leads to either overstocking or shortage.

• Malpractices and pilferage

Purchase record

Need recognized, demand estimated

Tender/enquiry/importsSuppliers records

Follow up

Invoice check

Inspection and quality control

• ISO and ISI stipulates standard of quality.

• It is preferable to purchase items that bear such certification , in other cases inspection is done before purchasing/acceptance.

• Qualified Quality control inspectors are usually appointed for this purpose.

Receipt

• After delivery the drugs are kept separate from other stock until complete inspection of supplies is complete.

• Ensure supplier has fulfilled the contract in terms of quality, quantity, packaging, type of items, consumption form any other special requirement.

Storage of materials

• Medical and non-medical items to be kept separate

• Convenient place for receipt of supplies and delivery with adequate space and facilities, preferably located in basement

• Combustible and non-combustible substances to be kept separate

• Place to be free from rodents

• Poisonous and narcotic substances to kept separately

Flow of Goods and Stores Accounting • Rule of first in first out (FIFO)

• Rule of first to expire first out (FEFO)

• Last In, First Out (LIFO)- generally not recommended in health care establishment

• Specific cost method- values of the material charged off / taken on charge are identical to the material issued / received and hence is the most suitable method of maintaining stocks in commercial organisations

• Average cost method: Average cost of each item issued from stores/ received at stores is assessed and this value is taken for maintaining the cost of inventory held by the organisation

• Pilferage:

• Stealing of stores in small quantity which is usually a continuous process/ ongoing activity.

• Prevention- packing of drugs, Stamping of containers, periodic surprise checks, strict accounting system for vital and costly drugs, internal audit of stores, minimum staffing, computerization of stores, stockless purchasing…

Inventory control

• Inventory may be defined as “usable but idle resource having an economic value”.

• When we deal with tangible (touchable) items such as materials, it is called stock. The literal meaning of word inventory is stock of goods.

• It is done to ensure that adequate amount of raw materials are available to meet the demand of the organisation in a health care establishment some inventory of essential drugs and supplies has to be maintained to ensure that health care to patients does not suffer.

Important Terms in relation to

Inventory Control

• Order Cost: The cost of placing an order for inventory. It includes advertising costs, salaries of personnel required to determine the inventory, stationary cost.

• Purchase cost: is the actual cost paid for the purchase of materials & stores, and the aim should be to reduce this as far as possible without compromising on the quality and quantity of items purchased.

• Inventory carrying cost: are the hidden costs and pertain to maintenance of a large inventory/stock. It include

• Cost of borrowed money which is the interest paid to a financier or the interest lost which could have been earned, had a large amount of money not been used for purchasing the stock presently held as inventory

• Cost of space: which needs to be hired for storage, utilised for storage & which could have been utilised for other activities

• Cost of additional manpower: by incurring additional expenditure on salaries, etc. of manpower required to manage the stocks

• Cost of obsolescence (out of date): All materials, especially hospital supplies, become obsolete, leading to financial loss

• Cost of deterioration : Supplies when stored for a very long time tend to deteriorate with time, especially crucial hospital supplies like injections, medicines and intravenous medicines etc

• Cost of pilferage: A large and unmanageable inventory is bound to lead to pilferage and loss to the organisation.

• Cost of insurance: Expensive inventory also needs insurance against unforeseen conditions

• Shortage costs are the direct and indirect costs paid by an organisation for not having a particular item in ready stock.

• Direct cost is in form of the expenditure incurred by the hospital in procuring these drugs urgently from the open market at a premium.

• Indirect cost is in the form of adverse publicity, suspended healthcare in form of refusal of admissions and may be a few avoidable deaths due to shortage of those critical drugs.

• Lead Time: It is the time required between placing an order & receiving the same. The delays are at –administrative level, production level, transportation level & finally inspection & storage of received items.

• Internal LT- time gap between the moment at which someone is aware of the need for additional stock and the order is placed.

• External LT- time taken by supplier to supply the materials after it receives the supply order from an organization

• Buffer or safety stock- Stock that must be maintained as emergency supplies for unforeseen demands.

• Reorder level- the stock level at which fresh orders have to be placed. It is calculated as average consumption per day multiplied by the lead time plus the buffer stock.

• Stock turnover- use the items before their warranty or shelf life expiry date, use items on a first in first out (FIFO) basis

Inventory management techniques

• For efficient inventory management, we have to answer

-how much should be ordered ? (ans;EOQ)

-when should it be ordered ? (ans;reorder

point)

Economic order quantity

• ordering materials whenever stock reaches the reorder point

• It tells how production to be scheduled

• optimum level of inventory involves two types of cost

1.ordering cost

2.carrying cost

Ordering cost

• It is the entire cost to acquire the raw material(supplies).

