CHAPTER 1

THE PROBLEM AND ITS BACKGROUND

Introduction
An inventory is a detailed itemized list of assets held by an organization or
institution. To be worthwhile, an inventory must be continually maintained and
updated to reflect the current status of each asset. Every health-care facility has
different requirements for the information about each item that needs to be
included in an inventory. Competent inventory management seeks to control the
costs associated with the inventory from the perspective of the total value of the
items included. In health care, WHO strives to "ensure improved access, quality
and use of medical products and technologies".
The Veterans Memorial Medical Center aims to be an integral part of the
community health services utilizing both hospital and community resources. In
connection to this, development of an effective inventory management is
paramount to achieve this objective. To enhance productivity, one must attain a
clever technique of minimizing outlays and of raising revenues to be used to
further expand operations and provide better-quality type of service. Particular
with this, different models and methods can be used to manage inventory. Not to
mention, this fast-paced generation proves to be helping in the discovery of new
technologies and approaches in line with the subject matter inventory
management.
To keep its integrity, the employment of inventoriable items and utilization
of equipment is vital towards meeting the organization's responsibility of
providing services to its members and beneficiaries/patients. Thus, this requires

that the organization invest not only in the development of its inventory
management system but also in the education and training of employees to
facilitate continuous improvement in the performance of both employees and the
system. One important concern is the building up of total quality management all
over the organization so as to create an environment that will solidify current and
future operations, as well as relationship inside and outside the organization.

Background of the Study

Like other enterprises, for-profit or not-for-profit, hospitals in the
Philippines are essentially engaged in the conversion of resources into desired
outputs in the process of production. As in other production processes resources
can be combined and utilized in various alternative ways to produce the same set
of outputs. The decisions involved in the conversion of resources into outputs are
called managerial decisions. Taken broadly, this includes the activities of
planning, organizing, implementing, and controlling the conversion process. In
economics, managerial decisions can be evaluated in terms of the efficiency by
which resources are utilized to attain the goals of the organization.
As a token of appreciation to the Filipino soldiers who helped and stood by
them during World War II, Veterans Memorial Hospital, presently called as
Veterans Memorial Medical Center, was constructed as a present of the
American people to the Philippines. The 80th Congress of the United States of
America passed Public Law 865 in July 8, 1948 which provided $9.4 million for
the construction of a hospital facility with the land donated by the Filipino people .

The law was implemented in the country by an agreement between the U.S. and
the Philippines signed by then Pres. Elpidio Quirino and the U.S. Ambassador to
the Philippines Myron Cowen. Various amendments have been introduced and
the latest is Republic Act 6948 which has liberalized the definition of veterans
which now included the Armed Forces of the Philippines (AFP) retirees.
Likewise, the hospitalization benefit was extended to the veteran dependents.
With the passing of Republic Act 6948, the AFP retirees and their independents
extended benefits of the Public Law (http://www.vmmc.gov.ph/index.php/about.
Retrieved August 20, 2015).
Executive Order No. 620 dated May 4, 2007, created the Urban Triangle
Development (TriDev) Commission and aims to rationalize and speed up the
development of the East and North Triangles and the Veterans Memorial area of
Quezon City, as a well-planned, integrated and environmentally balanced, mixeduse development model. Under the Executive Order No. 620, the Urban Triangle
Development Comission was tasked to: (a) Oversee the preparation of the
Master Development Plan for the 250 hectare area of the QC-CBD, for the
purpose of transforming this into a well-planned, integrated and environmentally
balanced, mixed-use development; and (b) Manage, control and direct the
implementation of the Master Development Plan (Executive Order No. 620-A,
s. 2007. Retrieved August 21, 2015).
In spite of this, news came out that the government planned to sell the hospital
and build a new hospital for veterans at a place where the land is still cheap.
That means these old soldiers and their families will have to travel far to get

hospitalization. With the high cost of transportation, thanks to a permissive

administration, that is like making our war heroes go through another Death
March. But, looking at how it looks now, the new government has eliminated this
plan

and

is

continuously

supporting

the

institution

(http://opinion.inquirer.net/inquireropinion/columns/view/20080326-126432/Govtselling-Veterans-Memorial-Hospital. Retrieved August 25, 2015).

