DR.

NITIN JAIN
ASSISTANT PROFESSOR, MBA , GGITS
 INVENTORY CONTROL
Webster's has defined Inventory as “The
quantity of goods or the materials on hand”
Goods or the materials is the essential
element of any of the organization right from
hospital, industry, private enterprise or the
government department.
 Definition
3

Inventory control is a scientific system which

indicates as to what to order, when to order, and how much to order,
and how much to stock so that purchasing costs and storing costs
are kept as low as possible.

Inventory Control | Dr. Nitin Jain

 Thus inventory control is the method of
maintaining of stock at a level at which purchasing
and stocking costs are at the lowest possible
without interference with the supply.
Thus it plays the vital role in maintaining the
balance between the two.
If the items like drugs are purchased in the large
quantity, the supply can be made easily and
immediately.
The risk of the Out-Of-Stock is avoided.
 But the disadvantage is that huge stock amounts to the
locking up of the money which would have been spend
more gainfully in some other ways.
A large stock will also imply a large storing space and
will require a staff to store and handle various items.
There is the danger of the drugs not being utilized
before the date of expiry, of pilferage, of the stock lost
some sight and not being utilized, better and cheaper
substitute available.
 It is generally accepted that total yearly
carrying cost on the inventory is 20-25%.
Thus inventory control has the objective of
maintaining optimum stock- neither excessive
nor likely to be exhausted.
Following are the various methods to store
the items based on their cost and utility.
 OBJECTIVES OF INVENTORY CONTROL
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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.

Inventory Control | Dr. Nitin Jain

 Types of inventory
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There are lots of different types of inventory, and which ones you’ll deal with
depends on the goods you sell. Here’s an overview of some of the types you’re
more likely to encounter:
Finished goods/for-sale goods: The products you sell to your customers
Raw materials: The inventory you use to make your finished goods
Work-in-progress: Essentially, unfinished goods — inventory that is part-way
through the manufacturing process
MRO goods: MRO stands for maintenance, repair and operating. This is the
inventory you use to support the manufacturing process
Safety stock: The additional inventory you keep in store to deal with supplier
shortages or surges in demand
Inventory Control | Dr. Nitin Jain
 TYPES OF INVENTORY COSTS
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Inventory Control | Dr. Nitin Jain

Ordering costs:
• This is the cost of getting an item into the store. The process of
ordering starts with raising requisition, placing an order, follow
up, transportation receipt and inspection, acceptance and
placing in stores.

• Carrying costs:
• This is the cost of holding an item in the store till it is issued out
or sold.
• Following are the elements:-
• Interest on capital cost incurred.
• Cost of obsolescence, wastages, damages.
• Shortage costs:
• These are the costs incurred both directly and
indirectly due to shortages like intangible costs due to
loss of goodwill, opportunity loss or production hold
costs.

• Total inventory cost:

• A total inventory cost consists of carrying costs and
ordering costs.
Lead time:
• This is the time which has elapsed between
placing an order till the same items are received,
stocked and ready to use.
 Inventory-Control Techniques
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ABC analysis ( Always Better Control )

Economic order quantity (EOQ)
Value Analysis
VED Analysis (Vital, Essential & Desirable )
HML Analysis ( High, Medium & low)
SDE Analysis (Scare, Difficult & Easy to use )
MRP (Material Requirement Planning)
FSN Analysis ( Fast moving, Slow Moving & Non Moving)
Just-in-time inventory management. ...

Inventory Control | Dr. Nitin Jain

 A B C ANALYSIS OF THE DRUGS

This is the system of analysis of store items

mainly drugs based on their cost in material
management.
Items can be categorized into three groups
based on their annual expenditure incurred
on these items.
 First the list of the drugs showing the
expenditure incurred in the previous
completed year is prepared
Then the drugs are arranged in the
descending order of the amount of the
expenditure.
Then the cumulative cost should be
calculated beginning from the first item of list.
 When such cost is found out, about 10% of
the items will be seen to consume 70% of the
budget, and these are called Group A Items.
Group B Item form about 20% of the total
item and account for the 20% of the budget.
Group C consists of the remaining 70% of
the items consume only 10% of the budget.
 Thus it can be easily judged that the
category A should get high priority and
managerial attention because though
constituting only small fraction of the total list
it amounts for the bulk of the expenditure,
Their stock, consumption, purchase should be
critically watched and controlled.
 V E D ANALYSIS
Another method of classification of drugs or
materials is grouping them according to criticality
in patient care.
“V” Items are vital drugs, without alternatives,
forming about 10% of the total drugs whose
absence cannot be tolerated. Every attempt is to
be made, at whatever cost, to avoid the Out-Of-
Stock position of these drugs.
 “E” Items are the Essential items that constitute
40% of the items and their absence can be
tolerated for the short stretch of time. They could
be made available in a day or two or the
alternative medicine can be made available.
“D” items are the desirable items which are the
remaining 50% of the drugs and their non-
availability can be tolerated for longer period.
They may be required for chronic and less serious
patients.
 Combination of ABC and VED Analysis can
be explained in the following way

