STUDY MATERIALS

OF
FUNDAMENTALS OF INVENTORY
MANAGEMENT
(BHM 305)

ANIS CHATTOPADHYAY
ASST. PROFESSOR

TECHNO INDIA
EM-4/1, SECTOR- V
SALT LAKE
KOLKATA-700091

1
 FUNDAMENTALS OF INVENTORY
Paper:

MANAGEMENT
Code : BHM(N)-305
Contacts Hours / Week : 2L+1T
Credits : 3

Module Topic
I Inventory control (theoretical knowledge only): definition, objectives of inventory
control, types of inventory cost, types of inventory control-Pareto's law-ABC/VED/SDE
analysis, lead time, buffer stock-reorder level, economic order quantity ( Basic
knowledge)- types of inventory control systems
II
Basic Knowledge of Hospital Stores management (theoretical knowledge only) location &
layout- standardization, Codification & Classification of materials- material accounting &
physical distribution-store documentation- condemnation & disposal of scrap , surplus &
obsolete materials-types of stores in
hospital Preservation of Stores
III
Hospital Purchase management(theoretical knowledge only): vendor selection &
evaluation, vendor rating, methods of payments, tendering procedures-concept &
frame work of supply chain management

Purchasing process, Meaning of purchasing, objectives of purchasing,5 R's of

purchasing Centralised & Decentralized purchasing

DGS & D- General principles of procurement of medicine ,equipment in DGHS under the
MOHFW,GOI
IV Strategies for Hospital equipment Planning and Selection, Hospital equipment
Utilization Distribution Management (Logistics Management)-distribution of
materials to various departments & auxiliary services.

Suggested Readings:

1. Production(Operation) Management , L.C Jhamp— Everest

2. Production and materials management , K.Sridhara Bhatt— Himalaya
3. Hospital stores management an integral approach , Shakti Gupta— JAYPEE

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Inventory control (theoretical knowledge only): definition, objectives of inventory control, types of
inventory cost, types of inventory control-Pareto's law-ABC/VED/SDE analysis, lead time, buffer
stock-reorder level, economic order quantity ( Basic knowledge)- types of inventory control
systems

Materials and purchase management is a body of knowledge which helps the manager to improve the productivity of
capital by reducing the material cost, prevents large amount from capital turnover ratio.

Importance of Materials and Purchase Management in profit centre

point of view:
Example:
I) Increase in profit by reducing material cost ( total turn over Rs. 130 crore)
Subject This year’s cost ( in Rs.,crore) Next year’s cost ( in Rs. Crore)
Over head cost 10.00 10.00
Material cost 80.00 78.40 (2% reduction in material cost)
Labour cost 18.00 18.00
Total cost 108.00 106.40
Profit 12.00 13.60
Turn over 120.00 120.00

By reducing 2% on material cost, we get 13.33% extra profit than previous year.
II) Increase in profit by reducing labour cost.
By reducing 2% in labour cost, we get only 3% extra profit in compare to the previous case. In this case producer has
to face tremendous labour problem which leads to stoppage of production.
Subject This year’s cost ( in Rs.,crore) Next year’s cost ( in Rs. Crore)
Over head cost 10.00 10.00
Material cost 80.00 80.00
Labour cost 18.00 17.64 (2%reduction in labour cost)
Total cost 108.00 107.64
Profit 12.00 12.36
Turn over 120.00 120.00

Materials productivity has a significant and direct effect on company’s profitability (ROI) Rate of return on
investment is the ratio of profit to capital which in turn for the purpose of analysis may be split up in to its basic
constituents, profit margin turnover ratio.

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 Rate of Return on Investment
(ROR)

P = Profit
C = Capital
X
S = Sales

Profit Capital
Margin Turn-over
Ratio

Fig: R.O.R and its constituents

Two basic ways to improve R.O.R are:
a) Increase profit keeping capital constant.
b) Reduce capital keeping profit constant.

a) Increasing profit keeping capital constant:

 Profit is the life line of an organization
 Profits give share holder its dividend
 Profits give employees the wages.
 Profit gives company to buy materials, machines, tools and other inputs.
 Profits provide greater job opportunities.
 Profits help the organization to improve quality of life and increase infrastructure.

By taking following measures an organization can control and improve profit.

i) increase units sold (S)
ii) increase units produced.(N)
iii) increase unit price (P)
iv) reduce unit cost (C)

Profit

Sales – costs

Unit Unit Unit Unit

Sold Price Produced Cost
(S) (P) (N) (C)

S×P N×C

N (P–C)

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  Increase units sold (S): Sales and production must be evenly balanced to ensure whatever is
produced is sold, failing which the company will end up with unsold stocks.
 Increased units produced (N): Production can be increased either by duplicating resources (adding
another identical production line) or by better management of existing resources (by improving
productivity).
 Increased unit price (P): Price is generally a function of demand and is controlled by the forces of
supply and demand. A company operating in a buyer’s market may find it impossible to make
increase price. Thus leaving us with the second factor to deal with and that is cost.
 Reduce the cost (C): Reduction in cost is something which is within the control of the company.
The total cost of a product consists of three main constituents: material cost, labour cost, and
overheads, the material cost being the major portion of the total cost.

Materials in Indian context constitute more than half of the cost of production in most industries and projects. In
some industries, 60-70% of the total production cost is due to materials. This makes the materials management the
biggest single are having tremendous scope for cost reduction. A well coordinated materials management
programme may lead to 15-20% of cost reduction.
A rupee saving n material cost is almost equivalent to ten rupees of sale. More over, sale is one time sale. Saving on
other hand is a recurring benefit. Effective materials management, therefore, has a tremendous effect on the
profitability of the firm.

b) Reduce capital keeping profit constant:

An alternative to increasing profit to improve ROR is to reduce capital. Capital can either be tied capital or working
capital which in a manufacturing firm is generally tied up in the proportion of 60:40. the fixed capital –capital
deployed in fixed assets like land, buildings, plant and machinery, jigs and fixture ,etc. –is fixed any how and hence a
little can be dine about it . This leaves us with the working capital. The study of this portion of the capital reveals that
a little over 80% of the working capital is locked up in inventory. (Raw materials, Work –In- progress, finished goods,
spares, etc.) ,which can be reduced if proper materials management techniques (JIT, MRP, scientific inventory
control) are employed.

INVENTORY MANAGEMENT

Inventory: - inventory is a list or, schedule of article / materials held on charge of a person or, stock of articles and
materials held-on behalf of an organization.

Inventory Management: - it means planning, procurement, holding & accounting and distribution of these article
and materials.

Needs of Inventory Management:-

 to cope with uncertain conditions of availability
 to cater better consumption pattern.
 To counter act lead time
 To attend probable up-ward fluctuation in customer demand.
 Advantage while purchasing a lot.
 To cope with uncertainty resulting from national and international politics.

Main purpose of inventory management:

 What quantities are required?
 When should we order /reorder?
 What quantity should be ordered?

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 Types of inventory ( According to materials)

1. Raw materials 2. Work in progress 3. finished goods

the materials, partly finished good Completed products,
components, fuel, etc and materials, ready for sales or,
used in the manufacture sub-assemblies, etc. distribution
of the product held between manufacturing
stages

Types of inventory ( According to function)

1. Anticipating 2. Fluctuating 3. Lot size 4. Transportation

inventories inventories inventories inventories
when a firm anticipating to cope with the Goods are bought raw materials and
a rise in price, fluctuation in in large lots to get finished goods are
it may purchase in bulk. Demand company the benefit of sent from one place
Quantities and hold the always keep safety discount. To another.
Same until price rise. Stock. Some amount of
In case of seasonal inventory are always
demand. In transit.

PHASES COVERED BY INVENTORY MANAGEMENT:-

i) Maintaining continuity of production by providing continuous supply of materials.
ii) Providing satisfactory service to customer.
iii) Reducing the amount of working capital tied-up in inventory by proper planning.
iv) Ensuring that the laid down procedures are followed in inspection, recording storage etc.
v) Eliminate the wastage.
vi) Establishing timing schedule
vii) Ensuring the quality and specification of supplied materials
viii) To take care to avail the concession in purchasing material.
ix) Formulating inventory receipts, issue and storage procedures.
x) Requisitioning materials where re-order level is reached.

Inventory control:-
Inventory control is the process of deciding what and how much of various items are to be kept in stock.

Pre-requisites or, inventory control must fulfill the following conditions:-

i. Determine item to be stocked.

ii. Determine when and how much to replenish.
iii. Keep suitable records.
iv. Weed out obsolete items.

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 Inventory control.

When to order? How much to order?

Fixed order fixed period Demand Supply

System system

Deterministic probabilistic

Rate of Lead time

Supply

Instantaneous Gradual

Deterministic probabilistic

Objectives of Inventory control:-

1. To minimize capital investment.
2. To minimize losses due to obsolescence.
3. Cope with fluctuation of demand.
4. Ensure uninterrupted availability of materials.
5. Maintain records.
6. Provide scientific planning.
Advantages of inventory control:-
1. it improves the liquidity position of the firm.
2. it ensure smooth production operations by maintaining reasonable stocks of materials.
3. it facilitates regular and timely supply of materials and finished goods.
4. it protects the firm against variations in raw materials delivery time.
5. it facilitates production scheduling by avoiding shortage of materials.
6. it helps to minimize losses due to obsolescence.
7. it enables firms to take advantage from price fluctuation.
Types of cost:-
1) Item cost (basic price):- it is the price of one unit.
Components are –
a) Direct material cost
b) Direct labor cost.
c) Direct expenses
d) Overhead cost.
e) Profit of the manufacturer.
2) Ordering cost:- This cost is associated with the placement of an order for the acquisition of inventories.
Components are –
a) Manpower cost – money spent in sending enquiries, receiving quotation, companies, placing and
typing order.
b) Finalizing orders and placing order cost.

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 c) Transportation cost and stationary cost.
d) Inspection cost.
3) Inventory carrying cost or holding cost: - it is defined as the cost of holding material inside and outside the
stores. It is associated with level of inventories, components of inventory carrying out are –
a) Interest on capital invested in the inventory.
b) Storage space cost including rent, electricity.
c) Handling cost.
d) Insurance and taxes.
e) Inventory maintenance cost.
f) Obsolescence cost.
g) Deterioration of quality cost.
h) Cost of maintaining inventory records cost.
4) Cost of shortage: - it is an extremely important cost that never appears in accounting records.

ECONOMIC ORDER QUANTITY:

The inventory control problem in which demand is assumed to be fixed and completely pre-determined are
usually referred to as the EOQ. In the following diagram, if we plot Quantity to X-axis and Cost to Y-axis
then we found inventory carrying cost curve or holding cost curve (upwardly stretched) .it increases with
quantity. If we plot ordering cost (as plotted in the diagram) we see that cost reduces with the increase of
Quantity ordered. After adding different points of ordering cost and holding cost curve, we can obtain
another curve which is known as total cost. In the production process there are two opposite costs, one
encourages increase in order size and other discourages.
It is evident from following diagram that the minimum total cost occurs at the point where the ordering
costs and inventory carrying cost are equal.
Inventory Control- Terminology and Different components of EOQ :-

Demand: It is the number of items (products) required per unit of time. The demand may be either
deterministic or probabilistic in nature. D= Annual Demand. It is expressed in unit.
Q = Quantity to be ordered (units/cycle)
N = Nos. of times order placed for material. It is expressed in Nos. /year.
t = Time period between placement of orders. It is expressed in year/ month / week.
Co = Ordering cost, expressed in Rs. / order.
Ch = holding cost , expressed in Rs. / unit/ annum or percentage of total cost.
Cb= Basic price of item expressed in Rs./ unit.
Tc = total cost for inventory control expressed in Rs. (annual cost)
Lead time: The length of time between placing an order and receipt of items is called lead time. tl = lead
time , expressed in months or weeks.

Safety stock: It is also called buffer stock or minimum stock. It is the stock or inventory needed to account
for delays in materials supply and to account for sudden increase in demand due to rush orders. Bs =
Buffer stock, expressed in unit.

Re-order level (ROL): It is the point at which the replenishment action is initiated. When the
stock level reaches R.O.L., the order is placed for the item.
ROL = the reorder is placed whenever the inventory level comes down to certain level. This level is called
ROL or

ROP (Re Order Level or Re Order Point)

Order cycle: The time period between two successive orders is called order cycle.

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Inventory turnover: If the company maintains inventories equal to 3 months consumptions. It means that
inventory turnover is 4 times a year, i.e., the entire inventory is used up and replaced 4 times a year.
Re-order quantity: This is the quantity of material (items) to be ordered at the re-order level. Normally this
quantity equals the economic order quantity.

Inventory Models
One of the basic problem of inventory management is to find out the order quantity so that it is most
economical from overall operational point of view. Here the problem lies in minimizing the two conflicting
costs, i.e., ordering cost and inventory carrying cost. Inventory models helps to find out the order quantity
which minimizes the total costs (sum of ordering costs and inventory carrying costs). Inventory models are
classified as shown in following figure.
Inventory Models

Deterministic Probabilistic
(Models assuming certainty)

Fixed Qty. Fixed Period

Fixed Qty. Fixed Period System System
System System

Fig: Inventory models

Inventory Cost Relationships
There are two major costs associated with inventory. Procurement cost (ordering cost) and inventory
carrying cost. Annul procurement cost varies with the number of order. This implies that the procurement
cost will be high, if the item is procured frequently in small lots. The procurement cost is expressed as
Rs./Order.

The annual inventory carrying cost (Products of average inventory x Carrying cost) is directly proportional
to the quantity in stock. The inventory carrying cost decreases, if the quantity order per order is small. The
two costs are diametrically opposite to each other. The right quantity to be orders is one that strikes a
balance between the two opposing costs. This quantity is referred to as ”Economic order quantity” (EOQ).
The cost relationships are shown in the following figure.

Annual total cost

Annual inventory
carrying cost
Cost

Annual ordering cost

Q* (Economic Order Quantity

Order Quantity
Fig: Inventory carrying cost.

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 Model-I
Economic Order Quantity with Instantaneous Stock Replenishment (Basic Inventory Model)
Assumptions
a. Demand is deterministic, constant and it is known.
b. Stock replenishment is instantaneous (lead time to zero)
c. Price of the materials is fixed (quantity discounts are not allowed)
d. Ordering cost does not vary with order quantity.
Graphical representation of the model is shown in following figure.
Consumption rate

Average
Quantity

Max. Inventory

Inventory

Time
Fig: Basic inventory model.
Derivation of EOQ formula:

i. In Mathematical way:
Let D be the annual demand (units per year)
Co = Ordering cost (Rs./order)
Ch = Inventory carrying costs (Rs./unit/unit time)
Cp = Price per unit
Q = Order quantity
Q* = Economic order quantity
N = Number of orders placed per annum
Tc = Total cost per annum.
Annual ordering cost
= No. of orders x Ordering cost/order
Annual demand
  Ordering cost/order
Order quantity
D
  Co … (1)
Q
Annual inventory carrying cost
= Average Inventory investment x inventory carrying cost.

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  Max.Invent ory  Min.Invent ory 
   inventory carrying cost
 2
QC h
 … (2)
2
Annual total cost (T c)
= Annual ordering cost + Annual inventory cost.
DC o QC h
  ….(3)
Q 2
To determine Economic order quantity (EOQ), differentiate, Annual Total cost.
equation (3) with respect to Q and set the first derivative equal to zero.
dTc  D.Co Ch
  0
dQ Q2 2
2DC o
Q*  … (4)
Ch
Q* is economic order quantity.
Note: If the inventory carrying cost is expressed as a percentage of annual average inventory investment,
then
2DCo
Q* 
CP I
Where, it is expressed as a percentage of annual inventory investment.
The optimal number of orders placed per annum
Annual demand D
N*   *
Economic order quantity Q
Optimal time interval between two orders.
Number of working days in a year
T* 
N*
Minimum total yearly inventory cost is given by
DC o Q *C h
Tcm  * 
Q 2
Substituting for Q* from equation (4)
D.Co 2 D.Co Ch
Tcm   
2 DCo Ch 2
Ch

Tcm  2DC o .Ch

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ii. In Graphical way
A
Annual total cost
C

Annual inventory
carrying cost
Cost

Annual ordering cost

O
B

Q* (Economic Order Quantity

Order Quantity
Fig: Inventory carrying cost.

Explanation:
The inventory control problem in which demand is assumed to be fixed and completely pre-determined are
usually referred to as the EOQ .
In the above diagram (graph), we plot quantity in x-axis and cost in y-axis. Then we find OC curve. This
curve is inventory carrying cost curve or, holding cost curve. It increases with Quantity. Because, we know
it consists of several cost which directly proportionate with Quantity of materials. If we plot ordering cost
(as plotted in the diagram and denoted as AB), we see that cost have been reducing with the increase in
quantity ordered. After adding different points of ordering cost and holding cost curve, we can obtain
another curve which is known as total cost curve.
In the production process there are two opposite costs, one encourages increases in the order size and other
discourages.
EOQ is that size of order which minimizes total annual (or, any other time period as specified by individual
firm) cost of carrying inventories and cost of ordering.
It is evident from above that the minimum total cost occurs at the point where the ordering costs and
inventory carrying cost are equal

Annual ordering cost

= No. of orders x Ordering cost/order
Annual demand
  Ordering cost/order
Order quantity
D
Tco   Co … (1)
Q

Annual inventory carrying cost / Annual Holding Cost

= Average Inventory investment x inventory carrying cost.

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  Max.Invent ory  Min.Invent ory 
   inventory carrying cost
 2
QCh
Tch  … (2
2

1) Since, the minimum to cost occurs at the point where ordering cost and inventory carrying cost are
equal .
So,
Tco =Tch
D QCh
 Co =
Q 2
2D
Or,  Co = Q 2
Ch
* 2 DCo
Or, Q =
Ch

Annual demand D
Optimum nos. of order placed = N   *
*
1)
Economic order quantity Q
D D
= =
Q* 2 DCo
Ch

2 DCo
Q* Ch
2) Total optimum time between two orders t* = =
D D
+  D  Cb 
D Q * Ch
Total cost Tc* =  Co +
Q* 2

   2 DCo
  
Co   +
 D  Ch
3) Tc* = Ch  + (Dx Cb)
 2 DC   2
 o
 
C 
 h  

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Establishing EOQ by problem:-
XYZ manufacturing Co. wants to determine the EOQ on the basis of the following information.

Annual usage = 5000 units.

Price/unit = Rs. 4/-
Carrying cost = Re 1/-/unit
Cost per order =Rs. 100/-
Solution
1. No. of 2. Order size (or) 3. Average 4.Carrying cost 5. ordering cost 6. Total cost /yr.
orders/yr. value of order Inventory (2)/2 (Re.1/unit) @Rs.100/order (4+5)
(1. *100)
1 5000/1=5000 5000/2=2500 Re.1*2500=2500 1*100 =100 2500+100=2600
*5 5000/5=1000 1000/2=500 500 5*100=500 1000
10 5000/10=500 500/2/=250 250 10*100=1000 1250
20 5000/20=250 250/2=125 125 20*100=2000 2125
50 5000/50=100 100/2=50 50 50*100=5000 5050
100 5000/100=50 50/2=25 25 100*100=10000 10025
The inventory control problem in which demand is assumed to be fixed and completely pre-determined are usually referred to as the
EOQ. In the following diagram, if we plot Quantity to X-axis and Cost to Y-axis then we found inventory carrying cost curve or holding cost
curve (upwardly stretched) .it increases with quantity. If we plot ordering cost (as plotted in the diagram) we see that cost reduces with
the increase of Quantity ordered. After adding different points of ordering cost and holding cost curve, we can obtain another curve
which is known as total cost. In the production process there are two opposite costs, one encourages increase in order size a nd other
discourages.
It is evident from following diagram that the minimum total cost occurs at the point where the ordering costs and inventory carrying cost
are equal.

12000
inventory
10000
carrying cost
Cost 8000
ordering cost
6000
4000
total cost
2000
0
EOQ

Quantity

EOQ under Wilson lot size formula or, Simple situation formula or, EOQ model under infinite ( instantaneous replenishment
rate. (Figure drawn below)
Assumption :-
1. the replenishment of stock is instantaneous (demand is fixed).
2. No shortage is allowed ( no back ordering)
3. price per unit is fixed and is independent to the order quantity.
 In the next figure the materials are used in a constant rate and continuously.
 The annual consumption being D unit
 Manufacture placed the orders in such away that by the time the inventory is over, the consignment of quantity Q
arrives.
 The lead time for the supply, tl time unit is constant.
 Since, lead time and consumption rate are constant, the reorder to the supplier is placed whenever the inventory
level comes down to a level , called ROL ( Re Order Level) .
 Here, ∆ABC, ∆PCE is called inventory cycle.
Safety stock:-
 It implies the stock of inventory held as a safety measure against fluctuating in demand and lead time.
 Safety stock is the function of lead time, the greater lead time, the greater safety stock.

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  Safety stock should be differentiated from working stock.
 Working stock is the stock which is generated from the orders.
 While determining the safety stock, reorder cost and reorder quantity should be considered. The cost of
reorder and quantity to be reordered depend upon the following factors.
i) The minimum level: - the minimum level of inventory is decided by taking in to account usage
value of the item, normal lead time, the availability of substitute.
Below this level the inventory should not fall.
ii) The re-order point: - the reorder point should be the minimum level + safety margin, which is
kept to ensure that shortage does not occur.
iii) The minimum level: - this level can be determined by adding up the minimum level of
inventory and standard order quantity.
iv) Standard order quantity means EOQ.

P
B Consumption rate

Average
Quantity

Max. Inventory

Inventory
A

B C E Time
Fig: Basic
B inventory model. B

Model-II
Economic Order Quantity When Stock Replenishment Is Non-Instantaneous (Production Model)
This model is applicable when inventory continuously builds up over a period of time after placing
an order or when the units are manufactured and used (or sold) at a constant rate. Because this
model is especially suitable for the manufacturing environment where there is a simultaneous
production and consumption, it is called “Production Model”.

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Assumptions
a) The item is sold or consumed at the constant demand rate which is known.
b) Set up cost is fixed and it does not change with lot size.
c) The increase in inventory is not instantaneous but it is gradual.
Production inventory model is represented in the above figure
Let p be the production rate.
d is the demand or consumption rate.
Replenishment of inventory under this system build-up during the period t p and consumption
takes place during the entire cycle T.

Note: All other symbols are same as in Model-I.

Inventory under this situation, builds at the rate of (p-d) units and inventory is maximum at the end
of production period t p.
Maximum inventory at the end of production run = (p-d) × tp
( p  d )t p
Average inventory 
2
Now, the quantity produced during production period (Q) = p  tp

 Q
tp 
P
Substituting for tp
Q Q d 
Average inventory = ( p  d ).  1  
2p 2  p
Annual inventory carrying cost = Average inventory x Inventory carrying cost
Q d 
 1  C h
2  p
D
Annual set-up cost = No. of set-ups x Set-up cost/set-up   Co
Q
D.C o Q  d 
Total annual cost (Tc)   1  C h …(1)
Q 2 p
To determine, the economic Batch (Lot) size (EBQ) differentiate equation (3) with respect to Q,
set the first derivative equal to zero.
dTc 1  d  D.C
 1  C h  2 o  0
dQ 2  p  Q

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 2 DC o
Q* 
(1  d / p)Ch
where Q* is economic batch quantity.

Note: If the inventory carrying cost is expressed as a percentage of annual inventory investment,
then

 2 DCo
Q*  (where I is expressed in )
 d
 1  p  Ch I
 
Optimal total cost is given by
Tcm  2 D Co C h (1  d / p)
Optimal number of production runs
Annual demand D
N*   *
Economic Batch Qty(EBQ) Q

Model –III
Inventory Model When Shortages Are Permitted
Assumptions
i) Ch is the holding cost per quantity unit per unit time
ii) Cs is the shortage cost per quantity unit per unit time.
iii) R quantity per unit time is the demand rate.
iv) tp is the scheduling time period which is constant
v) qp is the fixed lot size (qp = Rtp)
vi) Z is the order level to which the inventory is raised in the beginning of each scheduling
period. Shortages, if any, have to be made up. Here Z is the variable.
vii) Production rate is infinite
viii) Lead time is zero.

Determine:
(a) Optimum order level Z
(b) Minimum average cost.
Model-IV
Inventory Model with Price Discounts
When items are bought in large quantities, the supplier often gives discounts. However, if the
material is purchased to take advantage of discount, the average inventory level and so the
inventory carrying costs will increase.

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Benefits for the purchaser from large orders are, lower cost per unit, lower shipping and
transportation cost, reduced handling cost and reduction in ordering costs due to less number of
orders.
These benefits are to be compared with the increase in carrying costs. As the order size increases,
more space should be provided to stock the items.
A decision is, therefore, to be taken whether the buyer should stick to economic order quantity or
increase the same to take advantage that, at large quantities, the production costs per price are
lower (economics of scale) and, hence, part of the savings can be passed on to the customer.

Price-discount Model
Let D be the annual consumption (Demand)
C1 is the price per unit (Basic price)
C2 is the discounted priced per unit.
Co is the ordering cost.
I is inventory carrying cost expressed as a percentage of average inventory investment.
QB be the priced break quantity. (Quantity at which the price changes)

Start

Calculate Q2 and compare with QB

(Price break Qty.)

Yes
If Q2 > QB

No Purchase
Quantity Q2
Calculate Q1

Calculate annual total cost TCB at QB

and TCQ1 at Q1

No
If TCQB < TCQ1

Yes Purchase Q1

Purchase QB

Fig: Flow-chart for price discount model

Procedure (Decision Rules)

1. Calculate Q2 (Economic order Qty. at discounted price (C2)

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 2 D Co
Q2 
C2 I
Compare Q2 with QB (Price break quantity)
If Q2  QB Order quantity Q2
If Q2 < QB
Compute Q1 (Economic order Qty. at basic price (C1) and calculate –
Annual Total cost at Q1 and QB
D.C o QC1 I
Annual Total cost at Q1(TcQ1) = D.C1+ 
Q1 2
D.C o QB C 2 I
Annual Total cost at Q1 (TCQB) = D.C2+ 
QB 2
If TCQB<TCQ1 select QB, otherwise purchase Q1. (If annual Total cost at price break quantity (QB)
is less than annual total cost Q1, order quantity QB means of a flow chart as shown in above figure.

EOQ under Wilson lot size formula or, Simple situation formula or, EOQ model under infinite ( instantaneous
replenishment rate.

Assumption :-
4. the replenishment of stock is instantaneous (demand is fixed).
5. No shortage is allowed ( no back ordering)
6. price per unit is fixed and is independent to the order quantity.

AP

QUNTY

Average
inventory

tl
L
B C D E

TIME
DEMAND

 In the above figure the materials are used in a constant rate and continuously.
 The annual consumption being D unit
 Manufacture placed the orders in such away that by the time the inventory is over, the consignment of
quantity Q arrives.
 The lead time for the supply, tl time unit is constant.
 Since, lead time and consumption rate are constant, the reorder to the supplier is placed whenever the
inventory level comes down to a level , called ROL ( Re Order Level) .
 Here, ∆ABC, ∆PCE is called inventory cycle.
Safety stock:-
 It implies the stock of inventory held as a safety measure against fluctuating in demand and lead time.

19
  Safety stock is the function of lead time, the greater lead time, the greater safety stock.
 Safety stock should be differentiated from working stock.
 Working stock is the stock which is generated from the orders.
 While determining the safety stock, reorder cost and reorder quantity should be considered. The cost of
reorder and quantity to be reordered depend upon the following factors.
i) The minimum level: - the minimum level of inventory is decided by taking in to account usage
value of the item, normal lead time, the availability of substitute.
Below this level the inventory should not fall.
ii) The re-order point: - the reorder point should be the minimum level + safety margin, which is
kept to ensure that shortage does not occur.
iii) The minimum level: - this level can be determined by adding up the minimum level of
inventory and standard order quantity.
iv) Standard order quantity means EOQ.

AP

QUNTY

Average
inventory

tl
O
B E G
Tmin Buffer stock
Tmax
TIME
DEMAND

D =Average Demand in lead time.

BS= Buffer stock = D *(Tmax-Tmin)= lead time demand

ROL =tl * D + BS

tl =( Tmax- Tmin)
Average Demand = D = Annual Demand/week or month

STEPS OF INVENTORY CONTROL:

1. List out all materials

2. Standardization / codification to verify reduction.
3. Prepare materials directory.
4. Analysis and classification of all items.
5. fixed up inventory level
6. Implementation.
7. Periodic review for upgrading the systems.

Selective Control of inventories and methods

When manufacturer divide materials according to cost , criticality, availability and consumption and then use
different inventory control mechanism for each of the item in each type.
Suppose, according consumption value materials can be divided in to thee categories

20
A – 70% of consumption value.
B- 20% of consumption value.
C- 10% of consumption value.
When, marketer takes different inventory control mechanism to control A, B,&C items, then it is called selective
control of inventories.
Methods of selective inventory control:-
1. Fixed order Quantity System (Q-System).
2. Fixed interval System or, periodic review System (P-System).

1. Fixed order Quantity System (Q-System):

 The order quantity is fixed.
 The order is placed when inventory drops to re-order level.
 It is most suitable when carrying cost is measurable and significant
 It is preferred when the supplier places a minimum order quantity restriction.
 It is suitable for A and X items having highest consumption value and highest unit cost respectively.
 It is also known as two –bin system or maximum –minimum system, in this system re-order made
when inventory falls on re-order level =lead time requirement +BS.
 Further, the bin of an item is of two types, namely the main bin and reserve bin.
 From main bin we meet the demand that occurs before lead time and from reserve bin we meet
the demand during lead time.
 When main bin is empty. Fresh order is placed which should arrive well before the reserve bin is
exhausted.

Main bin
AP

QUNTY

Average F reserve bin

inventory

tl
O
B E G
Tmin Buffer stock
Tmax
TIME
DEMAND

D =Average Demand in lead time.

BS= Buffer stock = D *(Tmax-Tmin)= lead time demand

ROL =tl * D + BS

tl =( Tmax- Tmin)

Average Demand = D = Annual Demand/week or month

21
Tl, Tmax, Tmin = lead time
The above figure shows:
1) Supply equal to EOQ is received at point O and quantity in stock reaches a point A.
2) The materials are then issued and at time F, when the stock reaches the ROL, an order is placed for quantity
Q=EOQ, and supply continued.
3) At point B, the supplies of order placed at point F are received and the stock reaches P.
4) At the point E there is delayed in receiving the supplies and we cut in to Buffer stock.
5) Thus for this system of ordering , we fixed up the size of the order i.e., every time same quantity ‘Q’ is ordered
but the time of placing the order is allowed to vary depending upon the actual usage or demand.

In this case, the firm has to decide on three aspects of an item before placing the order.
a) EOQ=√2DCo/Ch.
b) Optimum Buffer Stock
c) R.O.L

2. Fixed interval System or, periodic review System (P-System).

This is also known as the FIXED-ORDER INTERVAL SYSTEM or CYCLIC REVIEW SYSTEM.
1. the reorder time is fixed.
2. the re-order quantity varies according to inventory on hand.
3. it is suitable when carrying cost in meaning less and insignificant.
4. it is preferred when the supplier will only ship at fixed date.
5. it is suitable for B and C class items.

This system has a fixed ordering interval but, the size of order quantity may vary with the fluctuations in demand.
The system is specified for any item by
i) Review period and
ii) Replenishment level ( R )

The operating procedure consists of review the inventory position regularly. once in every t unit of time . At each
review period, an order is placed for an amount equal to difference between a fixed replenishment level and actual
inventory level . the calculation of R is based on the formula –
R= Avg. consumption during review period + lead time +BS.

Since, the order quantity would be large than usual. When the demand has been less than the expectation.

The order quantity is variable in size from one review date to another date.

LIMITATIONS OF EOQ MODEL:-

1. The demand for inventory is seldom constant:- when demand fluctuates, the EOQ model will give
misleading results. In a period of rising demand , EOQ model based on historic demand level will
suggest smaller inventory levels than are economical.
2. The lead time for any supplier is generally unpredictable:- therefore buffer stocks are required to
insure against changes in lead time. It is difficult to determine buffer stock as it depends upon
uncertainty in the lead time.
3. It is very difficult to determine carrying cost:- only a rough estimate can be made of obsolescence
and deterioration costs.
4. The EOQ formula is based on assumption that no stock out will take place:- in some cases an
occasional stock-out position may be less costly than carrying excessively large stock, but, it is not
easy to determine the cost of stock out.

22
 SELECTIVE CONTROL OF INVENTORIES / CLASSIFICATION/ ABC,VED, GOLF, FSN ….ANALYSIS
Selective treatment of inventories is based on the following basic philosophy of business :- “neither one can control
everything nor one should try to do so (even if one can). Uniform control is rarely effective . Effectiveness results when
important aspects of a problem are pursued more rigorously than others. A major portion of managerial time should
be spent in performing more important jobs. Less important tasks- those involving routine decisions and which
involves less risk – should be delegated to a lower level .
this law can effectively be applied in inventory function so to identify items which are more important than others.
The classification enables managerial time being spent according to the importance of the item. Selective control is
essential since uniform control of all items:-
1. is expensive
2. gives diffused effect.
Selective control means variations in method of control from item to item based on selective basis. The criterion
used for the purpose may be cost of item, criticality, availability, consumption, etc. various classification are
employed to render selective treatment to different types of materials, each classification emphasizes on a
particular aspect. For example ABC analysis emphasizes on usage value (i.e., consumption of the item in terms of
money), VED analysis considers criticality, SDE analysis is based on procurement difficulty or availability.

Analysis criteria Classification

a) ABC (annual usage value of an item expressed
in monetary value. i.e., annual quantity * price
/unit)
ABC stands for Always Better Control.
1. COST a) HML ( it is based on unit cost of materials).
HML stands for –
H- High unit cost.
M-Medium unit cost.
L-Lower unit cost.
c) XYZ ( it is based on stock value)
2. CRITICALITY VED items ( it is based on criticality in usage)
VED stands for –
V- Vital
E- Essential
D-desired
3. PROCUREMENT DIFFICULTIES/ AVAILABILITY SDE (it is based on procurement difficulties and
/SEASONALITY availability)
SDE stands for
S- Scare item , which is not easily available in the
country.
D- Difficult items.
E- Easy available items.
S-OS analysis.
S-Seasonal.
OS- Off –seasonal
4. SOURCE OF PROCUREMENT GOLF analysis ( it is based on source of
procurement or supplier)
G- Government.
O- Ordinary
L- Local
F – Foreign
5. CONSUMPTION FSN analysis ( it is based on movement of the
item)
F- Fast moving goods.
S- Slow moving
N- Not moving item

23
 ABC (ALWAYS BETTER CONTROL) ANALYSIS

ABC analysis is basic analytical management tool which enables management to place the effort where the result will
be greatest. This techniques, popularly known as Always Better Control.
Characteristics of ABC items:-
A – no. of items less than 5-10% of total items but, consumption value to procure these materials 70 -75% of total
amount of procurement. These items require detailed and rigid control and need to be stocked in similar quantities.
These items should be procured frequently, the quantity per occasion being small.
B – These items are generally 10-15% of the total items and represent 15-20% of the total expenditure on the
materials. These are intermediate items.
The control on these items need not be a as detailed and rigid as applied to A items.
C – these are numerous ( as many as 70-80% of the total items), inexpensive ( represent hardly 5-10% of the total
annual expenditure on materials) and hence insignificant( do not require close control) items.
The procurement policy of these items is exactly reverse of A items. C items should be procured infrequently and in
sufficient quantities.

OBJECTIVE OF ABC ANALYSIS

1. It enables materials manager to exercise Selective control when he is confronted with a large no. of
items.
2. Degree of control should be rigorous for A and minimum for C.
3. The process should be accurate for A.
4. It also helpful to rationalize the number of orders and reduce the overall inventory.

Example: - 3 items accounting for a consumption of Rs. 60,000/-, Rs. 4000, and Rs. 1000/- respectively. Each being
ordered four times a year. The following pattern would then emerge.

Item no. Annual Nos. of orders Value per order Average inventory.
consumption value
1 60,000 4 15,000 7500
2 4000 4 1000 500
3 1000 4 250 125
Total inventory 8125

If ABC analysis is done , then it implies that ‘A’ item should be ordered more, say 8 orders, 3 in case of ‘B’ and 1 for
‘C’ item.

Item no. Annual Nos. of orders Value per order Average inventory.
consumption value (Rs.) (Rs.)
(Rs.)
A ( due to highest 60,000 8* 7500 3750
consumption
value)
B 4000 3 1333 667
C 1000 1 1000 500
Total inventory 4,917

24
(*)it is made arbitrarily.
If it is made according to formula then it will reduce Average inventory cost.

Item (2) Annual (3) = √ (2) (4) Nos. of orders = (5) Value (6) Average
no. consumption or Total orders*{ item per order inventory.
(1) value (Rs.) = √Annual consumption wise (3)/Total value of (Rs.) (Rs.)
value (3)}
A 60,000 √60,000=244.9=245 12*(245/340)=9 6667 3334
B 4000 √4000=63.2=63 12*(63/340)=2 2000 1000
C 1000 √1000=31.6=32 12*(32/340)=1 1000 500
Total =340 Total orders = 12 4834

Comparison between A, B and C items

Characteristics A items (high B items(moderate C items (low

consumption value) consumption) consumption value)
1. Control Strict Moderate loose
2. inventory control Fixed order quantity Fixed interval or Same as B
System System. periodic review system
2a. Control Report Weekly Monthly Quarterly
3. Safety stock Very low or no low High
4. ordering Frequent Once in three Bulk, once in a 6
months.
5.Follow-up Weekly Monthly Quarterly
6. Value analysis Rigorous Moderate Minimum
7. Sources As many as possible Two or more Two source for each
item
8. Forecast Accurate Based on past data and Rough estimate for
present plan planning.
9. Review of waste, After 15 days Quarterly Annual
obsolete and surplus.
10. Authority of centralized Combination Decentralized
purchase and storage
11. Effort to reduce lead Maximum Moderate Minimum
time
12 handling Authority Senior Authority Middle Management Fully Delegated

Steps of Conducting ABC analysis

i) Obtain unit cost of each manufactured or purchased item in inventory.

ii) Obtain the usage in units for each item or estimate the usage (future) over a period of time).
iii) Obtain the net value of the usage by multiplying the unit cost and the usage ( unit cost *no.
of units)
iv) Average the items in descending order of the usage value.
v) The number of items and their values are accumulated on a percentage of total basis.
vi) Roughly divide the list of values in to three (3) groups-A –accounts for 70-75% of total
account.; B- which account for 10-15%and rest is C item- accounts for 5-10% .

