Inventory Control Management

INVENTORY CONTROL MANAGEMENT

Introduction

• Inventory control is the systematic regulation, supervision, and management of the procurement, storage, distribution, and utilization of materials and supplies to ensure availability in the right quantity, at the right time, with minimum cost and wastage.
• In hospitals, inventory control ensures uninterrupted patient care by maintaining essential drugs, consumables, surgical items, linen, and equipment without excess or shortage.

Types of Inventory

1. Based on Nature:
• Raw Materials – supplies required for operations (e.g., drugs, reagents, disposables).
• Work-in-Progress (WIP) – partly processed material (lab samples, sterilized packs pending use).
• Finished Goods – completed products ready for use (sterile packs, compounded drugs).
• Consumables – items used regularly (cotton, syringes, gloves).
• Spare Parts – for equipment maintenance.
2. Based on Movement (ABC analysis):
• A-items (Vital, high value, strict control).
• B-items (Moderate value, moderate control).
• C-items (Low value, simple control).
3. Based on Criticality (VED analysis):
• Vital – essential for patient survival (life-saving drugs).
• Essential – necessary but non-critical (analgesics, gloves).
• Desirable – luxury items or rarely used.
4. Based on Usage Value (FSN analysis):
• Fast-moving – frequently used.
• Slow-moving – occasional use.
• Non-moving – obsolete or expired.
5. Other Classifications:
• HML – High, Medium, Low cost.
• SDE – Scarce, Difficult, Easy to obtain.
• XYZ – Based on stock value.

Objectives of Inventory Control

• Ensure uninterrupted supply of essential materials.
• Minimize stock-outs and shortages.
• Prevent overstocking and wastage.
• Achieve cost-effectiveness in procurement and storage.
• Improve utilization of working capital.
• Maintain optimum stock levels (neither too high nor too low).
• Ensure timely availability of critical items.
• Provide data for forecasting, planning, and budgeting.
• Reduce obsolescence, theft, and pilferage.
• Enhance quality patient care through availability of resources.

Principles of Inventory Control

1. Right Quality – materials should conform to required standards.
2. Right Quantity – optimum stock levels to prevent excess or shortage.
3. Right Time – availability as per demand.
4. Right Source – reliable and cost-effective suppliers.
5. Right Price – economical procurement without compromising quality.
6. Right Place – proper storage conditions and accessibility.
7. Right Accountability – accurate record-keeping and stock verification.
8. Scientific Techniques – use of EOQ, ABC, VED, and computerized systems.

Key Terms

• Lead Time: Time gap between placing an order and receiving the material.
• EOQ (Economic Order Quantity): The optimal order quantity that minimizes total inventory costs (ordering + carrying costs).
• Buffer Stock (Safety Stock): Extra stock kept to meet unexpected demand or supply delays.
• Reorder Level: Stock level at which a new order must be placed to avoid stock-out.
• Formula: Reorder Level = Lead Time × Average Daily Usage
• Optimum Safety Stock: Minimum extra quantity to avoid emergency shortages while minimizing carrying cost.

Tools & Techniques of Inventory Control

1. ABC Analysis (Based on Cost Significance)

Definition:
ABC Analysis is an inventory control technique that classifies items based on their annual consumption value (unit cost × annual usage).

Categories:

• A items:
  High cost, low quantity
  – About 10–20% of items
  – Account for 70–80% of total inventory value

• B items:
  Moderate cost and quantity
  – About 20–30% of items
  – Account for 15–25% of total value

• C items:
  Low cost, high quantity
  – About 50–70% of items
  – Account for 5–10% of total value

Purpose:

• Focus managerial control on high-value items

• Reduce capital blockage

Example in Hospital:

• A: MRI contrast media, implants

• B: Surgical gloves

• C: Cotton, gauze

2. VED Analysis (Based on Criticality)

Definition:
VED Analysis classifies items based on their critical importance to patient care and hospital functioning.

Categories:

• V – Vital:
  Non-availability can threaten life or stop services

• E – Essential:
  Necessary for routine care but short shortage can be managed

• D – Desirable:
  Non-availability does not seriously affect services

Purpose:

• Ensure patient safety

• Avoid service disruption

Example:

• V: Emergency drugs, oxygen cylinders

• E: Antibiotics

• D: Vitamin supplements

3. FSN Analysis (Based on Movement / Usage Rate)

Definition:
FSN Analysis classifies inventory based on rate of consumption or movement.

