HOSPITAL INVENTORY MANAGEMENT Dr A Prakash Sr Professor, Health Management Railway Staff College Vadodara

THE MEDICAL OFFICER Medical – Technologist Officer – Administrator/Manager

MANAGEMENT Men Machine Money Minutes Material

MATERIAL MANAGEMENT Capital Goods Consumables – Inventory Management - Medical Items (Drugs & Consumables) - House keeping Items

INVENTORY Inventory – A physical resource that a firm holds in stock with the intent of using or selling it or transforming it into a more valuable state. Inventory System – A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.

WHY INVENTORY To avoid stock out To hedge against future Uncertainities of demand Uncertainities of supply Uncertainities of cost Economies of scale Ordering cost Transportation cost Purchase cost Independence of planning

TYPE OF INVENTORIES 1.Cycle Inventory 2.Movement Inventory 3.Buffer Inventory 4.Anticipation Inventory 5.Decoupling Inventory

COST OF INVENTORY Ordering Cost Acquisition Cost Carrying Cost Storage Cost Pilferege Wastage Expiry Shortage Cost

FINANCIAL IMPLICATIONS 12% - 15% of Hospital Budget Upto 40% in Superspeciality Hospitals Carrying Cost – 15% to 30%

Hence Hospital Inventory Management is essential

OBJECTIVES – INVENTORY MANAGEMENT 1. Maximise the level of customer service by minimising out of stock situations (under stocking) 2. Promote efficiency in purchasing by minimizing the cost of providing an adequate level of customer service.

OBJECTIVE Right Material Right Quality Right Quantity Right Price Right Source Right Time Right Place

ORDERING METHODS Economic Order Quantity Bulk Ordering with Time-phased Delivery Fixed Order Quantity Fixed Order Period System Probability based Trade-off Matrix Speculative Considerations Just – in – time System

Basic Economic Order Quantity (EOQ): Principles Assumptions of the basic EOQ model Only one product is involved Annual demand requirements are known Demand is spread evenly throughout the year (constant demand rate) Lead time does not vary Each order is received in a single delivery There are no quantity discounts

15 EOQ: cycle inventory levels (graphical) Time Inventory Level Order Quantity (large Q) Time Inventory Level Order Quantity (small Q) Smaller Q  more orders, but lower inventory

Total (Annual) Ordering Cost Annual Number of Cost per Ordering = Orders X Order Cost Number of = Annual Demand Orders Lot Size

Annual Holding (Carrying) Cost Holding cost = Average Inventory x Annual Holding Cost per Unit Average CYCLE inventory = Lot Size 2 Holding cost per unit = % Holding Cost X Unit Cost

Basic Economic Order Quantity : Model Total Annual Cost TC : Total annual cost D : Total annual demand Q : Quantity ordered H : Unit holding cost S : Order or set-up cost C: Unit cost (price) Annual Holding Cost Order of set-up costTotal acquisition cost

TOTAL COST QUANTITY (UNITS) Costs $ EOQ TOTAL ANNUAL ORDER COSTS TOTAL ANNUAL HOLDING COSTS Basic Economic Order Quantity : Principles

E.O.Q. = Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal.

REORDER POINT When to place the order?

Introducing Lead Times Profile of Inventory Level Over Time Quantity on hand Q Receive order Place order Receive order Place order Receive order Lead time Reorder point Demand rate Time

23 Centura health example (1) Delivery network with 9 hospitals Currently each hospital manages its own inventory IV starter kit Weekly demand: 600 units Cost: $3 Yearly Holding cost per unit: 30% = $0.9 Fixed order cost: $130 Lead time: 1 week Current policy: each hospital orders 6000 units What happens if the frequence of ordering is changed? What happens if the order process is organized from a single warehouse?

24 Centura Health Example (2) R = units per year Yearly cost of the current policy (Q = 6000) Annual Fixed Order Cost: $130 * /6000 = $676 Total Annual Holding Cost : $0.9 * = $2.700 Total annual cost of material: $3 * = $ Total batch-dependent costs : $3.376 Total annual cost: $96.976

25 Centura Health Example (3) Optimal order quantity: Total batch dependent cost: $2.702 Total cost: $ Time between orders = 4.86 weeks

SAFETY STOCK Changing Lead Time Changing Demand

MAGNITUDE OF INVENTORY Average Hospital – items Multispeciality Hospital may have upto 35000

INVENTORY ANALYSIS A-B-C Analysis – Value of consumption H-M-L Analysis – Unit price X-Y-Z Analysis – Value of items in store V-E-D Analysis – Criticality of item F-S-N Analysis – Consumption pattern S-D-E Analysis – Procurement problems S-O-S Analysis – Seasonality G-O-L-F Analysis – Source of supply