25
Example 1
The following information is known about a group of items. Classify the material in A, B, C,
classification.
Model/Number Annual Consumption in pieces Unit Price (in paise)
501 30,000 10
502 2,80,000 15
503 3,000 10
504 1,10,000 5
505 4,000 5
506 2,20,000 10
507 15,000 5
508 80,000 5
509 60,000 15
510 8,000 10

Solution:
The number of items sold in the past 12 months as well as the unit cost standard for each item are given in the
problem. Now multiplying annual consumption of each item by its; unit cost and then ranking the items in the
descending order of the usage values thus obtained, the following table is obtained:

Model Number Annual Unit price Usage value Ranking

Consumption (in Paise) (in Rs.)
(in pieces)
(1) (2) (3) (4)=(3)×(2) (5)
501 30,000 10 3,00,000 6
502 2,80,000 15 4,20,00,000 1
503 3,000 10 3000 9
504 1,10,000 5 5,50000 4
505 4,000 5 20000 10
506 2,20,000 10 22,00000 2
507 15,000 5 75000 8
508 80,000 5 4,00000 5
509 60,000 15 9,00000 3
510 8,000 10 80000 7

26
Now compute the cumulative total number of items and their usage values and convert the
accumulated total items percentage of the grand total. The following ABC classification is thus
obtained.

Rank Model No. % of items Cumulative Cumulative % Category

Usage Value In (Rs.)
(Rs.)
(1) (2) (3) (4) (5) (6)
1 502 10 42,000 48.0 A
2 506 20 64,000 73.0
3 509 30 73,000 83.0
4 504 40 78,500 90.0 B
5 508 50 82,500 94.0
6 501 60 85,500 98.0
7 510 70 86,300 98.6
8 507 80 87,050 99.42 C
9 503 90 86,350 99.6
10 505 100 87,550 100

The cut-off points are determined from the following graph.

C
100
98 B
90 501 505
83
80
73 509
CUMULATIVE % OF USAGE VALUE

70 506
60
A
50

40 CLASS B CLASS C
Rs. (98–73)=25% Rs. (100–98)=2%
30
q=40% q=40%
20
CLASS A
10 Rs. 73%
q=20%
0
10 20 30 40 50 60 70 80 90 100
CUMULATIVE % OF ITEMS (q)

27
Example 2
Perform ABC analysis on the following sample of items in an inventory:
Item name Annual consumption Price per unit (in paise)
A 300 10
B 2,800 15
C 30 10
D 1,100 5
E 40 5
F 220 100
G 1,500 5
H 800 5
I 600 15
J 80 10

Solution:
Step 1: The usage value of the items can be calculated in the following tabular form by multiplying the annual
consumption and their corresponding unit price.
Items: A B C D E F G H I J
Usage value (Rs.): 30 420 3 55 2 220 75 40 90 8

Step 2: The usage values are ranked in descending order and the cumulative percentages of the number of items
and usage values are determined.
Item Usage value in Cumulative % of number Cumulative % of
descending number of of items usage value cumulative
order items usage value
(1) (2) (3) (4) (5) (6)
B 420 1 10 420 44.50
F 220 2 20 640 67.79
I 90 3 30 730 77.41
G 75 4 40 805 85.37
D 55 5 50 860 91.20
H 40 6 60 900 95.44
A 30 7 70 930 98.62
J 8 8 80 938 99.47
C 3 9 90 941 99.79
E 2 10 100 943 100.00

28
 V – E – D ANALYSIS
While in ABC analysis items are classified according to their consumption value, in VED classification they are
classified according to their criticality.
V – Vital item – are those items whose no availability can cause havoc and can stop the wheel of organization.
E- Essential – are those item whose non availability causes temporary losses/dislocation of production.
D- Desired – which are necessary but their non-availability does not result in immediate loss of production or
stoppage.

Relationship between ABC and VED item

V items E items D items
A items Low stock and constant Medium stock and no Nil stock
follow –up and control follow-up
B items Medium stocks with Medium stock Low stocks
little follow-up and
control
C items High stocks Medium stocks Low stocks

F-S-N ANALYSIS

F-S-N analysis is based on the consumption figures of the items. The items under this analysis are classified in to
three groups : F- Fast moving , S – Slow moving , and N – non- moving.
To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into account and
the period, usually in terms of number of months, that has elapsed since the last movement is recorded.
Such an analysis helps to identify:
i) active items which requires to be reviewed regularly.
ii) Surplus items whose stock are higher than their rate of consumption;
iii) Non-moving items which are not being consumed. The last two categories are reviewed
further to decide on disposal action to deplete their stocks and thereby release company’s
productive capital.
Further detailed analysis is made of the third category in regards to their year-wise stocks and items can be sub-
classified as non-moving for 2 years, non-moving for 3 years, non moving for 5years and so on.

X-Y-Z ANALYSIS
X-Y-Z analysis is based on value of the stock on hand.( inventory investment). Items whose inventory values are high
are called X item, while those whose inventory values are low are called Z items and Y items are those which have
moderate inventory stocks.

Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.

XYZ analysis when combined with ABC analysis is used as under:

Class of items A B C
X Efforts to be made Efforts to be made to Steps to be taken to
reduce stocks to Z convert them to Y dispose off surplus
category category stocks
Y Efforts to be made * Control may be further
convert these to Z tightened
category
Z * Stocks levels may be *
reviewed twice a year

29
X Y Z analysis when combined with F S N analysis helps to formulate more specific strategies as under:

Class of items F S N
X Tighten Control Deplete the stock to Disposed off
very low level immediately at
optimum price.
Y * Deplete the stock Disposed off as early as
further at good price possible.
Z Liberalize control ( to * Dispose off as early as
reduce clerical cost) possible even at lower
price.

( * items are within control. No further action is necessary.)

XYZ, therefore helps to identify a few items which account for large amount of money locked up in stock and take
steps for their liquidation/ reduction.

XYZ when combined with FSN analysis helps to classify non-moving items into XN,YN,ZN group and thereby identify a
handful of non moving items which account for bulk of non –moving stock. These can be stidied individually in details
to take decision on their disposal or retention

PARETO’S LAW
Originally, the Pareto Principle referred to the observation that 80% of Italy’s wealth belonged to only 20%
of the population.
More generally, the Pareto Principle is the observation (not law) that most things in life are not
distributed evenly. It can mean all of the following things:
 20% of the input creates 80% of the result
 20% of the workers produce 80% of the result
 20% of the customers create 80% of the revenue
 20% of the bugs cause 80% of the crashes
 20% of the features cause 80% of the usage
 And on and on…
But be careful when using this idea! First, there’s a common misconception that the numbers 20 and 80
must add to 100 — they don’t!
20% of the workers could create 10% of the result. Or 50%. Or 80%. Or 99%, or even 100%. Think about it
— in a group of 100 workers, 20 could do all the work while the other 80 goof off. In that case, 20% of the
workers did 100% of the work. Remember that the 80/20 rule is a rough guide about typical distributions.
Also recognize that the numbers don’t have to be “20%” and “80%” exactly. The key point is that most
things in life (effort, reward, output) are not distributed evenly – some contribute more than others.
Life Isn’t Fair
What does it mean when we say “things aren’t distributed evenly”? The key point is that each unit of work
(or time) doesn’t contribute the same amount.
In a perfect world, every employee would contribute the same amount, every bug would be equally
important, every feature would be equally loved by users. Planning would be so easy.
But that isn’t always the case:

30
The 80/20 rule observes that most things have an unequal distribution. Out of 5 things, perhaps 1 will be
“cool”. That cool thing/idea/person will result in majority of the impact of the group (the green line). We’d
like life to be like the red line, where every piece contributes equally, but that doesn’t always happen.
Of course, this ratio can change. It could be 80/20, 90/10, or 90/20 (remember, the numbers don’t have to
add to 100!).
The key point is that most things are not 1/1, where each unit of “input” (effort, time, labor) contributes
exactly the same amount of output.
So Why Is This Useful?
The Pareto Principle helps you realize that the majority of results come from a minority of inputs. Knowing
this, if…
20% of workers contribute 80% of results: Focus on rewarding these employees.
20% of bugs contribute 80% of crashes: Focus on fixing these bugs first.
20% of customers contribute 80% of revenue: Focus on satisfying these customers.
The examples go on. The point is to realize that you can often focus your effort on the 20% that makes a
difference, instead of the 80% that doesn’t add much.
In economics terms, there is diminishing marginal benefit. This is related to the law of diminishing
returns: each additional hour of effort, each extra worker is adding less “oomph” to the final result. By the
end, you are spending lots of time on the minor details.

Just In Time (JIT) Concept

i. This is an acronym for Just In Time or Toyota product system and is also known as Zero Inventory
System.
ii. The Zero Inventory system does not mean literally nil inventory , small amount of inventories are
maintained ,which is required to sustain production activity between two operation in an
organization.
iii. This philosophy initiated in Japanese industry for industrial growth and captured a major share of
world market.

31
 iv. The aim is elimination of all waste, being anything not essential such as scrap etc.
v. Production part, component or sub assembling must occur Just In Time, not earlier or not later.
vi. This is accompanied by a “pull” strategy instead of “push” strategy.
vii. “pull system works without the need of costly and integrated procedures, thereby minimize the
WIP inventory.

Competitive study between Traditional buying and JIT

Characteristics Traditional JIT
1. Supplier /Buyer Relationship Adversarial Partnership
2.Contract Period Short or long term Long term
3.Communication Written purchase order Verbal or telephonic
4.Quality Inspection No inspection
5. Quantity Bulk/large Small
6.No. of supplier Many Few
7. Design process Print then quote Ask for supplier ideas.
8. Ordering cost Negotiation+ open order cost + Negotiation + transportation
expediting cost +Receiving cost + cost.
Inspection cost + Transportation
cost.
9. lead time High Low
10. Transportation Full truck of single item Full truck with multiple item

JIT WILL ONLY WORK IN COMPANIES WHERE :

1. The top management knows the price.
2. Company is looking for confidentiality rather than competitiveness.

Kanban-an Integrated JIT System

INTRODUCTION

Japanese are good at manufacturing. Just ask any global producers of automobiles, copiers, or
personal electronics what happened in the 1980s. They will probably tell you how the Japanese
captured a large share of the global-market by creating world-class standards in design, materials,
and management. What is often overlooked is the attempt to understand how the Japanese industry
succeeds at the services that support the manufacturing process (Krajewski et al, 1987: 40). Within
the production field, the Kanban process is the most significant of these services.

The concept of time-based management is nothing new for managers outside of Japan and has
been in practice for many years. However, the Kanban process involves more than just in time
deliveries and inventory control. Briggs (1993: 29) notes that Kanban process components are the
most 'exportable' of Japanese techniques, but the complete process itself has not yet been
successfully adopted outside Japan.

THE ORGANIZATION OF THIS REPORT

This report will focus on the interlinked components and features which constitute the Japanese
Kanban process of time-based management. In addition, it will examine the potential for the
successful implementation of the process into Australian manufacturing firms. Experience from

32
the adoption of Kanban theories in North American manufacturers will serve as the foundation on
which the Australian case is built upon.

THE KANBAN

The Japanese refer to Kanban as a simple parts-movement system that depends on cards and
boxes/containers to take parts from one work station to another on a production line. Kanban
stands for Kan- card, Ban- signal. The essence of the Kanban concept is that a supplier or the
warehouse should only deliver components to the production line as and when they are needed, so
that there is no storage in the production area. Within this system, workstations located along
production lines only produce/deliver desired components when they receive a card and an empty
container, indicating that more parts will be needed in production. In case of line interruptions,
each work-station will only produce enough components to fill the container and then stop (Roos,
1992: 112). In addition, Kanban limits the amount of inventory in the process by acting as an
authorization to produce more inventory. Since Kanban is a chain process in which orders flow
from one process to another, the production or delivery of components are pulled to the production
line. In contrast to the traditional forecast oriented method where parts are pushed to the line
(Roos, 1992: 113).

The Kanban method described here appears to be very simple. However, this "visual record"
procedure is only a sub-process in the Japanese Kanban management system.

ADVANTAGES OF THE KANBAN PROCESS

Roos (1992: 115) notes the following advantages of Kanban over the traditional push system:

1 A simple and understandable process

2 Provides quick and precise information
3 Low costs associated with the transfer of information
4 Provides quick response to changes
5 Limit of over-capacity in processes
6 Avoids overproduction
7 Is minimizing waste
8 Control can be maintained
9 Delegates responsibility to line workers

He further indicates that "Kanban represents an efficient tool to continuously rationalize the
production process and find the source of problems" (Roos (1992: 115). Since the circulation of
Kanban will stop if there is a production problem on line, it is easy to both spot and correct the
problem instantaneously.

THE KANBAN PROCESS- MORE THAN INVENTORY CONTROL

To managers outside of Japan, Kanban may look only like a pure production method having little
or nothing to do with the surrounding environment. This is a fallacy. Instead, the concept takes
form on the shop floor, in close interaction between the work force and management, and more
importantly, involves both internal and external customers. Kupanhy (1995: 62) identifies Kanban
as a production system which draws many of its elements from two primary sources: industrial re-
engineering, and work force (Japanese) Kanban management.

33
INDUSTRIAL RE-ENGINEERING AND KANBAN

Industrial re engineering which goes hand in hand with Kanban consists of elements such as:

1 Modular/cell production. Flow-of-products-oriented layout of processes and machines layout.

2 U-shaped production/processing lines
3 Total preventive maintenance
4 Mass production of mixed models

The interrelationship between the Kanban concept and industrial re-engineering is clear.

Modular/cell manufacturing, which is sometimes referred to as group technology involves

organizing machinery so that related products can be manufactured in a continuous flow
(Kupanhy, 1995: 62). Here, products flow smoothly from start to finish, parts do not sit waiting to
be worked on, and forklift trucks do not travel kilometers to move parts and materials from one
part of the plant to another. This can be contrasted to a typical production system, where machines
are grouped by function and products move from function to function from one end of a facility to
another and back again. This results in long waiting times between procedures. Kanban will not
work effectively without efficient logistics systems and process-oriented plant layouts. Kanban
controlled production and the Kanban itself must be able to flow smoothly between processes
(Kupanhy, 1995: 63). Modular/cell manufacturing can be realized by U-shaped processing lines,
which integrate the manufacturing process into a continuous flow and increase supply accessibility
to the lines. It would be impossible to join different processes to form a U-line if processes are not
integrated. In addition, Total Preventive Maintenance, which prevents machines from breaking
down or malfunctioning during the production time, also contributes to the efficiency of Kanban.

Toyoda Gosei Co. advisor Taiichi Ohno, architect of the Toyota Kanban system believes that the
real benefits of Kanban probably will not be realized until the auto industry moves into a mixed
production mode in which modular production methods are employed (Schreffler, 1987: 74).

TYPES OF INVENTORY CONTROL SYSTEMS

Managing our inventory as a retailer is a humongous task. Inventory management grows more and
more complicated with increase in sales volume and diversification of product assortments. In this
post, we will discuss the various methods I have come across in retail industry for inventory
control.
Types of Inventory Control systems :
- ABC
- Two Bin Method
- Three Bin Method
- Fixed Order Quantity
- Fixed Period Ordering
- Just In Time
- Vendor Managed Inventory

34
ABC Method :
This is one of the common methods used across retail industry and it is at times coupled with other
methods for better control on inventory. This is more of an inventory classification technique
where in products are classified based on the sales contribution and importance of the same in their
assortment plan.
A- Category products will be the maximum grocers in sales and flagship products with higher
margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales
are classified under A category where tight control on inventory is required to ensure no loss in
sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle
C-Category products are bottom of the line contributing less to sales. These items are marginally
important for the business and are kept only for the sole purpose of customer requirement.
B-Category products are important to the retailer but are less important compared to A Category
products.

TWO BIN Method :

This is a simple method used usually in warehousing where in an item is stored in two locations or
bins in a warehouse and the stock is replenished in the first bin from the second bin once the first
bin is consumed completely. The required quantity to be filled in the second bin is placed for
ordering.

The availability of stock in each bin is calculated based on reorder lead time to ensure enough
stock is made available till the new stock arrives.

35
THREE BIN Method :

This is a common method following in manufacturing where Kanban system is being followed. It
is similar to two bins system with a third bin at the suppliers' location. The supplier will not
manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each with
a Kanban card tracking movement of inventory is available , one at manufacturing/ shop floor, one
at the shop/back store, one with the supplier. Once the inventory in manufacturing/shop floor
bin/display is consumed/sold, it is replenishmed with the complete bin from the back store/shop.
Later the back store bin is sent to the supplier and replace with a complete bin from the supplier.
Then the supplier will manufacture to fill the inventory in the third bin with him. This will act as a
complete loop until manufacturing of the product is ceased.

FIXED ORDER QUANTITY :

This method is used to avoid ordering mistakes and ensure regular replenishment of existing
products. Only a fixed quantity can be ordered at one time for the item. This type of ordering is
usually used in auto replenishment of goods where in auto reordering point is set in system and
when the product's inventory level hits the reordering point or minimum stock levels, an order is
placed to the maximum stocking capacity of the product. To use this method the retailer should
know the minimum and maximum stocking capacity of the product based on space allocated and
the sales trend.

In the above, the item has maximum stocking capacity of 24 and reorder point is set as 4, so when
the inventory hits 4 units, a purchase order is auto generated for 20 units to full fill the gap.

36
FIXED PERIOD ORDERING :
In this system there is fixed time interval between every order placed for the item. For example a
vendor will visit the store in person and check the inventory of the respective products and
resupply the products based on the sales for the time duration. This kind of ordering is done in
small format stores like pharmacies and grocery stores

JUST IN TIME :
The objective of JUST IN TIME method is to increase the inventory turnover and at the same time
reduce the inventory holding cost. JIT inventory system also exposes the unwanted or the dead
inventory held my the retailer/ manufacturer. This method is ideal for manufacturing organisation
and it is not used in Retail industry in general. This will also involve usage of Kanban card to track
inventory movement.

VENDOR MANAGED INVENTORY :

As the name explains, it involved SKUs managed directly by the supplier. Inventory is replenished
based on the sales on regular intervals by the vendor. The retailer provides shop floor space and
the vendor is charged a consignment rate on every product sold at the location. The ownership of
the items from receiving to sales and inventory loss if any will be with the supplier.

Inventory Control IN HOSPITAL

Inventory control is a tool of management which is used to maintain an economic
minimum investment in materials and products for the purpose of obtaining a maximum
financial return.

In the Inventory control system, control is exercised by fixing a minimum and maximum
stock level for each item. An item is reordered in such a way that the stock level, at any time,
never goes beyond the minimum level fixed for it. Similarly, the quantity to be reordered is so
adjusted that the stock does not exceed its maximum level. Thus, the system answers the two
fundamental questions-when to reorder and how much to order.

Objectives of Inventory Control:

To reduce the financial investments in inventories.

To minimize idle time by avoiding stockouts and shortages of essential medical and
surgical items.
To avoid losses from inventory obsolescence.
To improve quantity of care in hospitals.
What is Inventory?
Inventory is the sum total and costs of all supplies, official and non-official, wherever
they may be stored, that have not yet been used.

Principle of inventory control:

37
 The main principle of inventory control is that items for which annual consumption is
high, orders are placed frequently so that the inventory level is as low as possible. For items
whose annual consumption is not high, sufficient stocks are maintained and orders placed less
frequently.

For proper control of inventories, the following terms should be understood properly:

Lead time
Buffer stock (Safety stock or reserve stock)
Optimum safety stock
Economic Ordering Quantity (EOQ) System
ABC analysis
VED analysis

Lead time:
Lead time is the average duration of time in days between the placing of order and the
receipt of materials. When determining the quantity of any item to be ordered we have to take
into consideration this ‘Lead Time’ so that orders could be placed at a time when the existing
stocks are sufficient for the needs of the hospital during the lead time.The lead time to procure
any item can be divided into two parts, namely;
1. Internal lead time
2. External lead time

1. Internal lead time:

Internal lead time is the time required for the organizational formalities to be completed.
2. External lead time:
External lead time is the time taken in placement of order and receipt of goods.
Total lead time:

The total lead time can be computed by working out the time taken in internal and
external procurement processes.

Internal lead time (ILT) External lead time (ELT) Internal lead time (ILT)
+ +
Requisition order Placement of order and Taking unit in stock
Receipt of goods

38
 It is a common belief that external lead time should be controlled and reduced, but in
actual practice the internal lead time constitutes a considerable part of total lead time and offers
ample scope for reduction. The internal lead time is with in the purview of the administration.
The external lead time cannot be avoided but it can be prevented for exceeding the stipulated
time by:
Timely reminders and follow up;
Judicious expending and maintaining good relations with the suppliers;
Penalty for delayed supplies.

Buffer stock (Safety stock or Reserve stock):

Buffer stock is the quantity of stock set apart as a safeguard against the variations in
demand and procurement period. This quantity of item can be used only at the time of
emergency for unforeseen demands. It is calculated by multiplying the difference between
maximum and average consumption rate per day by the lead time for the item.
Reorder level:
This term is used to denote the stock level at which fresh order has to be placed. This is
equal to the average consumption per day multiplied by the lead time plus the buffer stock. At
the time of ordering when the stock reaches the reorder level we will assure that the chances of
‘Stockout’ are practically nil.

Optimum Safety stock:

If the safety stock maintained is inadequately low, the inventory carrying charges on the
safety stock would be low but stockouts will be frequently experienced and stockout costs would
be very high. Hence it calls for inventory costs to arrive at an optimum safety stock. Stockouts
may affect the functioning of the hospital in the following ways: Quality of patient care is
affected
adversely
Patient satisfaction
Emergency purchase of stores at high cost
Extra transportation charges
Overloading of machines or men.

Economic Ordering Quantity (EOQ) System

This is the fixed quantity of material for which order is to be placed each item. In the
cyclic system, it is the requirement of review period and lead time plus buffer stock minus stock
in hand. In the Two-bin system, it is calculated by using a formula which takes into consideration
the annual demand (A) for the item, the ordering cost per order (S), unit cost of item required (C)
and carrying cost per rupees of inventory per year (I). The formula is:

2AS
Q =
IC

39
 Once the order quantity is known, the frequency for placing the order can be calculated
by dividing the annual consumption with the order quantity.

Advantages:

In this system of ordering the following are the major advantages:

Each item of the store can be procured in the most economical quantity, hence called
economic ordering quantity system.
The item is purchased only when it is required to be purchased.
Positive control can easily be exercised to maintain inventory investment at the desired
level.

Disadvantages:

This system functions correctly only if each of the items exhibits reasonably stable usage
and lead time. When these factors change significantly, new order quantity and new order point
is required to be determined and in such cases, the system becomes extremely cumbersome to
operate.
ABC Analysis

ABC stands for ‘Always Better Control’. The intention is to control the best, then better
and, lastly the good. ABC analysis is the analysis of stores on cost criteria. By analysis of the
total cost of various inventories it has been found that inventories can be divided into three
groups as A, B, and C. the analysis has revealed that 10 percent of items of inventory attribute to
nearly 70 percent of the value of the inventory, 20 percent of the items attribute to 20 percent of
the value of the inventory, and 70 percent of item of inventory will be of low value and attribute
only 10 percent of the value of the inventory.

Based on ABC analysis, an average pattern of percentage of item and percentage of their
respective rupee values can be worked out as follows:

Item Percentage of items Percentage of rupee value

‘A’ items 10 70
‘B’ items 20 20
‘C’ items 70 10

It has been seen that a large number of items consume only a small percentage of
resources and vice verse. ‘A’ items represent high cost centre, ‘B’ items represent intermediate
cost centre, and ‘C’ items are low cost centres. So far as inventory control is concerned, the
following guidelines help in keeping the system optimum:

40
 ‘A’ items:
Tight control should be exercised.
Rigid estimates of requirements should be maintained.
Strict and close watch should be kept.
Safety stocks should be low.
Management of items should be done at top management.
Exact cost of individual items should be counted.
‘B’ items:
Moderate control should be exercised.
Purchase should be based on exact requirement
Reasonably strict watch and control should be kept.
Safety stocks should be moderate.
Management should be done at middle level.
‘C’ items:
Ordinary control measure should be exercised
Purchase should be based on usage estimates.
Controls exercises may be done by storekeeper
Safety stocks should be high
Management should be done at lower levels.

From the above, it is observed that ‘A’ class items receive strict control and ‘B’ class
items receive moderate control from overstock and stockout points of view, and ‘C’ class items
are not subjected too much control or attention.
VED Analysis

This analysis is based on the critically of the items in relation to the functioning of the
hospital. The items can be classified into Vital (V), Essential (E), and Desirable (D) items.
‘V’ items:
These are vital items without which the hospital cannot perform its functions, that is, patient care.
These items should have more safety stocks to ensure a higher degree of safety. These items
should be available at all times, and they should be controlled by the top management.

‘E’ items:
These are essential items without which the hospital can function for a short period but which may
affect the quality of patient care to a limited extent. These items can be controlled be middle-level
managers.

‘D’ items:
These are desirable items, the non-availability of which for a considerable period may not affect
the functioning of the hospital. Such items can be controlled at the lower management level.

41
An example of the coupling matrix model-1 fro equipment between critically and cost is shown in
figure.

V E D

H Defibrillator X-Ray machine Air-contains

1 2 3

M Ventilator Electric cutlery Ultrasonic wash

4 5 machine
6

L Oxygen Patient Trolley Electric BP

Regulator 8 Apparatus
7 9

Cell 1 contains Vital and high cost items like defibrillator. It must be noted that a material
managers has to comprehensively supervise category 1 items since an item may be a low cost
one but critical for patient care e.g. oxygen regulator.

Just in Time
A concept developed by the Japanese in which required materials are delivered by the
original supplier to the location where they are utilized and at the time they are needed.
Definition:
Just in time manufacturing is defined in many ways, but the most popular is the
elimination of all waste and continuous improvement of productivity. Waste means anything
other than the minimum amount of equipment, parts, space, material and worker’s time
absolutely necessary to add value to the product. This means there should be no surplus, there
should be no safety stocks and lead times should be minimal; ‘if you can’t use it now, don’t
make it how’.
The long term result of eliminating waste is a cost efficient, quality-oriented, fast
response to customer needs such as organization has a huge competitive advantage in the
marketplace.

Just in time environment

Many elements are characteristic of a JIT environment. They may not all exist in a
particular manufacturing situation but it general they provide some principles to help in the
development of a JIT system. These can be grouped under the following headings:
1. Flow manufacturing
2. Process flexibility

42
 3. Total quality management
4. Total productive maintenance
5. Uninterrupted flow
6. Continuous process improvement
7. Supplier partnership
8. Total employee involvement

Techniques of JIT:
The philosophy and techniques of JIT manufacturing discussed in this chapter are related
to how process and methods lies with manufacturing and industrial engineering. Manufacturing
planning and control is responsible for managing the flow of material and work through the
manufacturing process, not designing the process. However, manufacturing planning and control
is governed by and must work with the manufacturing environment.
1. Manufacturing planning and control

  
Forecasting
  
Master planning
  
Material requirements planning
  
Capacity management
  
Production activity control
  
Purchasing
2. Process design
  
Flow manufacturing
  
Process flexibility
  
Total quality management
  
Uninterrupted flow
  
Total employee involvement
 
Supplier partnership

Scientific Techniques
1. Feedback loop
2. Time series analysis
3. Value analysis
4. Queuing theory
5. PERT and CPM
6. Statistical quality control
7. Work study
8. Cost analysis
9. MBO
10. Quality circles
11. MAPs.

1. Feedback loop:
The hospital, in one way can be desired as a collection of functional service units. Each
of the units performs some specialized function. The departmental organizational structure of

43
 units, such as nursing, dietetics, radiology, laundries etc. are in fact built in this manner. In a
typical acute hospital there may be more than thirty such functional units. The functions of the
units vary widely and these may range form removal of waste and garbage to very specialized
clinical functions. Never the less form the point of view of the hospital manager each of these
units can represent a basic feedback loop or can provide result expected information or goal
achievement results. Each unit has a manager or a group of supervisors.
2. Time Series Analysis:
In the context of economic and business researchers, we may obtain quite often data
relating to some time period concerning a given phenomenon. Such data is labeled as ‘Time
Series’. More clearly it can be stated that series of successive observations of the given
phenomenon over a period of time are referred to as time series.

3. Value Analysis:
According to Miles, ‘the pioneer in value analysis is implemented by the use of a specific
set of techniques, a body of knowledge and a group of learned skills’.
Value is one of the most used words and has several meanings. From materials view
point value of an item may be thought of as composed of: (i) the functions required of the item
(ii) features which the user usually the patient wants and is willing to pay for it.
4. Queuing Theory:
A queuing system can be described as composed of patient arriving for service, waiting
for service if it is not immediate and if having waited for service learning the system after being
served
The study of a problem would take into account:
a. The arrival pattern : regularly or randomly varying
b. The no of queues: single or multiple
c. The queue discipline: FCFS or any other
d. The no of service points: single or multiple.
5. PERT and CPM:
A time-event network analysis system in which the various events in a program of projects are
identified with the planned time established for each is called programme evaluation review
technique (PERT) or Critical Path Method (CPM). It application is sequential scheduling of
problems, where certain activities cannot be started until others have been completed. Building
contracted and massive developmental projects for hospital are the most common example.

6. Statistical Quality Control:

It is the application of statistical techniques to which determine how far the product conforms to
the standards of quality and precision and to what extent its quality deviates from the standard
quality. The purpose of statistical quality control is to discover and correct only those forces which
are responsible for variations outside the stable pattern.
7. Work Study:
Work study is a management tool to achieve higher productive efficiency of an organization. It is
concerned primarily with human manual work, more efficiency with the efficient design of such
work and with the establishments of standards of performance.

44
International labour organization, ‘work study’ as the technique of method study and work
measurement employed to ensure the best possible use of human and material resources in
carrying out a specified activity.
8. Cost analysis:
A large part of management decision deals with alternatives differing in both the amounts of
capital and operating expenses. To assess the value impact calculation of expenses and cost are
essential. Cost analysis is a systematic pattern of analysis, which will aid in reducing cost in the
selection of alternatives and to gain the maximum benefit from a given level of expenditures.
9. MBO (Management By Objectives):
MBO is process where by the superior and the subordinate managers of an organization. Jointly
identify its common goals, define each individual major areas of responsibility in terms of the
results expected of him/her, and use these measures & guides fir operating the unit and assessing
the contributions of each of its members.
10. Quality Circles:
Quality circle is a people-building philosophy capable of providing astonishing results. Quality
circles is a small group of people doing similar or related work who meet regularly to identify,
analyze and solve quality, production, cost reduction, safety and other problems in their work area
leading to improvement in their performance and enrichment of their work life.
11. MAPs:
The organization ability can be improved by the use of management problem solving methods
(MAPs). The problem solving case study approach involving actual or contingency situations is
suitable for all management levels.

Inventory Model
One of the basic problems or inventory management is to find out the order quantity so that it is
most economical from over all operational points of view. Here the problem lies in minimizing the
two conflicting cost, i.e, ordering cost and inventory carries cost. Inventory model help to find out
the order quantity which minimized the total costs (sum of ordering costs and inventory carrying
costs). Inventory model are classified in to two categories;

1. Deterministic Model
2. Probabilistic Model

Both of them are just an elements or parts of inventory model. First deterministic
model assumes certainty i.e, by analyzing and referring the main dates, events, past
records, situation, sales and demand, consumption etc. by analyzing above factors it
predicts the future. But incase probabilistic model all are assumed by probability and
chances, but for this analysis no need of keeping long or more information details to
analyze. Just an experience personnel and a person from statistics and maths can able to
tell the future requirement. Any way both of the model follows the same period and
quantity system. The details of there are as follows:
(i) Fixed order quantity System
(ii) The working of the system
(iii) Fixed periodic review system
(iv)

45
 I Fixed Order quantity system:
This is also called Q-system. In this system, the order quantity is fixed and ordering time varies
according to the fluctuations in demand.
Characteristics of this system:
 Re-order quantity is fixed and normally it equals economic order quantity (EOQ)

 Depending upon the demand, the time interval of ordering varies.

 Replenishment action is initiated when stock level falls to Re-order Level (ROL)

 Safety stock is maintained to account for increase in demand during leas time.

JJJ Working of the system:

To begin with the stock from the first bin is consumed first. The emptying of first bin indicated
than the stock has reached ROL and the replenishment action is initiated. The quantity in then
second bin is thus consumed during the replenishment period. This system reduces the work
involved record keeping.
4. Fixed periodic review system:
It is also called fixed ordering system or P system. This system has a fixed ordering interval but the
size of the order quantity may vary with changes in demand. In this system, the inventory position
is verified at a prefixed interval (weekly/monthly/quarterly) then depending upon the situation,
replenishment action is taken.
Characteristics of this System:

(i) Order interval is fixed for individual item or group of items.

(ii) Stock is received at periodic intervals and quantity which will bring the
inventory to maximum level is ordered.

Basic Knowledge of Hospital Stores management (theoretical knowledge

only) location & layout- standardization, Codification & Classification of
materials- material accounting & physical distribution-store documentation-
condemnation & disposal of scrap , surplus & obsolete materials-types of
stores in hospital Preservation of Stores

GENERAL STORES MANAGEMENT

Objective of store management / objective of store
1) THE MOST IMPORTANT OBJECTIVE is to provide uninterrupted supply of the raw materials,
equipments, tools, components, to the user department.
2) Receive the materials (raw materials, components, tools and equipments) and check the materials in
respect to bills of materials.
3) Receive, inspect, and issue the materials.
4) Receive and issue finished goods
5) Accept, store, arrange scrap for disposal.

46
 6) To provide adequate and proper storage & preservation so that obsolescence and damage of
materials will be minimized.
7) To provide proper safety and security to materials & personnel.
8) To meet the demand of the consuming departments by proper issues and account for the
consumption.
9) To minimize obsolescence, surplus, and scrap through proper codification, preservation and
handling.
10) To ensure good house keeping, so that material handling, material preservation, stocking, receipt
and issue can be done adequately.
11) To assist in verification and provide supportive information for effective purchase action.

Functions of Scientific Store Management

The working of store need to be organized to perform the following functions:
i. Requisitioning from purchasing department an economical quantity of material for delivery at the
most appropriate time.
ii. Exercising control on quantity of material received.
iii. Storing and protecting materials against hazardous condition, weather, deterioration and
pilferage.
iv. Issuing materials against properly authorized material requisitions.
v. Maintaining exact records of all receipt, issues, and balance to facilitate ordering of required
materials.
vi. Maintaining adequate records of records of receipt and expenditures.
vii. Maintaining adequate stock of materials to serve production needs.
viii. Keeping inventory investment within desired limits.

In another Way We can Determine the Functions of Store Management

1) Identification:-it is the process of codifying and describing all items required to be stocked.
2) Receipt: - it is the process of accepting after inspection all materials required for use and (or)
accepting of end product.
3) Inspection: It is the quality checking pf all incoming materials.
4) Storage: It is the process of storing the materials in the warehouse.
5) Stores accounting: It is charging each issue voucher in a manner so that the money spent is
properly allocated.
6) Stock control: It is the process of provisioning , which mean continuously arranging, receipt and
issuing of stocks so as to ensure required service consistent with economy.
7) Stock record: It has to be maintained day to day position of receipt issue.
8) Stock taking: It is the process of verifying physically the quantity of materials.
Corresponding with the above responsibilities and functions every store should have the following sections.
 Identification
 Receipt and inspection
 Stocking wards that look after storage issue.
 Dispatch
 Ledger, which looks after stock records.
 Stock verification.
9) Issue and dispatch: It is process of receiving demands from consumers and issuing the demanded
materials without loss of time.

Functions of Store can be divided into Two Heads

1) Primary function and 2) Secondary function
1) Primary function:
a) To make available a balanced flow of raw materials, components, tools, equipment and
other stores required for operation.

47
 b) To provide maintenance materials spare parts and general stores as required.
c) To received and issue materials after physical inspection and proper identification.
d) Storage and preservation of materials.
e) Safety and security of materials.
f) To arrange for collection, acceptance of scrap & other discarded materials for disposal.
2) Secondary function:
a) Quantity inspection and acceptance.
b) Stores accounting.
c) Stock control.
d) Feedback information to material control section.
e) Help in standardization and variety reduction.
f) Service information such as:
i. Demand for materials and its specification quantity, etc.
ii. Notification when stocks are running low.
iii. Details of deliveries rejected on inspection.
iv. Certification of invoices for quantity and quality.
v. Particulars of anticipated change in consumption.
vi. Warning of items urgently required for breakdown.
vii. Listing of obsolete, surplus and scrap materials for disposal.

Benefits of Scientific Store Keeping / Advantages of Store Management

i) Scientific stock control reduces losses due to accumulation of inventories.
ii) Efficient stores issues reduce down time in production and increases profit.
i) Periodic review detects obsolete and non- moving items and helps the firm to get rid of
unproductive inventory.
ii) Follow up with purchase, helps to avoid stock outs and the production losses.
iii) Proper record keeping, provides exact picture of inventory in store to higher level of management.
Types of Stores
According to function (functionally) stores are of five types.
1. Receiving stores.
2. Main store.
3. finished product store (warehouse)
4. Special store.
5. Scrap yard.
According geographical area stores are of four (4) types:
1. Central store
2. Regional store.
3. Divisional store.
4. Sub store.

Methods of Storing
Preservation of Stores
Storage means that as long as materials belong to the custody of stores department, they should free from
damage and deterioration and maintain their required properties. preservation, technically is the protection
of stores from heat, moisture, dust corrosion rust fire, etc so as to maintain materials in their original form.
Preservation measures serve three objectives:

a. To keep materials safe from all kinds of damage.

ii) To maintain materials to their original value and quality.
iii) To reduce storage losses and consequently to reduce production cost
Deterioration is caused by
I. climate and environment

48
 II. physical and chemical agents
III. Biological agents.

General rules of preservation:

i) Materials should not be kept in direct contact with the floor; they should be kept on raised
platforms. This prevents moisture from ground, dust, insect,
ii) All items those are perishable – should be issued on “first in first out” (FIFO) principle.
iii) Expiry date should be informed for replacement
iv) The store should be kept free from rodent menace for which the following measures are
essential:
a) The floors should be in concrete or bricks.
b) Windows should be kept at least one meter above the floor level.
c) The edges of the windows should lined by tin plates. Should be sealed properly
d) Drains pipes should be kept provided with wire mesh inside.
e) The rat holes should be fumigated.
v) Pesticides and fungicides should be sprayed in order to remove termites, ants and fungi in the store.