Categories:

• F – Fast moving: Frequently issued items

• S – Slow moving: Occasionally used

• N – Non-moving: Not used for long time

Purpose:

• Identify dead stock

• Improve store space utilization

Example:

• F: IV fluids

• S: Special surgical instruments

• N: Obsolete medicines

4. HML Analysis (Based on Unit Price)

Definition:
HML Analysis classifies items according to their unit cost, not annual consumption.

Categories:

• H – High cost items

• M – Medium cost items

• L – Low cost items

Purpose:

• Control purchase and approval process

• Prevent misuse of costly items

Example:

• H: Ventilator parts

• M: BP apparatus

• L: Syringes

5. SDE Analysis (Based on Availability)

Definition:
SDE Analysis classifies items based on difficulty in procurement and availability in the market.

Categories:

• S – Scarce: Imported or rare items

• D – Difficult: Limited suppliers

• E – Easily available: Locally available items

Purpose:

• Plan procurement time

• Avoid stock-outs

Example:

• S: Imported implants

• D: Specialized drugs

• E: Gloves, cotton

6. XYZ Analysis (Based on Stock Value at a Point of Time)

Definition:
XYZ Analysis classifies items based on the value of stock held (closing inventory value).

Categories:

• X: High value stock

• Y: Medium value stock

• Z: Low value stock

Purpose:

• Control inventory investment

• Reduce excess stock

Example:

• X: High-end diagnostic equipment spares

• Y: Laboratory reagents

• Z: Stationery

7. ABC–VED Matrix (Cost + Criticality Combined)

Definition:
ABC–VED Matrix combines cost (ABC) and criticality (VED) to decide priority of control.

Classification:

• Category I: AV, AE, BV (High priority – strict control)

• Category II: BE, CE, AD (Moderate control)

• Category III: CD (Low control)

Purpose:

• Balanced decision-making

• Efficient resource utilization

Hospital Use:
Critical and costly items get maximum attention

8. Just-in-Time (JIT) Inventory System

Definition:
JIT is a system where materials are procured exactly when needed, minimizing storage.

Advantages:

• Reduces inventory holding cost

• Less wastage and expiry

Disadvantages (Important for Hospitals):

• Risky in emergencies

• Supplier delay can affect patient care

Example:
Non-emergency consumables ordered daily

9. Two-Bin System

Definition:
Inventory is divided into two bins:

• First bin: Working stock

• Second bin: Safety stock

When the first bin is empty, reorder is placed, and second bin is used meanwhile.

Purpose:

• Prevent stock-out

• Simple and effective system

Example:
Syringes, gloves in wards

10. Perpetual Inventory System

Definition:
A system where continuous record of stock is maintained using manual registers or computer software.

Features:

• Real-time stock balance

• Immediate detection of shortages

Benefits:

• Better control

• Accurate financial reporting

Used in:
Modern hospital stores with HIS software

11. Cycle Counting

Definition:
Cycle Counting is a method of periodic physical verification of selected inventory items instead of full stock checking.

Features:

• Items checked daily/weekly/monthly

• Focus on high-value or critical items

Advantages:

• Reduces workload

• Improves inventory accuracy

Example:
Daily checking of A-category drugs

Inventory Costs

1. Ordering Costs: Cost incurred per order (administration, communication, tendering).
2. Carrying/Holding Costs: Costs of storing inventory (space, refrigeration, insurance, deterioration, pilferage).
3. Shortage/Stock-out Costs: Loss due to unavailability (delayed treatment, substitution costs, patient dissatisfaction).
4. Purchase/Procurement Costs: Cost of acquiring inventory (supplier cost, transportation).

Ordering System

• Fixed Order Quantity System: A fixed quantity is ordered whenever stock reaches the reorder level (e.g., EOQ model).
• Fixed Order Period System: Orders placed at fixed intervals (weekly, monthly), quantity varies as per need.
• Two-Bin System: One bin for active use, second as reserve. When first bin is empty, reorder is triggered.
• Min-Max System: Stock maintained between minimum and maximum levels; orders placed when stock falls to minimum level.
• Just-in-Time (JIT): No excess storage; procurement aligned with immediate need.

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