Inventory control

methods of inventory control

1. METHODS OF INVENTORY CONTROL ARATHY R NATH 5 th year pharmD

2. 10/14/2018 XIDAS, INVENTORY CONTROL 2 Inventory means… All the materials , parts, suppliers, expenses and in process or finished products recorded on the books by an organization and kept in its stocks, warehouses or plant for some period of time.

3. TYPES OF INVENTORIES Raw materials Purchased parts and supplies Finished goods Work- in- process Items being transported Tools and equipment

4. 10/14/2018 XIDAS, INVENTORY CONTROL 4 Definition of inventory control Inventory control is the technique of maintaining the size of the inventory at some desired level keeping in view the best economic interest of an organization.

5. Objectives of Inventory Control To meet unforeseen future demand due to variation in forecast figures and actual figures. To average out demand fluctuations due to seasonal or cyclic variations. To meet the customer requirement timely, effectively, efficiently, smoothly and satisfactorily. To smoothen the production process. To facilitate intermittent production of several products on the same facility. To gain economy of production or purchase in lots.

6. To reduce loss due to changes in prices of inventory items. To meet the time lag for transportation of goods. To meet the technological constraints of production/process. To balance various costs of inventory such as order cost or set up cost and inventory carrying cost. To balance the stock out cost/opportunity cost due to loss of sales against the costs of inventory. To minimize losses due to deterioration, obsolescence, damage, pilferage etc. To stabilize employment and improve labour relations by inventory of human resources and machine efforts.

7. Benefits of Inventory Control Ensures an adequate supply of materials Minimizes inventory costs Facilitates purchasing economies Eliminates duplication in ordering Better utilization of available stocks Provides a check against the loss of materials Facilitates cost accounting activities Enables management in cost comparison Locates & disposes inactive & obsolete store items Consistent & reliable basis for financial statements

8. Functions of Inventory Control   To assess the material requirement methodically and to obtain the materials and supplies in the required quantity at the lowest cost at the proper time to maintain operational efficiency.   To keep the inventories as low as possible consistent with market conditions.   To minimize stock out situations that result in cash purchases at uneconomical rates.   To forecast market and economic conditions of supply for availability of material.   To maintain proper records.  

9. Inventory control Techniques   ABC Method VED Analysis Lead Time E.O.Q Buffer stock FSN classification HML classification SDE classification SOS classification

10. ABC Method   All ways Better Control Method Also known as stock control according to value method. All the medicines are divided in to three categories such as A, B, C based on the cost. A category items are costly items. B items are medium cost C items are cheap

11. Group % Of items % Of Costs A B C 8 25 67 75 20 5

12. Procedure for ABC Analysis Make the list of all items of inventory. Determine the annual volume of usage & money value of each item. Multiply each item’s annual volume by its rupee value. Compute each item’s percentage of the total inventory in terms of annual usage in rupees. Select the top 10% of all items which have the highest rupee percentages & classify them as “A” items. Select the next 20% of all items with the next highest rupee percentages & designate them “B” items. The next 70% of all items with the lowest rupee percentages are “C” items.

13. 1 . A b c analysis ( Always better control ) A ITEMS B ITEMS C ITEMS 10% of total inventory 20% 70% Consumes 70% of total budget 20% 10% Strict control Moderate control loose control Requires no safety stocks Requires low safety stocks Requires high safety stocks Maximum follow up Periodic follow up close follow up Handled by senior officers middle management any official of the management 13

14. Advantages of ABC Analysis Helps to exercise selective control Gives rewarding results quickly Helps to point out obsolete stocks easily. In case of “A” items careful attention can be paid at every step such as estimate of requirements, purchase, safety stock, receipts, inspections, issues, etc. & close control is maintained. In case of “C” items, recording & follow up, etc. may be dispensed with or combined. Helps better planning of inventory control Provides sound basis for allocation of funds & human resources.

15. Disadvantages of ABC Analysis Proper standardization & codification of inventory items needed. Considers only money value of items & neglects the importance of items for the production process or assembly or functioning. Periodic review becomes difficult if only ABC analysis is recalled. When other important factors make it obligatory to concentrate on “C” items more, the purpose of ABC analysis is defeated.