Definition of Stores:

Store keeping involves “to receive materials, to protect item, while is the storage from
damage & unauthorized renewal to issue the materials in the right quantities, the right time, to
the right place and to provide there services promptly and at least cost.

Meaning of Stores:

The term store in general manner is a place (opened & closed) where the goods,
inventories, stocks, spares, drugs, surgical instruments, dietaries etc are kept for meeting day to
day activities periodic works and so on.
Importance of Stores:
Receiving materials ordered by purchased department
Informing indenting department regarding the arrival of the material
Inspection of materials
Preparation of goods receipts (GRs) for approved material.
Entry of materials into stores ledger.
Storage and preservation of materials
Issue of materials against authorized indents.
Bill passing of materials received
Entry of issued materials into ledger.
Physical safe custody of materials.
Raising purchase requisition for inventory items.
Types of Stores:
The hospital stores can be divided into twp broad categories.

1. Consumable Stores This store are those which can be used only once.

2. Non-consumable Stores are those which can be used again and again.

49
Planning of hospital stores:
Hospital stores can be planned according to the nature of store.
Medical and drug stores:
The medical and drug stores consists of emergency drugs, special drugs, medical gases
and chemicals, etc.
Surgical stores:
These stores have bandages, gauges, sutures, instruments, equipments, rubber goods,
glass items, cotton and general surgical items.
General stores:
The items of general stores are cleansing materials like soap and detergents, enamel
wares, ward and general furniture, small electric items.
Linen stores:
Linen stores include textiles, synthetic fabric, woolen articles and furnishings.
Stationary Stores:
All the stationary items, including medical forms and papers for medical documentation,
etc., are available in stationary stores.
Dietary stores:
Raw materials like vegetables and fruits, tinned items, dry rations like atta and rice, etc.,
are dealt by dietary stores.
Engineering and Maintenance stores:
These consist of spare parts of civil, electrical, mechanical and electronic items, etc.

Layout of Stores
The efficiency of storekeeping depends upon how and in what way the materials
management is planned.

Meaning of stores layout:

Stores layout is an effort to average materials other parts and other services within a
predesigned building ensuring study, smooth the environmental flow of materials.
Definition:
Aims of stores layout:
The following are the aims of a good layout:

Maximum utilization of the available space

Greater efficiency of the stores depot 

Easy accessibility to all materials 

Maximum security of all materials 

Proper maintenance of records 

50
 
Greater economy and use of lesser time in receip 

Minimum of spoilage, damage, and other kinds of losses.

Types of stores layout:

1. Straight through flow:

This is the simplest form of layout design. The goods enter through one door and stocked. In
straight line, packed line, packed moved in one direction along the length of stores house & move
on through the exit. This can be shows the above diagrams.

2. Element basis:

In this the stores are stored either on their consumability. Fast moving, medium moving
and slow moving are other characteristic such as long life, short life or expandable or non-
expandable are required in special temperature such as cold room.

Location of Stores
Meaning of store location:
Stores location concerned with a store should be located at a place where in habitance are
interested in the success a material can be issued receive & purchase & profit & cost its
economical menu.
Hospital storerooms have normally been found located in areas which are either unusable by other
departments or are not suitable for other functions of the hospitals. Basement is one of such areas
being use as stores. They are poorly designed even for use as storage facilities with low ceilings,
exposed pipes, poor access and flow design.

Aims of stores location:

The location of stores should be such that it fulfils the following aims:
 
To receive and issue materials within least possible time.
 
The cost of transportation is economical
 
Materials are saved form unnecessary pilferage, theft and fire
 
To have strict control over the movement stock
 
Unnecessary fatigue and monotony is avoided
 
To be easily accessible to all user areas of hospital.

51
The store building should be close to the area where the materials are required. While selecting a
suitable site for a store, due consideration should be given to temperature, humidity and lighting
arrangements and also to scope for future expansion of the store.

Factors influencing location of stores:

These are 2types namely

1. Internal
2. External
1. Internal stores location factors:
 
Maintenance of suitable temperature
 
Separate place and rooms for storing
 
Maintenance proper records
 
Enough control
 
Proper packaging
 
Availability of material handling equipment
 
Machinery for early disposal
 
Trained & talented store keeper.

2. External stores location factors:
 
Enough transport facility
 
Favorable climate
 
Nearness to the organization
 
Attractive & spacious building
 
Enough security
 
Facility for disposal
 
People friendly location

Stock Routines / Daily activities of stores / steps / procedure of stock or store keeping:

Receipt System

Physical System

Stocking / Storing
Practice

Issue Control

52
 A) Receipt System:

  
Receipt from outside supplementing
  
Planning labour contracts for loading & unloading
  
Reports fro stores inspection
  
Materials issued to production
  
Updating stores document
  
Conception controlled
  
Insurance disposable
 
Transport contract
Stores Receipts
Receiving concerns control on quantity and quality of materials from the time they are received until they are
accepted and taken into stock.
Receiving is though a clerical operation but is the most important function of stores management. Its importance can
be gauged from the following:
 Errors in purchase transaction can be detected more easily at the time of receiving of material rather than
afterwards.
 Correctly performed receiving function can prevent malpractices.
 Receiving department can assist purchase department in improving effectiveness of their vendors.
Receiving department therefore, should not be looked upon as merely a clerical operation but an important
function designed to throw up error automatically.

Responsibilities of Receiving Stores

The receiving store is charged with the following responsibilities.
i) Verification of correctness of paperwork and appropriateness of supply before accepting the goods.
ii) Verification of quantities.
iii) Unloading of materials.
iv) In warding of the consignment.
v) Informing purchase/ indenter/PPC regarding receipt of goods.
vi) Preparing necessary documents
vii) Arranging inspection of materials.
viii) Returning all rejected goods and all chargeable empties back to suppliers.
ix) Forwarding accepted materials to appropriate stores for storage.

Nature of Materials Receipt

Material in the receiving store are received from following sources:
i) Purchased materials received from supplier.
ii) Materials received from customer for processing.
iii) Materials returned by customer as defective.
iv) Materials returned by the customer on account of excess supply.
v) Defective materials returned by customers during the warranty period.
vi) Tooling , gauges, etc. received from customers “on loan” to be returned .
vii) Semi-finished or finished jobs received from vendors.
viii) “On loan materials” returned by the vendors.
ix) Delivery of materials by the couriers.
x) Materials received from forwarding agents against imports.
xi) Petty cash purchases by the purchase personnel.

Documents Used in Receiving

The following documents are received/ raised for receipt transaction:
1. Delivery challan:
 Also called dispatch memo, delivery note or delivery advice.

53
  It is sent by the supplier with the material.
 It lists the item details and the number of packages sent by them.
 Two copies of the delivery note are sent by the supplier to the buyer.
 Buyer retains the original and returns the second copy duly signed asa proof of safe delivery.
2. Rail way receipt (RR)/ lorry receipt (LR): Issued by the railways/ transporter is the document which acts as
an authorization slip for getting the delivery of goods by the purchaser from the railways/ transporter.
3. Bill of entry: It is received from the clearing agent against imports.
4. Cash memo: when cash purchased is made then it is used as a receipt for the money which buyer has paid
to the seller.

Receiving Procedure
1. In warding at the security gate:
 It guards against the malpractices by store personnel.
2. Verification correctness of paper work and appropriate ness of supply:
 Right kinds of goods are only received.
 Goods should be received in the right time, not very early and not late.
 Right quantity goods should be received.
3. In-warding in the receiving stores
 Verifying number of packets (quantity checking).
 Observing apparent damages (damage and shortage checking). If any damage or shortage found then
discrepancy note should be made and it should be duly signed by carrier.
 Unload materials with the help of carrier and own people at the appropriate place.
 Entering details of the consignment in to a goods received register.
 The carrier copy is also stamped duly signed by receiving authority.

4. Verification of quantities:
 Loss of packages: the number of packages received may be less than the number that is supported to
be received.
 Damage of packages: the packages on receipt may be found to be broken or damaged.
 Wrong items: material different than what has been ordered may be found on opening of the package.
 Damage to the materials: materials within the package should be checked that these are in the right
condition. If any thing found damaged then company has to do according to the contract.
 Shortages in supply: If the quantity will be found short, then discrepancy notes should be issued.
 Excess supply: If the quantity will be found excess than mentioned in the packing slip or in the delivery
challan/ delivery advice note, then again discrepancy note to be made.
5. Notifying indentor about receipt of materials:
 It notifies the indentor/ purchaser of the receipt of materials and thereby avoid unnecessary follow up
on their part.
 It provides a formal “communication channel” between receiving department and purchasing
department as well as receiving and indenting department.
 It enables the indentor to inspect “urgent materials”.
6. Preparation of goods received report:
GRR - Goods Receipt Report – is prepared by the receiving store on completion of physical verification of
quantities. It is also known as GIN ( Goods Inward Note) , MRR ( Materials Received Report), MIN( Materials
Inward Note), RCIA (Receipt-cum-Inspection Advice), etc. is an important linking document between
supplier, store, inspection, purchase and accounts department. It has different copies like following:

i. Original copy
ii. Accounts Copy should be provided to accounts department on quantity invoiced by the supplier. It is
given to facilitate the movement of payment.
iii. Indenter’s copy to intimate the receipt and inspection results of the materials received.
iv. Main stores copy to give custody of the accepted materials, post stock cards, etc.
v. Purchaser’s copy to enable buyer to record receipt materials on follow up copy of the P.O.

54
 vi. Receipt cum inspection copy to maintain records on GRRs.
7. Inspection of materials:
1. After the materials have been verified for quantity, quality control department
has to undertake quality certification process.
2. Most commonly used approach is to forward the complete set of GRR.
3. The task of inspection of material may require the receiving store to –
i) Send the material to inspection department.
ii) Indicate the location where material is kept in the receiving stores.
iii) Provide copy of drawing of the component to be inspected.
1. Inspection department after receiving GRR carry out the inspection function.
2. They have to issue another report after completion of inspection; this is known as
Inspection Note.
3. Few companies use a document called “Rejection Note” to report inspection
results.
8. Delivery of inspected materials to stores :
 Accepted / rejected materials after inspection are forwarded to their respective stores accompanied by
a copy of goods receipt report (GRR).
 Accepted materials are moved to main store while non-conforming materials are sent to rejection
store.
9. Return of defective materials back to suppliers:
 Defective materials are kept in the rejection store.
 A rejection register is maintained where each rejected material is recorded. Local suppliers are
informed to collect rejected materials. Outstation suppliers are notified and defective materials are
sent back to suppliers.
10. Returning all changeable empties back to supplier:
All empties are returned to the supplier as per terms of purchase order.


B)Physical System:
  
Match with valve & quantity
  
Physical verification
  
Rechecking the receipt
  
Find the storage
 
 Material department & stores section

C) Stocking / storing practices:

  
Stock near than testing laboratories at inspect outfits
  
Accept the material after inspection in each stage
  
Reject the material if it is fails in one stage
 
Return to the supplier.
Stock Taking
Stock taking, also called stock verification, is the process of ascertaining – by counting, weighing or measuring –
whether the physical stock of materials tallies with the balances shown in the stock records i.e. bin cards or stock
ledger.
Purpose:
Stock taking –
 Is required to correct discrepancies between physical stock and book balance and thereby ensure better
material control.
 Is the primary requirement for the financial statements.
 Is an indicator of overall stores efficiency and management control.
 Helps early detection of obsolete and dormant stocks.

55
  Helps to audit store procedures.
 Acts as a form of performance check on stock record

Common Causes of Discrepancies

Some of the common causes of discrepancies between physical stock and book balance are:
i) Manual (clerical) error.
ii) Materials handling error.
iii) Incorrect stock taking.
iv) Incorrect location of parts.
v) Environmental factors.
vi) Preservation error.
vii) Poor storage conditions.
viii) Theft and malpractices.

D) Issue control:
 
Issue
Conception department
Outside supplier for processing & conversion.
  
Check the content given in bills of materials
 
Equalizing the requirement & conception.

Issue of Materials
One of the major activities of stores is to issue materials of the right quality , in the right quantities and at
the right time. “Efficiency of the stores infact is judged by the user departments how correctly and efficient
their demands for materials are met”.

Materials, in general, are issued for the following purposes. Material is issued to –
i) Production for manufacture of goods against customers’ demand to make supply equals demand.
ii) Maintenance department for plant repairs and maintenance of machinery.
iii) Suppliers to be returned.
iv) Sister companies from stock held.
v) Employees / scrap contractors (e.g. sale of scrap materials).
vi) Customers as sale of finished products. etc
Timing of Issue
Material should be issued only during specified hours of the day. This enables the storekeeper to attend to
other duties outside these hours.

Issue Procedure
The following issue procedure may be followed:
i) Logging the request for material: Request for the issue material should be logged in the
requisition register which maybe maintained date wise like a diary.
ii) Scrutiny of request: Material requisitions should be scrutinized to verify whether it is signed by
an authorized signatory. For this, the storekeeper should be provided a list of authorized officials
and their designations and specimen signatures.
iii) Checking availability of materials: Stores keeper should check the availability of indented
material in full or part in any one of the following categories:
a) Second hand / repaired
b) Obsolete
c) Surplus
d) Material returned from shops.

56
 e) New material
Issue should be made in the above order to ensure that accounts of second hand repaired and surplus are
closed first.
If the material of the exact specifications is not available, the store should check the availability of
substitute material. The indentor should be informed of the availability of substitute material and the same
should be issued if it is acceptable to the indentor.
If the exact material or substitute material is not available, the requisition may be kept pending for issue
later on receipt of material.
iv) Logging the record in issue counter: Before taking the material to the issue counter, the issue
clerk should update the material requisition and make an entry in the bin card and in the stores
ledger / ledger card.
v) Preparation of gate pass: Where the material is to be taken out by vendor, sub-contractors,
customers, a gate pass prepared giving the following details:
 Description / code no. of the material
 Quantity
 Issue voucher no. and date
 Name of the person/ organisation
vi) Disseminating the materials: Material should be collected by the indenter’s representative from
the issue counter after signing the issue voucher.
Where the materials are bulky / heavy, they may be delivered by the store on door-delivery basis.

Essentials of Correct Issues

Essentials of correct issue are as follows:
 Material should be issued only against written requisitions.
 Material should be issued only against authorized requisitions.
 Material should be issued only in pre-fixed quantity especially for C-class of items.
 Material should be issued on the basis of FIFO principle (first-in-first-out), particularly for the
items of low shelf life.
 Material should be issued in bags, cartons to avoid damage.
 Materials should be issued only during the specified hours of the day.
 Material requisitions should be received preferably a day in-advance.

Codification
Definition: Codification in an industry is the systematic concise representation of equipment, raw materials, tools,
spares, supplies, etc. in an abbreviated form complying alphabets, numerals, colors, symbols etc.

Objective of codification:
a. to classify and codify the items on some logical basis to suit the objective of the organization.
b. to assist the process of standardization and variety reduction .
c. to facilitate proper functioning of the store house.
d. to ensure that each item is kept under one unique code.
e. to prepare a catalogue – nomenclature list to reduce ambiguity.
f. to make available the catalogue to all concern dept.

Benefits of codification:
1. Accurate and logical identification:
 Codification distinguishes one item from another item.
 helps in accurate identification which eliminates any confusion.
2. Avoid long description:
 codification reduces the chance of using long description of items which leads to incorrect and wrong
typing of item name.

57
3. Prevention of duplication:
 Items in absence of codification require to be described by brand names, trade names, or, technological
names and as such they often requisitioned by different personnel under different names.
 This can result in stocking of an item at different places under different names.
 Codification system prevent duplication.
4. Product simplification:
 A basic reason for codification is the simplification (i.e. reducing unnecessary variety) and
standardization (i.e., regulating variety).

 Objectives
a) For proper codification, grouping of identical items is essential.
 The most commonly used method is to take up an item group. Within its main
classification list down variety in use, identify variations among the variety and prepare
the vocabulary.
b) Vocabulary (i.e., manual on codification) lists down all the items in stock according to the basic characteristics
which provides a quick reference for the personnel from design and planning to know what variety already
exists.
5. Smoothening the purchase activities:
Codification makes the purchase activity efficient due to the following :
i) It helps to avoid long clerical activities.
ii) Codes avoid the ambiguities.
iii) Buying instructions to the suppliers become easy and quick if there is proper understanding of
codification by the supplier.
iv) Codification classifies the items in to groups which in a large sized firm enable section wise organization
of purchase department based on group codes.
v) Purchase records too can be maintained according to the group codes and different documents can also
be filed accordingly.

6. Efficient storekeeping:
Codification facilitates locating and indexing of the materials in the main stores, sub stores, finished parts stores and
warehouses.
7. Accurate and reliable recording and accounting:
Codification leads to effective store control, efficient recording and result-oriented accounting.

8. Others:
Codification –
a. Helps to look for alternative at a time when the stock of a particular item is nil.
b. Ensures proper quality description of the item which assists in efficient inspection.
c. Simplifies costing and pricing since, due to codes cost can be calculated job wise for which different
cost heading can be provided.
d. Assist production since manufacturing runs can be planned on the concept of group technology.
e. Assists management in their efforts to earn a good return on its investment. This being possible
due to the various benefits of codification enumerated above.

Three Basic Stages of Scientific Codification

Three basic stages of scientific codification are: Identification, Classification, and Codification.
a) Identification: it is the process of assigning correct nomenclature to the items. The nomenclature description
must take into consideration the specification and technical name of the item. Identification system should be
uniform for all items.
b) Classification: it is the arrangement of items in to groups according to the common features of the items. The
grouping of stores items which may be done on the basis of “description”, “supplier”, “origin”, “value” or “function”
of the item.

58
 i. Description classification: it refers to the grouping of items of similar description, irrespective of the end
use, into one class.
ii. Nature of materials: items under this method are classified according to their nature such as raw materials,
machinery, machinery and equipments, consumable items, chemicals, etc.
iii. Source of purchase: Under this the items are classified according to sources of procurement.
iv. Source of origin: This classification is rarely used except in cases of spares of machinery.
c) Codification: “it is the allocation of specific codes to the items within the broad frame work of the selected items”.
Characteristics:
i) Simplicity: The system must be simple in its form. Personnel without any external assistance and without
much of training can handle this.
ii) Small: The codes should use minimum possible number of characters/ digits/ symbols.
iii) Flexibility: The system should be flexible enough to comply with different situation.
iv) Uniqueness: The system should ensure one and only code for each item. That is each item should have a
unique identification code.
v) Proper choice of coding symbol: The selection of the symbols especially in alpha – numerical system, should
be such that there is no possibility of confusion. O, s, z, l, v should not be used because, they are similar to
0,5,2,1,u.
vii. Self decoding: The codes should be capable of being easily decodified.
viii. Convenient for accounting: the system should be convenient for accounting.

Basic System of Codification

Coding systems adopted by various organization may be classified under—
1) Alphabetical.
2) Numerical
3) Alpha-numerical
4) Color coding system

1. Alphabetical:
In this method letters or alphabets are used to describe an item. Sometimes combination of alphabets are designed
to give a mnemonic meaning.
Methods:
a) Each material group is assigned alphabet(s) as basics. Usually first one or two alphabets in the title of its
material group is taken as the starting point of the code.
b) Sub-alphabets, based on the characteristics of the items, are used for their identification.
Example:
Particulars Sub-alphabet vocabulary
I Acids ( AC)
i. sulfuric acid SU AC-SU
ii. Nitric Acid NI AC-NI
iii. Hydrochloric Acid HC AC-HC

Advantages:-
i. Simple to understand and easy to use
ii. do not require any formal training in code allotment or in its implementation.
Disadvantages:-
a) Codes are difficult to remember.
b) Chances of duplication.
c) Repetition of alphabets often leads to confusion.
d) Selection of proper alphabet is difficult.

2. Alpha- numerical system:

Alpha-numerical system in the combination of alphabetical and numerical systems and is in improvement over
the alphabetical method. The system operates as under:
i. Each item is identified and is given a proper description.

59
 ii. Identical items are classified into groups and each group is provided a suitable title.
iii. Codes are assigned next to the group, which are usually alphabets.
iv. Individual items within each group are assigned numbers based on block system or decimal system.
Item Items codes
Group main sub vocabulary

I Acids:
i. Sulfuric acid AC 51 AC-51
ii. Nitric acid - 52 AC-52
iii Hydrochloric acid - 53 AC-53

3. Numerical system:
The numerical system is based on use of numbers. Three sub-systems within this category are:

a) Sequential code:
 The system is suitable for small organisation where the number of items is limited.
 Each item is assigned a number and the new item is allotted the next higher number.
 After each allocation few numbers are reserved for future. These reserved numbers are allotted to new
items in future when expansion takes place.
Example: manufacturer of water pumps coded following items as under.

Sr. No. Item description code

1. Housing 1001
2. Impeller 1002
3. Cover 1003
4. Inner gasket 1004

b) Block code:
 Under a block code system, items of similar nature are grouped together and a block of numbers is
assigned to each group.
Example:
1001 to 2000 for raw materials
2001 to 3000 for electrical items
3001 to 4000 for mechanical item.
The block numbers may be further subdivided according to the need.

c) Decimal code:
 In this system a group of numbers separated from each other by a decimal point, identifying the
general ( or main) category of items, sub –category and individual items.
 The first category called general category divides the items in to main classification such as raw
materials, electrical items, mechanical items, packaging and packing materials, etc.
 The second category called sub-category divides the main classification into sub-classification according
to their nature, use or characteristics. Electrical items group may be sub-divided in to wires, fuses,
plugs, shades, cutouts, etc.
 The third category called item category divides the sub-category into individual items within the sub-
category.

Main class : tools (40)
Sub-classes : drills (01), tapes (04), etc.

Process of Codification
1. Coding by end-use: groups or sub groups may be evolved keeping in view the purpose for which the items
are eventually employed.
2. Coding by source of supply: sometimes codification of an item done according to its source of supply.

60
 3. Coding by nature of items: groups may be based on inherent characteristics.
4. Coding customer wise: groups may be based on end user.

Codification systems:
There are two universal systems of classification and codification:-
1. Brisch system: Brisch system of classification was conceived by Mr. E.G. Brisch and was evolved by jointly with Mr.
J. Gombinski. It is one of the most popular systems used in the industrial applications. The system is primarily design
oriented and it divides all facets of an organization into number of main categories (ten or less) according to the
nature of the business.
A 10 – digit typical class breakdown in an engineering company is given below.
0 – Organization and operations.
1 – preliminary materials.
2 – bought out commodities.
3 – components ( single piece parts) to user’s own design.
4 – sub assemblies and assemblies to user’s own design.
5 – tools and portable equipment.
6 – plant and machinery.
7 – building , services, and utilities.
8 – Scrap and waste.
9 – Reserved.
The first digit of the code , depending upon class of the item, is picked up from the above series and all other digits
are tailor-made to the client organization.
How to use this system:
The Brisch system basically consists of blocks separated by decimal point :
a) The first block represents major classification. The materials to be coded are grouped together
based on one of the classification systems (e.g. raw materials, packing materials, fasteners,
stationary, tools, finished products, etc.). Usually, 2 digits (xx) are adequate for most of
organization.
b) The second block represents the next level classification (next to primary classification). The items
are divided and sub-divided based on their types and kinds. Usually, two digits are enough for
secondary classification.
c) The third block represents the lowest level classification (usually dimensions, appearance, other
distinguishing features)
As mentioned above, the codes are assigned in three blocks separated by decimal point. Total number of digits can
vary as per needs of the user but the common figure is seven.
2. The Kodak system:
this system was originated by the Eastman Kodak Company of New York, USA. The system is primarily based on
numerical system of codification and it combines all the good points of other systems. The system employs ten –
digit-numerical-code. The composition of code is in three groups of digits that are separated by hyphens. The
hyphens serve to break the code into easy to handle group of digits.
Main Class Sub-class Minor class

2 2 1 5 4 5 3

Size

Material

Kind

Types

(Fasteners)

Brought out items

61
Salient characteristics:
1. Materials are divided in to few broad classifications, called basic classifications.
i. The number of basic classification is restricted to 100 and first two digits, between 00 to
99, are employed to indicate the basic classification of the item.
ii. The classification of materials is primarily based on purchase category. This system does
not consider nature, use or characteristics for basic classification.
iii. The items are grouped according to purchase categorization.
Basic class ( preliminary class): Materials based on purchase categorization:
First two digits (00-99)
Main class code
00-20 Raw materials
21-35 Machines and Mechanical Equipment.
36-40 Mechanical product and loose tools.
41-49 Electrical products and Electrical equip.
50-52 laboratory equip.
53-68 chemical, chemical equip. and misc. chemical product.
office equip. and other misc. items.
69-78 office equip. and other misc. items.
79-83 furniture and fixture.
84-87 Semi- finished and finished product.
88-99 Miscellaneous.

2. Each preliminary class is further divided in to sub-classes (representative group). To illustrate the concept, we list
below the subclasses of one of the basic classifications (say 40 covering cutting tools).

Sub –division of basic classification

Main class Sub-class Description

(code) ( kind of cutting tool)

Cutting tools (40) 0 Drills, reamers, counter bores, broaches

1 Cutters and hobs.

2 single point tools
3 Taps and dies.

To form sub-groups, same factors and reasoning which apply to classes themselves are made applicable to sub-
classes. For example,
a) Drills, reamers, counter bores, etc. which are generally made by the same manufacturers and are
used on the same machine are grouped together and are placed in one class.
b) Tools required to cut threads – taps, dies, chasers, etc. are pt together.
c) Bar stocks are placed in one group while casting and forging are placed in different group.
3. Each sub-class is next amplified/ divided in to kinds of items. The kinds are arranged alphabetically within the
sub-class.
4. Each kind of item is further split up into “types”. Identification by alphabetization is continued further and each
kind is divided in to “types”. Next two digits – sixth and seventh digit of the two digits are assigned to the various
types of particular kind.
5. Each type of item is next arranged according to its size and next two digits – eighth and ninth digits – are utilized
for the purpose.
6. the last digit – tenth digit – is assigned to minor variables such as :
a) Types of steel.
b) Surface finished desired

62
 c) Special tolerance.
d) Source of origin.
e) Usage value classification.
7. Exception to the pattern discussed above is made in order to fit special kind of materials

3. Color Coding:
Color codes find their use in identification of raw materials, lubricants, pipelines, etc.
i) color code for identification of pipelines
The Bureau of Indian Standards (BIS), vide there is : 2379 of 1963 has suggested the color identification as under:
Sr. No. content Ground color First color band Second color band
1 Cooling water/ chilled Sea green French blue -
water
2 Drinking water Sea green French blue Signal red
3 treated soft water Sea green Light orange. -

ii) Color code for raw materials:

No standard system exists for color code for identification of raw materials. The practice varies from company to
company.

iii) Color codes for lubricants:

Color codes find their application in the maintenance departments as well. Different colors may be specified for
different types of lubricant. Color codes can also be applied to identify the lubricant to be applied to a particular
point.

STOCK VERIFICATION
Stock verification should be done half-yearly by the Head of the department concerned or once a year by
an officer nominated by the Head of the organization. It is advisable to carry out surprises stock
verification of the few potentially pilferage items every now and then.
Definition:
Stock verification may be defined as the process of physical conditioning, weighting or measuring the
stock of material. Ex. Health care service materials.

Needs / purpose/ benefits / advantages of stock verification:

 To verify the stock physically against them quantity shown in the ledges.
 To identify which repair and control
 To disclose the possibility of fraud, theft, loss etc.,
 As a necessary against spoilage, damage, obsolescence & error.
 To support the value of stock shown in the balance sheet by physical verification.
 To verify the accuracy.
 To disclose fraud, theft or loss of or, deterioration.
 To reveal the weakness of the system in regard to safe custody.

Various methods of stock verification:
i. Periodic stock verification.
ii. Perpetual / continuous verification.
iii. Blind stock verification.

i) Periodic stock verification: Under this method of stock verification the whole stock should be
verified in periodical manner in one financial manner.

63
 ii) Perpetual / continuous stock verification: Under this method, verification is done throughout the
year as per a pre- determined plan of action. ‘A’ item may be verified thrice a year, ‘B’ item twice a
year and ‘C’ items once a year.
iii) Blind stock verification: In this system, the stock verifiers are given the location, but not details
about code numbers, description and stock record. After verification, the report of verified
compared with the actual record.
Another types of Methods of Stock Verification

The hospitals carry out stock certification by any of the following methods:

1. Annual Inventory Method:

In this method verification is usually done at the close of the financial year. Verification
should be completed within 2 weeks and report submitted to the Head of the institution.

2. The Continuous Method:

The inventories are divided into twelve equal parts and one part checked every month.
This method has the advantage that the store room operations are not required to be shut down
during the stock verification.

Verification Report:
Verification report should be examined by the purchase officer and submitted to the
Head of the institution/hospital with his remarks and recommendations for his orders.

Steps / procedure of stock verification:

Identifying the member, location and sub stores

↓
Sealing stores and sub stores
↓
Double with seal after physical verification over
↓
No issue or receipt during verification
↓
Complete the ledger postings and entries
↓
Unexplained signature, discrepancy should be noted
↓
Findings and suggestion of the committee

Supply & Replacement of stock:

1. Waste management
2. Salvaging
3. Reclamation
4. Review
1. Waste management:
All non metabolic scrap is called waste. Paper corrugated containers, oils bags, plastics, rubber wood etc. it
can be managed by chemical reaction and other process.

64
 2. Salvaging:
Recovering or saving, condemned, discarded or abandoned materials, equipment or property in order to
obtain useful parts is called salvaging. It can be also mean the saving of material for further utilization. The
materials thus saved are called salvaged material.
3. Reclamation:
This involves the bringing back to their original serviceable condition, equipment, warn out parts etc. A
typical example is retrading a type or metalising a worn out spare and bringing it back to its original
specification.

4. Review:
In most organization, some degree of obsolescence or surplus is inevitable. It is particularly acute in
factories making product where the design changes frequently and also in organization such as transport
undertaking or the armed force, where rapid technical development is a frequent phenomenon and large
quantities of spares.

Stores audit
Meaning & Definition of Auditing:
Auditing is concerned with verification of accounting & financial record with a view to determining their
accuracy & reliability.

According to Institute of Chattered Accountant of India (ICAI), “Auditing is a systemic & independent
examination of data statements, records, operation & performance of an enterprise for its stated purpose in
any auditing situation. The auditor preserves & recognizes them proposition before him for examination
collects evidence, evaluate same formulation is a judgment which is communicated through his audit report.

Purpose of auditing:
To prevent frauds & errors
To maintain accuracy & clear documents
To maintain clear record about stores position & status.
Clear record for issue & purchase
Requirement of material & purchase department.
Acting as an evidence for supplied & inspection department.
Stores Auditing:
Stores auditing is a process of verification, valuation & formulating the stores recorded
translation is a systemic manner here the auditor verifies stock returns issued purchase records, bills of
materials etc. by finishing this statement the auditor given a report. These are known as stores auditing.
All the newly received stores from the firms, after placement of order, should kept separately till
their inspection is carried out. In no circumstances these will be merged with the regular stocks.
A standing committee should be constituted for carrying out the inspection at the hospital level.
On receipt of any store, these would be thoroughly checked and inspected with a view to
ascertaining the quantity, quality and correctness of the stores received and also to know the breakages.

In case where supply is in bulk, it may not be feasible to carry out a 100 percent check of the
stores. Here checking of stores based on random selection can be carried out. In case of any doubt on the
random checking, entire consignment should be subjected to physical verification.

65
 Injectables and life saving drugs at Medical stores depot level should normally be accepted only
after testing. At the hospital level where requirements may be urgent, the item may be accepted on the
post lab test basis or under a guarantee/warranty certificate.
The following points are to be kept in mind while auditing the drugs:
The supplies are as per specification quoted in supply order.
Packing schedules are as specified in supply order and challan
Shelf life of items should be adequate.
The supplies have been made within the date of delivery (D.O.D)
The supplies and containers have been stamped.
In case of non-expendable items, inspection should be carried out with reference to the
specification/catalogue/approved samples or sealed samples in stock/sample rooms.
All items found in order should immediately be entered on the inspection note, and adjustment of items
should be completed promptly after that.
Items are not approved should be rejected after recording adequate reasons for such rejections.
Necessary action for replacement and lifting of the rejected stores by the firm should be taken.

66
 Store Accounting / Valuation of Stock
In relation to the estimation of the cost of the product for pricing decision, store accounting assumes a key role.
Material costing is very important in terms of the valuation of the cost of materials consumed by the production
department as well as in terms of the estimation of the value of the materials held in stock.
Costing of the issues to production:
1. First In First Out (FIFO)
2. Last In First Out (LIFO)
3. Weightage average cost
4. Simple average cost.
5. Base stock method

1. First In First Out (FIFO)

The assumption made here is that the oldest stock is used first. Therefore at the time of issue, the rate of pertaining
to that will be applied.
It is logical for the products which deteriorate with time
Date receipt Issues Stock on hand
Qty Rate (Rs.) Value Qty Rate Value Qty Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
1.2.2007 1000 1.00 1000 - - - 1000 1.00 1000

1.3.2007 2000 1.10 2200 - - - 1000 1.00 1000

2000 1.10 2200
3200

14.3.2007 - - - 500 1.00 500 500 1.00 500

2000 1.10 2200
2700

28.3.2007 - - - 1500

500 1.00 500 - - -

1000 1.10 1100 1000 1.10 1100

Advantages Disadvantages
1. Simple to understand and easy to operate. 1. In case of fluctuating price this method leads
2. Material cost represents actual cost which to clerical error.
should be charged to a product. 2. In case of price change, comparison of one job
with another can not serve any useful
3. Closing stock will be as closely representative purpose.
of current prices as possible. 3. When price rise, it will give low charges to
product. It leads to many problem related to
price of product.

67
2. Last In First Out (LIFO)
The basic assumption here is that the most recent receipt are issued first. We can apply LIFO system to the example
discussed earlier.
It is logical for the products which deteriorate with time
Date receipt Issues Stock on hand
Qty Rate (Rs.) Value Qty Rate Value Qty Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
1.2.2007 1000 1.00 1000 - - - 1000 1.00 1000

1.3.2007 2000 1.10 2200 - - - 1000 1.00 1000

2000 1.10 2200
3200

14.3.2007 - - - 500 1.10 550 1000 1.00 1000

1500 1.10 1650
2650

28.3.2007 - - - 1500 1.10 1650 1000 1.00 1000

Advantages Disadvantages
1. Material cost will represent current price 1. In case of fluctuating price this method
as far as possible. leads to clerical error.
2. It minimizes losses in inventory. 2. In case of price change, comparison of one
job with another can not serve any useful
purpose.
3. When there is wide fluctuation in price 3. When price are falling it will lead to low
level LIFO tends to minimize unrealized charge to production.
gain

68
3. Average cost method or Weightage average method:
In this method, the issues to the production department are spit in to equal batches from each shipment at stock.

It is logical for the products which deteriorate with time

Date receipt Issues Stock on hand
Qty Rate (Rs.) Value Qty Rate Value Qty Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
1.2.2007 1000 1.00 1000 - - - 1000 1.00 1000
(Q 1) (V1)
1.3.2007 - - - 3000 1.067 * 3200
2000 1.10 2200
(Q2) (V2)

14.3.2007 500 1.067 533 2500 1.067 2667

28.3.2007 1500 1.067 1600 1000 1.067 1067

* Average price = (V1+V2) / (Q1+Q2) = (1000+2200) / (1000 +2000) = 3200/3000 = Rs. 1.067.
Weightage average Price = Value of material stock / Quantities in stock.

Advantages Disadvantages
1. In case of fluctuating price, it will smooth 1. Tedious calculation.
out the fluctuation.
2. New issue price need not be calculated 2. Material cost does not represent actual
each time issues. cost price.

69
4. Simple average cost method:
In this method, the issues to the production department are spit in to equal batches from each shipment at stock.

It is logical for the products which deteriorate with time

Date receipt Issues Stock on hand
Qty Rate (Rs.) Value Qty Rate Value Qty Rate Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
1.2.2007 1000 1.00 1000 - - - 1000 1.00 1000

1.3.2007 2000 1.10 2200 - - - 3000 1.05 * 3150

14.3.2007 500 1.05 525 2500 1.05 2625

28.3.2007 1500 1.05 1575 1000 1.05 1050

* Average cost = (1.00+1.10) / 2 = 2.10 /2 = Rs. 1.05.

It can be used in following situations:-
1. Materials are received in uniform lot quantities.
2. Difficult to identify each issue of materials.
3. Purchase price does not fluctuate.
Advantages Disadvantages
1. Simplicity. 1. Material cost does not represent actual
cost price.
2. In case of fluctuating price it gives very
incorrect result.

Comparison of FIFO and LIFO in profit center point of view:

Raw materials:-
Opening stock =400 units @ Rs. 10/-
Purchases = 1000 units @ Rs. 15/-
Closing stock = 500 units
Wages ,etc. = Rs. 2000/-
Sales = Rs. 20,000/-show the profit if raw materials issued are priced at a) FIFO & b) LIFO.

70
Raw material consumed
a) FIFO b) LIFO
Opening stock 400 units @ Rs. 10/-=Rs. 4000/- 400 units @ Rs. 10/-=Rs. 4000/-
+ 1000 units @ Rs. 15/-=Rs. 15000/- + 1000 units @ Rs. 15/-=Rs. 15000/-
Rs.20000 Rs.20000
Less closing stock - Rs. 6000 - Rs. 4000
( 400 units @ Rs. 15/-)* (400 units of Rs. 10/-) **
Rs. 14000 Rs. 16000
Add wages etc Rs. 2000 Rs. 2000

Cost of production Rs. 16000 Rs. 18000

Sales Rs. 20,000 Rs. 20,000

Profit Rs. 4,000 Rs. 2,000

* in case of FIFO the stock in hand ( closing stock) will be charged according to last receipt price.
** in case of LIFO the stock in hand ( closing stock) will be valued according to first receipt price.

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 Control of pilferage
Pilferage: Meaning

In general, pilferage refers to theft or misleading of goods & spare by the employees
or the person related or unrelated to the organization engaged in taking away the goods
without permission or knowledge of officials who are responsible for the organization or
department.