Theoretical Framework
Different theories and principles about inventory have arisen ever since
the system was invented in the early ages of trade and manufacturing. Most of
them have evolved from simple ideas to fundamental concepts which are now
being applied in many different firms. The adoption of these concepts has one
common goal: to be efficient in handling and delivering inventory. With this, we
associate materials cost of handling, storing, freight charges, discounts, etc. For
this study, some of the most important concepts will be discussed as follows:

1. Repairable Inventory theory

Repairable inventory theory involves designing inventory systems for
items which are repaired and returned to use rather than discarded. Such
systems are composed of items which are typically less expensive to repair than
to replace, and are considerably more complicated than traditional inventory
systems. The typical problem is concerned with the optimal stocking of the
repairable parts and the location of these stocks, given that there may be multiple

locations. An added dimension to the problem is the determination of the size

and location(s) of the repair capacity for these parts. Further, different
performance measures may be used, such as cost, backorders, and availability.
There are many complicating factors in the design of repairable inventory
systems, for example, not all failed units can be repaired and put back into
service, and some will be condemned and have to be replaced by new
procurements. Various solution approaches have been developed to solve the
problem, few have been implemented in practice, and no single model has
addressed all or most of the complicating factors. Recent trends in the repairable
inventory environment, environmental trends and regulations, and trends in
product design are calling some of the assumptions of earlier models into
question (Repairable inventory theory: Models and applications. Retrieved 27,
2015).

2. Perishable Inventory Theory

Smallbusiness.chron.com defines perishable inventory as to items a
company sells that lose their value over time until they eventually are rendered
worthless. Whether it is milk that turns sour, a bouquet of flowers that withers or a
ticket that goes unsold, companies use inventory management strategies to
make sure their products don't expire before they're purchased.
The performance of any perishable inventory system, in terms of outdating
and shortages, strongly depends on how the issuing and ordering of products is
controlled. The ordering policy prescribes when and how-many to order at the

production department or at an external supplier. The issuing policy prescribes

which items are taken from stock upon meeting the demand.
Figure 1. Perishable Inventory Theory

2.1 Deterministic models EOQ, Camps formula, and ELS. In 1913, Harris

introduced one of the first mathematical inventory models: the economic order
quantity (EOQ). According to Erlenkotter, the EOQ formula became since 1922
also known as Camps formula and since 1934 as Wilsons economic lot size
formula (ELS). The EOQ formula sets the optimal order quantity for a

nonperishable product in a deterministic problem setting, based on a linear cost

structure with both fixed and variable cost components.

2.2 Stochastic single-period problems: Newsboy model, Christmas-tree model.

One of the first articles on a stochastic inventory model dates back to the early
fifties of the last century. In 1951, Morse and Kimball present a one-period
problem with stochastic demand. The model is often called the Newsboy model
and is solved by the so-called Newsboy equation. Later it became also known as
the Christmas tree model. Kraiselburd describes the very interesting history of
the Newsboy problem. In fact, the model comes from classified research for the
Navy during World War II. Many of the references to the work of Morse and
Kimball recall military applications (mainly inventory problems) rather than the
problem of a newsboy deciding on the number of newspapers to buy. Over the
years the model is extended and applied to various one-period decision
problems. The Newsboy model can be seen as a first stochastic inventory model
for perishables with a fixed shelf life of one period.
2.3 Stochastic multi-period problems: (s, S) policies and Bellmans principle of
optimality. Soon after the introduction of the Newsboy problem, the sequential
ordering of a nonperishable product over multiple products was studied. The
multi-period problems appeared to be significantly more complicated when fixed
order costs apply. In 1951, Arrow, Harris and Marschak presented in
Econometrica the so-called (s, S)-type inventory control with stochastic demand.
In 1952 and 1953, Dvoretzky, Kiefer and Wolfowitz, studied the optimal