V E D
A AV AE AD Category I 10% Items
B BV BE BD Category II 20% Items
C CV CE CD Category III 70% Items
 Thus drugs in Category I are either Vital or
expensive and should be managed with
maximum attention.
Consumption and its stock should be
continuously monitored and safety stock
should be kept at low to reduce the carrying
cost.
 Category II consists of drugs, which are
essential, and of average cost.
They can be managed with little less priority
and can be managed with middle level
managers.
Category III consists of the drugs which are
desirable and inexpensive and thus lowest in the
hierarchy of priority. They should be purchased
periodically and buffer stocks can be high
managed by lower level of management.
 H M L ANALYSIS
The Items are classified according to High
Cost, Medium Cost and Low Cost
Criticality and Cost can be coupled in
Coupling Matrix Module.
V E D
H Defibrilator X-ray Machine Air Curtain
M Ventilator Electric cautry USG machine
L Oxygen regulato Patient trolley Electronic BP ap
 S D E ANALYSIS
In situation where scarcity of items is not
uncommon SDE Analysis is helpful.
“S” refers to Scarce items which are know to
be in short supply because of the various
reasons
“D” items are of Difficult items which may
be difficult to obtain in in adequate quantity
or quality immediately.
 “E” items are items which are easily
available and no difficulty is experienced in
purchase and procurement.
SDE Analysis helps to avoid Out-OF-Stock
position of items by management with
reference to their free availability.
 F S N ANALYSIS
In this analysis the quantity and rate of
consumption is studied and categorized
accordingly
F Items are fast moving items that have
large consumption
S Item are slow moving item
N Item are non moving items
 Non moving items which are in stock and not
consumed over a long period lock up space and
fund and may have to be condemned because of
time barred or obsolete.
Such items are to be identified and disposed off
and care to be taken so that they are not ordered
ordinarily.
The reason for their non utilization are to be
studied
Big hospitals notice around 10-15% of items as
non moving items.
 METHODS OF ORDERING

There are different systems in use to order

items. Some of them are as follows.
A) Two bin system
B) Cyclic system
 1) Two Bin system:-
in this system orders are not placed at
fixed periods but are placed when the stock
of the item reaches a certain predetermined
level.
For fixing this level the information on
following is essential.
 1) Lead Time:- This is defined as the average
interval between placement of order for supply of
some item and actual receipt of the material for use.
Further classified into two
a) Internal lead time:- This is the time gap between
the start of the preparation of the demand of
material to the time of dispatch of order.
b) External lead time:- time from dispatch of the
indent to the receipt of the supplies is called ELT
c) Total lead time= ILT+ELT
 2) Minimum order level:- This is the quantity of
material derived by calculating average daily
consumption of the material and multiplied by total
lead time
For example avg daily consumption of the 5%
dextrose is 50 bottles and the total Lead Time is 30
days the Minimum Order Level is 1500 bottles. Avg
daily consumption* Total Lead Time
If you have less then that then u are bound to face
Stock-Out condition.
 3) Buffer Stock:- In addition to the minimum
order level we need to have something in
extra to meet out any extingency. Calculated
by the formula
BS= (Max daily consumption- avg daily
consumptions)* Total Lead Time.
 4) Reorder level:- This is the point where we
have to place the order for procurement for
replenishing the stock derived by the formula
(Minimum Order Level+ Buffer Stock).
5) Maximum Order Level:-this is the
maximum quantity of the material to be
stocked, beyond which the item must not be
inventory.
 BENEFITS OF INVENTORY CONTROL
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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

Inventory Control | Dr. Nitin Jain