Control of pilferage:

1. Proper Record keeping:

This is the method by which the store keeper maintenance records for each and
every transaction. Through this he will be able understand the correct inflow & out flow
goods & control pilferage to large extent.
2. On the spot inspection:
In this way store manager make surprise inspection to the store to make sure that
all items are the right place if he finds any in adequately the level of stocks be can
enquire it right than.
3. Adoption of latest technology:

Here the organization adopts latest technology in order to defect the pilferage,
frauds. For example, it closed circuit camera will capture all the activities happening
with in the stores. They are other high hand sophisticated methods to detect all
fraudulent activities control
4. Control of errors:
Here the management should have make all efforts should to minimize the level
of errors with respective input & output of stock storage, preservation etc.
5. Proper storage:
Storage of all items should be in a transparent manner so that incase of loss the
goods lost should come under the notice of the store manager immediately.
6. Close assessment of personnel’s:
Here the personnel working in the organization should be asset and cross
checked at the end of the day to ensure the particular person is not involved in any
pilferage activity.
7. Proper security:
It is a most essential requirement of store keeping. If the security arrangement
are made without any loopholes. The chances of any misappropriation will remain
impossible.
8. Systemic layout & location:
This means that the building and the location in which the items are stored
should be in a secured environment.

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 Treatment of material losses, obsolete, surplus and scrap management
Surplus: Surplus stocks are those materials which are procured and stocked in excess of an
organization’s production and operation requirement. Surplus stock arises because of unplanned
purchase, lack of coordination between production, maintenance and materials department or
wasteful processes in production and unscientific inventory management.

Scrap, Obsolete And Waste

Scrap: Scraps are generated through production waste or as product of operations in the production
shop floor through the production system.

Obsolete: Because of technological changes and advancement every organization may have to
adopt the latest operational practice or production method. In such case any material, part,
component, assembly, sub assembly required to be kept in the sore to meet up the demand of
consumption for previous product is called obsolete.

Waste: Waste is known as discarded substances having no value or very low value

Reasons of Waste
1) Changes in product design: These may lead to some items getting invalid so far as the final
product is concerned. Hence, the entire stocks of such items become obsolete.
2) Rationalization: Sometimes raw materials rationalized to minimize variety and simplify
procurement. The rationalization process renders some items as surplus or obsolete.
3) Cannibalization: When machine breakdown occurs, sometimes it is rectified using parts of an
identical machine which is not functioning due to various reasons. This process is called
cannibalization. It is common in many Industries.

4) Faulty planning and forecasting: the marketing department may have a projected a sales
forecast which might be on higher side. It causes obsolete.

5) Faulty purchase practices: Decisions like buying in bulk to take care of discount and
transportation economy without taking in to account factors such as shelf life, storage space
requirement and technological changes once again lead to the accumulation of surplus and
obsolete stock.
6) Other causes: Many items are held as insurable spares for many years without any
consumption. Faulty store-keeping, without adequate preservation, lead to spoilage. Improper
codification, poor manufacturing methods and inferior materials handling are also result in
obsolete, surplus and scrap item.
Rules of Disposal of scrap:
Movement Analysis:
 The process of combining the stock records and movement analysis has been found very
effective in locating such stocks in the total inventory.
Disposal of Scrap:
 Disposal of scrap when handled in an imaginative manner can result in handsome returns to
the organization.
 Continuous market survey on the prices of various categories of scrap generated in the plant
is necessary
 Disposal action follows when the scrap cannot be utilized within the organization.
 In practice, it is profitable to dispose the scrap directly to end-users rather than to middlemen.

Management of Waste, scraps, and obsolete:

Waste is known as discarded substances having no value or very low value. Waste may arise due to
the inherent nature of materials, chemical reaction, evaporation drying, sublimation of goods etc.
Wastes are also be in the form of smoke, gas slag or dust which arises in the course are
manufacturing process. The waste may be visible or non-visible.
The waste can be:
(a) Normal waste and (b) Abnormal waste

73
a) Normal Waste: It is due to natural causes, it cannot be checked only it can be minimized by
exercising strict control. The effect of such waste is to reduce the quantity of output and to calculate
the cost per unit of the output.
b) Abnormal Waste: Any loss caused by unexpected or abnormal conditions such as sub-standard materials,
carelessness, accident etc. or loss in excess of the margin anticipated for normal process loss should be regarded
as abnormal waste.
Scrap of materials and scrap at works (factory): Scrap is discarded material having some values. It represents
fragments or remnants of material that are left from certain type of manufacture
There are three types of scrap, namely (a) legitimate scrap, (b) administrative scrap, (c) defective scrap.
a) Legitimate scrap arises due to the nature of operation like turning, boring, punching, etc. This type of
scrap can be pre-determined and efforts should be made that it should not be more than the pre-
determined quantity.
b) Administrative scrap arises due to administrative action, such as, a change in the method of production.
c) Defective scrap arises because of use of inferior quality of material or bad workmanship or defective
machines. Such type of scrap is abnormal because it arises due to abnormal reasons.
Treatment of Scrap: The useful methods for the treatment of scrap are as follows:
1. When realizable value of normal scrap is insignificant (i.e., legitimating scrap administrative scrap) it may
be credited to Profit and Loss Accounts like other income. This method is not suitable effective control
over scrap because
The sale value of scrap may be deducted from the cost of material consumed or factory overhead
Defective output: Defective products or units are those which do not meet with dimensional or quality standards
and are reworked for rectification of defects by application of material, labour and/or processing and salvaged to
the point of either standard product or sub-standard product to be sold as seconds. So defectives are that portion
which can be rectified at some extra cost of re-operation. Defectives may arise due to the following reasons:
a) Sub-standard materials.
b) Poor workmanship.
c) Poor maintenance of machines.
d) Wrong tool setting.
e) Faulty design of products.
f) Bad supervision.
g) Careless inspection.
h) Poor working conditions.
i) Lack of control, such as humidity, furnace temperature etc.
j) Excessive short runs.
Treatment of Cost of Rectification of Defectives: The following methods may be adopted for the treatment of
this cost:
When the defective production is identified with a specific job or department, the cost of rectification is charged
to that specific job or department.
Spoilage of Production: Spoilage refers to production that does not meet with dimensional or quality standards
in such a way that it cannot be rectified economically and is junked and sold for a disposal value. So it occurs
when goods are so damaged in course of manufacturing process as to become not rectifiable
Treatment of cost of Spoilage: The treatment of cost of spoilage depends upon the nature of spoilage. If the
spoilage is normal, the cost is borne by good units of output. In case of abnormal spoilage, cost of spoilage is
transferred to Costing Profit and Loss Acount
Control of Wastage, Scrap, Defectives and Spoilage: Every effort whould be made to reduce the cost of
production by exercising control on wastage, scrap, defectives and spoilage. The following steps may be taken
in this direction.
Biomedical Waste
Introduction: The waste produced in the hospital in the course of health care activities carries a higher
potential for infection and injury than any other type of waste. Therefore, it is essential to have safe and
reliable method for its handling. Inadequate and inappropriate handling of health care or bio-medical waste
may have serious public health consequence and significant impact on the environment. Hospital generates
75-90 percent of non-hazardous general waste and rest 10-25 percent is the hazardous waste generated by
hospital.
Definition: According to bio-medical waste (management and handling) rules, 1998 of India, Bio-medical
waste means any waste, which is generated during the diagnosis, treatment or immunization of human beings
or animals or research activities pertaining thereto or in the production or testing of biological, and including
categories mentioned in schedule-I.

74
Categories of biomedical waste: Hazardous, toxic and bio-medical waste should be segregate into following
categories for the purpose of its safe transport in a site and fir specific treatment or disposal. The categories
are as follows:
1. Human Anatomical Waste: This contains human tissues, organs, body parts etc.
2. Animal waste: This contains animal tissues, organs, body parts, bleeding parts, fluid, blood and
experimental animal used research. This waste generated in veterinary hospital and animal house.
3. Microbiological and biotechnological waste: This contains waste from laboratory culture, stocks and
specimens of microorganism live or vaccines, human or animal cell culture used in research.
4. Sharp waste: This contains needles, syringes, scalpels, blades, glass, etc
5. Discarded medicine and cytotoxic waste: This contains waste comprising of out date, contaminated and
discarded medicine.
6. Soiled waste: this contains item contaminated with blood and body fluids, including cotton, dressing,
soiled plaster casts, linens, bedding and other material contaminated with blood.
7. Solid waste: This contains waste generated from disposable items, other than the waste sharps, such as
tubing, catheters, intravenous sets, etc.
8. Liquid waste: this contains waste generated from laboratory and washing, cleaning, housekeeping and
disinfecting agents.
9. Incineration waste: this contains ash from incineration of any biomedical waste.
10. Chemical waste: this contains chemicals used in production of biological, and chemical used in
disinfection and insecticides, etc.
Collection, segregation, storage and transportation of biomedical waste:
A. Segregation of waste: Segregation of biomedical waste is very important part of hospital waste
management department. The operation of segregation consist:
1. It should be done at the sources of generation of biomedical waste, e.g. the entire patient care active
area; diagnostics services area Operation Theater, labor room, treatment room, etc.
2. Responsibility of Segregation should be with the generator of biomedical waste i.e. doctors, technicians
etc.
3. Bio-medical waste shall be segregated into color coded containers / bags at the point of generation.

S Type of Colour coding Treatment/ disposal

l Category container

1 Human Plastic bag Yellow incineration\ deep burial

anatomical waste
2 Animal Plastic bag Yellow incineration\ deep burial

3 Microbiological Plastic bag Yellow\ red Local autoclaving,

and microwaving, incineration
biotechnology
waste
4 Waste sharps Plastic bag, Blue\white\transluce Disinfection(chemical
puncture proof nt treatment, autoclaving,
container microwaving,
mutilation/shredding
5 Discarded Plastic bag black Incineration, destruction &
medicines and drugs disposal in secured
cytotoxic waste land fills
6 Solid waste Plastic bag, Yellow\ red Incineration, autoclaving,
(soiled) puncture proof microwaving
container
7 Solid waste Plastic bag Blue\white\transluce Disinfection by chemical
(plastic) nt treatment, autoclaving,
microwaving,
mutilation/shredding
8 Liquid waste Plastic bag Disinfection by chemical
treatment and discharge into
drains
9 Incineration ash Plastic bag black Disposal in municipal land fill

75
1 Chemical Plastic bag black Chemical treatment and
0 waste(solid) discharge into drains for
liquids and secured land fill
for solids.
4. Whenever possible, biomedical waste must not be mixed with chemical, radioactive or other laboratory
trash. This may be unavoidable (i.e. radioactive e carcasses) and in such instances special handling may be
required.
5. The various types of biomedical waste should be segregated from each other.
6. Fluid waste should be contained separately from solid waste
B. Collection of Biomedical Waste:
Collection of biomedical waste varies for different services or departments depending upon waste generation
practices, available resources or management approaches. Collection of biomedical waste should be done as
per biomedical waste (management and handling) rules 1998. However, a separate container with color code
shall be placed at every point of generation. The trolleys, which are used to collect hospital waste, should be
designed in such a way that there should be no leakage or spillage of biomedical waste while transporting to
designated site.

Type of container and color code for collection of biomedical waste

C. Storage of waste: Storage refers to the holding biomedical waste for a certain period of time. Although
biomedical waste should be treated as promptly as possible it can be held temporarily. Treatable waste
should not be allowed to accumulate. Waste that is to be disposed off-site should be stored in designated
areas which are secure and access is limited to delegated individuals. Guide line for storage of biomedical
waste are:
1. No untreated biomedical waste shall be kept or stored beyond a period of 48 hours.
2. The authorized person must take the permission of the prescribed authority, if for any reason; it becomes
necessary to store the waste beyond 48 hours.
3. The authorized person should take measures to ensure that the waste does not adversely after human
health and the environment, in case; it is kept beyond the prescribed limit.
D. Transportation: after collection, segregation and storage biomedical waste needs to transfer to disposal
site. There are two type of transport, like: 1) transportation within the hospital and 2) outside the hospital.
The parameters of transport are as follows:
1. Transportation within the hospital:
 Within hospital, waste routes must be designed to avoid the passage of waste through patient-
care areas as far as possible.

 Separate time should be fixed for transportation of biomedical waste to reduce changes of its
mixing up with general waste as far as possible.

 Dedicated wheeled containers, trolleys or cars should be used to transport the waste bins\
plastic bags to the site of storage/ treatment.

 Trolleys or carts should be thoroughly cleaned and disinfected in the event of any spillage.

 The wheeled containers should be designed in such a way that the waste can be easily loaded,
remains secured during transportation, does not have any sharp edges and easy to clean and
disinfect.

2. Transportation of clinical waste treatment or disposal site outside the hospital:

 Untreated biomedical waste shall be transported only in such vehicles as may be authorize for
the purpose by the competent authorities as specified by government under the motor vehicle
act 1988.

 The counters for transportation must be leveled as given in schedule-III and IV of BMW 1998.

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Conclusion: The hospital waste, in addition to the posing risk to the patients and personnel who handle these
wastes, is also a threat to the public health and environment. It is emerging as a health hazard to the
community at large. Keeping in view, inappropriate management of biomedical wastes, the Ministry of
Environment and Forests notified the “Bio Medical Waste (Management and Handling) Rules 1998.” These
rules are meant to protect the society, patients and health care workers. The most imperative component of
the waste management plans is to develop a system and culture through education, training and persistent
motivation of the health care staff.
Why is safe disposal of biomedical waste important?
Introduction: The problem of bio-medical waste disposal in the hospitals and other healthcare establishments
has become an issue of increasing concern, prompting hospital administration to seek new ways of scientific,
safe and cost effective management of the waste, and keeping their personnel informed about the advances in
this area. The need of proper hospital waste management system is of prime importance and is an essential
component of quality assurance. The safe disposal of biomedical waste important because exposure to
hazardous health care waste can result in disease or injury due to one or more of the following characteristics:
a) It contains infectious agents, b) it contains toxic and hazardous chemicals or pharmaceuticals c) it contains
sharps, d) it is genotoxic, e) it is radioactive.
Unscientific handling of bio-medical waste is the risk for the groups like:
1. Medical staff: doctors, nurses, sanitary staff and hospital maintenance personnel;
2. In and out patients receiving treatment in healthcare facilities.
3. Visitors of hospitals.
4. Workers in support services linked to healthcare facilities such as laundries, waste handling and
transportation services.
5. Workers in waste disposal facilities, including scavengers.
6. The general public and more specifically the children playing with the items they can find in the waste
outside the healthcare facilities when it is directly accessible to them.

Objectives of safe disposal of Bio Medical Waste Management are:

1. Inappropriate treatment and disposal of bio-medical waste contributes to environmental pollution. To
prevent environmental pollution safe disposal of Bio Medical Waste important.
2. To prevent transmission of disease from patient to patient, from patient to health worker and vice versa.
3. To prevent injury to the health care worker and workers and workers in support services, while handling
biomedical waste.
4. To prevent general exposure to the harmful effects of the cytotoxic, genotoxic and chemical biomedical
waste.
5. The proper bio-medical waste management will help to control nosocomial diseases (hospital acquired
infections)
6. Reduces HIV/AIDS, sepsis, and hepatitis transmission from dirty needles and other improperly cleaned /
disposed medical items
7. Prevent illegal repackaging and resale of contaminated needles, cut cycles of infection and avoid negative
long-term health effects like cancer.
8. To maintain healthy public health safe disposal of Bio Medical Waste needed.

Conclusion: From the above discussion it is found that improper management of biomedical waste has serious
effect on environment, occupational and public health and to maintain the hygiene and health environment,
occupational and public health safe disposal of biomedical waste is very important.

Disposal process: Answers is in K. Park or Madhuri Sharmas support and utility

1. All the items sent to incineration\ deep burial (categories 1,2,3 and6) should be placed in yellow coloured
bags.
2. All the biomedical treatment should be placed in red coloured bags.
3. Any waste, which is sent to shredder after autoclaving/microwaving\chemical treatment, is to be packed
in blue\white translucent bag.
4. Location of containers: all containers having different coloured plastic bags should be located at the point
of generation of waste i.e. near OT tables, injection room, diagnostic service areas containers\plastic bags
used for collection of segregated biomedical waste should be identifiable.
5. Labeling: all the bags\ containers must be labeled according to the rules (schedule-III of biomedical waste
rules, 1998).

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6. Bags: it should be ensured that waste bags are filled up to three-fourth capacity, tied securely and
removed from the site of generation regularly and timely.
7. Certain categories of waste, which may need pre-treatment (decontamination\ disinfection) at the site of
generation such as plastic and sharp materials. Etc. should be removed from the site of generation only
after treatment.
8. The process of collection should be documented in a register. The coloured plastic bag should be replaced
and garbage bin should be cleaned with disinfectant regularly
Classification of hospital waste
1. General waste: Largely composed of domestic or house hold type waste. It is non-hazardous to human
beings, e.g. kitchen waste, packaging material, paper, wrappers, and plastics.
2. Pathological waste: Consists of tissue, organ, body part, human foetuses, blood and body fluid. It is
hazardous waste.
3. Infectious waste: The wastes which contain pathogens in sufficient concentration or quantity that could
cause diseases. It is hazardous e.g. culture and stocks of infectious agents from laboratories, waste from
surgery, waste originating from infectious patients.
4. Sharps: Waste materials which could cause the person handling it, a cut or puncture of skin e.g. needles,
broken glass, saws, nail, blades, scalpels.
5. Pharmaceutical waste: This includes pharmaceutical products, drugs, and chemicals that have been
returned from wards, have been spilled, are outdated, or contaminated.
6. Chemical waste: This comprises discarded solid, liquid and gaseous chemicals e.g. cleaning, house
keeping, and disinfecting product.
7. Genotoxic Waste: waste containing substance with genotosic properties e.g. waste containing cytostoxic
durgs and genotoxic chemicals.
8. Pressurised container waste: gas cylinders, gas cartridges, aerosol cans, etc.
9. Radioactive waste: It includes solid, liquid, and gaseous waste that is contaminated with radionucleides
generated from in-vitro analysis of body tissues and fluid, in-vivo body organ imaging and tumour
localization and therapeutic procedures.

Functions of Stores Management in

Hospital
The stores function is a vital part of all industrial undertakings, whether in the public or the private
sector. The store is the centre of activities of materials in motion. Conditions of operation in different
undertakings differ widely and, therefore, the practices followed also vary widely.

Purpose and objectives:

The main objectives of the stores function is to provide efficient service to all operating functions-
production, construction, repairs and maintenance, etc.
1. Make available a balance and timely flow of all materials- raw materials, spare parts and
components, tools and equipment and all general stores.
2. Receive, inspect and issue the above stores to work in progress.
3. Accept, store and arrange disposal of scrap and unwanted stores.
Responsibilities and Functions:
The main responsibility of the store function is to provide stores service most economically. To
discharge the responsibilities effectively the following functions will have to be performed-
1. Identification is the process of codifying and describing all items required to be stocked.
2. Receipt is the process of accepting after inspection all materials required for use in the
organization.
3. Inspection is checking of all incoming materials for quality.
4. Storage is the process of storing the materials in warehouse, stockyards, etc…
5. Stock control is the process of provisioning which means continuously arranging recoupment,
receipts and issues of stocks so as to ensure required service consistent with economy.
6. Issues and dispatch is the process of receiving demand from consumers and issuing the
demanded materials without loss of time.

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 7. Stock records have to be maintained showing day to day position of receipt issues and stock
balances.
8. Stores accounting is charging each issuer voucher in a manner so that the money spent is
properly allocated.
9. Stock taking is the process of verifying physically the quantities of materials and their condition
in the stock at specified intervals to see if they agree with quantities shown in stock records.
Types of Hospital Stores:
The hospital stores can be divided into two broad categories:
1. Non Consumable Stores: These stores may be utilized repeatedly.
2. Consumable Stores: These stores are utilized only once.

Planning of preservation of Hospital Stores:

Hospital stores may be planned according to the nature of stores.
1. Medical and Drug Stores: These consist of emergency drugs, general drugs, special drugs,
medical gases, chemicals and so on.
2. Surgical Stores: These store bandages, gauzes, sutures, instruments, equipment, rubber goods,
glass items, cotton and general surgical items.
3. General Stores: The items of general stores are cleansing materials like soaps and detergents,
enamel wares, ward/general furniture, small electric items and so on.
4. Linen Stores: Linen stores include textiles, synthetic fabric, woolen articles and furnishings.
5. Stationery Stores: All the stationery items including medical forms and papers for medical
documentation etc.
6. Dietary Stores: Raw materials like vegetables, fruits, tinned item, dry rations are dietary stores
items.
7. Engineering and Maintenance: It consists of spare parts of civil, electrical, mechanical and
electronic items.
Duties of the Store-Keeper
 The items on stores should be placed in such a way that these can be easily located to ensure the
availability of products.
 To maintain the stores premises neat and clean. Adequate storage and preservation should be
provided.
 To ensure that materials are issued against authorized requisitions only.
 To keep up-to-date record of materials issued, received and balance in stock.
 Store keeper is the custodian of stores and is responsible for its safety and security.

Duties of Medical Officer-in-Charge Stores

 Projection of budgetary requirements.
 Planning and execution of stock checking activities.
 Communicate the purchase department about requirements.
 Help in standardization and variety reduction.
 Minimize obsolescence, surplus, scrap through proper codification, preservation and handling.
 Co-ordination with other departments for various stores function activities including demand
forecasting.

VALUE ANALYSIS
What is Value?
Value is broad term often used to denote cost and price. however, we would go a step further and
introduce the concept of function as well into the definition of value. Value can be divided into the
following classification.
1. Use of functional value: the properties and qualities which accomplish a use , work or
service.
2. Esteem value: the properties, features and attractiveness which cause us to want to own it.
3. Cost value: the sum of labor, materials and various other costs required to produce it.

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 4. Exchange value: its properties or qualities which enable us to exchange it for something else
we want

Based on this classification, value is defined as “an organized creative approach which has as its
objective – the achievement of the value of the product.” Value analysis aims at reducing the cost
value to the value of the product.
It should be borne in mind that:
1. Value is not inherent in a product, it is relative term, and value can change with time and
place.
2. It can be measured only by comparison with other products which perform the same
function.
3. Value is the relationship between what someone wants and what he is willing to pay for it.
4. In fact, the heart of value analysis technique is the functional approach. It relates to cost of
function whereas others relate cost to product.
Function
Value=
Cost
In the ABC analysis, the products are classified according to their sales or consumption value and
ranked in descending order. The products which offer the result the maximum sales or
consumption value are selected. These would offer the best result in terms of returns when
analyzed. Critical and production holding items are to be subjected to value analysis in order to
examine the rigidity of the specification.

Value Analysis Framework:

The basic framework for value analysis approach is formed by the following question, as given by
Lawrence D. Miles.
a. What is the item?
b. What does it do?
c. What does it cost?
d. What else would do the job?
e. What would the alternative cost be?

Value analysis requires these questions to be answered for the successful implementation of the
technique. Value analysis is also applied through by MISS technique, i.e., Modify, Improve,
Subdivide, Substitute, with regard to the product under study.
Implementation and Methodology:
In order to answer the above questions, three basic steps are necessary:
1. Identifying the function – any useful product has some primary function which must be
identified, a bulb to give light , a refrigerator to preserve food , etc . in addition it may have
secondary functions such as withstanding shock, etc. these two must be identified.
2. Evaluation of the function by comparison – value being a relative term, the comparison
approach must be used to evaluate functions. The basic developed. In order to develop
effective and identify unnecessary cost the following thirteen value analysis principles must
be used.
i) Avoid generalities.
ii) Get all available costs.
iii) Use information only from the best sources.
iv) Brain –storming session.
v) Blast, create and refine – in the blast stage, alternative products, materials, processes or
ideas are generated. The ideas would qualify for at least satisfying the accomplishment
of the function partly and economically. In the ‘create’ stage the idea generated in the
blast stage are used to generate alternative which accomplish the function almost

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 totally. In refining stage the alternative generated are shifted and refined so as to arrive
at the final alternative to be implemented.
vi) Identify and overcome the blocks.
vii) Use industry specialist to extend specialized knowledge.
viii) Key tolerance not to be too high.
ix) Utilize and pay for vendor’s skill and techniques.
x) Utilize vendor available functional products.
xi) Utilize speciality processes.
xii) Utilize applicable standard.
xiii) Use the criterion “would I spend my money this way?”
Implementation and Job Plan
In order to successfully implement a value analysis programme Lawrence D. Miles has formulated a
Job Plan which consists of the following even phases :
The orientation phase: is set by asking relevant questions like: What is to be done? What is it that
the customer really wants or need? What are the durable characteristics regarding weight, size,
color, etc.
Information phase: in this phase all pertinent information regarding costs, quantities, vendors, and
specification is collected. The basic methods of manufacturing process are studied.
Creative phase: during this phase, creative thinking and imagination are used to generate
alternative methods for performing the function. All ideas regardless of their seeming impractibility
must be recorded. This phase is extremely important in that it helps to evaluate an idea objectively
and to study the effect of an idea on various or all related fields.
Analysis and evaluation: in this phase suggested alternatives are analyzed and evaluated regarding
costs, probability of applicability etc.
Program planning phase: the program or plan for studying the various alternatives in greater depth
is laid down.
Execution phase: during this phase all the alternatives, with the cost and benefits, are studied
according to the plan or program, to finally arrive at the best alternative.
Presentation and implementation: during this phase all relevant data are presented to the decision
–making body or authority. The accepted ideas are then implemented and closely followed to study
the actual benefits derived.
Organization for Value Analysis
It indicates that value analysis focuses the attention of design , purchase , packaging, production,
finance(costing) and sales management to one objective – equivalent performance at a lower cost.
This means that representation from each of these department is essential to form a value analysis
team.

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Hospital Purchase management(theoretical knowledge only): vendor selection &
evaluation, vendor rating, methods of payments, tendering procedures-concept & frame
work of supply chain management

Purchasing process, Meaning of purchasing, objectives of purchasing,5 R's of

purchasing Centralised & Decentralized purchasing

DGS & D- General principles of procurement of medicine ,equipment in DGHS under the
MOHFW,GOI

Methods of Buying
Introduction
The buying department of the company is responsible to provide goods and services required by the company
at least cost to the company. The request to procure may be received either from stores department or from
one of the functional departments.
Such requests may be received:
i) Either for direct materials or for indirect materials;
ii) Either for production items or for non-production items;
iii) Either for low priced items or for expensive items;
iv) Either for the items which are controlled by the forces of supply and demand or for the items which
are available off the self;
v) Either for items to be procured from manufactures or for items to be bought from middlemen;
vi) Either for the seasonal items or for the non-seasonal items;
vii) Either for items produced to buyer’s design or for items produced to commercial standards;
viii) Either for items sold at premium or for items sold at discount;
ix) Either to meet immediate needs or it may be to satisfy needs at a later date;
x) Either at time when prices are at their peak or at a time when prices are stable;
The above discussion, therefore, implies that there can be wide variations in the practices to
be followed for the purchase of different types of items. This chapter deals with such
practices (i.e. different buying methods)

Factors Influencing Selection of a Buying Method

A number of factors influence selection of a buying method. They are:
i) Nature of the item;
ii) Regularity of its demand;
iii) Quantities required;
iv) Susceptibility to price variations
Some organizations decide upon different methods of buying on the basis of market condition where decision
may be –
1) Hand to mouth buying.
2) Speculative buying
3) Hedging
4) Forward buying / Market purchasing
Apart from these main buying methods there are other buying methods.
5) Scheduled buying.
6) Contract buying
7) Blanket orders.
8) Tender buying.
9) Seasonal buying.
10) Group purchasing.
11) Sub-contracting.
12) Central purchase organization.
13) Directorate general of supplies and disposal.

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Different types of Buying Methods
1. Hand to Mouth Buying
Hand to mouth buying also called “buying according to the requirements”. It refers to the frequent purchases
of an item in small quantities.
Important characteristics of hand to mouth buying are undertaken:
a) When demand arises.
b) To cover immediate requirements.
c) When the quantity purchased is small.
d) When there is emergency or urgency.

Advantages:
i) Inventory investment Low.
ii) Carrying charges is Low.
iii) Losses will be lesser when price declines.
iv) Reduced deterioration and obsolescence of materials.

Disadvantages:
i) Higher clerical costs.
ii) In emergency case quality may be degraded.
iii) Increase in prices may lead to loss.
iv) In urgency buyer may have to buy the materials with high price.
v) Production schedule may be interrupted for the shortage in the time of urgency.

Criteria:
This method applies to:
a) Items whose prices are expected to fall in the near future;
b) Items which are perishable;
c) Items required for under development products in product development phase;
d) Items which are used infrequently and would not be required to stocked.
e) cover immediate requirements of a stock items caused either due to delay in delivery from regular
supplies or due to increase in consumption;
f) Replacement spares;
g) bulky Materials

1) Speculative buying
Definition: Speculative buying refers to the buying large requirements of an item when its price is low with the
intention to sell bulk of it at a higher price for speculative profits.
Characteristics:
i) An item which is not required for production may be purchased.
ii) Its single aim is to make speculative profits when price of the commodity increases.
iii) The quantity purchased is high .

Advantage:
Earning speculative profits.
Disadvantages:
 Investing large amount of capital,
 Storage problem.
 Risk of obsolescence.
 Inventory holding cost higher.
3) Hedging
One of the techniques used to minimized the risk associated with fluctuation of prices is Hedging.
Hedging is used to protect an organization , or business from an open exposure in the foreign exchange
market. By using hedging, the trading party is protected from loss, - the risk of advance changes in the price of
an asset.

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Hedging is used by both traders to eliminate foreign exchange risk in international and by multinational
corporations to avoid foreign exchange risks in the translation of their financial statement into dollars.

In order to protect their business traders have got two options (i) hedging in Spot exchange rate and (ii)
hedging in Forward exchange rate.

(i) Hedging in Spot exchange rate

If the contract with the customer to buy or sell foreign currency is agreed upon and executed immediately it is
known as spot transaction and the rate quoted is the spot rate. Example: purchase of an export bill. Here the
customer tenders the bill for which the bank quotes a rate . if the rate quoted by the bank is acceptable to the
bank , the bill is purchased by the bank and the account of the customer is credited with the amount.

(ii) Hedging in Forward exchange rate.

A “future” transaction takes place where the purchase is made now at the quoted price, while the actual
delivery will take place at a future date to be specified in the contract.

Forward rate:
The N-day forward rate is the rate which appears in a contract to exchange a currency for another N days in the
future. It is distinguished from the spot rate, which is the rate used in agreements to exchange one currency for
another immediately. No currency changes hand between the parties in a forward contract at the time it is
signed; the currency is exchanged at the maturity date of the contract N days in the future.
A forward exchange contract or simply a forward contract is one where a banker and a customer or another bank
enters into a contract to buy /sell a fixed amount of foreign currency at a specified future date at a predetermined
rate of exchange. the rate quoted for the transaction is called forward rate. Example: Bank of India agrees to
buy one month forward US$ 1million from Bank of Baroda. That means the delivery of foreign exchange by
Bank of Baroda to Bank of India will take place after one month from the date of contract

Forward premium (forward discount):

A forward premium (forward discount) is the proportion by which a country's forward exchange rate exceeds
(falls below) its spot rate. Premium and Discount Forward Rate may be the same as the spot rate . then it is said
to be ‘at per’ with the spot rate. But, it rarely happens. More often the forward rate may be costlier or cheaper
than the spot rate . The difference between forward rate and spot rate is known as ‘forward margin’ . The
forward margin either may be either premium or discount.
When the foreign currency is cheaper under forward rate than under the spot rate , the currency is said to be at a
premium. Under direct quotation , more Indian rupees will be needed for a unit of foreign currency under the
forward rate than under the spot rate. Therefore, premium is added to the spot rate to arrive at the forward
rate.

Under indirect quotation , for a Liven unit of Indian rupees the customer would get lesser units of foreign
currency than he would get by applying the spot rate. Therefore premium is deducted from the spot rate to
arrive the forward rate. The addition and deduction of premium is applicable both for purchase and sell
transaction.

When the foreign currency is cheaper under forward rate than under the spot rate , the currency is said to be at a
discount . Under direct quotation , fewer Indian rupees will be needed for getting unit of foreign currency under
the forward rate than under the spot. . therefore , discount is deducted from the spot rate to arrive at the
forward rate .

Under indirect quotation, for a given unit of of Indian rupees, the customer would get more units of foreign
currency than he would get under the spot rate. Therefore, discount is added to the spot rate to arrive at the
forward rate.

Determinants of the forward premium:

The forward premium (or forward discount if the number is negative) is determined by the interest rate
differential between the United States and Canada. According to the Interest Rate Parity theorem, the expected

84
appreciation of the Canadian Dollar is equal to the difference between the U.S. and Canadian interest rate. For
example, if the interest rate in Canada is one percent higher than in the United States, over a period of one year
the Canadian Dollar will tend to depreciate by one percent. Note that a raise in Canadian interest rates first lifts
the exchange rate, and only then the CAD starts to depreciate. The interest rate differential is based on
comparable assets (with risk premium already factored in), for example, Canadian and U.S. 90-day or 1-year
treasury bills.

Condition of forward rate :

Insurance against exchange rate risk can be obtained through contracts in the forward market. Such activity is
called hedging. A hedge is the offset of a given position in a separate bu parallel market by an equal and
opposite position in which the effect of the offset reduces or eliminates the effects of a value change in both
positions. In simple terms, a hedge locks in the current value in a contract. The instrument for a hedge is often a
currency swap in which a spot contract is offset by an equal-amount forward contract.

ILLUSTRATION :-Dollar is quoted in the inter bank market as follows: (simulated value)
Spot US$ 1=Rs.31.35 -31.40
1 Month forward 20 /30 pm
2 Month forward 40/50 pm
3 month forward 60/70 pm
Calculate 1month , 2Month and 3 Months forward rates for dollars.
This is a direct quotation. Premium should be added to spot rate to obtain forward rate.
Buying :- 1 Month (Rs.) 2 Months (Rs.) 3 Months (Rs.)
Spot Rate - 31.35 31.35 31.35
Add: Premium 00.20 00.40 00.60
Forward Rates 31.55 31.75 31.95
Selling :- 1 Month (Rs.) 2 Months (Rs.) 3 Months (Rs.)
Spot Rate 31.40 31.40 31.40
Add: Premium 00.30 00.50 00.70
Forward Rates 31.70 31.90 32.10

4) Forward buying / Market purchasing:

Definition: In this case a buyer may enter in to a long term contract with a vendor, say for one in this one year
vendors, and say for one year. In this one year time spam the delivery only a single delivery.
Example: - suppose buyer enter in to contract in March for one year and seller supply the material in
September and it will be single delivery. But, the purchase contract inclusive of price, delivery date and other
terms concluded in January
Reasons:
i) It is a safeguard in regard to continuity of supplies.
ii) It protects the price over a long period.
iii) It is a safeguard in respect to standard of quality.
iv) For seasonal product forward buying can be seen.
5) Scheduled Buying
Definition: Scheduled buying is the process of procuring an item in slower deliveries according to the delivery
schedule furnished to the supplier by the buyer.
The salient characteristics of scheduled buying are:
i) A purchase order covering annual requirements is placed to the supplier.
ii) The supplier is given the estimate of the procurement needs covering a mutually agreed period of
time.
iii) When fresh delivery schedules are given to the supplier prior to completion of the previous
schedule. Fresh schedule supersedes the previous schedule.
iv) Monthly deliveries are usually specified except for perishable materials, bulky items and others
required in large quantities
Advantages:
i) This is an win-win situation where both buyer and seller enjoy the savings resulting from regularity
of production and smaller inventories.
ii) Buyer is assured of supply of goods while supplier is assured of business.

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 iii) Supplier can effectively plan his factors of production while buyer can plan his requirements of
finance
Ctriteria:
Scheduled buying is best suited for –
 Items of regular use, Proprietary items and items produced according buyer’s design.
7) Contract Buying
Definition (According to Spiegel): “Contract buying is the purchasing made under contract, usually formal, of
needed materials, the delivery of which is frequently spread over a period of time.”
Characteristics:
a) Contracts are given to suppliers for large amount of future requirements or for a certain period.
b) Quantity received per occasion is small.
c) The cycle time between two consecutive receipts may be any period considering the value of
requirements, distance and the mode of transport;
d) The buying department usually finds sufficient time to secure competitive bids and negotiate terms of
contract.

Advantages:
i) It saves time and money of the company from the inviting quotations, preparing, comparative
statements, placing of orders, etc.
ii) it ensures regularity in supply .
iii) The buyer needs to keep very little working stock and safety stock. So that capital blockage is
minimum.
v) The buyer can plan their financial requirement as they have a prior idea about payment to vendor.
Types of contracts:
Contract buying is of three types:
 Rate contract: In this case rate is fixed but, quantity is not fixed.
 Running contract: Here the rate and the quantity both are fixed for the contract period.
 Service contract: in this case various services are obtained periodically.
Criteria:
Contract buying is suited to the procurement of materials and production items of regular use.
8) Blanket Orders
Definition: Blanket orders refer to the purchase of variety of items from single source,
usually a middleman.
Characteristics:
a) A blanket order specifies the categories of items covered by the order;
b) The supplier is given requirements on phone who supplies at the prevailing prices with discount.
c) The items covered by the order generally have low unit price;
d) More than one middlemen may be selected ensure right time of delivery

Responsibility of the buying department:

i) The middleman who is selected should be located nearer to buyer and should have large stock
facilities (warehouse) and who are known for their honesty and reliability.
ii) The buying department must watch the items in the groups and periodically check up whether the
demand for any item has risen considerably.
Criteria:
The method is best suited to general hardware, electrical supplies, stationery.
9) Tender Buying
Generally government departments and public sector undertakings in India follow this method of buying.
Characteristics:
i) The buying department establishes a bidder’s list and invites them to submit bids (quotation)
ii) Bids on receipt are evaluated by comparison and the right supplier is selected. Mainly lowest price is
the criterion of this method. But, when supplier quoting the lowest price has questionable delivery
time, quality, reliability or financial stability they may be evaluated under different criteria.

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Advantage:
i) By tender buying is the purchaser can select qualified supplier on the basis of competitive price.
ii) It eliminates favoritism, patronage and personal preferences.

Disadvantages of the method:

Tender buying is costly and time-consuming.

Types of Tenders:
Tenders are of four types:
i) Single tender refers to the system of tendering wherein the details of the requirements are
communicated only to one firm.
ii) Limited or closed tender refers to the system of tendering wherein enquiry is sent to a limited
number of suppliers who are on the approved list of suppliers and bids are received in response.
iii) Open tender system is the system of tendering wherein the enquiry is advertised in the newspapers
or periodicals. in response. It may be termed as ‘open tender’, ‘advertised tender’, or ‘unlimited
tender’ is used.
iv) Global tender is the system of tendering wherein the enquiry is advertised in the newspapers and
trade journals of not only of the home country but also in the foreign country.