• It include

-Requisitioning

-order placing

-Transportation

-Receiving, inspecting and storing

-clerical and staff

Carrying cost

• It is the cost incurred to maintain the given level of inventory

• It include

-Warehousing

-Handling

-clerical and staff

-Insurance

-Deterioration and obsolescene

• Assumptions

-known annual requirement

-steady usage

-ordering and carrying cost to be constant through the entire period

Trial and error approach

Example

• Estimated annual requirement, A =1200unit

• Purchasing cost per unit, P(Rs) =50

• Ordering cost (per order),O(Rs) =37.50

• Carrying cost per unit,c(Re) =1

Total cost in the various orders Order size(Q) 1200 600 400 300 240 200 150 120 100

Average inventory(Q/2)

600 300 200 150 120 100 75 60 50

No.of orders(A/Q)

1 2 3 4 5 6 8 10 12

Annual carryingCost (Rs)(cQ/2)

600 300 200 150 120 100 75 60 50

Annual ordering cost(Rs)(OA/Q)

37.5 75 112.5 150 187.5 225 300 375 450

Total annual costs (Rs)

637.5 375 312.5 300 307.5 325 375 435 500

Inference from the TC table

Order Total cost

1.For single order(once in year) 637.5

2.12 order (once in a month) 500

3.4 order(once in every 3 month) 300

i.e.the third option is the most economic

Order formula approach

• It is more easier way compared to trial and error approach

• A=Total annual requirement

• C1- Replenishment/ procurement cost per order

• C2- inventory holding cost/item

• EOQ= √2*A*C1/C2

Example

• Cost of one drug- Rs 180/ bottle• Required at average rate of 60 bottles a month• Cost to replenish the stock of an item – Rs 50 per

order• Cost of holding inventories- Rs 2.60 per bottle• EOQ-√2*60*12*50/2.60=167• Since the drug has limited shelf life of 2 months,

max quantity to be ordered will be equal to 2 month’s consumption

• Reorder level= 2* 60=120

Graphical method

• Vertical axis =costs

-carrying cost (TCC)

-ordering cost (TOC)

-Total cost (TC)

• Horizontal axis =order size (Q)

Order Quantity Size (Q)

Co

st (

Rs.

)

EOQ

Tc (Total Cost)

Carrying Cost (Q/2)H

DS/Q (Ordering Cost)

• Carrying cost increases with increase order size, because of large have to be maintained

• Ordering cost decline with increase in order size, because larger order size means lesser no of order

• Total cost has the behaviour of both ordering cost and carrying cost

• EOQ=deviating point of TC

Method of inventory control

• ABC analysis (always better control)

• method for dividing on-hand inventory into three classifications A, B, C based on annual consumption unit.

• “A” items : money value is highest 70%, represent only 10-15% of items

• “B” items : money value is medium 20%, represent about 20-25% of items

• “C” items : money value is lowest 5-15%, represent about 70% of items

• A items: procured frequently, the quantity per occasion being small or atleast not greater than EOQ

• B items: control need not be as rigid or detailed as A items

• C items: procurement policy exactly reverse of A items i.e. C items may be procured infrequently and in large quantity

Methods of control

Advantage of ABC analysis• Helps to exercise selective control over such items, which are

having a sizable investment. • Helps to point out obsolete stocks easily. • Provides sound basis for allocation of funds & human resources. • It enables the maintenance of high inventory turn over rate. Disadvantage• Considers only money value of items & neglects the importance

of items for the production process or assembly or functioning. • It does not categorize the items based on their critical needs,

hence sometimes the purpose of ABC categorization may be defeated.

Steps involved in implementing the

ABC analysis

• Classify, determine expected use & price of the inventories

• Determine total value of item(expected unit * unit price)

• Rank the items (according to total value)

• Compute the ratios (no. of unit/total unit) & (each value of item/total value of all item)

• Combine on the basis of relative values (A,B,C)

• VED: Based on criticality and importance of consumables, items are classified as Vital (V), Essential (E) and Desirable (D)

• Vital (V): The medicines that are critically needed for the survival of the patients, which must be available in the hospital all the times.

• Essential (E): Medicines with lower critical need, which may be available in the hospital.

• Desirable (D): The remaining medicines with lowest critically, the absence of which will not be detrimental to the health of the patients.

ABC-VED Matrix Analysis

• In hospital inventory management, ABC analysis (based on net value) should be coupled with VED analysis (based on the criticality of an item) to narrow down the group of medicines requiring greater managerial monitoring

• Category I is high priority group, requires greatest attention.It contain all the vital and costly items, whose shortage may adversely affect the functioning of the hospital or whose over stocking /pilferage may lead to financial loss to the hospital.

• Category II is under moderate management and moderate attention is devoted. Here items are essential but are less costly and can have lesser stringent controls.

• Category III is under simple management and receives loose attention. Here items are the stores and medicines which are desirable but would not affect the functioning of the hospital even if they are not available for a long time. In addition this category would also include least costly medical stores which need not be kept under strict control.

• HML: Items are classified based on cost of individual item as High cost (H), Medium cost (M) and Low cost (L). This classification does not depend on consumption of items.

• SDE system is based on the ease of availability of items and items are classified as Scarce (S), Difficult to obtain (D) and Easy to obtain (E).

• GOLF system is based on the source of supply & includes Governmental sources (G), Ordinary (O), Local (L) and Foreign (F).

• FSN: Items are classified based on the rate of issue from the stores into Fast- moving (F), Slow moving (S) and Non-moving (N) items.

• SOS is the classification of items based on Seasonal (S) and Off-seasonal (OS) availability.

• XYZ is the classification based on the value of stocks of items held.

Maintenance, repair and

condemnation

• Preventive maintenance of sophisticated expensive equipment, with training of users

• Repair to medical equipment is another area where better management practices are needed

• Criteria for condemnation- non functional and obsolete item, beyond economical repair, functional but obsolete/hazardous/no longer required.

Information system

• Records maintenance

• Bin card- record of receipt, issue and stock on hand

Summary

material management

material planning

purchase & procurement

inspection &quality control

storageinventory

control

issue procedure

maintenance & repairs

information system

Thank You