A-B-C ANALYSIS Pareto's Law (Selective Management Principle) Significant value in a group of items normally constitute a small portion of the total number of items in the group and that the majority of items, in the aggregate, will be of small significance. The 80 – 20 rule! In A-B-C classification  A – 10% => 70%  B – 20% => 20%  C – 70% => 10%

ABC Analysis Percentage of items Percentage of dollar usage value — — — — — — — — — — 0 0 — Class C Class A Class B

ABC Classification : Guidelines

METHOD FOR A-B-C CLASSIFICATION All items listed in descending order by total order value. Two columns added - % of total budget & cumulative percentage Lines drawn at 70% & 90% OR Total Budget / Total no. of items = Average Usage Value Av Usage Value X 2.25 => A/B cut off line Av Usage Value X 0.50 => B/C cut off line

ADVANTAGE - DISADVANTAGE Equal attention to all items will be – Very expensive Diffuse control Misalign priorities Has to be carried out with standardization & codification Only money value Criticality not seen Periodic review

H-M-L CLASSIFICATION Unit cost High – Medium – Low Decides ordering / issuing authority

X-Y-Z CLASSIFICATION Value of inventory available on date X – stock value high Y – stock value medium Z – stock value low Method – same as A-B-C Helps to control stock / obsolescence Shows how stock values are distributed amongst the material in store

A-B-C & X-Y-Z COMBINATION CLASSX ItemsY ItemsZ Items A ItemsCritical analysis to reduce stock Attempt to convert to Z category Within control B ItemsReview of stock control & consumption more often Further action not necessary Review twice a year C ItemsDisposal of surplus stock Tighten control Review once a year

V-E-D CLASSIFICATION Vital – must for functioning e.g. Oxygen Essential – required for functioning e.g. Antibiotics Desirable – may be kept e.g. Tonics

V-E-D & A-B-C COMBINATION CLASSV ItemsE ItemsD Items A ItemsConstant control & regular follow up Moderate stocks NIL stocks B ItemsModerate stocks Very low stocks C ItemsHigh stocksModerate stocks Low stocks

V-E-D & X-Y-Z COMBINATION CLASSV ItemsE ItemsD Items X ItemsControlDispose Y ItemsReviewControlDispose Z ItemsNo ActionReviewControl

F-S-N CLASSIFICATION Fast Moving – at least once in a week / month Slow Moving – at least once in a month / year Non-moving – nil in a year Useful in controlling obsolescence, spoilage & deterioration

F-S-N & X-Y-Z COMBINATION CLASSF ItemsS ItemsN Items X ItemsTight controlReduce stock to low level Dispose at best price Y ItemsNormal Control Keep low level stock Dispose quickly Z ItemsIncrease stock Keep low level stock Dispose even at low price

S-D-E CLASSIFICATION Scarce to obtain Difficult to obtain Easy to obtain

G-O-L-F CLASSIFICATION Source / Suppliers Government Ordinary Local Foreign

S-O-S CLASSIFICATION Seasonal Items Off season Items

USES OF ANALYSIS My AMI Budget 1 crore 1000 items HQ supplied only 300 items (30%) ?

PRIORITY WAS MINE I got all the items in categories A & B. Categories C items (70%) will cost only 10% i.e which will be managed by LP

UNCONVENTIONAL CASE AMI has 1000 items HQ has capacity to process only 600 – 700 items in a year

Buy all the A & B category items Buy half the C category items for two years Average inventory level of category C items will increase from to i.e. An inventory increase of 5% of total budget will solve the problem!

COMBINED ANALYSIS An item is in category A and Z

Look at VED V – useful & popular drug D – a lot of wasteful expenditure

The item falls in categories A, X & V

Look up SDE Category S or D – Stock-pile (expiry permitting)

MBASIC SYSTEM Multiple Basic Approach to Selective Inventory Control A-B-C / X-Y-Z / H-M-L / V-E-D / F-M-S / G-O-F Selective Control Techniques – 6 Categories in each – 3 Total Classification – 3 6 = 729 Out of which 483 can not occur (invalid combinations) Remaining 327 combinations to be analysed critically & coded. Each will have a line of action.

DISTRIBUTION Ensure FIFO vs LIFO

SUB-INVENTORY CONTROL At distribution counterr / ward / ICU / OT level The safety stock adds up Methods of distribution Requisition Method At par Method Unit dose Method

ORGANISATION OF STORE Location Infrastructure Man power Administrative control

Computerisation Bar Coding RFID

Annual Medical Indent

Price Negotiation

3 P L Third Party Logistics Management

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