10) Seasonal Buying

Definition: “buying of the annual requirements of an item during its season”. This method is used for items
available in particular season only. Example: Food processing industry.
a) The items involved are seasonal and therefore need to be purchased and stocked in sufficient
quantities till the next season (e.g. oranges, sugarcane, apples, mangoes etc.).
b) Usually purchases are made directly from producers / farmers of the goods.
c) The items covered may be small in size but they are required in large quantity.
d) Market price is the lowest during the season. Therefore, the items can be purchased at the cheapest
rates:
Criteria:
a. Purely seasonal products
b. Items which are having high price in off season.
11) Group Purchasing
Definition: ‘buying of items in a single purchase order’.
Characteristics:
a) Items required in small quantities are classified into few basic groups. These basic groups depend on
the source of purchase.
b) Inventory levels are fixed for each item within each classified group.
c) One purchase order – one for each group – covering a number items within its group.
d) Stocks-on-hand are reviewed periodically.
e) Replenishment is also done

Advantages:
Group purchasing reduces clerical and delivery costs, because, one order is placed for a number of varied small
items instead of an individual order for each item.

12) Sub-Contracting
Definition: Sub-contracting is the hiring of another firm to perform some of the manufacturing operations or
assembling or producing certain parts and sub-assemblies to be incorporated into the buyer’s end product.

Types of sub-contracting:
Sub-contracting is of two types:
i) The company makes some units of the final product on their own shop and buys balance from
outside.

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 ii) The company buys some assembly form outside.
iii) The company can do certain operations like electroplating, heat-treatment, rough blanking etc.
done from others
Conditions :
Sub-contracting is desirable when –
i) The product involves number of components requiring different types of machines.
ii) Special expertise is required for certain operations and this is not available in the buyer’s firm.
iii) There is lack of capacity at the home plant
iv) If the cost of buying is less than cost of production then company may buy materials from outside.

Responsibilities of the buying department:

i) The buying department has to locate, select and develop qualified sub-contractors who can supply
parts of right quality, in right quantity, at right cost in right time
ii) Sub- contractor should be located within close proximity. Because,
 Transportation cost, and time is less.
 Follow up is easy and less costly.
 Buyer can have better control on supplier’s quality
iii) More than one sub-contractor should be selected for each component.
iv) Maintain supply of goods from alternate source in the event of any production hold-up with one of
the sub-contractors.
v) Buyer should ensure the quality of the materials which are required to make final product.
vi) Delivery scheduling is the most important aspect of sub-contracting.
vii) Buyer can give financial, marketing and administrative support to the supplier to ensure time,
price, delivery of goods ( in the time of natural condition and in the time of emergency)

Central Purchase Organisation

A large firm in the public or private sector may have section-wise stores at different places. The requirements
of these stores can be satisfied by either of the following two methods:
i) Each store to make its own purchases.
ii) A central stores to make purchases and supply material in turn to section wise stores.
The advantages of central stores purchases are:
i) The central purchase organisation (CPO) can obtain quantity discounts, lower rate and better
contract terms due to large purchases made possible due to consolidating the requirements of
individual stores.
ii) Malpractices by individual purchase officers by some kind of understanding with the local dealers
which can result in purchase at higher prices are avoided.
iii) The Central Purchase Organization can exercise strict control on consumption thereby minimizing
the risk of malpractices.
iv) The central purchase organisation can contract directly with the manufacturers and obtain items as
per specifications. Individual section stores may not be able to do this.
Examples:
Reserve Bank of India, State Bank of India, etc.
Directorate General Suppliers & Disposal (DGS & D)
The DGS and D is the Central Purchasing Organisation for the various government departments. It enters into
contract with various firms for the supply of certain materials to the government departments during the year
at the agreed rate. A formal document raised for the purpose is called “rate contract”.

Meaning of Purchase Cycle

Purchasing activity plays a vital rile in all the firms in general and in the manufacturing firms in particular.
Purchasing, is not merely “buying to satisfy the indentor’s requirements”, but “buying goods of right quality, in
the right quantities, at the right time and at the right price”.
Purchase cycle consists of following eight major activities (Fig 2.3)
1. Establishing and communicating the need for procurement.

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2. Scrutiny of the purchase indents.
3. Market study and selection of sources of supply
4. Order preparation
5. Follow up
6. Receiving and inspection
7. Storage and Record keeping
8. Invoicing and Payment.

Establishing the need Scrutiny of the

for procurement purchase indent

Order Purchase market

preparation research

Follow up with Receiving and

supplier Inspection

Invoicing and Storage and record

payment keeping

Fig: Major activities of purchase cycle

Each of these activities is described below and their major aspects are summarized below:

Elements of Procurement Cycle / Steps of purchasing cycle

1. Establishing and communicating need for Procurement
The need for purchase originates in one of the firm’s operating departments or its inventory control section.
The demand may be for raw materials, such as steel; or it may be for semi-finished goods such as castings,
forgings, semi-matched parts; or it may be for bought out parts; or for cutting tools such as drills, reamers,
cutters, etc.; or it may be for supplies or for spares. The need is communicated to the purchase department
through a formal document called “Purchase Indent” or a “Bill of Material”
a) Purchase indent: Purchase indent, also called purchase requisition, is a formal request made to the
purchase department to purchase materials or services specified, time when required etc. A purchase indent
originates either from the firm’s inventory control section, production control department, or from one of the
operating departments.
1. ESTABLISHING THE NEED FOR PROCUREMENT

1. Recognising the need for procurement

2. calculate the requirements
3. jotting down the specifications
4. informing requirements to purchase
(i) Purchase indents / Bill-of-material

2. SCRUTINY OF PURCHASE INDENT

1. Completeness
2. Appropriateness
3. Passing the indent through stores
4. Logging of indents into indent register

3. MARKET RESEARCH

1. Source selection & source development

2. Advertisement. 89
3. Telephonic quotations
4. Written quotations
5.
4. ORDER PREPARATION

1. Scrutiny of quotations
2. Negotiations
3. Placing orders to suppliers
4. Obtaining suppliers’ acceptance.

5. FOLLOW UP

1. Pre-delivery follow up
2. Shortage chasing
(a) Reminders
(b) Personal visits
(c) Telephones
(d) emails
(e) Faxes / Telexes
(f) Posting of personnel at suppliers’ works

6. RECEIVING & INSPECTION

1. Receiving dispatch details (RR/LR) and logging them into
the consignment register
2. Collection of material
3. Inspection for physical damages to the packages and
number of packages
4. Entering consignment details into GR register
5. Uncrating of goods
6. Quantity certification
7. Raising of GRR
8. Intimating receipt of materials to the indentor
9. Inspection of goods

7. STORAGE & RECORD KEEPING

1. Movement of materials to concerned store / rejection
store
2. Quantity certification
3. Application of protective coating / marking
4. Storage of materials into appropriate racks
5. Posting of receipt into stock card.

8. INVOICING & PAYMENT

1. Receiving GRRs in Accounts department
2. Receiving suppliers’ bills
3. Linking of GRR and suppliers’ bills
4. Posting of purchase register
5. Passing of bills
6. Effecting payments

Constituent activities of a purchase cycle (Contd.)

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  The indent alternatively rose either by plant engineer, or by maintenance engineer, or by office
manager, or by other responsible persons authorized to request these items.
 Organization permitted different person to sign the purchase indents for different kinds of items are
issued by the top management.
 Stock items (items of regular use): for these items the purchase indents will be given by inventory
section or stores are generally. When the stock level drops to or nears the re-order level, an indent is
sent from stores to the purchasing department to replenish the stock.
 The buying department may also receive indents for capital goods, the purchase of which has already
been approved by the management.
 Non-standard items: The indents for these items are filled in by the operating departments. The
requests for items may come from planning department. Indents are raised by all indenting
departments. It should have three copies. Original is sent to the purchase, second goes to the stores,
and third copy remains with the originating department.
 Purchase indents from inventory section or the store is sent directly to the purchase department.
Purchase indents from all other persons must be approved by the authorized signatory and should
be routed through inventory section or stores to see whether required items are carried in the
stores.
b) Bill-of-material:
 Bill-of-material, also called parts list of building list,
 Bill of material is prepared by the engineering department, production and material dept.
 The final assembly is broken into major assemblies. Major assemblies are divided into parts. The
individual parts comprising each assembly are arranged, as far as practical, in the manner in which
each part is assembled.

The main advantages of bill-of-material are:

i) It eliminates the unnecessary clerical activities regarding purchasing of goods. This saved time and energy.
ii) It can minimise clerical error.
iii) It can reduce wastage of materials and also reduces unnecessary inventory cost.

2. Scrutinising Purchase Indents

a. A purchase indent may describe the items either by its brand name, or by commercial
standard, or by its performance standards. Sometimes the indents may be forwarded sample
of the item.
b. Purchase departments must scrutinize the accuracy and completeness of quality description.
The scrutiny of the indents is a routine activity of the purchase department. The indent is scrutinized to see
whether –
i) It should be signed by the authorized signatories to avoid irresponsible and unethical purchases;
ii) It should be coming through stores department to certify non-availability and stock history of the item in
stores;
iii) Quantity and quality specification of the item should be correctly and clearly written.
iv) The description of the required item should be clearly given;
v) quality specification of the item may be correctly and clearly written

Each purchase indent after scrutiny is recorded in the purchase indent register and then given
to the concerned buyer. The second copy is initialed, dated and returned back to its indentor.

3 Identification, Selection, development of Sources of Supply or Survey

 After the scrutiny of the indents the next stage is market survey and selection of the
sources of supply.
 This stage involves differentiate and sorting of items into item groups, review of
available information, and selecting potential source(s) of supply who can supply
goods -
i) of the right quality;
ii) at the right price; and
iii) Meet buyer’s quantity requirements, and make reliable delivery promises.

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 a. Buyers can select suppliers by virtue of their experiences and data collected from their
various internal sources such as catalogues and price lists, etc.
b. In general, the work involved in market search and source selection is as under:
i) For the items purchased to commercial standards, telephonic quotations are obtained from vendors and
verbal order is given to a supplier whose terms are most suitable.
ii) For highly price fluctuating products and items an inquiry is sent to probable sources and quotations are
received. A comparative statement is prepared from the quotations received from the suppliers. Then
company select one or more than one suppliers according to their suitability.

iii) For the regular use items buyers send design specification along with blue print or sample and delivery
schedules are released to the suppliers

iv) For non-stock items, the sources are selected as per previous points depending upon the nature of the
item
v) For capital equipment, enquires are either mailed to the machine tool manufactures or the enquiries are
advertised (open tender) in the paper of this country. Company can float global tender by advertised the
enquiries in the news paper of other country.
vi) If lesser amount is involved and the item is easily available, the buyer may buy with petty cash.
vii) For new items, the buying department have to explore information to identify sources and undertake the
activity of selection and development of suppliers.
4. Order Preparation
 After selection of source of supply, the next step is to authorize the selected suppler to supply
material, which is done by placing the purchase order.
 A purchase order is a formal document prepared by the buying department on behalf of the company
to authorize (request) the supply of the goods and services in the quantities, at the time and at the
price specified there in the document.
 A purchase order is a legal document and serves as an evidence of the contract between the buyer
and the seller.

After getting the orders typed, the buyer has to check for its correctness and sign it. Once the
purchase order has been signed, it requires to be entered in the purchase register. The individual
copies of the purchase order, materials required urgently are purchased on verbal or telephonic
orders which are covered immediately by written purchase orders.
A written purchase order serves the following objectives:

i)It gives full details of the materials to be supplied to avoid ambiguities.

ii)
It serves as a future reference for placement of orders.
iii)
It helps buyer’s accounts department to link goods-receipt-reports with supplier’s invoices.
iv)
It helps buyer’s receiving department to verify that the materials received are in
accordance with those ordered.
The copies of the purchase order go to the supplier, the accounts department, the receiving
department, the indenting department, the reference file, and the follow-up section.
The placement of an order cannot be considered complete until the acknowledgement of the
purchase order is received from the vendor.

5. Follow-up with Suppliers

The follow up function now-a-days has become the foremost function of the buyers. Basic rules of
follow-up are:
i) Follow-up should be based on market condition and buyer’s experience with the
vendor’s delivery performance.
ii) Buyer should keep a constant himself up-to-date with latest progress on each order.
iii) Mode of follow-up should be based importance of the item, reliability or otherwise of
the supplier, number of suppliers, location and so on.

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Purchase follow-up is made in two stages: pre-delivery follow-up and shortage chasing.
Pre-delivery follow-up is intended to remind the supplier of the due date and obtain advance
information of expected delays. Pre-delivery follow-up enables buyer –
 If the supplier is expected to fail in his delivery commitment; buyer has to develop alternate
arrangements to ensure that delivery should be on time. In this case buyer may identify
another source of supply to make delivery on schedule. Typical methods used are:
i) Phone call to local suppliers;
ii) Letters to outside supplier typed and signed by the buyer;
iii) Regular visits –to new suppliers to review progress
iv) Delivery confirmation letters from supplier intimating that the delivery shall be made
on promised date. It is one sort of guarantee card;

Shortage chasing is the universally accepted most vital part of purchase follow-up. purpose:
a. First to obtain the shortage materials as soon as possible and
b. Second to intimate suppliers that delivery should be made on time, if not then
shortage chasing will be done by company. It prevents future recurrences.
c. The approach depends upon the type of supplier:
i) In the time of vendor evaluation buyer may warn supplier about the delivery and shortage
of supply.
ii) Supplier’s delivery ratings should be communicated on periodical basis. Suppliers with A
and B ratings should be encouraged. Those with C and D rating should be warned to
improve on their delivery performance.
iii) New sources should be developed and schedule on existing suppliers who are in C and D
position should be gradually rejected to pressurize them to improve.
iv) Meeting between the senior representatives should be arranged to discuss the problems.
Example: the follow-up system in operation can be done in following manner
d. Once the date is marked on the follow-up copy, the staff has to segregate all order
copies and puts them into date compartments.

The buyers are asked to adopt the following method for follow-up:
i) Telephone or email the party;
ii) Faxes: when urgency exists
iii) A personal visit should be made to local supplier in case of extreme urgency and in case of
failure to get the supplier on phone;
iv) Telephone and also write a reminder on a printed form indicating the delivery required,
the quantity pending and so on;
v) Written letters, duly typed and signed by the higher authorities must be issued to distant
supplier;
6. Receiving and Inspection
a. After receiving the purchase order the supplier fills up the buyer’s requirements and
arranges delivery of the materials according to instructions regarding quantities,
time, route, mode of transport, etc.
b. In a small company “Receipt” or “Receiving” department/section will receive the
materials and inspect. In a large company, receiving materials is looked after by the
stores department.
The activities involved are as under:
(a) Receiving:
Materials in the receiving department are received against a specific document depending upon mode
of dispatch and geographical location of the supplier.
Materials from local supplier
 Responsibility of delivery of materials depends on the terms of contract. Materials to be
delivered by the suppliers

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  The original copy of the delivery challan is retained by the receipt department. The duplicate
copy is stamped “Subject to physical count and inspection” and is signed by the receipt clerk
and is handed over to the supplier’s representative.

Different methods of receiving Materials from outside supplier:

i) Post parcel: Post parcel is the convenient method of receipt of materials from outstation
suppliers. No information is received from postal authority regarding receipt of materials but
postman personally delivers the parcel. Only light weight materials such as samples, spares,
and cutting tools are sent by the post parcel.
ii) Road transport:
 If the materials are sent through road transport, the receipt of the transporter, called “Lorry
receipt”. It is sent by the supplier.
 The lorry receipt is numbered and contains description of the items packed in the boxes, the
number of Containers.
 Freight paid or to be paid and the type of delivery has to be mentioned.
 If the delivery is mentioned as “Door delivery”, the transporter has to deliver the goods at the
buyer’s works.
iii) Rail transport: This is similar to road transport except the following differences:
 the railway receipt is received by the buyer in duplicate;
 the railway does not inform the consignee of the arrival of the material;
 The materials require to be collected by the consignee.
iv) Air: Air consignment (AC) note must be sent as soon as material is booked. The receipt
department on the receipt of A.C. note visits airlines office to collect materials.
Since, it takes a long time for clearing; a register is maintained to keep a proper control on the documents.
The register mentioned above serves many purposes:
 It enables clearing department to do follow up with the transport agency.
 It enables buyer to know the time when the materials to be received.
 It enables clearing department to plan their administrative work load as well as achieve optimum
utilization transport facilities.

(b) Verification and logging of delivery challan of materials:

When materials are received with supplier’s delivery challan, receiving department takes out the copy of
the relevant purchase order and verifies to ensure:
i) Right materials
ii) They have supplied materials as per delivery schedule.
iii) Right quantity.
iv) Purchase order number, part name, part number, broad purchase category etc. are mentioned
clearly and correctly.
v) Right time.
After having satisfied, the receipt clerk makes the entry of the receipt materials into a register called
“Goods Receipt Register”.

(c) Preparation of Goods-Receipt-Reports (GRR):

i. Goods receipt register cannot be made available to different departments.
ii. Other departments have to be informed. That’s why information from the
goods-receipt-register is transformed on “Goods Receipt Report” (GRR). It is
also known as “Goods Inward Note” (GIN), or Receipt-cum-Inspection Advice
(RCIA), or Materials Inward Note (MIN) etc.
The need for preparing a separate document such as GRR arises because of the following reasons:
i) Only one copy of the delivery challan is received. But, concerned department should be
informed.
ii) Preparation of GRR helps to combine information on delivery challan and results of inspection.

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(d) Communication of receipt of material:
 Moreover, the personnel who are engaged in receiving may not know whether a particular
material is required urgently.
 Therefore, they have to inform the concerned departments as soon as materials are
received. First communication can be made on intercom. But, after that written
communication should be done.

Physical count of the received material:

Materials received should be verified for quantities.
The receipt clerk has to attach receipt tag containing all details about the delivery challan to the part or to
the package. This tag also contains challan numbers, description of materials, code numbers of materials,
name of the suppliers, number of packages received, quantity received and date of receipt.
The verification method of quantities may be one or more of the following types:
i) Counting by number (quantity).
ii) Weighing.
iii) Measurement of length.
After quantity verification material is kept ready for quality verification by the inward inspection
department.
If the verified quantity is less than claimed quantity then authority should issues Discrepancy Note.

(e) Inspection of goods

All supplies are subjected to inspection and testing.
Critical items: These are inspected at vendor’s plant prior to deliveries by the vendor.
All remaining items are inspected by the inward inspection at the buyer’s premises to conform the
following criteria
 Dimensions;
 Materials specifications, and
 Performance.
7. Storage and record keeping
o After inspection The goods are segregated in to accepted and rejected categories.
o Only fully accepted quantity is forwarded to the stores. The quantity is physically
verified and entered into the ledger or bin cards and only thereafter the issue is
allowed.
8. Invoicing & Payment
Receipt of supplier’s invoice:
When the supplier supplies goods, he immediately prepares invoices. Sometimes, both buyer and
supplier have discussion and supplier agrees to raise invoices after the receipt of goods-receipt-reports.
Such a system has a number of benefits namely:
i) Reconciliation statements are very easy to prepare
ii) Invoices indicate the exact quantity of materials accepted by the buyer.
iii) Paper work is cleared faster and payment wise there is no dispute.
iv) Rising of credit or debit notes can be avoided for discrepancies in quantities or
rejection.
Scrutiny of invoice:
Supplier’s invoices on receipt are sent to the accounts department. The personnel of this department
again scrutinize the invoice in accordance with GRR.
Journal entries:
Verified invoices are entered in a purchase register, called “purchase journal”. A purchase journal is a
register wherein invoices are entered supplier wise.
Payment:
The purchase journal is reviewed periodically and the cashier is informed of the invoices which are due
for payment. Cheques are drawn to effect payment on due dates

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Vendor Rating and Source Selection
 Reputed suppliers are intangible asset of any organization.
 They are not only supplier of materials, but they also extremely important source of information
regarding market condition , price trend and general industrial climate.
 Many organization have accepted source selection as a corporate policy. This brings fair competition
among the suppliers and supply failure are minimized.
 Improper selection causing inferior goods and servicing has resulted in authority being shared with
the using department.
 Therefore, proper source selection must b exercised by the purchasing department to avoid
possibilities of interdepartmental conflict.

Procedures:
Procedures of source selection involves the preparation of an exhaustive list of prospective supplier and the
successive elimination from this list on various grounds until the number has been reduced to the one or , few
to be forwarded wit the business.

The stages of procedures as follows:

1) Searching stage: The need for a materials or product is starting point. The search process begins with
the finalization of specification in consultation with technical department.
It involves identifying the source of supply.
It can be obtained from various journals and news paper advertisement.
Supplier representative also be a good source of information.
2) Selection stage: The selection of supplier starts with floating of enquiries by the purchaser.
Certain progressive suppliers often contact buyers with a request to be included in the buyer’s list of
approved suppliers.
The buyer can also visit and inspect the suppliers factory to know the details.
3) Negotiation and trial order: After selection the process of negotiation will be started for placing the
trial orders. Correct and cordial relationship with the vendors are essential for mutual cooperation.
4) Rating and experience stage: After the trial order are executed, it becomes necessary for the buyer
to rate the vendors to enable him for determining how he should apportion his requirements among
vendors.
Special Aspect of Source Selection
Local source:
 Generally local source are preferred, provided they meet the requirements of buyer in terms of
quality, delivery and price.
 A personal follow-up or a local “phone call” is enough for quicker delivery.
 In fact, some organization prefers local suppliers even though they may not compare favorably with
outside supplier.
 In India may big organization encourage ancillary suppliers in and around their plants through
technical and financial assistance.
Subcontracting: Selection of source for sub contracting is another special issue. The manufacturer may decide
to “off-load” some product to suppliers s as to facilitate scheduling of production in the plant. It also enables
better utilization of manpower.

Small or big? If the requirement is small, then obviously small suppliers are prime choice.
A personalized contact can be established and because he is small, he is likely to have fewer customer, will be
more loyal and will meet even unusual request.
Big suppliers are equipped to meet larger requirements they usually have reserve facilities and may thus be
able to meet additional requirement.

Development of Vendors – Necessity and Importance

1) Sometimes it can happen that there is no supplier of an item or, the item is a new one. In this case
development of vendor is very much essential.
a) first , is to locate a manufacturer who produces an item almost similar to the one required.
b) He may be encouraged t take up the new line of production.

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 c) Often development costs are shared by the purchasing company, and even expertise is
shared by two company.
2) To facilitate procurement of materials need all organizations require to develop source of supply for
the material requirement.
3) Vendor development helps to develop sources for new material and enlarge/ increase source for
other materials.
4) Revolution in the field of materials management field such as , MRP, KANBAN, JIT, etc. necessitates
structured discipline of material flow which leads to development of new sources.
5) Establishment of indigenous sources of supply to substitute imported materials
6) To incorporate functional improvement.
7) To reduce overall cost of a product.
8) In case of monopoly situation the price of the goods are frequently changed without any reasons,
even commercial terms and conditions like payment terms, liquidated damage, performances
guarantee, etc are not accepted by all of the monopoly vendors for different items. If few more
parallel sources can be located, then better price , improve delivery , better quality , etc. may be
obtained.
9) Due to delay of the materials by the existing vendors, as a result stock out situation arises which leads
to stoppage of production.
10) When the vendor is not at all interested to reply or, provide acceptance letter of an order, within
stipulated time frame, then others vendors can supply the product.
11) Proximity of vendors is necessary. Because, a local buyer is always welcome than the buyer of distant
area.
12) Diversification will force the requirement of vendors.
13) When capacity of current vendors do not meet with the demand of the buyer, and then buyer needs
other vendors.
14) To ensure the availability from more than one sources.

Factors influencing Source/ vendor selection

1) Price: this is the most obvious factor, along with any discount offer, although it may not be the most
important. Because firm spend a large amount of money of their total income on purchasing items,
finding supplier who charges low prices is a key objective in vendor selection.
2) Quality: quality of a supplier’s materials also is important because a company may be willing to spend
money to obtain materials of high quality.
3) Delivery: shorter lead times and on-time delivery help the buying firm maintain acceptable customer
service with fewer inventories. The benefit of fast, on time deliveries applies to both service and
manufacturing sectors. Many manufacturers demand quick, dependable deliveries from their
suppliers to minimize inventory level.
4) Services: special services can sometime be very important in choosing a supplier. Replacement of
defective item supplied, instruction in the use of equipment, repair of equipment and other similar
services can play a key role in preferring one supplier over another.
5) Location: location of supplier can have impact on shipping time, transportation cost and response
time for rush orders or emergency service. Local buying can create goodwill in the community by
helping the local company.
6) Inventory policy of the supplier: if a supplier maintains an inventory policy of keeping spare parts on
hand, this could be helpful in case of an emergency equipment break- down.
7) Flexibility: the willingness and ability of a supplier to respond to changes in demand and to accept
design changes could be important considerations.

In addition to the above major factors several other factors are also considered in supplier selection.
1. Reserve capacity: A supplier with an adequate reserve of productive facilities can respond to increased
requirements of customer.
2. Internal factors and quality control procedures: the stage of a supplier’s technological development
and its ability to keep up with current methods are also considered to choose an effective source.
3. Labour Relation: A possible interference with the continuity of production in a supplier’s plant may
originate with the workers themselves. Strikes or production slow down are directly related the
labour relations of the supplier.

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 4. Warranties: Service may include the kind and form of warranty that accompany the supplier’s
products, i.e., installation, maintenance, replacement of parts etc.
5. Plant visits: it is often desirable for a representative of the production or engineering departments to
accompany the buyer on such visits, especially if highly technical products are involved.

Types of Vendor Development

1) The vendor is given a plot outside the buyer’s premises:
 The buyer also gives them all assistance with tool and gadgets.
 The entire product of the vendor may not be consumed by buyer itself and vendor has the liberty to
sell the balance materials in the market.
 The vendor is assured of the fixed sales of his production by the buyer’s firm.
 The buyer may give them managerial, financial, and technical help.
These are two types:
a) Local source (nearby source): The source of supply may be inside the state where the buyer’s plant is
situated. The buyer develops them with technical, managerial and financial assistance so that they get the
product on desire.
Advantages:
 Closer cooperation because of proximity.
 Delivery dates are more certain as transportation sonly the minor factor.
 Rush orders are likely to be filled faster.
 Saving in entry tax.
 Implied social responsibilities to the community are fulfilled.
 Shorter lead time can frequently permit in inventory. In effect the seller carries the buyer inventory.
 Disputes are more easily resolved.
b) Far away source:
The vendor can be located any where outside the state of buyer.
Advantages:-
 As a result of economies of scale the vendor, in some situation can be more efficient and offer higher
quality of better services at a lower price.
 Sales tax – since, the central tax is applicable which is quite lower than the state sales tax.

2) captive development:
In this type, the vendor’s plant is inside the buyer’s premises. An agreement is made with the vendor that a
section of the product will be solely manufactured for the buyer and buyer has the first option to get it.
Advantages:-
 Buyer can get it at lowest possible cost.
 Saving in transportation ( time & cost)
 Delivery is assured. This enables the buyer to operate at low inventory.
 Considerable savings in sales tax.

Techniques and Procedures of Vendor Development

If the current vendor(s) is not capable to supply goods in right time in right manner then company has to
develop some other vendors. the techniques & procedures of vendor development are as follows.
1st step: identify the problem of current vendor.
2nd step: investigate the genuinity of the problem.
3rd step: in case of a genuine problem the buyer has to identify the area problem after identification buyer
may give assistance to the vendor.
4th step: sit with the supplier with the problem.
5th step: if the vendor posses any managerial incapability, then buyer may assist them with managerial
support. Else, buyer proposed them to be sole vendor of them or, negotiate with other vendor apart from this
vendor.

Vendor Evaluation
Purpose:
Periodically vendor analysis is a must for such analysis, which is essential to build up efficient source of supply.
This analysis seeks to evaluate each vendor, past performance and overall worth to buying company.

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Vendors are generally evaluated on the basis of the following attributes.
i) Delivery as per schedule.
ii) Reliable quality.
iii) Quick replacement of rejection.
iv) Supplier with out asking for any financial consideration.
v) Answering queries readily.
Performance will be determined by applying decision matrix system. In this system weightage is determined
which indicate the relative importance of each attributes and this is known as Attribute Weightage Coefficient
(AWC).
During course of inspection of suppliers premises all the following factors are also to be ascertained –
2) Technical know how.
3) Financial capability
4) Organization set-up and man power.
5) Records of past performance of supplier in delivering materials in right time with right quality and
quantity.
6) Own manufacturing units.
7) Staff and line capacity of firm.
8) Service level.
9) History of labor relation.
10) Quality control and testing facilities.
11) Financial adequacy and stability
12) R&D facilities.
13) After sales service.
14) Reputation in the market regarding price, quality, quantity and behavior.
15) Whether he is vendor or agent of vendor.

Levels of Vendor Evaluation:

i. Product level: At this level, the focus is on establishing and improving the vendor’s product quality.
Incoming inspection and quality inspection are carried out to establish the degree of quality
conformance of incoming materials.
ii. Process level: At this level the production process is closely investigated rather than focusing on
product inspection. It is because the quality of product depends on manufacturing process.
iii. Quality assurance system Level: quality assurance means checking the way in which quality
inspection procedures are developed, maintained and improved.
iv. Company level: In this approach, not only quality aspects are focused, but also financial aspects are
taken into consideration. The quality of the management of the vendor firm is assessed. In this way
the buyer tries to establish how competitive that a particular supplier will be in future.

Different Methods of Vendor Evaluation

1) Categorical method:-
 In this method the buyer makes out a list of all the factors, which he considers necessary for
evaluation, and at periodic intervals he makes out a performance report.
 The buyer may also seek the help of all dept. i.e., production or, quality control dept. in order to
determine the grading given.
 A performance standard may be decided upon the points.
i.e., 80-100= excellent
70-80 = very good
60-70 = good
50-60 = satisfactory
40-50 = poor.
 On the basis of points meeting between buyers and supplier should be held.
 Low rated suppliers should be warned and given chances for one or more times, if they do not show
any improvement, they will be removed.

Merits:
1) It depends upon the performance of the vendor.
2) It is a very inexpensive method.

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Demerits:
1) It totally depends on experience and ability of the buyer.
2) If buyer is lazy and does not have ability to do it periodically then it loose importance and ability.

2) Weighted point method:

Suitable point should be allotted on different criteria such as, quality conformation, delivery scheduling, total
price, innovative attitude, etc.
Depending upon the prime use of an organization, the point of each factor can be earmarked for some users.
Point should be allotted according to preference lead down by the top management to achieve the corporate
objective and mission.
Example: (A company for which quality is the key factor)
Quality – 50 points
Delivery – 30 points
Price – 15 points
Service – 05 points
For vendor ‘X’
i) for quality, we calculate Quality Performance Ratio (QPR) =
No. of Delivery without rejection / Total No. of deliveries.
Say, total no. of deliveries =100.
Deliveries without rejection =70
Therefore, QPR = 70/100 = .7 = 70%

ii) for Service, we calculate Service Performance Ratio ( SPR) =

No. of calls Attended / Total No. of deliveries.
Say no. of calls attended = 10
SPR = 10/100 = .1
iii) Price Performance Ratio (PPR) = lowest offer received / price offered by vendor
Example:
Vendor ‘X’ quoted – Rs. 40/- per unit.
Vendor ‘Y’ quoted = Rs. 50/- per unit.
Vendor ‘Z’ quoted = Rs. 60/- per unit.
PPR for –
Vendor ‘X’ = 40/40 = 1
Vendor ‘Y’ = 40 /50 =. 8
Vendor ‘ Z’ = 40/60 = .67
Note : in ideal situation the ratio should be =1
iv) Delivery Performance Ratio ( DPR) =
Nos. of delivery on schedule / total no. of delivery = 60 /100 =. 6

Total weightage = (50 * QPR) + (30 * DPR) + (15 * PPR) + ( 5* SPR)

For vendor ‘X’ –
TW = (50*. 5) + (30*. 6) + (15 * 1) + (5*. 1) = 35 +18 +15 +. 5 = 68. 5

In this way value can be compared with other vendors.

Merits:
b) Any number of evaluation factors can be included and they can be assigned relating weight as
required by the organization.
c) Subjective evaluation is minimized.

3) Cost Ratio Methods:

it involves a good systems of determining the actual costs incurred in purchasing, follow-up, transaction,
packaging, receiving, etc. and determining the unit cost incurred by the buyer on the material when actually
received.
The higher the cost, the lower the supplier’s comparative rating.
Example: Cost related to quality—
Vendor’s Factory visit – Rs. 3000/-

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 Approval of sample - Rs. 1000/-
Inspection cost - Rs. 2000/-
Cost of rejected materials- Rs. 800/
Cost of losses in production- RS. 100/-
Total Rs. 6900/-

The value of purchase = Rs. 6, 90,000/-

Hence, quality –cost ratio = 6900:6, 90,000
= 1:100
= .01 =1%
Cost related to Delivery –
Cost of telegram, fax, telephone, etc = Rs. 900/-
Visit to plant for expediting = Rs. 6000/-
Total = Rs. 6900/-

Delivery –cost ratio = 6900:6,90000

= 1:100 =.01 = 1%

The three methods described above are intended to enable buyer to exercise better judgment over selecting
his vendor.

Vendor evaluation and Selection process

1. Recognize the need for vendor selection

2. Identify key sourcing requirement

3. Determine sourcing strategy

4. Identify potential supply source.

5. Limit vendor in pool

6. Determine the method of vendor evaluation

and selection

7. Select Vendor

1. Recognise the need for vendor selection:

Recognizing that a requirement exists to evaluate and select a supplier for an item or service is the first step of
the evaluation and selection process. Purchasing may participate in a product development team to get an
early insight into new product development plans and thereby obtain some preliminary specifications on the
type of materials, services or process required. This preliminary information may trigger initial evaluation of
potential sources of supply in anticipation of future material need. The recognition of a purchase requirement
occurs when a standard purchase requisition is received by purchase department. Also, a supplier selection
decision may arise when existing supplier fail to perform satisfactorily. Changing supplier for existing items is
termed as supplier switching.

2. Identify key sourcing requirement:

The requirement that are crucial for a purchase often differ widely from item to item, organization to
organization or industry to industry – while different requirements exist for each evaluation area, the
minimum evaluation criteria include supplier quality, cost, delivery – performance, and technological capacity.

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3. Determine sourcing strategy:
There is no single sourcing strategy which can satisfy the requirements of all purchases. Because of this, the
purchasing strategy adopted for a particular item or service will influence the approach adopted for supplier
evaluation and selection process.
A commodity sourcing strategy provides direction on the overall objectives to be achieved for the commodity
such as the number of supplier that will be used (multiple sourcing), the type of contract ( long term or short
term) and the type of supplier to be evaluated.
Some of the strategy options available are:
 Single versus multiple supply source.
 Short-term versus long-term purchase contracts.
 Choosing suppliers who provides product design support versus those who lack design support
capacity.
 Developing a close working relationship versus traditional purchasing.
The strategy option selected has great influence on the supplier selection and evaluation process.
4. Identify potential Supply Sources:
Purchasers rely on various source of information when identifying potential sources of supply several variables
determine the degree to which a buyer must search for information about supplier.

Strategy importance of purchaser/ technical complexity requirement

High Low
Capacity of existing supply High Minor-moderate Minor information search
base to satisfy low cost,
delivery, technology and
information search
service requirements Low Major –moderate Major information search
information search
A major source of information comes from existing suppliers. Buyers often expect existing suppliers to satisfy a
new purchase requirement. The advantage is that doing business with an already familiar supplier thereby
saving time and resources required to evaluate a new items is that the purchasing manager may never know
whether better supplier are available without information about other sources of supply.

Selecting an existing supplier for a new purchase requirement may be recommended if a list of preferred
suppliers is maintained. A preferred supplier status conveys immediate information about the supplier’s
overall performance and competency.
Other information sources are:
a) Sales representatives.
b) Information Data bases.
c) Experience of purchasing personnel by which they gain knowledge about potential supplier.
d) Trade journals and trade directories.
e) Industrial trade shows or exhibition.
f) Other supplier.
g) Purchasing personnel of other units.
h) Internet search.

5. Limit Supplier in a Pool:

Based on the information gathered, the purchaser may identify many potential supply sources from which to
choose. Because the performance capabilities of suppliers vary widely and also because of limited resource
available to the purchaser, an in-depth visit to all potential supplier or evaluation of all of them will not be
possible. Hence, a preliminary evaluation of potential supplier is often used to narrow down the choice before
conducting an in-depth formal evaluation.
The various criteria used to making the preliminary evaluation are:
i) Financial Risk analysis.
ii) Evaluation of current and previous supplier performance.
iii) Evaluation of information provided by suppliers.

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6. Determine the method of supplier evaluation and selection:
Based on the preliminary evaluation, supplier who are not capable are eliminated. The buyer or purchase team
must decide hoe to evaluate the remaining suppliers who may appear to be equally qualified.

7. Select Supplier:
The final step of evaluation and selection process is to select one supplier or more than one supplier. The
selection methods vary widely depending on the purchase item under consideration.

Vendor Rating
Vendor rating system is an asset and valuable tools of making the purchase decision and also providing a
feedback to suppliers with low rating to encourage improvement in their performance
After selecting the most eligible vendor, the buyer must “educate” them with regard to his various
requirement.
It is important to evaluate vendor’s performance as apart of continuing process of vendor development.

Example: Relative weights given to different parameters.

Quality – 40
Delivery – 40
Price – 20
i) Quality points = (quality product accepted / total quantity supplied) *40.
j) Delivery points = (Quantity delivered in time / Quantity ordered) *40
k) Price point = (last normal or emergency purchase rate / ordered price) * 20
Delphi survey was conducted in certain organization to identify the factors and corresponding weightages,
which need to be considered for designing an effective system to monitor the performance of supplier.
In order to ascertain the view of management as to the criteria to be adopted for selecting a supplier a list of 8
criteria was circulated to 25 managers and purchase officers. Blank spaces were left for individuals to add
additional criteria.
The criteria chosen were:
a) Quality of product.
b) Price of product.
c) Maintaining delivery date.
d) After sales service.
e) Reputation in the market.
f) Ancillary unit supply.
g) Technological expertise / experience of supply.
h) Financial standing.
The twenty three completed performances were received back and ranking was as follows.
Criteria Position
a) Quality of product. I
b) Price of product. III
c) Maintaining delivery date. II
l) After sales service. VII
m) Reputation in the market. VI
n) Ancillary unit supply. VIII
o) Technological expertise / experience of supply. IV
p) Financial standing. V

The following additional criteria were also received—

b) payment terms
c) Testing facilities available.
d) Proximity of supplier.
e) Installed capacity

Objectives of vendor rating:

I. To establish a procedure by which quality control, purchasing and user departments can fulfill the
corporate objective of obtaining quality product at minimum cost.