16. II .Ved analysis V - V ital E - E ssential D - D esirable Utility and essentiality of the item are the dominating factors. 16

17. VED analysis is based on the importance of the item and its effect on functioning and efficiency of a hospital. Vital drugs (v) : whose absence (NO STOCK)cannot be tolerated even for a single day. Essential drugs (E): those drugs without which a hospital can function but may affect the quality of service to some extent but not to serious extent. Desirable drugs (D): those whose absence will not affect the functioning of hospital and it can be managed at lower level managers

18. It is useful in capital intensive industries, transport industries, etc. VED analysis can be better used with ABC analysis in the following pattern: Category “V” items “E” items “D” items “A” items Constant control & regular follow up Moderate stocks Nil stocks “B” items Moderate stocks Moderate stocks Low stocks “C” items High stocks Moderate stocks Very low stocks

19. FSN Analysis FSN: Fast moving, slow moving & non moving Classification is based on the pattern of issues from stores & is useful in controlling obsolescence. Date of receipt or last date of issue, whichever is later, is taken to determine the no. of months which have lapsed since the last transaction. The items are usually grouped in periods of 12 months. It helps to avoid investments in non moving or slow items. It is also useful in facilitating timely control.

20. For analysis, the issues of items in past two or three years are considered. If there are no issues of an item during the period, it is “N” item. Then up to certain limit, say 10-15 issues in the period, the item is “S” item The items exceeding such limit of no. of issues during the period are “F” items. The period of consideration & the limiting number of issues vary from organization to organization.

21. Sde classification S – Scarce D - Difficult To get or procure E - Easy classification is based on lead time (LEAD TIME :time taken between the placing of order and receipt of drugs to the department,) 21

22. ` S`refers to scarce items which are know to be in short supply because of various reasons. `D` items are of difficult items which may bedifficult to obtain in adequate quantity or quality immediately. `E` items are items which are easily available and no difficulty is experienced in purchase and procurement

23. Hml classification classification based on weight of the items. H – H EAVY WEIGHT M – M EDIUM WEIGHT L - L IGHT WEIGHT Advantage : useful in the storage and display of items in the stores. 23

24. V E D H defibrilator X-ray machine Air curtain M Ventilator Electric cautry USG machine L Oxygen regulator Patient trolly Electronic bp ap

25. Safety stock(buffer stock) Minimum level of inventory to cover unforeseen and uncalled for situation or Minimum quantity of particular item that should be kept in store at all the times Protect against variation in demand and procurement period Used in emergencies

26. Factors affecting stock Uncertainty in demand Uncertainty in lead time Degree of insurance at for an item Nature of item and rate of consumption Size of batch Availability of substituent's

27. It can be determined by Buffer stock = [m-a] n a – avg. consumption /day n – lead time

28. EOQ( economic order quantity) EOQ (Economic Order Quantity) One of the best known models for inventory control is the economic order quantity (EOQ). The purpose of this model is to answer two important questions: When should an item be reordered (resulting in procurement cost)? and What quantity should be ordered (resulting in carrying or holding cost)? Thus the model can be used to determine how much inventory needs to be carried to meet demand.

29. . The formula for calculating EOQ is: EOQ = 2*D*PC ICC*UC Where, D = annual demand (in units) PC = procurement cost (cost to place one order) ICC = inventory carrying cost (as % of unit cost) UC = unit costs

30. LEAD TIME METHOD It is the time taken between the placing of order and receipt of drugs to the department. The longer the lead time, the larger is the safety stock, resulting in excess of investment in inventories. As far as possible efforts should be made to decrease the lead time for effective inventory control.

31. SOS CLASSIFICATION Sos analysis is based on seasonality of items and it classifies all the items into two categories, `seasonal` and `off seasonal`. This analysis helps in : Identifying the items that are available only during a limited period of the year. Identifying the items that are seasonal but available throughout theyear however their costs in offseason are relatively high