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 II. To develop an effective tool for rectification of defects, improving the vendor’s ability to serve more
satisfactorily and as a basis for making future purchase decisions.
III. To periodically evaluate the written evaluation aspects relating to quality, quantity, price and service
pertaining to the vendor.
Advantages of Vendor Rating:
i. An efficient vendor rating system obtains the best vendor for the buyer organization which saves both and
money and also achieve the best value for money spent on purchases.
ii. Provide scientific vendor rating system, which improves the image of the purchasing executive.
iii. Rates the entire performance of the vendors and is not guided by a narrow vision.
iv. Provide the buyer additional information on the capabilities of the vendor with regard to know-how,
testing, transport, contractual willingness etc.
v. Objectively compares performance of vendors and improves their performance.
vi. Decision to disqualify , blacklist or discriminate the existing vendors can be arrived at on an objective
basis.
vii. Inculcate a competitive spirit among vendors.
viii. Vendors rating can be used as an important mechanism to allocate the share of business amongst a large
number of supplier.
ix. Vendor rating not only enables the buyer organization to know the performance of their suppliers but also
gives an idea as to how much they out-perform their competitors regarding price, quality, lead-time, split
shipment, service , technical assistance, meeting in emergency, ad hoc requirement of buyers etc.

DGS & D- General principles of procurement of medicine ,equipment in DGHS under the
MOHFW,GOI

PROCUREMENT OBJECTIVES AND PURCHASE POLICIES

1.1 PROCUREMENT OBJECTIVES The main objectives of public buying are :-
a) To procure the stores and services of requisite quality and in required quantity necessary for performance of
duties by the government departments.
b) To procure stores as per the required delivery schedule so as to minimize the inventory and cost thereof
c) To procure the stores on a competitive basis at the most economical manner ensuring value for money.
d) To ensure transparency, and equitable approach in the procurement process.

1.2 PURCHASE POLICY The purchase policy of Government procurement, follows the principles contained in
General Financial Rules (GFR). The salient features of which are :-
a) To Purchase the stores and services required for public service, in such a way as to encourage development
and availability of indigenous products and services to the optimum extent.
b) To provide the price and/or purchase preference upto specified limit as may be prescribed by the
Government from time to time, to the notified sectors/agencies. Following types of preferences are provided
to KVIC, ACASH (Associations of Corporations and Apex Societies of Handloom), WDO Dehradun, SSI Units and
Public Sector Undertakings:- i) Product reservation ii) Purchase Preference iii) Price Preference
c) To make available products and services of latest affordable technology and quality

2. PRODUCT RESERVATION

A) PURCHASE OF KHADI ITEMS – PROCUREMENT FROM KVIC.

i) All items of handspun and handwoven textiles items, termed as ‘Khadi’ are reserved for exclusive purchase
from KVIC. List of all such khadi items is given in Annexure– 3.I

ii) Purchase of Khadi Items should be made from KVIC and the payment made as per price finalised by Cost
Accounts Branch of Ministry of Finance.
iii) All the items to be purchased from KVIC are required to conform to relevant Indian Standard Specifications
as applicable for these items.
iv) The supply orders on KVIC is to be placed based upon their capacity. For determination of the capacity, ,
reliance may be placed on the report of Cost Accounts Branch of Min of Finance or a certificate from KVIC duly

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signed by their internal/statutary Auditor. Normally, the quantity in a year should not exceed their annual
capacity plus 10%

B) PURCHASE OF HANDLOOM TEXTILES ITEMS INCLUDING BARRACK BLANKETS : PROCUREMENT FROM

KVIC/ACASH /WDO

i) All items of Handloom Textiles required by Central Government Departments are reserved for exclusive
purchase form KVIC, notified Handloom Units Through the Association of Corporations and Apex Societies of
Handloom (ACASH) and Women’s Development Organisation WDO Dehradun.
ii) The Handloom Textile items are to be purchased from KVIC, ACASH and WDO Dehradun dividing the qty.
equally among them subject to the capacity of individual agency. However, for requirements below Rs.5.00
lakhs, order can be placed on any one agency.
iii) The payment of Handloom Items to the above agencies will be made as per prices finalised by Cost
Accounts Branch of Ministry of Finance.
iv) DGS&D also enters into a rate contract with KVIC and ACASH for supply of certain handloom/textile items.
Hence, where there is an existing rate contract, the same should be utilized, before issuing tender enquiry to
these agencies.
v) The inspection of stores supplied by ACASH shall be carried out as per existing procedure, for other supplies.
For civil demands, no capacity verification will be required before placing order on ACASH. However in respect
of Defence demands, with inspection by Defence Authorities, capacity verification of the units will be carried
out, and orders placed only on receipt of satisfactory and capacity verification report.
vi) Testing arrangement will generally be provided by the ACASH notified units. Where the same is not
available, testing charges for testing the stores in outside laboratories by the inspectors will be borne by
ACASH or its notified units.
vii) The list of items reserved for purchase from the handloom sector in accordance with the procedure
outlined above and the IS specifications to which these items should conform, is given in Annexure – 4.

C) ITEMS RESERVED FOR PROCUREMENT FROM SSI UNITS.

i) This category comprises items in respect of which the demand, can be fully met by KVIC/ACASH/Small Scale
Sector Units or any combination of these sectors and such items of stores are reserved for exclusive purchase
from them. With regard to these items, other things being equal, where KVIC are in a position to meet the
requirements, purchase would be made from KVIC.
ii) Presently, 358 items are reserved for exclusive purchase from small scale sector – as per list given in
Annexure V. However, such items, which are included in this list, but are not exclusively reserved for
production by SSI units, are also treated as unreserved items. This list is reviewed at periodical intervals by
Standing Review Committee set up under the chairmanship of Secretary (Commerce), and Development
Commissioner SSI as Member Secretary These items will be identified by definite specifications.

3. PRICE PREFERENCE
3.1 Where offers are received from large scale unit as well as SSI units, but some of the lowest offers are from
large scale units, the offers of SSI units are to be given a price preference of up to 15% over the lowest
acceptable offer from large scale private sector unit, provided that the stores are technically acceptable and
satisfy the basic consideration of delivery schedule and capacity.
3.2 However, the price preference admissible to SSI units will be accorded on tender to tender basis, on merits
of each case in consultation with Finance. Further, this price preference may be accorded in a manner to
provide SSI Units an incentive to grow up and discourage inflation and profiteering
3.3 In cases where the cottage and SSI units have established themselves as a supplier of certain items on
competitive terms and enjoys an advantage over large scale unit, no price preference need to be given.
3.4 The price preference would not be granted in the following cases:
i) Where competition exists amongst the Small Scale units alone or where the items are exclusively reserved
for purchases from SSI Units; and
ii) Where the tenders are received from both the SSI Units and large scale units and the lowest offers are from
SSI units and their capacity is more than adequate to meet demand in hand.
3.5 SMALL SCALE UNITS WHEN THEY QUOTE IN CONSORTIUM UNDER THE NSIC/SSIDC/STATE LEATHER
DEVELOPMENT CORPORATION / STATE GOVERNMENT HANDICRAFT DEVELOPMENT CORPORATION :
i) Where the NSIC / State Development Corporation themselves quote on behalf of some SSI Units, their offer
will be considered as an offer from SSI Unit registered with the DGS&D/NSIC. The NSIC/ State Development

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Corporation will shoulder the normal responsibilities applicable under terms and conditions of the DGS&D
contracts and fulfil all the contractual obligations on behalf of the units for which they quote.
ii) These facilities will not apply to the procurement of the under mentioned items :-
(a) Paint items for the Railways
(b) Drug
(c) Medical and Electro-medical equipments
(d) Requirements of Defence where inspection is to be carried out by the Defence Inspection Organisation.
(e) Items where technical competence, capacity and manufacturing facilities are required to be verified before
placement of order.

4. PURCHASE PREFERENCE FOR PUBLIC SECTOR UNDERTAKINGS

i) Purchase preference to Public Sector Undertakings, is admissible, when they compete with large scale
private units in accordance with Govt. policy notified from time to time . Present Policy of the Govt. in this
respect is as per Appendix ‘A’. ---------------------------------- ANNEXURE ‘A’ 1. In ad-hoc purchases, the purchase
preference in favour of PSUs will be applicable as per following guidelines:-

a) Where the quoted prices of Public Sector Undertakings is not within the 10% of lowest acceptable price,
such offers may be rejected without any further consideration.
(b) Where the quoted price is within 10% of the lowest acceptable price, other things being equal, purchase
preference may be granted at the lowest acceptable price.

2. The above policy of allowing price preference to PSUs was extended up to 31.3.2004. (Proposals have been
submitted to Government by Bureau of Public Enterprises, to extend this preference by another two years.).
All the Central Govt. PSUs or joint ventures with PSUs, with minimum value added content of over 20% are
entitled for consideration of purchase preference, subject to purchase being in excess of Rs. 5.00 Crores.

3. In case where there is a conflict between the incentive to be given to small scale sector and the incentive to
be given to the public sector undertaking, the interest of the small scale sector will prevail over that of the
PSUs. In other words where the acceptable offer of the small scale unit is lower to or equal to the offer of the
public sector enterprises or even within a range of price preference of up to 5% over the public sector
undertaking contract would be placed on SSI unit in preference to a public sector unit, provided the price
preferences are admissible according to the existing policy and it does not exceed 15% over the lowest offer of
a large scale private unit.

4. A Public Sector Undertaking would not be entitled to any price preference when it quotes as an agent of an
Indian or foreign manufacturer/supplier. However, where a Public Sector Undertaking is selling goods or
services of another Public Sector Undertaking it would be allowed the benefit of price preference.

5. In cases where the products of Public Sector Units have been offered by a Private Sector as the sole
selling/authorized agent, the private sector will not be eligible for price preference.

6. The above policy of purchases preference is not applicable to State Government Public Sector Undertakings.
2 ANNEXURE ‘A’ 2.

8. Instances of bad and indifferent performance of public Sector Undertakings, when noticed, should be
brought to the notice of the Ministry/Department controlling the Undertaking.

9. When a public Sector undertaking defaults either in the delivery schedule of material/equipment/service or
does not complete particular construction/delivery/erection of a project/equipment satisfactorily, that public
Sector Undertaking need not be shown purchases preference for a period of 3 years. This ban of purchase
preference to the Public Sector Undertaking will be counted from the last default/unsatisfactory performance
by the Public Sector Undertaking and non-eligibility for the purpose of purchase preference will be applicable
for the entire range of production of the under manufacture. ----------------------------------

7. Excepting for purchase preference to be considered as above, in all other matters such as capacity,
specification, deliveries, payments etc. the Public Sector Undertakings would be treated at par with the Private

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Sector Undertakings and will be bound by all commercial obligations, as per terms of the contract and tender
enquiry. DRAFT CHAPTER-2 GENERAL PRINCIPAL OF ENTERING INTO CONTRACTS INTRODUCTION The Contract
Manual issued by the Directorate General of Supplies and Disposals gives information with regards to the
elements and principles of contract law and the meaning and import of various legal terms used in connection
with the contracts. Some of the salient principles relating to contracts generally and those relating specifically
to DGS&D contracts are set out briefly in this chapter. For a proper understanding of the general principles of
entering into contracts, the Contract Manual should be studied.

1. ELEMENTARY LEGAL PRACTICES: What is a contract? The proposal or offer when accepted is a promise, a
promise and every set of promises forming the consideration for each other is an agreement, and an
agreement if made with free consent of parties competent to contract, for a lawful consideration and with a
lawful object is a contract. Proposal or offer: When one person signifies to another his willingness to do or to
abstain from doing anything , with a view to obtaining the assent of the other to such act or abstinence, he is
said to make a proposal or offer. In a sale or purchase by tender, the tender signed by the tenderer is the
proposal. The invitation to tender and instructions to tenderers do not constitute a proposal. Acceptance of
the proposal: When the person to whom the proposal is made signifies his assent thereto, the proposal is said
to be accepted. A proposal when accepted becomes a promise. In the DGS&D contracts ,this is usually done by
the issue of an advance acceptance letter/telegram or a formal acceptance of tender. What agreements are
contracts: An agreement is a contract enforceable by law when the following are satisfied . A defect affecting
any of the above renders a contract unenforceable. (a) Competency of the parties. (b) Freedom of consent of
both parties (c) Lawfulness of consideration (d) Lawfulness of object.

2. COMPETENCY OF PARTIES: Under law any person who has attained majority and is of sound mind or not
debarred by law to which he is subject, may enter into contracts. It , therefore, follows that minors and
persons of unsound mind cannot enter into contracts nor can insolvent person do so. Categories of persons
and bodies who are parties to the contact may be broadly sub-divided under the following heads:- (a)
Individuals (b) Partnerships (c) Limited Companies (d) Corporations other than limited companies

(a) CONTRACTS WITH INDIVIDUALS; Individuals tender either in their own name or in the name and style of
their business. If the tender is signed by any person other than the concerned individual, the authority of the
person signing the tender on behalf of another must be verified and a proper power of attorney authorising
such person should be insisted on . In case, a tender is submitted in business name and if it is a concern of an
individual, the constitution of the business and the capacity of the individual must appear on the face of the
contract and the tender signed by the individual himself as proprietor or by his duly authorised attorney.

(b) CONTRACTS WITH PARTNERSHIPS; A partnership is an association of two or more individuals formed for the
purpose of doing business jointly under a business name. It is also called a firm. It should be noted that a
partnership is not a legal entity by itself, apart from the individuals constituting it. A partner is the implied
authority to bind the firm in a contract coming in the purview of the usual business of the firm. The implied
authority of a partner, however, does not extend to enter into arbitration agreement on behalf of the firm.
While entering into a contract with partnership firm care should be taken to verify the existence of consent of
all the partners to the arbitration agreement.

(c ) CONTRACTS WITH LIMITED COMPANIES: Companies are associations of individual registered under
companies Act in which the liability of the members comprising the association is limited to the members
comprising the association is limited to the extent of the shares held by them in such companies. The company
after its incorporation or registration, is an artificial legal person which has an existence quite distinct and
separate from the members or shareholders comprising the same. A company is not empowered to enter into
a contract for purposes not covered by its memorandum of association; any such agreement in excess of
power entered into the company is void and cannot be enforced. Therefore, in cases of doubt, the company
must be asked to produce its memorandum for verification or the position may be verified by an inspection of
the memorandum from the office of the Registrar or Companies before entering into a contract. Normally, any
one of the Directors of the company is empowered to present the company. Where tenders are signed by
persons other that Directors or authorized Managing Agents, it may be necessary to examine if the person
signing the tender is authorized by the company to enter into contracts on its behalf.

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(d) CORPORATION OTHER THAN LIMITED COMPANIES: Associations of individuals incorporated under statutes
such as Trade Union Act, Co-operative Societies Act and Societies Registration Act are also artificial persons in
the eye of law and are entitled to enter into such contracts as are authorised by their memorandum of
association. If any contract has to be entered into with any one or such corporations or associations, the
capacity of such associations to enter into contract should be verified and also the authority of the person
coming forward to represent the said Association.

4 CONSENT OF BOTH PARTIES; Two or more persons are said to consent when they agree upon the same thing
in the same sense. When two persons dealing with each other have their minds directed to different objects or
attach different meanings to the language which they use, there is no agreement. The misunderstanding which
is incompatible with agreement , may occur in the following cases:- (a) When the misunderstanding relates to
the identity of the other party to the agreement;. (b) When it relates to the nature or terms of the
transactions; (c) When it relates to the subject matter of the agreement. 5. FREE CONSENT OF BOTH PARTIES:
The consent is said to be free when it is not caused by coercion undue influence, fraud, mis-representation or
mistake. Consent is said to be so caused when it would not have been given but for the existence of coercion,
undue influence , fraud, misrepresentation or mistake. When consent to an agreement is caused by coercion,
undue influence, fraud or misrepresentation , the agreement is a contract voidable at the option of the party
to a contract, whose consent was caused. A party to a contract whose consent was caused by fraud or
misrepresentation may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in
the position in which he would have been if the representations made had been true. In case consent to an
agreement has been given under a mistake, the position is slightly different. When both the parties to an
agreement are under a mistake as to a matter essential to the agreement , the agreement is not voidable but
void. When the mistake is unilateral on the part of one party only, the agreement is not void. Distinction has
also to be drawn between a mistake of fact and a mistake of law. A contract is not void because it was caused
by a mistake as to any law in force in India but a mistake as to law not in force in India has the same effect as a
mistake of fact.

5. CONSIDERATION: Consideration is something which is advantageous to the promisor or which is onerous or

disadvantageous to the promise. Inadequacy of consideration is, however, not a ground avoiding the contract.
But an Act forbearance or promise which is contemplation of law has no value is no consideration and likewise
an act or a promise which is illegal or impossible has no value.

6. LAWFULNESS OF OBJECT; The consideration or object of an agreement is lawful, unless it is forbidden by law
or is of such a nature that if permitted, it would defeat the provisions of any law, or is fraudulent of involves or
implies injury to the fraudulent property of another or the court regard it as immoral or opposed to public
policy. In each of these cases the consideration or object of an agreement is said to be unlawful. There is
hardly any possibility of any of the contingencies herein above mentioned arising in the case of DGS&D
contracts.

7. COMMUNICATION OF AN OFFER OR PROPOSAL: The communication of a proposal is complete when it

comes to the knowledge of the person to whom it is made. A time is generally provided in the tender forms for
submission of the tender. DGS&D are not bound to consider a tender which is received beyond that time
though there is no legal prohibition for accepting such a tender.

8. COMMUNICATION OF ACCEPTANCE: A date is invariably fixed in tender forms upto which tenders are open
for acceptance. A proposal or offer stands revoked by the lapse of time prescribed in such offer for its
acceptance, or if no time is so prescribed by the lapse of a reasonable time, without communication of
acceptance. If, therefore, in case it is not possible to decide a tender within the period of validity of the offer
as origin ally made, the consent of the tenderer firm should be obtained to keep the offer open for further
period or periods. The communication of an acceptance is complete as against the proposer or offerer, where
it is put in the course of transmission to him, so as to be out of the power of the acceptor, and it is complete as
against the acceptor when it comes to the knowledge of the proposer or offerer. The medium of
communication in DGS&D contacts is generally by post and the acceptance is, therefore, complete as soon as it
is posted. So that there might be no possibility of a dispute regarding the date of communication of
acceptance, it should be sent to the correct address by registered post acknowledgment due.

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9. ACCEPTANCE TO BE IDENTICAL WITH PROPOSAL: If the terms of the tender or the tender, as revised and
modified, are not accepted or if the terms of the offer and the acceptance are not the same, the acceptance
remains a mere counter offer and there is no concluded contract. It should, therefore, be ensured that the
terms incorporated in the acceptance are not at variance with the offer or the tender and that none of the
terms of the tender are left out. In case, uncertain terms are used by the tenderers, clarifications should be
obtained before such tender is considered for acceptance. If it is considered that a counter offer should be
made, such counter offer should be carefully drafted as a contract is to take effect on acceptance thereof. If
the subject matter of the contract is impossible of fulfilment or is in itself in violation of law such contract is
void.

10. WITHDRAWAL OF AN OFFER OR PROPOSAL: A tenderer firm, who is the proposer may withdraw its offer at
any time before its acceptance, even though the firm might have offered to keep the offer open for specified
period. It is equally open to the tenderer to revise or modify his offer before its acceptance. Such withdrawal,
revision or modification must reach the accepting authority before the acceptance is put in communication.
No legal obligations arise out of such withdrawal or revision or modification of the offer as a simple offer is
without a consideration. Where, however, a tenderer agrees to keep his offer open for a specified period for a
consideration, such offers cannot be withdrawn before the expiry of the specified date. This would be so
where earnest money is deposited by the tenderer in consideration of his being supplied the subsidiary
contract and withdrawal of offer by the tenderer before the specified period would entitle the DGS&D to
forfeit the earnest money.

11. WITHDRAWAL OF ACCEPTANCE: A n acceptance can be withdrawn before such acceptance comes to the
knowledge of the tenderer. A telegraphic revocation of acceptance which reaches the tenderer before the
letter of acceptance will be a valid revocation.

12. CHANGES IN TERMS OF A CONCLUDED CONTRACT: No variation in the terms of a concluded contract can
be made without the consent of the parties. While granting extensions or making any other variation the
consent of the contractor must be taken. While extensions are to be granted on an application of the
contractor, the letter and spirit of the application should be kept in view in fixing a time for delivery.

13. DISCHARGE OF CONTRACTS: A contract is discharged or the parties are normally freed from the obligation
of a contract by due performance of the terms of contract. A contract may also be discharged:-
(a) By mutual agreement:- If neither party has performed the contract, no consideration is required for the
release. If a party has performed a part of the contract and has undergone expenses in arranging to fulfil the
contract, it is necessary for the parties to agree to a reasonable value of the work done as consideration for
the value.
(b) By breach:- In case a party to a contract breaks some stipulation in the contract which goes to the root of
transaction, or destroys the foundation of the contract or prevents substantial performance of the contract, it
discharges the innocent party to proceed further with the performance and entitles him to a right of action for
damages and to enforce the remedies for such breach as provided in the contract itself. A breach of contract
may, however, be waived.
(c) By refusal of a party to perform:- On a promisor refusal to perform the contract or repudiation thereof even
before the arrival of the time for performance, the promise may at his option treat the repudiation as an
immediate breach putting an end to the contract for the future. In such a case the promise has a right of
immediate action for damages.
(d) In a contract where there are reciprocal promises, if one party to the contract prevents the other party
from performing the contract, the contract may be put to an end at the instance of the party so prevented and
the contract is thereby discharged.

14. STAMPING OF CONTRACTS: Under Article 5 of the Indian Stamp Act, an agreement or memorandum of
agreement for or relating to the sale of goods or merchandise (not being bought or sold not through a broker)
is exempt from payment of stamp duty. The Stamp Act also provides that no Stamp Duty shall be chargeable in
respect of any instrument executed by or on behalf of or in favour of the government in cases where but for
such exemption government would be liable to pay the duty chargeable in respect of such instrument,{Cases
in which government would be liable are set out in Section 29 of the Act}.

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15. AUTHORITY FOR EXECUTION OF THE CONTRACTS BY DGS&D: The DGS&D officers are authorised by the
President of India in exercise of the powers conferred by Clause (I) of Article 299 of the Constitution to make
contracts for services, supply or work on behalf of the Central Government. Copy of the relevant notification
issued by the Ministry of Law is given in Annexure-2 The DGS&D makes similar contracts on behalf of the State
Governments where so authorised by the State Governments ,and on behalf of governments sponsored
companies or corporation or local bodies where so authorised by such companies or corporations or local
bodies.

16. CONTRACTS ON BEHALF OF THE CENTRAL GOVERNMENT OR STATE GOVERNMENTS : Article 299 of the
Constitution stipulates:- That all contracts made in the exercise of the executive power of the Union or of a
State shall be expressed to be made by the President or by Governor of the State as the case may be and all
such contracts and assurances of property made in exercise of that power shall be executed on behalf of the
President or the Governor by such person and in such manner as he may direct or authorizes. The contracts on
behalf of the president or the Governor should, therefore, state in express terms that they are made for and
on behalf of the President or the Governor of the State by such officers who are authorised to enter into
contracts on behalf of the President of India or the State Government as the case may be. The contracts on
behalf of Union Territories are also to be executed on behalf of the President of India. These provisions are
mandatory. If these are not compiled with the contract is not binding on or enforceable against the
government, though a suit may lie against the officer who made the contract in his personal capacity . Such
contracts are also enforceable by the government and the government cannot sue the other party on the basis
of the defective contract. By virtue of the provisions of Article 299(2) of the Constitution, the official making or
executing such contracts on behalf of the President etc. are exempted from personal liability for acts done or
purported to be done in the exercise of their official duties. There cannot be an oral contract binding the
government and all contracts with government must be in writing and all terms must be specifically provided
therein.

17. CONTRACTS ON BEHALF OF PARTIES OTHER THAN THE CENTRAL GOVERNMENT AND THE STATE
GOVERNMENT: (a) In case of contracts on behalf of the public sector undertakings, corporations or local
bodies, all the documents forming part of the contract are to be expressed to be made, issued or acceptance
on behalf of the public sector undertakings, corporations or local bodies. The corporation or local bodies as the
case may be, should be named as the purchaser in the Invitation to the Tender and Acceptance of Tender. (b)
There should be an authorization specific or general in favour of the officers of the Directorate General of
Supplies & Disposals from the concerned undertakings or corporations or local bodies to enter into contracts
on their behalf.

18. GOVERNING LAW IN PURCHASES MADE BY DGS&D: There is no separate law governing public buying.
Therefore, all purchases made and contracts entered into therefor by the DGS&D are governed by the Sales of
Goods Act, 1939 and the Indian Contract Act, 1872.

19. GENERAL GUIDELINES FOR ENTERING INTO CONTRACTS BY THE DGS&D; While the various aspects of
contract management in the DGS&D are discussed in the respective subject chapters, the following general
guidelines for enforcing into contracts have been laid down by the Government of India.
(a) Save in exceptional circumstances, no work of any kind should be commenced without prior execution of
contract documents. Even in cases where a formal written contract is not made, no order for supplies etc.
should be placed without at least written agreement as to the price.
(b) The terms of a contract must be precise and definite and there must be no room for ambiguity or mis-
construction thereon.
(c) No contract involving an uncertain or indefinite liability or any conditions of an unusual character should be
entered into without the previous consent of the Ministry of Finance.
(d) Subject to adequate prior scrutiny of terms, general or special, if any, standard forms of contracts should
be adopted, wherever possible. The alternatives used in the standard forms, which are not applicable, should
be invariably scored out in consultation with the Ministry of Finance and Ministry of Law.
(e) In cases where standard forms of contracts are not used, legal and financial advice should be taken in
drafting the contracts and before they are finally entered into.
(f) The terms of a contract once entered into should not be materially varied without the previous consent of
the authority competent to enter into the contract as so varied. No payments to contractor by way of

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compensation or otherwise, outside the strict terms of the contract or in excess of the contract rates may be
authorised without the previous approval of the competent authority.
(g) No relaxation of specifications agreed upon in a contract or relaxation of the terms of an agreement
entered into by Government should be made without proper examination of the financial effect involved in
such relaxation. The interest of the public exchequer should be taken due care of before agreeing to any
relaxation of agreement or contract.
(h) In selecting the tender to be accepted, the financial status of the individuals and firms tendering must be
taken into consideration in addition to all other relevant factors.
(i) Before entering into a contract or an agreement, all pros and cons should be considered and validity of
contractual documents should be ensured. Effective administrative machinery should also be set up to keep a
vigil on the performance of parties concerned.
(j) Provision must be made in contracts for safeguarding Government properly entrusted to a contractor and
the recovery of hire charges, if any, therefore.
(k) When a contract is likely to endure for a long period or where the contract provides for a clear schedule for
the fulfilment of the various stages of the contract, it should include a provision for unconditional power of
revocation or cancellation at the discretion of the government at any time on the expiry of reasonable notice
to that effect. The period of notice should not normally be longer than 6 months.
(l) All contracts should have a provision for recovery of liquidated damages for defaults on the part of the
contractor, unless there are any special instructions issued by the competent authority. The terms of contract
for the purchase of perishable stores should invariably include a (separate) Warranty G.F.R.I This form may,
however, be modified to suit local conditions. (m)It should be ensured that in all contracts where a warranty
clause is included, the position regarding delivery of goods in replacement of rejected ones in made clear
beyond doubt by adding the words “Free of cost at the ultimate destination” after the words by the
purchaser” in the penultimate sentence of the said clause, where the incorporation of such a clause is not in
consistent with the other conditions of the contract.
(n) A schedule of qualities with their issue rates of such materials which are supplied departmentally, and are
used in the contract work, should form an essential part of the contract. It should also contain an escalation
clause pertaining to rates of such materials the prices of which are controlled by Government and which the
contractor arranges himself, so that Government may get the benefit of any saving in the quantities of the
material actually used in execution.
(o) The question whether any sales tax, purchase tax, octroi and terminal taxes and other local taxes and
duties are to be paid and if so, by which party, should be settled and cleared up before entering into any
contract, involving transfer of movable property whatever its nature.
(p) All contracts for purchase involving import of materials from abroad should as a rule provide for purchases
on F.O.B basis and similarly all sales contracts involving transport of materials from India to other countries
should be entered into on C.I.F. basis.
(q) Provided that a departure from the procedure prescribed above may be with the prior concurrence of the
Ministry of Surface Transport.
(r) No work should be done under an agreement/contract beyond the date of expiry of its tenure. Wherever it
is considered that the work has to be continued beyond the date of expiry of the tender timely action should
be taken for renewing the contract/agreement for the further period required, after a suitable review of the
provisions of the old agreement/contract o see whether any modifications therein are required.
(s) Where escalation in respect of labour overheads, customs duties, freight etc. is provided for in a contract,
the basis for the calculation of the same should be clearly indicated.
(t) “Cost Plus “ Contracts should be avoided except where they are inevitable.
(u) Lump sum, contract should not be entered into except in cases of absolute necessity. Whenever such
contracts are entered into, all possible safeguards to protect the interest of Government should invariably be
provided for in the conditions of the contract.
(v) The Comptroller and Auditor General and under his direction other audit authorities have power to
examine contracts and to bring before the Public Accounts committee any cases where competitive tenders
have not been accepted or where other irregularities in procedure have come to light.

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Strategies for Hospital equipment Planning and Selection, Hospital equipment
Utilization Distribution Management (Logistics Management)-distribution of materials to
various departments & auxiliary services.

Medical Equipment Management

Medical Equipment is a core asset for any healthcare facility. To ensure medical equipment is
safe and effective there is a need to understand its associated management methodology.
Consequently, a typical life cycle approach for medical equipment management is identified and
explained in terms of processes and applications.

Medical equipment plays an important role in healthcare delivery. It ranges from small and simple
devices such as sphygmomanometer to complex and big devices such as Magnetic Resonance
Imaging (MRI) machines. This ranking is as a result of differences in utilised technologies and
intended applications.
It is, therefore, of vital importance that healthcare organisations manage their assets to keep their
expenditures under control as well as ensure the quality of healthcare delivery.

Medical Equipment Management (MEM) takes place within the context of human, material,
structural, organisational, and financial resources. It is a process which helps hospitals to
develop, monitor, and manage their equipment to promote the safe, effective, and economical
use and maintenance of equipment. Responsible organisations should setup and regularly
review MEM to ensure that a suitable medical device is used in accordance with the
manufacturer’s instructions, maintained in a safe and reliable condition, and disposed
appropriately at the end of its useful life.

A systematic way to manage medical equipment is to study and optimise all phases in the useful
life of that equipment. A typical life cycle approach that was originally developed for major
medical equipment, also applies to non-major but essential medical devices and may be
extended to additional devices. It is a logical sequence of medical equipment management
activities or stages, and each stage is dependent on and linked with other activities, as shown in
Figure 1.

It consists of nine stages as follows:

1. Planning
2. Acquisition
3. Delivery and incoming inspection
4. Inventory and documentation
5. Installation and commissioning
6. User training
7. Monitoring of performance
8. Maintenance
9. Replacement or disposal

1. Planning
Planning process is an important aid in decision-making because it provides essential information for
management. In other words, it provides technology vision where healthcare facility should position
itself; it can specify the following conditions in order to aid the decision-making process.
• Demonstrated needs and benefits
• Available qualified users
• Confirmed maintenance services and support

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• Adequate environment support
• Regulatory compliance
These conditions are simple and should be applied to any routine acquisition of a medical device. A
policy on medical device acquisition meeting these conditions as prerequisites to acquisition will
reduce problems later in the life cycle of the device. For example, appropriate financial planning for a
medical device can ensure optimum position for operating and service costs of this device.
Planning is the responsibility of the Medical Technology Advisory Committee (MTAC). The
committee includes an administrator, a planning director, and a clinical engineering director. The role
of planning is to ensure a balance between clinical and technology sectors of healthcare facilities in
addition to meeting the community needs. The procedure of strategic planning of medical equipment
includes:
• Performing an initial audit for existing technologies
• Conducting a technology assessment for new and emerging technologies that fit the desired clinical
services
• Planning for replacement and selection of new technologies
• Setting priorities for acquisition
• Developing processes to implement equipment acquisition, and monitor ongoing utilisation
2. Acquisition
Healthcare industry is known for its continued innovation and production of new devices and
techniques intended to improve the delivery and outcome of patient care. Funding constraint is
considered the master key to evaluate incorporation of new technology to healthcare service. Thus,
more attention should be given to the acquisition process keeping in mind both healthcare delivery
outcomes and funding availability. Acquisition stage usually incorporates four main processes as
shown in Figure 2.
Needs identification usually starts from users of technology, i.e. the medical staff (physicians and
nurses).Indeed, the need to acquire a medical device may be due to one or a combination of the
following reasons:
• Provide a new service
• Improve service efficiency
• Improve clinical outcomes
• Improve cost benefits
• Meet specific standards
• Reduce a risk.
In general, tendering process takes place to purchase medical equipment based on the required
specifications. In tendering, all vendors are allowed to bid under a competitive and fair evaluation.
Moreover, it gives a good opportunity for hospitals to select the best possible medical equipment. It is
worthy to mention that technical specifications should include general requirements such as the
warranty, technical services, technical documents, and any other necessary requirements for
equipment operation.

In the evaluation process, the purchased medical equipment should be evaluated from three different
angles: technical, clinical, and financial. The purpose of technical and financial evaluations is to check
the proposed technology, and to ensure the performance of the devices meets the desired outcomes.
On the other hand, financial evaluation considers only the costs of the proposed technology. Both
technical and clinical evaluations are carried out using either scoring or accept/reject approaches,
whereas financial evaluation regards the lowest price among accepted vendors.
After making the selection, an award must be issued to acquire the device. A purchase contract
document is prepared by the purchasing department and it must cover all terms and conditions that
have been agreed upon by the vendor and the hospital.
3. Delivery and incoming inspection
Clinical engineering department ensures an incoming inspection on equipment includes verification of
accessories, manuals, and electrical safety and operation in accordance with all applicable policies.
Incoming equipment should be carefully checked for possible shipment damage and compliance with

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specifications in the purchase order. One role of clinical engineer is to ensure an incoming inspection
on medical equipment by verifying the following:
• Accessories existence
• Manuals existence
• Electrical safety
• Compliance with specifications
• Possible shipment damage
4. Inventory and documentation
Medical device inventory and documentation is an assistive stage in the life cycle. It provides
information to support medical equipment management in different stages. Upon completion of the
incoming inspection, a device record file should be created and it should be active throughout the
useful life span of the device. Each device is identified and tracked by a unique number called
equipment record number. The device record file should contain the following data:
• An Equipment Control Number (ECN)
• A generic description of the equipment
• The equipment manufacturer, model, and serial number
• The owner department and the location of the equipment
• The purchase order number and date
• The equipment’s acquisition cost
• The supplier’s name, address, and telephone number
• The warranty conditions and expiration date
• An abbreviated description of the inspection and preventive maintenance requirements and intervals
• An abbreviated service history
• Information regarding any applicable service contract
• The location of the equipment’s user and service manuals.
5. Installation and commissioning
Installation and commissioning can be carried out by in-house technical staff if they are familiar with
a given item of equipment. If the installation and commissioning are needed from the suppliers, in-
house technical staff should monitor this process. In general, installation process should be compatible
with standard policies for
medical equipment installation.
6. User Training
To reduce the possibility of equipment malfunction following service or repair, all personnel involved
in maintaining and servicing equipment must be trained to appropriate standards for the work they are
carrying out. Operator error is a leading cause of device malfunctioning, especially in developing
countries. Incorrect usage of medical equipment will also greatly increase maintenance problems.
Therefore, training of users should be regularly monitored from the vendor to ensure an appropriate
skill level that is required for equipment operation. In fact, training should include all of the user staff
as needed, such as clinical and technical staff. In addition, it should cover all aspects of medical
equipment usage.
7. Monitoring of use
One common mistake in MEM is to believe that the warranty period is covered by the supplier, so no
in-house technical attention is necessary. In-house technical staff should become the link between
user and supplier and should observe any supplier's technical staff. This also will provide a learning
opportunity for the in-house technical personnel. This performance should be also documented in the
service history of the device by in-house technical staff.
8. Maintenance
Equipment maintenance involves all activities related to providing an adequate level of service and
limiting downtime of medical devices. Maintenance or service activity is required in order to ensure
the devices are kept functioning within the limits imposed by the test criteria and to return devices to
the required level of functioning after breakage or other failure. The primary goal of maintenance
activity is to reduce, or, if possible, to eliminate the need of repairs.

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Traditionally, equipment maintenance is categorised as Preventive Maintenance (PM) and Corrective
Maintenance (CM). Preventive maintenance procedures are actions that are necessary or desirable in
order to extend the operational intervals between failures to extend the life of equipment or to detect
and correct problems that are not apparent to the user. On the other hand, corrective maintenance
procedures are any services that involve medical equipment repair, in addition to any specific service
include repairs performed under a service contract or repairs performed by vendors during the
warranty period.
It could be extended in case of a hazard notification or user error. In summary, PM aims keep the
device as new as possible whereas CM aims to keep the device as good as prior to failure as possible.
Indeed, PM procedures are based on manufacturer's requirements, individual experience, and
equipment service history, whereas CM procedures are mainly based on manufacturer's
recommendations. Forward planning of maintenance calls for knowledge of maintenance
requirements and the resources that are required in order to perform maintenance. These resources
include labor, parts, materials, tools, and costs. PM should be performed based on the frequency and
the procedure. Frequency of maintenance is based on the manufacturer’s recommendation and the
equipment history. The maintenance procedure includes all
actions that should be carried out on a device. It should be written down for each device as a check list
and reviewed regularly.
In CM, a response is carried out due to a service request. In this request, a summary of problem
symptoms should be identified. Regardless of a technical service type, a set of factors can influence
effectiveness of CM. These include experience, information, device complexity level, availability of
spare parts, service manual existence, and equipped workshop. In this context, service modalities that
provide CM are classified into four main classes; in-house service, contracted service, maintenance
insurance, and contracted technology management. In-house service refers to maintaining the
equipment by engineers and technicians in the clinical engineering department. The service contract is
the most popular method for maintenance of medical equipment. Different options of this type are
available based on labor and spare parts. In maintenance insurance, by its name, a hospital chooses to
pay an insurance company instead of a service supplier. The insurance company then calls an
appropriate service provider to support medical equipment. The last type is contracted technology
management, in which all activities are completely assigned to management provider. In addition, a
manager or a service provider is stationed in the hospital.
9. Replacement
Replacement is the last stage of medical equipment's life cycle. All medical devices reach the point in
their life where the cost-benefit ratio goes to the negative because of decreased reliability, increased
downtime, safety issues, compromised care, increased operating costs, changing regulations, or
simply obsolescence. A synopsis diagram that illustrates the replacement process in terms of
participants, inputs, and output is shown in Figure 3.
Disposal of equipment must follow safety procedures in order to protect people and the environment.
The ideal healthcare technology replacement planning system should be facilitywide, and cover all
clinical equipment employing accurate objective data for analysis. Moreover, it should be futuristic
and include strategic planning relating to clinical marketplace trends and the hospital’s strategic
initiatives relating to technology. The plan should encompass factors relating to cost-benefit analysis,
safety, expected life span, standardisation, and clinical benefits. In application, decontamination
requirements should be regarded prior to disposal. Furthermore, many benefits can be obtained by
utilising scrapped equipment as listed below:
• Use spare parts with similar equipment
• Replace with new ones with the same vendors
• Donate them to charity clinics after operation verification
• Dummies in internal training
• Use in research labs
• Save them for museums.
In fact, most of hospital planning processes tend to focus on current or short-term needs with little or
no consideration of future replacement of medical equipment. An equipment replacement plan will
help to guide the hospital on potential future spending obligations relating to medical devices.
Different approaches are used for replacement of medical equipment. These approaches are either

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qualitative or quantitative. In qualitative approach, a combination of different criteria is regarded to
approve replacement decision; whereas in quantitative approach, a mathematical model is proposed to
determine replacement thresholds which lead to a realistic replacement decision.

Introduction

Medical equipment plays a vital role in healthcare; however, when equipment is not properly used or
maintained, it also can cause harm. In many instances, patient injuries occur because of assumptions
about who may use, calibrate, modify, or repair equipment.

Injuries from medical equipment also might arise from training gaps that don’t address pre-use
testing, preventive maintenance, malfunction reports (and incident reports), and repair procedures.

A commitment to safety is an essential element of any process related to the use of medical
equipment — whether the medical equipment is purchased, rented, borrowed, or leased.

Objectives

The objectives of this guideline are to:

3. Review due diligence considerations for selecting and acquiring medical devices and
equipment

4. Define key aspects of an equipment management program and offer risk strategies to
consider when developing such a program

5. Discuss the necessary components of a well-defined incident response procedure

6. Offer guidance related to responding to equipment recalls and documenting essential

information about medical devices and equipment

7. Provide general recommendations for managing risks associated with the operation of
onsite laboratory and radiology equipment

8. Review proactive strategies for addressing patient-supplied medical equipment.

Equipment Selection and Acquisition

The selection of medical equipment should not be based on hasty or insufficient

decision-making. Each healthcare organization (e.g., practices, hospitals, clinics,
and large health systems) should formally establish a team that is responsible for
researching and recommending medical equipment.

Once recommendations are made, prospective equipment should be thoroughly reviewed in a

collaborative effort by end users — especially if it will be used in the direct diagnosis, treatment, or
care of patients. Due diligence when selecting medical equipment might include:

• A literature review

• Consultation with experts

• Consideration of whether to contract the services of a biomedical engineering company

• Requests for data and research results from clinical trials

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 • Discussions with other healthcare providers who use the same equipment (follow-up of
references)

• A review of the history and fiscal standing of potential vendors

The medical equipment selection process also should include a formal assessment of the
anticipated risks and benefits associated with the equipment. For example, consider the
following questions:

3. Is the use of the equipment consistent with your healthcare organization’s mission and
ethical policies and procedures?

4. Does the equipment or new technology reduce the risk of injury to patients or staff
members who may be required to use it (e.g., exposure to lower levels of radiation, latex,
or mercury)?

5. Do health benefits and/or time-savings for patients, healthcare providers, and staff
outweigh the cost associated with the equipment?

6. Will the equipment require any costly software upgrades? Can the manufacturer supply a
schedule of upgrades?

Will charges to the patient that are associated with this equipment remain
consistent with similar community pricing?

• Are the procedures for which the equipment is used billable? Does your electronic
health record (EHR) system or billing system need to be modified to bill for these
services?

• What is the community standard? Are market pressures influencing the decision to
purchase new equipment (e.g., “our competition offers it” or “we don’t want to be left
behind”)?

• Do staff and providers need to be aware of any regulatory requirements related to the
equipment (e.g., only licensed independent practitioners can operate the equipment,
environmental safety requirements, etc.)?

• Are you able to integrate direct patient care equipment (e.g., blood pressure monitors and
laboratory equipment) with your EHR (if appropriate)? If not, what additional resources
would be required to do so?

• Does the new equipment require additional supplies or materials to use or maintain it? If so,
what are the availability and costs of these items?

• Is vendor support or other technical support for maintenance available?

• Have you considered the purchase/lease requirements and options (e.g., warranties, volume
purchasing, trade-in programs, upgrades, indemnification for injuries/failures, contract
terms, new versus used/refurbished equipment, etc.)?

• What are the training and ongoing competency considerations?

The answers to these questions and the rationale for purchasing the equipment should be
documented and saved for future reference.

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Equipment Management

A patient injury caused by a medical device or piece of medical equipment may trigger a claim
against a practitioner, healthcare organization, and/or an equipment manufacturer. To reduce patient
safety and liability risks associated with medical devices and equipment, healthcare organizations
should have effective programs for managing equipment used in patient care.

Considerations when developing an equipment management program include inventory

management and documentation; evaluation of equipment; testing; maintenance and usage; and
education and training.

Inventory Management and Documentation

A first step in designing an effective equipment

management program is documenting what
equipment you have. Each healthcare
organization should:

• Maintain an inventory of all medical

equipment, whether it is leased or owned
and whether it is maintained according to
manufacturer recommendations or an
alternative equipment maintenance
(AEM) program.1

• Include as part of the inventory a record

of maintenance activities. (See
Appendix A and

Appendix B for sample tracking and maintenance/repair logs.)

Ensure that equipment managed through an AEM program is clearly identifiable as

subject to AEM. Further, critical equipment, whether subject to AEM or not, must be
readily identified as such.

Document the following information for all equipment included in the inventory:

Unique identification number

Equipment manufacturer

Model number and serial number

Description of the equipment

Location of the equipment (for equipment generally kept in a fixed location)

Identity of the department considered to “own” the equipment

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Evaluation of Equipment

In addition to having a written inventory of medical equipment, healthcare providers and staff should
understand the purpose of each piece of equipment. As part of the equipment management program,
each organization should:

2 Evaluate each piece of equipment to determine:

1. Function and clinical application

2. Preventive maintenance requirements and expected lifespan

3. Likelihood of equipment failure; check U.S. Food and Drug Administration (FDA)
reports, consumer reviews, and literature reviews.

4. Compatibility with other equipment used at the facility

5. Space allocation for equipment and supplies

3 Once the equipment has been evaluated, assign each item a tier level (1, 2, or 3) based on
how critical its function is to the practice or patient.

1. Tier 1 is for the most critical equipment, such as life support and emergency
devices (e.g., an automatic external defibrillator).

2. Tier 2 is for common use equipment, such as blood pressure monitors and heat
therapy units.

3. Tier 3 is for equipment that has little to no risk, such as a patient scale.

Testing

Testing medical equipment is an essential element of an equipment management program and vital
for patient and staff safety. Each organization should:

2. Test equipment based on manufacturer recommendations or the tier level assigned

(whichever is most frequent):

1 Equipment in Tier 1 should be tested on at least a semi-annual basis.

2 Equipment in Tier 2 should be tested on at least an annual basis.

3 Equipment in Tier 3 may only need to be visually inspected on an annual basis.

Ensure that qualified personnel inspect, test, and maintain all medical equipment
(diagnostic, therapeutic, life support, and monitoring).

Consider contracting the services of an approved biomedical engineering company to

assist with equipment testing and maintenance.

Maintenance and Usage

Each organization’s equipment management program should include guidance related to

maintaining and using medical equipment. For example:

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 3. Maintain and use all equipment according to manufacturers’ recommendations or a
specified AEM program. Document all inspections, testing, preventive maintenance, and
repairs — and include telephone numbers for the equipment vendors.

4. Ensure maintenance processes include specific accountability and schedules for

preventive maintenance and testing.

5. As part of maintenance guidance, include specific information about (a) disinfecting all
reusable equipment according to FDA guidelines and CDC guidelines, and

(b) documenting equipment disinfection processes.

6. Develop a plan for monitoring and updating software on medical devices. Work closely
with the organization’s information technology team to research updates and implement
appropriate strategies.

7. Develop a competency process for using equipment. Make sure the process takes into
account job descriptions and training (external and in-service).

8. Determine the healthcare organization’s point of contact for reporting any equipment
malfunctions or incidents that could cause patient injuries.

9. Ensure staff members who are responsible for addressing reports of equipment
malfunctions or incidents know their responsibilities and timeframes for taking action.

10. Never use a piece of medical equipment that shows signs of damage or has been partially
repaired or otherwise altered from its original condition by nonqualified staff members.

Education and Training

Healthcare providers and staff cannot be expected to properly use and maintain medical equipment
unless they receive appropriate education and training. Each organization should:

E) Provide all staff members (including temporary staff) with initial training and ongoing
annual training on medical equipment procedures. Training should address:

How to report a piece of medical equipment that is not functioning properly,

which can include visual clues like smoking, sparking, or display errors.

How to remove the piece of medical equipment from service, tag-out the
device, and notify the appropriate repair service or biomedical engineering
contractor for repairs.

F) Train appropriate staff on how to properly set up, use, calibrate, and clean equipment. If a
staff person has not been trained, or is not appropriately licensed/certified, he or she should
not be allowed to use the equipment.

G) Educate staff about back-up plans for when a piece of equipment needs to be serviced or
repaired.

H) Provide timely training and education for any new or updated equipment prior to
putting the equipment into use.

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 I) Document all equipment training and competency for both providers and staff in each
individual’s personnel file.

Incident Response Procedure

In the event that a piece of equipment or medical device causes patient injury or harm, each
healthcare organization should have a well-defined incident response procedure. As part of this
procedure, appropriate staff members should:

• Stabilize the patient.

• Remove from service and secure any equipment involved in the incident.

• Complete an incident report per organizational policy.

Guideline: Medical Equipment Management 8

Report the incident as required by the Safe

Medical Devices Act (SMDA).

A designated staff member should

complete the required form and
forward it (or an electronic
equivalent) to the appropriate
party as required by law.

If an incident results in death, it

should be reported to the FDA
and the equipment/device
manufacturer.

Serious injuries/illnesses should

be reported directly to the
manufacturer. If the
manufacturer is not known, the

user organization should report directly to the FDA.

2 Notify the organization’s professional liability claims specialist immediately (he/she will
advise you if/when you should release the equipment).

Equipment Recalls

If a healthcare organization or a biomedical engineering contractor receives a recall or hazard notice

from a manufacturer or distributor, the organization is responsible for taking appropriate action, as
outlined in thenotification.

If the notification does not clearly state what steps to take a designated staff member should contact
the entity that issued the recall/hazard notification for guidance. Until the process is clarified, cease
use of the equipment.

If the organization fails to take appropriate action in the face of such notice and the defective
device injures a patient, the organization might be found negligent. Additional the organization

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might bear legal responsibility for improper revisions or modifications made to medical devices
as a result of a recall notice.

Manufacturers may specify how they will conduct a recall of equipment. Some contracts, especially
those addressing the purchase of equipment with high potential for patient or user injury, may
specify how and within what timeframe a manufacturer will notify users of possible risks that have
precipitated a recall.

Documentation

Documentation related to medical equipment use and management should include written
policies and procedures for:

2. Procurement of equipment (purchase, acquire, lease, borrow)

3. Disposal of equipment (sale, recycle, destroy)

4. Pre-use testing, calibration, and use

5. Development and implementation of training programs, as well as periodic training

updates

6. Responses to, and reporting of, equipment-related incidents

Additional documentation might be required and should be considered with the purchase of new
equipment. For example, contracts related to the lease of equipment or maintenance agreements
should be kept in a central location. The appropriate individuals should assume responsibility for
reviewing and asking questions about the agreements before they are signed (including legal counsel
as needed). Vendors may not be accountable for “assumptions” that weren’t included in a contract.

Preventive maintenance and repair records should be available for all procured equipment (leased,
borrowed, used, etc.). Further, documentation related to who insures the equipment should be
maintained.

If necessary for proper pre-use testing or calibration, information from the manufacturer should be
used to develop training and in-service staff updates. These materials should also be available for
reference, and originals of these documents should be filed with contractual arrangements.

Manufacturers’ specifications, schematics, testing, and calibration directions — and any other user
instructions — should be retained in a master file. Copies should be available, as needed, for
equipment users. Manufacturers’ warranties (and information about actions that might void
warranties) also should be retained.

Codes or stickers placed on equipment for the purposes of identification, inventory management,
and preventive maintenance should be consistently color-coded throughout the organization and
should comply with state regulations.

All communications regarding damaged or nonfunctional equipment should be maintained,

including logs of telephone conversations. When disposing of equipment, all protected health
information should be wiped from the equipment memory.

Onsite Laboratory, Anesthesia, Sterilization, Dialysis or Radiology Services

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If your healthcare organization performs laboratory, anesthesia, sterilization, dialysis or
radiology services, constant vigilance to ensure the safety and accuracy of equipment is
necessary.

All radiological testing and services must be in compliance with Nuclear Regulatory
Commission (NRC) rules and regulations, as well as state and private licensing and certification
requirements. Similarly, all laboratory, anesthesia, sterilization, and dialysis equipment must be
maintained based on federal, state, and private licensing and certifications requirements.
Therefore, each organization’s personnel should be knowledgeable about the laws and ensure that
onsite equipment operates in compliance with all of the applicable rules and regulations

The following general recommendations are intended to help manage risks associated with the
operation of onsite diagnostics:

3. Retain licensing documents within your organization’s permanent files.

4. Train, supervise, and periodically test the proficiency of all personnel performing
laboratory or radiology services.

5. Maintain an inventory log of all diagnostic equipment and use it to monitor equipment
maintenance, recalibration, and servicing (as recommended by the manufacturer).

6. Maintain and revise written instructions and procedures, including maintenance and
reporting results, on an annual basis.

Patient-Supplied Medical Equipment

Patients might bring their own medical equipment to use during inpatient stays, such as canes,
heating pads, insulin pumps, home dialysis machines, continuous positive airway pressure (CPAP)
units, and CPAP masks. Their comfort level with the equipment or desire to avoid fees related to
using the facility’s equipment might motivate these decisions.

However, patient-supplied medical equipment comes with risks. The ECRI Institute notes that
“Healthcare organizations have a duty to ensure the safety of equipment and devices used in their
institutions. When they allow the use of patient-supplied equipment, they may also assume
responsibility for the equipment's performance and safety.”2

Healthcare organizations can proactively address patient-supplied medical equipment by

developing and following a policy for how to manage these situations. When developing a
policy, consider these questions:3

4. Has your organization conducted an assessment to determine what types of medical

equipment patients are mostly likely to bring with them? Have you considered the risks
versus benefits associated with the identified types of equipment and the steps required to
evaluate and maintain the equipment?

5. Has your organization developed a written policy that clearly states which types of
patient-supplied medical equipment are allowed (if any) and which types are
prohibited?

6. Are healthcare providers, staff members, patients, and families educated about the
organization’s policy on patient-supplied equipment? Are patients made aware of their
responsibility for any equipment that is permitted and they choose to bring?

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 7. Is physician approval required for all patient-supplied medical equipment?

8. Is a requirement in place that biomedical or engineering staff inspect all patient-

supplied medical equipment to make sure it is in good working condition? Is the
equipment tagged following inspection, and is the inspection documented?

9. In urgent or time-sensitive cases, do nurses or other frontline staff members inspect the
equipment for obvious defects or problems until biomedical or engineering staff can fully
evaluate the equipment?

10. Do staff members who will be caring for the patient know how to operate the
equipment?

11. Does your organization plan to use waivers to address liability associated with patient-
supplied medical equipment? Has legal counsel reviewed these forms?

Once your healthcare organization has developed a policy for patient-supplied medical equipment,
make sure that healthcare providers and staff members are aware of the policy and procedures for
handling these types of requests.

Conclusion
Medical equipment provides many valuable services to support and enhance patient care, but its use
is never without risk. While appreciating the benefits that medical equipment can provide,
healthcare providers and staff also should remain cognizant of potential safety issues. Risk
management strategies can help healthcare personnel proactively manage medical equipment. When
equipment is properly tested, used, and maintained, it is more likely to work properly, which can
help avoid delays in care, reduce the risk of patient and staff injuries, and optimize patient outcomes.

Healthcare Solutions > Healthcare Resources > Hospital Logistics

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The main task of all hospitals is the improvement of the patient’s state of health. The provision of the medical
treatment and patient care – core processes of the hospital, create demand for patient-related support
services. These secondary processes can be of medical or non-medical nature.
Additional services summarized in tertiary processes are not directly linked to patients, but are necessary for
proper operation of the healthcare facility.

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Hospital Processes
Tasks of Hospital Logistics
Hospital logistics is coordinated cross-departmental with the flow of goods and information as well as a part of
patient care. Examples of logistics tasks can be found in secondary and tertiary processes:
Logistics tasks in patient-related medical
secondary processes
 Patient logistics  Logistics of sterile goods
 Drug management  Information and documents
 Laboratory logistics  Disposal of hazardous waste
 Management of medical goods
Logistics tasks in patient-related non-medical
secondary processes
 Food management  Management of beds
 Management of linens
Logistics tasks in patient remote tertiary processes
 Management of administration  Disposal of non-hazardous
demands waste
 Mail service

Automated Hospital Material Transport

In many processes of hospital logistics, material transport plays a decisive role. According to requirements,
hospital material transport is either scheduled (planned) or on-demand (un-scheduled).
Compared to industrial applications, the quality of material transport in healthcare facilities must be of the
highest quality. Wrong or inaccurate deliveries could have fatal implications for patients, hospital employees,
and visitors. .

Automated Drug Management

The conventional drug management in hospitals is typically a manual process. The preparation of the
individual patient daily medication is managed by nurses on the wards. Therefore, hospitals operate many
drug storages in several departments. In addition, the preparation processes in the hospital pharmacy are
characterized by manual handling. Automated drug management in the hospital pharmacy (pharmacy
automation) and on hospital wards supports and increases patient safety.

Health care absorbs such a large proportion of public finances that it’s not surprising the health system hasn’t
escaped cutbacks. For instance, the health sector accounts for about a third of the Quebec government’s budget
and about 7.5% of the province’s GDP.
There’s a pressing need to review health care practices to improve hospital operations and bolster their
efficiency and effectiveness. Improved operations should provide better cost control, while maintaining the
quality of care delivered to the public. Support processes are excellent targets because they don’t necessarily
have a direct impact on the quality of care provided. Hospital logistics is one such process, the goal of which is
to efficiently deliver medical supplies and pharmaceutical products to the final consumer, the patient.
Comparative analysis, or benchmarking, is an improvement process that compares practices used by several
organizations to identify best practices. Organizations use this management tool to identify both the problem
areas in their business processes and opportunities for improvement.
A benchmarking process targeting hospital logistics was recently initiated in five Quebec hospitals. The aim of
the study was to develop and test the validity of an analytical model and data collection tool tailored to hospital

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logistics. With these tools, the costs of current hospital practices and their impact on the quality of care could be
evaluated. Eventually this could offer a clear set of benchmarked best practices for large hospitals.
Hospital logistics
A poorly understood and often unappreciated process, logistics accounts for a sizeable portion of a hospital’s
operating budget. Studies have shown that from 30% to 46% of hospital expenses are invested in various
logistical activities, and that almost half of the costs associated with supply chain processes could be eliminated
through the use of best practices.
In hospitals, logistics cover not just support services such as purchasing, stores and the pharmacy, but also
health care services such as patient care units and operating rooms. Many activities that could be carried out by
support personnel are often on the list of duties performed by health care personnel. The result is that the
internal supply chain within a hospital is often highly fragmented.
Logistics is a complex process. The people involved vary with the type of products in question: for example,
stores manage medical and office supplies; the pharmacy looks after pharmaceutical products; and food services
manages the procurement and processing of food products.
Two major management methods are applied by hospitals. Certain products are managed and stored in the
hospital’s stores (or pharmacy) before being distributed to specific departments: these are called inventory
products. Other items are ordered directly by specific departments from the purchasing department, which
oversees the purchases as needed and delivers them upon receipt to the departments: these are non-inventory or
direct purchase products. The latter are generally not stored in the institution’s stores.
Pharmaceutical products, meanwhile, are divided under two main headings: general products and prescription
drugs. The inventory and non-inventory distinction doesn’t apply to pharmaceuticals because all requisitions
must go through the pharmacy.
Figure 1 summarizes the main players and their role in the replenishment of two critical items, medical supplies
and pharmaceutical products. These relationships may differ at certain institutions. The pharmacy and stores
order their products directly from suppliers in some cases. Yet, in other hospitals, ordering is taken care of by a
purchasing department.
Figure 1 also shows the people who store medical supplies and pharmaceutical products, and indicates the two
types of flows between them: the flow of materials and information. These two flows were studied in the project
to benchmark hospital logistics processes.
Benchmarking
To benchmark hospital performance, performance measures for material and information flows had to be
established. However, the information technology systems in place for support services in the health sector are
very limited. In Quebec, few hospitals have an integrated system with extensive information retrieval
capabilities. Moreover, this information is rarely standardized, which further complicates data collection and

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analysis. Given these limitations, a strictly results-oriented comparison was not feasible, so a process-based
approach was taken.
Three steps were taken to provide structure to the benchmarking process. First, the hospital logistics process was
divided into several components to facilitate the analysis. Second, an analytical model and related data
collection tool was developed. The model identifies the performance measures used. And third, a data collection
approach was selected to get the project up and going.
Breaking down the process
The hospital logistics process was divided into three main sub-processes, namely Ordering and Managing
Supplies, Receiving Orders, and Replenishing User Departments. These sub-processes were also divided into
various activities to obtain a sufficient amount of detail without unduly complicating data collection. The
processes associated with inventory and non-inventory products are similar, with the exception of three
activities not used in processing non-inventory items. Table 1 presents the breakdown of the logistical processes,
with the activities not used in processing non-inventory items identified in italics.

Analytical model
The analysis hones in on two types of performance measures — efficiency and quality. Breaking down these
processes into a number of specific activities offers a more detailed cost analysis. It is then feasible to assess a
hospital’s efficiency for each activity as well as the overall process. These costs become the primary point of
comparison for identifying hospitals with the best practices. Since labour accounts for about 60% of a hospital’s
costs, the primary element affecting cost calculations is the time spent by personnel in carrying out various
logistical activities. A second element, technology maintenance expenses, was also considered to build a more
thorough picture of the situation.
The quality of the logistics process was also considered in the measurements of hospital performance. The
health sector stands out specifically because of the critical nature of the service levels associated with logistical
activities: the lack of an item or a drug in the operating room could, for example, greatly compromise the work
performed by health care workers and threaten the health of a patient. The quality of support services must be
maintained. Table 2 lists the service quality performance measures used in this study.

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The study then examined various contextual elements such as hospital budgets, number of beds and type of
specialties, as well as process-related elements (the current administrative practices in the hospital).
The analytical model helps identify best practice hospitals while shedding light on why the institutions perform
well. Analyzing costs and quality through the practices employed by hospitals also leads to an understanding of
the effectiveness and efficiency of various hospital-specific practices. It should be noted that the methodology
identifies optimal practices for large hospitals, not residential and extended care centres.
Data collection
The data collection combined case studies of five hospitals, which provided an in-depth study of a limited
number of sites, and questionnaires, which delivered the advantage of reaching a large number of respondents at
a reasonable cost, but didn’t allow for an in-depth analysis of these hospitals. This hybrid method thus identifies
the practices deployed by institutions and determines their performance level.
The method doesn’t, however, explain the nuances among hospitals with the same practices, because such
hospitals are grouped together in the analysis. A second data collection phase specific to the most promising
practices will therefore be needed to identify the impacts of implementing these practices. This phase will be
conducted on a much more limited scale, since only the most promising hospitals will be visited.
In the current context, where health institutions must carefully manage public funds, where public accountability
is becoming more and more pressing, and where governments are trying to motivate hospitals by rewarding high
performing ones and penalizing those that are not performing as well, improving the logistics process through
the implementation of best practices has become a must. Identifying best practices by benchmarking the hospital
logistics process can help hospital managers find cures for the ailing health sector.
Logistics in hospitals
The concept of using logistics’ principles within UK hospitals is not new and the wide spread use of small bore
pneumatic tube systems to distribute pharmaceutical products and test tubes is evidence that the
optimisation of material movement, including the potential costs savings these systems generate, has been

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considered. However, the continuously increasing requirements imposed on existing developments mean that
the ‘logistics’ components of the operation are increasingly seen as a way to not only reduce costs but also
improve the effectiveness of the day-to-day processes, including the use of IT, and the service provided.

A further driver for the development of logistics concepts within hospitals is the use of the PFI procurements
route. Operators of these new developments now have a financial horizon of 25-30 years making longer pay-
back periods that may not be suitable to NHS trusts, on new processes or technology acceptable. They also
have strong incentives to ensure that the layout of any new development, however integrated to existing
buildings, provides the most cost effective solution for the delivery of FM services, whether in terms of space
take up, shortest delivery routes, maximization of lift usage, etc, and that the operational processes proposed
follow corporate sustainability targets. This paper looks at some of the logistics concepts that can be applied to
the development of new hospitals and technologies used to provide the service required. Topics include site
planning and the relationship with internal logistics, how internal logistics can be reviewed as horizontal or
vertical distribution concepts and the impact on building layout and movement segregation. Automation and
its use are described; covering small and large bore hole pneumatic tube systems, automated guided vehicles,
track vehicle units and automated storage and retrieval systems.

Site planning
The logistics strategies used to define delivery routes, separation of flows, use of automation, etc, must start
with a suitable strategy for the overall site planning. This should ensure that vehicles, used for goods and
people, drop off at the closest possible point of usage, whether the main entrance or FM storage or the A&E
department, to reduce travelling distances within the building. Any site planning should therefore start with
the rationalisation of site entrances, ensuring that road access leads towards these entrances and suitable car
parking is provided close to each entrance.

Site access and car parking seem to be issues regularly raised by hospital staff; either because of the lack of car
parking, complexity of road infrastructure and the impact on way finding, unsatisfactory blue light access or
the mixture of staff access with FM deliveries, patients, visitors and blue light. Some recent PFI projects have
provided the opportunity to re-assess site planning in terms of providing clear access and parking by creating
visitor ‘front of house’ and staff and FM ‘back of house’ areas. If this separation can be matched by the
provision of alternative access roads then this solution ensures that the front of the hospital is not seen as a
pool of cars (as 70 to 80% of car parking is typically allocated to staff which would be at the back) and traffic
can be controlled around the site with vehicle flows being separated before the entrance of the site. The
suitable location of barriers also ensures that rat-runs around the site are avoided.

The rationalisation of entrances to the buildings and site access also impacts on the level of double handling
that may exist. In this context double handling is used to describe the process of offloading from a delivery
vehicle and re-loading the goods onto a smaller vehicle, to be offloaded again at another entrance, etc. By the
rationalisation of entrances, it is intended that not only visitors be directed to a single point of entry, but also
FM deliveries be taken to a single FM industrial zone.

This industrial zone could include a catering distribution point, pharmacy bulk storage and manufacturing,
security hub, telephone operators, porters, waste rooms, gas storage, etc. From this central FM zone, ideally,
all goods would be broken down and re-packed into containers ready for their end point of use, therefore
avoiding any middle processing or storage spaces. In some instances, the goods should be delivered in a
format already suitable to be taken directly to other departments, such as linen cages.

Rationalisation of roads?
Internal logistics
The outcome of a logistics review of internal routes should be to ensure that goods and people can reach their
final destination in the shortest and most direct possible route but still maintain any required segregation,
such as between the public and patients in beds going to and from theatres. Visitors would therefore enter the
main reception and then be directed towards main departments such as the day treatment centre, women
and children’s unit, wards and A&E. Each with clear signage and a clear identity to facilitate way finding.

Goods would be taken directly to the point of use from the central FM building through FM corridors and
service lifts that provide direct access into the support spaces of each department without, for example,

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having to be taken through wards. It is obvious that in some instances it will not be possible to affect the
layout of existing hospitals to such an extent that all double handling and cross-overs are removed and, in fact
there may times when they are required as part of the normal operation, particularly if the central FM area is
used to then distribute to a number of other buildings possibly on other sites.

Within the building, there are two principle methods of setting out the distribution routes and achieving the
required movement segregation: horizontally and vertically. Horizontal segregation is based on providing
separate corridors for the different types of activities; so for example, if the intention was to segregate
between front of house (visitors and the general public) and back of house activities (FM, patients in beds and
staff) then two corridors could be provided linking into each of the departments. This is illustrated on the
sketch below.

Horizontal segregation is in fact the hardest to achieve, not necessarily because it is difficult to ensure the
corridors do not cross but, because the corridors would run the length of the building in several locations, it
would be much harder to integrate this strategy with the requirements for daylight. There is also a risk of
simply creating too much circulation space.

Vertical segregation makes use of lifts to bring the different flows of goods and people into appropriate spaces
on each floor. It is still necessary to provide the horizontal access routes to access these lifts, but the corridors
are only duplicated on one floor and also possible to have them at different levels. This is by far the easiest to
integrate with the requirement for daylight, but has a considerable impact on the number of lifts that need to
be provided.

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Vertical segregation is therefore not particularly suited to large sprawling developments with only two or three
floors, but can easily be fitted when several departments such as wards are located above each other with
identical access points. The use of vertical segregation is shown on the following sketch.

In practice the chosen solution is most likely to be a combination of both strategies to suite the site layout and
access, and any existing buildings. In smaller hospitals, it may also be that there is in fact very little choice in
terms of the solutions that can be put forward.

The sketch below makes use of vertical distribution for FM deliveries with a back of house corridor at ground
floor, whereas the public is taken to a central core of lifts and distributed on each individual floor. The central
lift core ensures that lift usage is maximised, which can reduce the number of lifts required compared to the
vertical solution.

The choice of distribution strategy has a fundamental impact on where service spaces are located. For the
horizontal distribution, FM spaces are located on each individual floor, as in the example given above, and link
into each department on each floor across the corridor on that floor. In the vertical distribution, FM spaces are
centralised on level A and are located remotely from the areas they serve.
This should not have an impact on the level of service provided and response times, but changes the
interaction between ward/department staff and FM support staff. The vertical distribution option should also
reduce the FM space required as functions are centralised. There are clearly a number of alternatives as to
what spaces can be centralised and others that should be physically close to the various departments and each
needs to be reviewed to ensure the most suitable solution is selected.

Automation
Various types of automation have been used in the UK healthcare industry for several years, but the
NHS has shied away from some types because of the payback periods involved and capital investment. The use
of different procurement routes such as PFI, where a contractor has say a 25 year contract to run the building,
bring new opportunities to look at automation and understand the benefits.
The descriptions below give a very broad-brush view of payback periods and need to be estimated for each
specific project. However the other drivers for using automation should not be underestimated, these are:
Improvement of service provision
Better use of existing staff
Reduction in the wear and tear of the building
24 hour availability
The improvements in service provision are typically centred on increased speed of response and flexibility. A
single test tube can be transported several hundred meters within minutes and without a second thought to
the need for manpower, with results coming straight back once ready. Similarly dirty linen and waste can be
collected during the night when the hospital is quite and re-scheduled within minutes without having to re-

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organise staffing. The shift of goods portering functions from man based to automated also means that
porters’ interface can be moved from dealing with deliveries to patients. This not only moves resources to
dealing with patients and the public, but also creates a much more rewarding working environment.

A benefit of automation that is harder to quantify is the reduction in wear and tear. The movement of trolleys,
cages, etc around corridors and in lifts creates considerable damage to finishes and transferring these
movements to automated solutions can considerably reduce the impact of FM activities. Other benefits are
the reduction in lift usage and subsequent reduction in wear and tear of the mechanical drives, car finishes,
etc. Below is a short description of different types of automation that can be used for the distribution of
goods.

Small bore hole pneumatic tube systems

These systems are commonly used in the UK and abroad. They basically consist of a PVC tube network that
links a number of the hospital departments and into which carriers can be inserted for the distribution of
pharmaceutical goods, specimens, Xrays, documents, etc. The movement of the carriers is achieved by one or
more fans pressurising various runs of the tube network and either blowing or sucking air to move the carrier.
The tubes are typically 110mm, 160mm, 200mm or 300mm in diameter depending on what needs to be
distributed, however the smaller system is the most common in the UK.

The design of pneumatic tubes is well understood, however hospitals sometimes complain about the waiting
time of a carrier before it is actually sent. This is normally caused by bottlenecks in the system, usually at the
bridge between two or more zones, or simply because there is insufficient spare capacity on the system. The
capacity is limited by the number of fans (or zones) available, as one fan is able to push or pull one item at a
time, two fans can move two items at a time and so on. Therefore if the fans are busy, any new carrier has to
wait until the system has cleared any backlog and is free again. Most manufacturers now produce linear
transfer stations, also called linear coupler servers, that can move carriers from one tube network to another
and also store them when the network is very busy. As a rule of thumb, these should be considered if three or
more zones are required. It is also normal to design a network to run at 50 to 70% of its capacity, which should
ensure maximum waiting times of 5 to 10 minutes.

A simple system will cost approximately £3,750 per station. So for a hospital with say 16 stations (i.e. 10 wards,
pharmacy, pathology unit, A&E, theatres, etc) on two zones, the cost will be in the region of £60,000. If it is
used to replace three daily bulk deliveries from each station taking 15minutes each, the system is saving 12
man-hours a day, which means a possible pay back period of 2 years. This is extremely crude and the
pneumatic tube system should hopefully provide a much better service than the equivalent of three bulk
deliveries every day. Payback periods are however reasonably easy to calculate and short enough to justify the
usage of these systems in most large NHS developments.

Integration of this system with an automated pharmacy dispensing unit & optimisation of the use of the
dispensing system?
Large bore hole pneumatic tube systems
These systems are very similar to the ones
described above but are, as the name suggests,
larger and can therefore transport bulkier items.
They are typically used to transport dirty linen
and waste from various departments to central
collection points that can be up to a mile away,
and are therefore particularly suitable to either
very large sites or high buildings. There is, as far
as we are aware, not a single system in operation
in a UK hospital despite this being reasonably old
technology regularly used in airports and high-rise
residential buildings. Arup are involved with two
installations in Ireland and feedback from the
users is so far very positive.

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These systems are considerable more expensive than their smaller counterparts and, for example, a unit taking
waste and linen from 16 areas (i.e. two networks running in parallel) to a central collection point with around a
mile of pipe-work will be in the region of £450,000 to £500,000. If the FM team are expected to collect 3 waste
containers and two linen cages from each area twice a day, then with a 15 minute travel time the system is
saving approximately 40 man hours a day. The payback period is therefore much longer than the small
diameter pneumatic systems, around 5 years in this example, which may be too long term for NHS trusts to
consider their usage. Such payback periods would however be perfectly reasonable with longer service
agreements, such as on PFI projects, and it is anticipated that new procurement routes will encourage their
use within new developments.

Automated Guided Vehicles

AGVs are small robotic platforms approximately 400mm wide, 1500mm long and 300mm high that can lift and
carry a variety of containers to pre-set destinations. They are programmed to carry out particular tasks at
defined times, such as collecting waste containers and delivering catering boxes, and use the same corridors as
staff, as they are fitted with anti-collision protection to ensure they do not collide with other moving objects or
people. There are several types of guidance systems but the least obtrusive to install into existing buildings use
laser technology that can locate walls and obstructions, which enables them to determine where they are and
where they are going. AGVs will also call for a lift and request a floor ensuring that any point accessible
through corridors and lifts can be reached. Doors also need to be fitted with actuators to ensure the unit can
open them when approaching.

There are, as far as we are aware, no AGVs currently used in hospitals in the UK, although they are common in
hospitals in the US, Germany, etc, and are used in many other industries such as manufacturing and aviation.
Their main drawback is the payback period, which typically ranges between 5 to 7 years. Manufacturers do
quote amortisation periods as low as 3 years, but these estimates clearly need to be done project by project.
As a guide, the CAPEX for a large system using 20 vehicles to distribute around an 800 to 900-bed hospital will
be around £2 to £2.5m including containers. Another important factor is the ease with which they can be
introduced to existing developments. As noted previously, they can be mixed with staff and are able to control
lifts, but routes need to be clearly defined and they may not be ideal in developments where buildings are at
different levels accessed via stairs and corridors are consistently blocked by doors. A further item that needs to
be resolved early on is the type of container that will be moved. AGVs can usually deal with the weights
involved in FM deliveries but having a wide variety of containers can be an issue. The AGV has a preset
dimension and the choice of containers needs to be suitable to fit under the AGV so that it can be moved.
Most AGVs can be modified to take other containers than those specified by the manufacturer but there is
limited flexibility. The rationalisation of container sizes is probably a good thing in any logistics review, but the
affects need to be understood throughout the supply chain (i.e. why have clean linen delivered in cages if it
needs to be transferred to something else once at the hospital?).

Monorails and track vehicle systems

Track systems exist in many different formats ranging from the smaller units used for document handling and
hospital distribution (typically around 30kg) to the systems used in manufacturing that can handle loads up to
500kg (some industrial units will move higher loads). The smaller track systems are slower than pneumatic
tube systems and generally more cumbersome because of the space requirements. Their main advantage is
their capacity to transport goods of different sizes in one container horizontally and vertically, making them
suitable for constant flows of larger deliveries.
For individual projects, the choice will come down to either the monorail or the pneumatic tube systems and
different diameters of pipe need to be reviewed to compare like for like. It may be that a mixed solution is the
most suitable with the monorail used to deliver the larger containers between particular departments.

The larger monorail systems are marketed as being suitable to distribute FM containers for catering and linen.
These systems need to be planned in at the early stages of design because they take up considerable space
and do interfere with people movement if high ceilings are not available. As with the smaller systems they
need to be reviewed against AGVs when looking at automation options, however their impact on the building
infrastructure is a considerable disadvantage.

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Pharmaceutical storage and dispensing systems
There are typically three different types of storage and retrieval systems: mini loaders, vertical carousels and
dispensers. A mini loader is a small version of the Automated Storage and Retrieval Systems (ASRS) found in
distribution centres and warehouses. Systems vary between manufacturers but typically products are stored
and retrieved by a two-axis robot mounted on a rail system that operates between two rows of shelving. The
tight shelving means that product density is maximized and use of the robot ensures fast picking (450 to 900
products / hour). The automated storage software will also deal with channel allocation, stock management
(including expiry date) and lot tracking.

Vertical carousels consist of vertical shelving units that rotate around a conveyor belt to ensure that the shelf
with the product required is located at the picking face. They usually come with various module heights to
suite the quantity of items than need to be stored. Pick-to-Light displays highlight the item that is requested so
that the operator does not have to check all the labels available on one shelf. As with the mini loader, software
is available for full stock control.

Dispensers use the same principle as the mini loader but items are stored vertically within a sealed container.
One unit should be able to dispense approximately 300 units every hour, with a storage capacity dependent on
the height available. They are usually smaller than the min loaders and therefore suite slightly different
applications. Again they are able to provide full stock control.

The choice of storage and dispensing system needs to be based on the required storage, the number of
dispensing points to be covered and the handling speed. Once these parameters have been defined, it should
be easy to make a comparison between the various options.

Exception Management
Exceptions are special cases that deviate from the normal behaviour in a business process and need to be
cared for exceptionally, normally by human intervention. Their cause might include: process deviation,
malformed data, infrastructure or connectivity issues, poor quality business rules, etc. Exception
management is the practice of investigating, resolving and handling such occurrences by using skilled staff and
software tools. Good exception management can contribute to efficiency of business processes.
Need:- Logically, any company attempting this does so to alleviate perceived problems with recurring
errors, things like rework, slow cycle times and information defects. The theory is that a formulaic
approach will drive down process variability with benefits similar to how a standard tooling process
will drive down defects and scrap in manufacturing. Unfortunately, this is not without its costs.
Scalability is a critical component to most successful organizations. In many ways, the same could be
said for individual consultants and their respective consulting firms. However, in order to effectively
scale and drive revenue, a consultant needs to possess an excellent foundation in project management
principles and techniques.
Exceptional project management skills help a consultant avoid being in a constant state of “catch up”
and instead focus on managing an engagement, anticipating risk, resolving issues, and refining his/her
ever-expanding library of best practices. It is these exact best practices that will help a consulting
firm win business over a competitor during a competitive RFP process. While it is not always the
case, a firm that is able to convey value, experience, and credibility through repeated success will end
up well-positioned in good and not so good economic periods.
BLOOD BANK:-
Blood transfusion is an essential therapeutic intervention. We all may need blood in an emergency, and some
of us need regular transfusions. The purpose of a transfusion is to provide the blood component(s) that will
improve the physiological status of the patient. Various blood components can be harvested from a single
donation of whole blood. Most blood banks are able to separate red cells and plasma components. Others are
able to prepare components such as platelet concentrates and cryoprecipitate. All these components,
prepared by centrifugation, are often referred to as ‘wet or labile products’. Other plasma products, generally
referred to as plasma derivatives, can be harvested from plasma by a pharmaceutical process called plasma
fractionation, which renders their properties stable. The collection of blood from donors may take place within
the blood transfusion centre or hospital blood bank. It is also often collected from donors during mobile blood

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collection sessions. The blood is then taken to a laboratory for testing and processing into components and for
storage and distribution as the need arises.
Safe storage of blood:-
Whole blood and red cells must always be stored at a temperature between +2 °C and +6 °C. The main reasons
for giving a blood transfusion are to restore or help to maintain the body’s oxygen-carrying capacity and the
volume of blood circulating around the body. If blood is not stored at between +2 °C and +6 °C, its oxygen-
carrying ability is greatly reduced. The anticoagulant/preservative solution in the blood bag contains nutrients
for the blood during storage and stops the blood from clotting. The red cells can only carry and deliver oxygen
if they remain viable: that is, if they retain the same properties as they have during their normal circulation in
the body. The most important substances in maintaining the viability of red cells are glucose and adenosine
triphosphate (ATP).

Packing and transportation of blood and blood components

An efficient system must be in place to ensure that all blood and blood components shipped by or received
into a blood bank or blood transfusion service have been maintained within the correct temperature ranges.
Red blood cell components must be kept at a temperature of +2 °C to +10 °C during transportation. All
components routinely stored at +20 °C to +24 °C should be kept at these temperatures during shipment. All
frozen components should be transported in a manner to maintain their frozen state. The transit time for
blood and blood components should not normally exceed 24 hours Whole blood and packed red cells must
always be stored at +2 °C to +6 °C and transported between +2 °C and +10 °C.

 Blood components and plasma derivatives should never be stored in unmonitored equipment.
 Red cells, platelets or whole blood must never be allowed to freeze.
 The optimal storage temperature for conditions for fresh frozen plasma and cryoprecipitate is –30 °C,
and they must always be frozen solid. They can be stored at lower temperatures, but must never be
warmer than –20 °C.
 Platelets must be stored at +20 °C to +24 °C with constant agitation and transported at temperatures
within this range.
 During transportation, frozen components must be maintained at a temperature that ensures they
will remain frozen.
 It is important to use a temperature monitor during transportation in order to check temperature
ranges on receipt of the shipment.
 To assist the maintenance of temperatures for blood components, it is often useful for hospital wards
to possess a refrigerator for short-term storage of issued blood from the blood bank.

A database is a collection of persistent data that is used by the application systems of a given enterprise.
Traditional databases are organized by fields, records, and files. A field is a single piece of information; a record
is one complete set of fields; and a file is a collection of records. To access information from a database, we
need a database management system (DBMS). This is a collection of programs that enables the service
providers and clients to enter, organize, and select data in a database. Presently in Bangladesh 113 Safe blood
transfusion centers are providing safe blood to the clients. The effective management of blood transfusion
program encompasses a good number of areas and one of the areas is development of data base for the safe
blood transfusion centers and also for the donors. The development of a data base always needed good
documentation.

Objectives of Data base

• To develop and maintain an appropriate integrated blood donor tracking database system for the efficient
and effective recording and management of blood donor data and blood donor retention
• To significantly improve the quality of recording and management of information about blood donors to
facilitate the effective tracking of repeat blood donors and the establishment of a reliable pool of regular
repeat blood donors
• To significantly improve the accuracy, efficiency and effectiveness of tracking information on blood
donations, and ensure blood safety through accurate labeling and identification of blood units at every stage
• To ensure sustainability through capacity building, staff skills training and the integration of plan and
operations.
• Obtain the best available information on blood transfusion services in the country

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• Assess the country situation on blood safety
• Monitor trends and progress
• Identify problems and needs in order to provide appropriate technical assistance
• Identify the areas and issues for providing support.

Data base software of Blood bank transfusion system

The Blood Bank Transfusion System consists of seven separate but interrelated application software modules:
• Blood Processing
• Patient Processing
• Inventory Management
• Recipient History
• Reports
• Purge Processing
• File Maintenance
Blood donation, also called blood banking, refers to the process of collecting, testing, preparing, and storing
whole blood and blood components intended primarily for transfusion. Blood registry refers to the collection
and sharing of data about donated blood and donors. Donors who have been determined to be temporarily or
permanently ineligible to donate blood are listed in a confidential national data base known as the
Donor Deferral Register. A possible definition is that a database is a collection of records stored in a computer
in a systematic way, so that a computer program can consult it to answer questions. For better retrieval and
sorting, each record is usually organized as a set of data elements (facts). The items retrieved in answer to
queries become information that can be used to make decisions. The computer program used to manage and
query a database is known as a database management system
(DBMS). The central concept of a database is that of a collection of records, or pieces of knowledge. Typically,
for a given database, there is a structural description of the type of facts held in that database: this description
is known as a schema. The schema describes the objects that are represented in the database, and the
relationships among them. There are a number of different ways of organizing a schema, that is, of modeling
the database structure: these are known as database models (or data models). Strictly speaking, the term
database refers to the collection of related records, and the software should be referred to as the database
management system or DBMS.
Blood Bank Management Software
Blood Bank Management Software, readily scalable and adaptable to meet the complex need of Blood Banks
Who are Key Facilitator for the Healthcare Sector, it also supports all the functionalities of Blood Bank
Features of Blood Bank Management Software
• Generating reports on Stocks-Blood Group wise, Area wise and Expiry date wise.
• Donor Database-Blood Group wise and Area wise
• Maintain and update Unique Donor Identifications.
• Complete Key Consumables Inventory Management.
• Track and maintain all the Donor Types-Voluntary, Exchange and Directed.
• Improve the Effectiveness and efficiency of Blood Bank-Faster Response
Time and Better Control
• Accurate database/Record Management.
• Blood Cross Match and Result Storage Facility.
• Digital Record archival backup and restoring facility-Better Housekeeping and Record Maintenance.
• Rejected Donor Database for Donor Control and Identification-Blood
Transfusion related disease control and prevention.
• Searched Facility for Destroyed and Expired Blood.
• Comprehensive Donor database with Search Facility.
• Unique Donor ID and Patient record ID for managing future list.
• Improve Blood Bank processes by providing efficient and continuous software support

A comprehensive application software called Blood Transfusion Management System is required to

implement by incorporating blood screening data, blood donor profile, valid documentation of laboratory
testing , schedule for regular blood donation and motivational camp, schedule for training program,
management of routine blood supply, monitoring of transfusion hazard, quality control of blood and its
product, procurement and finance related activities. By establishing networking system between the centers

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will enhance optimum use of information and data exchange to oversee, monitor and evaluate the quality of
the services of the centers from a National Reference Center and dissemination of collective information
worldwide through Website on Safe blood Transfusion Program of Bangladesh.

Software features
To fulfill the entire need of computer based operation, the following application modules to be developed and
implemented in each computer c enter of the department :
• Donors Health Profile Management Module
• Recipient Health Profile Management Module
• Blood Screening Data Management Module
• Cross-Matching Data Management Module
• Medicine Inventory Control Management Module
• Blood Stock Inventory Management Module
• Check-List Management Module
• Investigation and Surgical Management Module
• And other module as required
VARIOUS TYPES OF LAUNDRY SERVICES
Laundry and Linen are one of the important supportive services in a hospital. The word Laundry is derived
from Launderer/ Laundress which literally means washerman or washerwoman. Hospital linen means clothing
made up of cotton, wool, synthetic fibers. Linen is comprised of basic fabrics which are spun into yarn and
finally woven into cloth.
Hospital having its own laundry or in – plant system.

Justified and applicable in large hospitals, teaching hospitals as it is very expensive. In this system hospital has
its own linen and laundry and all activities of laundry services like
 Collection
 Washing
 Pressing
 Distribution Marking
 Drying
 Folding
 Controlling Sorting
 Ironing
 Storing
Are done in hospital laundry and premises.

Rental Linen Supply System:

a) In this hospital hire laundered linen from the contractor
b) Contractor is responsible for everything i.e laundering of patient and staff linen as well as
replacement.
c) Hospital does not have to spend on inventory of Linen.

Contractual System:
a) Hospitals own their linen but no means of laundering.
b) Washerman or Dhobi in contract takes the linen and after laundering brings back.
c) If hospital is providing the platform for washing area and water a subsidized contract type of
system can be introduced.

Co-operative System:
a) When a group of small hospitals pool together and adopt a single laundry cooperative system.
b) Economical if adopted for small government hospitals also as they share services of highly
qualified laundry manager/ supervisor, back up by modern machineries and automation.
c) Can evolve common policies of purchase, supplies, maintenance of standardization of linen
after pooling their resources.
PURPOSES OF AMBULANCE SERVICES:-

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Early detection
Members of the public, or another agency, find the incident and understand the problem
Early reporting
The first persons on scene make a call to the emergency medical services and provide details to
enable a response to be mounted
Early response
The first professional (EMS) rescuers arrive on scene as quickly as possible, enabling care to begin
Good on-scene care
The emergency medical service provides appropriate and timely interventions to treat the patient at
the scene of the incident
Care in transitthe emergency medical service load the patient in to suitable transport and continue to
provide appropriate medical care throughout the journey
Transfer to definitive care
the patient is handed over to an appropriate care setting, such as the emergency department at a
hospital, in to the care of physicians

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 FORMULA AND MATHEMATICAL PROBLEMS ON INVENTORY CONTROL

a) Raw materials :
Opening stock = 400 units @ Rs. 10/-
Purchases = 1000 units @ 15/-
Closing stock = 500 units
Wages, etc. = Rs. 2,000/-
Sales = Rs. 20,000/-
Show the profit if raw materials issued are priced at
i) FIFO
ii) LIFO.

a) FIFO b) LIFO
Opening stock 400 units @ Rs. 10/-=Rs. 4000/- 400 units @ Rs. 10/-=Rs. 4000/-
+ 1000 units @ Rs. 15/-=Rs. 15000/- + 1000 units @ Rs. 15/-= Rs. 15000/-
sales Rs.20000 Rs.20000
Less closing stock - Rs. 6000 - Rs. 4000
( 400 units @ Rs. 15/-)* (400 units of Rs. 10/-) **
Rs. 14000 Rs. 16000
Add wages etc Rs. 2000 Rs. 2000

Cost of production Rs. 16000 Rs. 18000

Sales Rs. 20,000 Rs. 20,000

Profit Rs. 4,000 Rs. 2,000

b) M/s. ABC Toys buys a special spring worth Rs. 14,400.00 each year. It has now entered into a contract with
the manufacturer to supply springs in staged lots against the purchase order to be raised by M/s. ABC Toys
covering annual requirement. The procurement cost and inventory carrying cost of the buyer are as under:
Cost of replenishing the stock of an item once: Rs. 24 per occasion inventory carrying cost as percentage of
average inventory investment: 12%
Calculate Economic Order Quantity. 8+7

D=Rs.14,400.00
Ch= 12%
Co = Rs24/order
No. of order = 1 order per year
Total Ordering cost = Toc = Rs.24x1=Rs.24

2 DCo / Ch = 2 x14, 400 x 24 / .12 = 691200 / .12 = Rs. 2400

EOQ is in amount Rs.2400

ii) If maximum usage 90 units, minimum usage 30 units & delivery period 6 weeks, recorder
level will be
a. 760 units
b. 640 units
c. 540 units
d. 360 units c
Ans:
[Formula: ROL= Maximum usage x Maximum time]
Process 1:
Maximum usage = 90 units/wk

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Minimum usage = 30 units /wk
Delivery period (lead time) = 6 wks
Safety stock (considering maximum consumption level) = 90x6 = 540 units
Safety stock (considering minimum consumption level) = 30x6 = 180 units
Re- order Level (R.O.L) 1=180 + (lead time x consumption rate per wk) (considering minimum usage)
=180+(6x60) = 180+360=540 Units
Process 2:
[Formula: ROL= Maximum usage x Maximum time]
ROL = 90units x 6 weeks = 540 units

1. The following information is available in respect of material X & Co. Ltd:

Recorder quantity 12000 units
Lead time 4 to 8 weeks
Maximum consumption 4000 units per week
Normal consumption 3000 units per week
Minimum Consumption 1550 units per week
Ascertain i) RE-order level, ii) minimum stock level, iii) maximum stock level, iv) safety stock
Ans:
PROCESS 1:
Maximum consumption 4000 units per week
Normal consumption 3000 units per week
Minimum Consumption 1550 units per week
Lead time = 4 wks (considering maximum usage)
Lead time = 8 wks (considering minimum usage)
Safety stock = 3000x4 = 12000 units (considering normal usage)

i) Re-order level
Case 1 :
Considering maximum usage
ROL=[safety stock+ lead time consumption]
=12000+4x4000 = 12000+16000=28000 units

Case 2: considering minimum usage

ROL =[safety stock+ lead time consumption]
= 12000+4x1550 =12000+12400=24400 units

ii) Maximum level = safety stock + reorder quantity

=28000+12000 = 40000 units

iii) Minimum level = 12000 units

PROCESS 2:
1. [Formula: ROL= Maximum usage x Maximum time]
ROL = 4000 units x 8 weeks = 32000 units

2. [Formula:Minimum stock level = ROL – (Normal usage x average

lead time)] (average lead time =Normal lead time = {max lead time
+min lead time)/2})
Minimum Stock level = ROL – (Normal usage x average lead time)
= 32000-(3000x (8+4/2))
= 32000 – 3000 x 6

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 = 32000-18000 = 14000 units

3. [Formula: Maximum stock level = (ROL+EOQ) – (Minimum usage x

minimum lead time)]
Maximum stock level = (32000+12000)- (1550 x4) = (44000-6200) units = 37800 units.

4. [Formula: safety stock

= Maximum usage rate – Minimum usage
rate = [(maximum usage x maximum lead time) – (Minimum usage
x Minimum lead time)]

Safety stock = (4000x8)-(1550x4)= 32000-6200 units = 37800 units

2. A hospital purchases an item at the rate of Rs. 25 per piece. The annual consumption of the items are
18000 nos. If the ordering cost is Rs. 250 per order and carrying cost is 25% p.a, what would be the EOQ? If
the supplier offers a discount of 5% for order quantity of 3000 nos. Per order, do you accept the discount offer?
15
Ans:
Annual demand = 18,000 card board boxes. (D)
Unit Price = Rs. 25/- (Cp)
Ordering cost per order = Rs. 250/- (Co)
Carrying cost percentage = 25% of coverage inventory value ( I )
i) Economic order Quantity (EOQ) determination
2×Annual Demand×Ordering Cost per order 2 DCo
EOQ (Q*) = =
Holding cost per unit per year Cn

√ ⁄
= 2 x 18000 x 250 25 x .25 = 1200 units
The EOQ is 1200 units
Annual Total Cost (ATC) considering EOQ
D Q
=  Co   Cn = (18000/1200) x 250 + (1200/2) x 25 x .25= 3750 + 600 x 6.25
Q* 2
=37500+3750 =Rs. 41250
Total Cost = (Unit price × annual demand) + ATC = (25 x18000)+ 41250= 450000+41250=Rs. 491250/-

2nd Part:
If we accept the offer of Supplier,
Then unit price becomes, Rs. 25 × 0.95 = Rs. 23.75
Annual Total Cost Calculation
Annual Demand
= (Annual Demand × Unit Price) + { × (Ordering Cost/Per
Order placed
Oreder Placed
Order)} + { × Inventory Holding Cost}
2
= 18000 × 23.75 + {(18000/3000)x 250} + (3000/2) x 23.75x.25
= 427500 + 1500+ (1500x5.93) = 427500 + 1500 + 8895
=Rs. 437895/-
Offer made by supplier is most economic. So we should accept 2nd offer

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. Average consumption 4000 units, maximum order period 4-8 weeks . the danger level
would be.

a) 32000 units b) 4000 units c) 2000 units d) none

Ans: d
Danger Level = Normal Consumption x Maximum re-order period.
Or, Danger level = [4000 x (4+8) / 2] units
Or, Danger level = [4000 x 6] units
Or, Danger level = 24000 units

2. By the help of following data, evaluate vendor A, vendor B and vendor C under Quality,
Price and delivery performance point accordingly
Criteria Vendor A Vendor B Vendor C
Scheduled Delivery 1000 units 700 units 500 units
Delivery on time 1000 units 650 units 470 units
Rejection after 10 units Nil 5 units
delivery
Price quoted Rs. 5/ unit Rs. 5.50/unit Rs. 6.00/unit

Ans:
I, assume that according to importance, the following weightage can be assigned to each
parameter

Quality = 50
Price= 30
Delivery=20
QPR = (quantity accepted after rejection/ quantity delivered)
PPR= (lowest bid/ bidding of respective supplier)
DPR= (scheduled delivery/ actual delivery on schedule)
Point Vendor A Vendor B Vendor C
Ratio
QPR 900/1000 =.90 650/650 =1 465/470=.99
PPR 5/5=1 5/5.5=.91 5/6=.83
DPR 1000/1000=1 650/700= .93 470/500=.94
Cumulati (.9*50)+(1*30)+(1* (1*50)+(.91*30)+(.93*20)=50+27. (.99*50)+(.83*30)+(.94
ve value 20)= 45+30+20=95 3+18.6= 95.9 *20)= 49.5+24.9+18.8
= 93.2

Therefore, according to cumulative value of performance the following ranking will be

observed
1. Vendor B = 95.9
2. Vendor A=95
3. Vendor C = 93.2

A firm uses 1200 units per month of an item each costing Rs. 2. Cost of planning each order is
Rs. 50. Carrying cost of average inventory is 6% per year. Find EOQ.
[WBUT 2011]
Answer:

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Annual usage of the item (D) = [1200 × 12] = 14,400 units
Cost of Planning each order (Co) = Rs. 50/-
Unit Cost (Cp) = Rs. 2/-
Inventory carrying cost (J) = 0.06
Annual inventory holding cost (Ch) = Cp × I = Rs 2 × 0.06
2 D Co
Economic Order Quantity (Q*) =
Ch
2  14,400  50
=
2  0.06
= 3,464 units
Economic Order Quantity = 3,464 units

4. Determine the safety stock, reserve stock and buffer stock for the following data of a firm:
Normal usage = 100 per week
Lead Time = 4 to 6 weeks
Minimum usage = 50 per week
Maximum usage = 150 per week
Also calculate the re-order level, minimum and maximum levels of inventory and average
level. [WBUT 2011]
Answer:
Maximum usage = 150 per week
Minimum usage = 50 per week
Normal usage = 100 per week
Lead time = 4 weeks (considering maximum usage)
Lead time = 6 weeks (considering minimum usage)
Safety stock (minimum consumption level) = 50 per week
= (50×4) = 200/month
Safety stock (maximum consumption level) = 150 per week
= (150 × 4) = 600/month
Buffer stock (considering consumption level at maximum) = 600/month
Reserve stock = (600 – 200) = 400 units/month
Re-order level (R.O.L) = Safety stock + Lead time consumption (considering normal usage)
= 200 + (Lead time × Consumption rate per week)
= 200 + (5 × 100)
= 200 + 500
= 700 units
Minimum level of inventory = 50 per week
Maximum level of inventory = 150 per week
1
Average inventory = (Minimum level + Maximum level)
2
1
= (50 + 150)
2
= 100 per week.

5. M/s Laha & Co. manufactures a special product A. The following particulars were collected
for the year 2011:
a) Monthly demand of A : 1000 units
b) Cost of placing an order : Rs. 100
c) Annual carrying cost per unit : Rs. 15
d) Normal usage : 50 units per week
e) Maximum usage : 75 units per week
f) Minimum usage : 25 units per week
g) Re-order period : 4 to 6 weeks
Compute from the above:
a) Re-order level

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b) Re-order quantity
c) Minimum level
d) Maximum level
e) Average stock level.
[WBUT 2013]
Answer:
Monthly demand A = 1000 units;
D (Annual Demand) = 1000 × 2 = 12,000
Cost of placing of an order = ` 100 Co = ` 100
Annual carrying cost per unit = ` 15 Cn = ` 15
EOQ (Economic Order Quantity)
2 DCo 2 12000 100
   400 units
Cn 15
Safety stock
= (Maximum lead Time–Minimum Lead Time)×Average Demand
= (6–4) weeks × 50 units/weeks
= 100 units
Minimum Inventory = Safety Stock = 100 units
Maximum Inventory = (Safety stock) + (Economic Order Quantity)
= (100 + 400) = 500 units
Safety stock + Max. Inventory
Average Inventory 
2
100  500
  300 units
2
Reorder level = Safety Stock + lead time consumption
= (Average lead time = 5 weeks)
= (100) + 50×5
= 350 units
Reorder Quantity = EOQ (Q*) = 400 units

b) An organization purchases 20,000 cardboard boxes per year each costing Rs.100, cost of
ordering is Rs.400 per order and cost of carrying is 30% of average inventory value.
i) Determine EOQ
ii) Two vendors have quoted for the same with the following terms and conditions:
vendor A has quoted 10% discount for order quantity of 10,000 and Vendor B has quoted 20%
discount for supplying entire lot at a time. Which is the most economic offer? Will you lay any
conditions while accepting the offer? [WBUT 2007]
Answer:
Annual demand = 20,000 card board boxes. (D)
Unit Price = Rs. 100/- (Cp)
Ordering cost per order = Rs. 400/- (Co)
Carrying cost percentage = 30% of coverage inventory value ( I )
i) Economic order Quantity (EOQ) determination
2×Annual Demand×Ordering Cost per order 2 DCo
EOQ (Q*) = =
Holding cost per unit per year Cn
2  20000  400
= = 730
100  0.3
Annual Total Cost (ATC) considering EOQ
D Q 20, 0000 730
=  Co   Cn =  400   (110  0.3)
Q* 2 730 2
= Rs.10958.9 + 10950 = Rs. 2190
Total Cost calculation = (Unit price × annual demand) + ATC

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 = Rs. (100 × 20,000) + 21,909 = Rs. 2,021,909

ii) Case-I, If we accept the offer of vendor A,

Then unit price becomes, Rs. 100 × 0.09 = Rs. 90

Annual Total Cost Calculation

Annual Demand
= (Annual Demand × Unit Price) + { × (Ordering Cost/Per
Order placed
Oreder Placed
Order)} + { × Inventory Holding Cost}
2
20000 10000
= 20000 × 90 + × 400 + × (90 × 0.30)
10000 2
= 1,800,000 + 800 + 135000
=Rs.1,935,800
Case II, If we accept the offer of vendor B,
The unit price becomes, Rs. 100 × 0.80 = Rs. 80
Annual Total Cost Calculation
20000 20000
= 20000 × 80 + × 400 + × (80 × 0.30)
20000 2
= 1600,000 + 400 + 2,40,000
= Rs.1,840,400
Offer B is most economic, that will save Rs. 95,400 (Rs. 1,935,800 – 1,840,400) in comparison with offer A, and
offer B will save Rs. 1,81,509 (Rs. 2,021,909 - 1,840,400) in comparison with Economic order quantity policy.
Offer B is the most economic offer.

3. The following information is available in respect of material X & Co. Ltd.:

Re-order quantity 12,000 unit, Lead time 4 to 8 weeks, Maximum consumption 4,000 units per
week, Normal Consumption 3,000 units per week, Maximum consumption 1,550 unit per week.
[WBUT 2009]
Ascertain:
i) Re-order level
ii) Minimum stock level
iii) Maximum stock level.
Answer:
Re-order Quantity (Q) = 12,000 units.
Maximum consumption = 4000 units/week
Normal consumption = 3000 units/week
Minimum consumption = 1550 units/week
Lead time (maximum consumption situation) = 4 weeks
Lead time (minimum consumption situation) = 8 weeks
i) Re-order level (ROL)
Safety stock = (4×3000) = 12,000 units. [Considering normal consumption]
Case-I: Considering maximum wage
ROL = [Safety Stock + Lead time consumption]
= 12000 + 4 × 4000 = 28,000 units
Case II: Considering minimum wage
ROL = Safety Stock + Lead time consumption
= 12,000 + 8 × 1550 = 24,400 units
ii) Maximum level = Safety Stock + Reorder Quantity
= 28,000 + 12,000 = 40,000 units
iii) Minimum level = 12,000 units

4. Classify the following items into A, B & C category. [WBUT 2009]

Sl. No. Items Annual Usage Price/Unit

145
 (Rs.)
1. Graphite 4,000 kg 10 per kg
2. Toluene 800 kg 5 per kg
3. Wax 600 kg 10 per kg
4. Cap 2,000 6 per kg
5. Drums 1,000 nos. 18 each
6. Oil 150 kg 9 per kg
7. Carton 3,000 nos. 0.2 each
8. Powder 200 kg 0.5 per kg
9. Spirit 400 kg 1 per kg
10. Hydrochloric acid 2,500 kg 6 per kg
11. Carbon 700 kg 15 per kg
12. Nail 5,000 nos. 0.10 each
Answer:
Table-I: Determination of usage value of items and ranking the items based on wage value.
Sl. No. Items Annual Price/Unit Usage value Ranking
(1) (2) Usage (Rs.) (5) = (4) × (3)
(3) (4)
1. Graphite 4,000 kg 10 per kg 40,000/- (I)
2. Toluene 800 kg 5 per kg 4,000/- (VII)
3. Wax 600 kg 10 per kg 6,000/- (VI)
4. Cap 2,000nos. 6 per kg 12,000/- (IV)
5. Drums 1,000 nos. 18 each 18,000/- (II)
6. Oil 150 kg 9 per kg 1,350/- (VIII)
7. Carton 3,000 nos. 0.2 each 600/- (IX)
8. Powder 200 kg 0.5 per kg 100/- (XII)
9. Spirit 400 kg 1 per kg 400/- (XI)
10. Hydrochloric acid 2,500 kg 6 per kg 15,000/- (III)
11. Carbon 700 kg 15 per kg 10,500/- (V)
12. Nail 5,000 nos. 0.10 each 500/- (X)

Table-II: Determination of cumulative usage value and category determination.

Rank Item No. % of items Cumulative Cumulative Category
(1) (2) (3) usage value % in Rs. (6)
(Rs.) (5)
(4)
[I] 1 8 40,000/- 37
[II] 5 17 58,000/- 53 A
[III] 10 25 73,000/- 67
[IV] 4 33 85,000/- 78
[V] 11 42 95,500/- 88 B
[VI] 3 50 1,01,500/- 94
[VII] 2 58 1,05,500/- 97
[VIII] 6 67 1,06,850/- 98.5
[IX] 7 75 1,07,450/- 99
C
[X] 12 83 1,07,950/- 99.5
[XI] 9 92 1,08,350/- 99.9
[XII] 8 100 1,08,450/- 100

6. An auto parts supplier sells Hardy-brand batteries to car dealers and auto mechanics. The
annual demand is approximately 1200 batteries. The supplier pays $28 for each battery and
estimates that the annual holding cost is 30 per cent of the battery’s value. It costs
approximately $20 to place an order (managerial and clerical costs). The supplier currently
orders 100 batteries per month.
a) Determine the ordering, holding and total inventory costs for the current order quantity.
b) Determine the economic order quantity (EOQ).
c) How many orders will be placed per year using the EOQ?

146
d) Determine the ordering, holding and total inventory costs for the EOQ. How have ordering
cost, holding cost, total inventory cost changed? [WBUT 2010]
Answer:
Case-I

(I) Economic Order Quantity Q  

* 2DCo
Ch
D = Annual Demand = 1200 per annum.
Co = Ordering Cost = $20.
Ch = Holding Cost = Unit Cost × Inventory carrying cost percentage.
= Ch  I = $28 × 0.30.

2 1200  20
Q  
*

28  0.30
 76
(II) Ordering Cost = No. of order per year × Ordering cost per order
Annual Demand
 ×Ordering cost per order
EOQ
1200
  20  $315.78
76
(III) Holding Cost = Average Inventory × Holding Cost
Q* 76
  $28  30   28  0.30  $319.20
2 2
(IV) Total Inventory costs = $ 315.78/- + $ 319.20/-
(Considering EOQ) = $ 635/-
1200
No. of orders placed per year using the EOQ   16
76
Case-II
Present order situation = 100 batteries per months
1200
(I) Ordering cost   $ 20  $ 240
100
100
(II) Inventory carrying cost   28  0.3  $ 420
2
Total Inventory cost = $ 240 + $ 420 = $ 660
Therefore, we may conclude, $ (660 – $ 635) = $ 25 saved for EOQ model is followed.

Q. Classify the inventory items as A, B and C based on Annual Consumption Value.

Items I II III IV V VI VII VIII IX X
Annual 90 40 130 60 100 180 170 50 60 120
usage
Unit price 60 350 30 80 30 20 10 320 510 20
Use the following basis for classification:
‘A’ items account for 70% of the total annual consumption value.
‘B’ items account for 20% of the total annual consumption value.
‘C’ items account for 10% of the total annual consumption value.
[WBUT 2011]
Answer:
Step – I: Determination of usage value = (Annual Consumption) × (Unit Price); then ranking the items in the
descending order of the usage value thus obtained, the following is obtained:
(4) Usage Value (in
(1) (2) Annual (3) Unit Rs.) Ranking
Items Usage Price [4] = [3] × [2]
I 90 60 5,400 4

147
 II 40 350 14,000 3
III 130 30 3,900 6
IV 60 80 4,800 5
V 100 30 3,000 8
VI 180 20 3,600 7
VII 170 10 1,700 10
VIII 50 320 16,000 2
IX 60 510 30,600 1
X 120 20 2,400 9

Step II: Now compute the cumulative total number of items and their usage values and convert the
accumulated total items percentage of the grand total. The following ABC analysis is thus obtained:

Rank Item % of Usage Cumulative Cumulative

no. Items value in usage %value Category
descending value (Rs.)
order
1 IX 10 30,600 30,600 35.83
2 VIII 20 16,000 46,600 54.57 A
3 II 30 14,000 60,600 70.96
4 I 40 5,400 66,000 77.28
5 IV 50 4,800 70,800 82.90 B
6 III 60 3,900 74,700 87.47
7 VI 70 3,600 78,300 91.68
8 V 80 3,000 81,300 95.19
9 X 90 2,400 83,700 98.00 C
10 VII 100 1,700 85,400 100

A shopkeeper has an annual demand of an item of 600 units. He buys from a supplier at a cost
of Rs. 6 per item and the cost of ordering Rs. 10 each time. If the stock holding costs are 20%
per year of stock value, how frequently should he replenish his stock? Suppose the supplier
offers a 5% discount on orders between 200 and 999 items and a 10% discount on orders
exceeding or equal to 1000. Can the shopkeeper reduce his cost by taking advantages of
either of these discounts?
[WBUT 2013]
Answer:
Annual Demand (D) = 600 units
Unit Cost (Cp) = `6/-
Ordering Cost (Co) = `10/-
Stock holding cost (I) as percentage = 0.20
Annual holding cost (Cn) = Cp × I = `6×0.20 = `1.20
2 DCo
 
EOQ (Economic Order Quantity) Q * 
Cp  I

148
 2  600 10
  100 units.
1.20
A shopkeeper should replenish his stock by the amount of 100 units.
Annual Total Cost (ATP) considering EOQ
= (Annual Purchasing Cost) + (Annual Ordering Cost) + (Annual holding Cost)
D Q*
ATC  D  C p   Co   Cp  I
Q* 2
600 100
  600  6    10   6  0.2
100 2
 3600  60  60
 ` 3720
Case-I: Ordering Amount 200  Q  999
Unit cost C p1    6  0.95  ` 5.70 [5% discount]
 
To avail this offer, minimum purchase quantity Q1  200 units
D Q
(ATC)1  D  C p1   Co  1  C p1  I
Q1 2
600 200
 600  5.70  10   5.70  0.2
200 2
 3420  30 114 ` 3564
Case-II: Ordering Amount Q  1000
Unit cost C p 2    6  0.90   ` 5.40
 
To avail this offer, minimum purchase quantity Q2  1000 units
D Q
(ATC)2  D  C p 2   Co  2  C p 2  I
Q2 2
600 1000
 1000  5.40  10   5.40  0.2
1000 2
 5400  6  540 ` 5946
The shopkeeper can reduce his cost by taking advantage of Case-I situation where he can get 5% discount in
each product and save  ` 3720 ` 3564 ` 156
12. The store of an oil engine repair shop has 10 items whose details are shown in the
following table. Apply ABC analysis to categorize the items.
Component Description Price / Unit Unit / Year
Code
C01 Packing thread 100 100
C02 Tower bolt 200 300
C03 Hexagonal nut 50 700
C04 Bush 300 400
C05 Coupling 500 1000
C06 Big bearings 3000 30
C07 Small bearings 1000 100
C08 Fuel pump 7000 500
C09 Fixture 5000 105
C010 Drill bit 60 1000
[WBUT 2013]
Answer:
ABC Analysis

149
 Price Unit
Based on Pareto’s law, Annual usage value  
Unit ye
Table I: Identification of the materials based on usage value.
Componen Description (B) Price/Unit Unit/ Usage value Ranking
t Code (A) (C) ye (in Rs.) (F)
(E)=(C)×(D)
C01 Ranking thread 100 100 10,000 10
C02 Tower Bolt 200 300 60,000 7
C03 Hexagonal nut 50 700 35,000 9
C04 Bush 300 400 1,20,000 4
C05 Coupling 500 1000 5,00,000 3
C06 Big bearings 3000 30 90,000 6
C07 Small bearings 1000 100 1,00,000 5
C08 Fuel pump 7000 500 3,500,000 1
C09 Fixture 5000 105 525,000 2
C10 Drill bit 60 1000 60,000 8

Table II: ABC classification

Rank Component % of Cumulative Cumulative Category
code items usage value (Rs.) % in Rs.
1 C08 10 3,500,000 70
A
2 C09 20 4025,000 80.5
3 C05 30 4525,000 90.5
4 C04 40 4645,000 92.9 B
5 C07 50 4745,000 94.9
6 C06 60 4835,000 96.7
7 C02 70 4895,000 97.9
8 C10 80 4955,000 99.1
C
9 C03 90 4990,000 99.8
10 C01 5,000,000 100
100

150
 FORMULA

1. REORDER LEVEL (ROL) = MAXIMUM USAGE X MAXIMUM LEAD

TIME or MAXIMUM USAGE RATE

2. MAXIMUM LEVEL = (REORDER LEVEL+ REORDER QUANTITY or

EOQ) – (MINIMUM USAGE X MINIMUM TIME or MINIMUM USAGE
RATE)

3. MINIMUM LEVEL = REORDER LEVEL – (NORMAL USAGE X

NORMAL TIME or NORMAL USAGE RATE)

MINIMUMLEVEL  MAXIMUMLEVEL
4. AVERAGE LEVEL =
2
OR
MINIMUM LEVEL + 1 X REORDER QUANTITY (EOQ)
2

5. BUFFER STOCK or SAFETY STOCK or RESERVE STOCK = MAXIMUM

USAGE RATE – NORMAL USAGE RATE = (MAX USAGE X MAX LEAD
TIME)- (AVERAGE or NORMAL USAGE X AVERAGE or NORMAL
TIME)

6. DANGER LEVEL = AVERAGE USAGE X EMERGENCY TIME

151