parameter values of the (s, S) strategy. Most of the studies on multi-period

problems rely on solving functional equations. The proof that the optimal policy
for non-perishables is of the (s, S) type was first given in 1960 by Scarf, for a
wide class of problems with a linear cost structure. The study of the optimal
control of inventories boosted after the introduction of Bellmans principle of
optimality in the fifties. According to Arrow, he generalized some previous work
on sequential analysis and announced a new technique called Dynamic
Programming (DP). The recursive nature of solving a sequential decision
problem was already addressed by Arrow, Blackwell and Girshick in 1949.
Anyway, DP became a new tool of finding optimal strategies for various decision
problems. In 1960, Howard introduced a special class of sequential decision
problems called Markov decision problems (MDP). In particular, Howard and
Bellman deserve the credits for the successful introduction of this field of study.
Nevertheless, due to the dimensionality of the state space, the multi-period
perishable inventory problem was still considered too complicated to solve.
(s, S)-policy When fixed ordering costs apply, a threshold s for ordering
is included. Orders are placed only when the stock position is at s or below. Most
commonly, the order size is then derived from a fixed order-up-to level S. When
the stock position is above s, no order is placed. This policy is commonly called
an (s, S) policy.
2.4 (Multi-period) Stochastic Perishable inventory models. Virtually all inventory
studies before 1960 dealt with non-perishables or with perishables that last for
one period only. The inventory management of perishables over multiple periods
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is considerably more complicated, since products are not only removed from
stock to meet the (stochastic) demand but also because they become outdated.
The study of inventory management of perishables started already in the sixties
with the thesis of Van Zyl and articles Pierskalla and Pierskalla and Roach. In the
seventies the research of perishable inventory models flourished and resulted in
papers by Cohen, Nahmias and Pierskalla and many others. Most studies are on
issuing policies and approximations of the outdating and shortages under specific
ordering policies, or on finding good parameter values for order-up-to S and for
(s, S) policies.
In some numerical studies, in which outdating and shortage figures are
low, one claims simple rules to be nearly optimal. The question to what extent
these rules are optimal in other cases remained unanswered. A number of
features, that may be relevant in real-life perishable inventory problems, were not
included in these studies. Moreover optimal stock-age-dependent policies were
hardly studied, in these (early) years. Two exceptions are the studies by Fries
[47] and Nahmias [98]: in which some properties of the optimal solution are
proved. Numerical approaches to compute optimal strategies for realistic sized
problems were doomed to fail at that time. Solving the underlying MDP is
seriously hampered by insufficient computer power and the curse of
dimensionality in the state space: the number of possible states is too large to
solve problems of real size.
2.5 Simulation of perishable inventory systems. In the 70s, computer simulation
rapidly became a more-and-more useful tool to analyze complex dynamic
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systems. Where the analytical models need to be relatively simple to allow its
mathematical analysis, problems could now be studied at a reasonable realistic
level by simulation. This different, say more practical, line of research was carried
out by quite some researchers and practitioners. Simple order-up-to S rules were
simulated to find out whether they yield low shortage and outdating figures under
different issuing policies. For simple rules with one or two parameters search
algorithms were developed to find optimal parameter values. Analytically
obtained insights on the convexity of the cost function proved to be very useful in
streamlining the optimization process. Despite the modeling flexibility of
simulation, there is always a tradeoff to make between the degree of realism to
add to a model and the required accuracy of the outcomes, given the speed of
the computer(s) on which the simulation is executed. This trade-off is inherent to
simulation. Since computers were not that fast that time as compared today, the
level of detail in mimicking a real inventory systems was quite limited; in the early
simulation studies the existence of different, limited-compatible blood groups is
simply left-out. Most likely, this also explains why no periodic ordering policies
are simulated with different order-up-to levels S1,...,SD of each of the D periods.
In only a few studies stock-age-dependent ordering rules were developed that
acknowledge the perishability of the products. For example, in 1972, Pinson,
Pierskalla and Schaefer test by simulation what-they-call modified order-up-to S
rules. These rules were developed based on common sense arguments to
reduce shortages and outdating. Setting new stock-age-dependent rules requires

10

insight into the perishable inventory problem. Simulation is one way to obtain
these insights.
2.6 Optimal stock-age-dependent ordering policies for perishables. Although it
was known that an optimal policy for ordering perishables should be stockagedependent, the actual computation of an optimal policy was not considered for
perishables with a fixed shelf life of more than 3 days. At the start of the twentyfirst century Blake et al., and Haijema, Van der Wal, Van Dijk and Smit Sibinga
numerically solved realistic (down-sized) Markov Decision Problems of blood
platelets pools (BPPs) with a maximal shelf life of up to 7 periods. They apply
independently an aggregation-disaggregation approach: individual BPPs are
aggregated into batches. Blake et al. focuses on the cost reduction and the
tractability at varying batch sizes. Haijema et al. study the structure of the optimal
policy (with one and two categories of demand) and derive simple rules with
nearly optimal parameter values (Solving large structured Markov Decision
Problems for perishable inventory management and traffic control. Retrieved
August 27, 2015).

Conceptual Framework
The conceptual framework discussed the flow of the study undertaken.
The study adapted the systems approach. The approach used the system of
three (3) frames composing the input used which went through the processes or
operation and emerged as output.
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INPUTS
Profile
Age
Gender
Civil Status
Educational Attainment
Position
Department/Division
Number of years in the organization
Profile of the hospital
Type of organization
Size of the Company
Gross Profit of the Company
No. of years in operation
Uses of Inventory Management
Inventory Balance
Inventory Turnover
Accurate Planning
Warehouse Organization
Employee Efficiency
Inventory Order
Inventory Tracking
Time Saving
Cost Cutting
Inventory Control Systems
Perpetual Inventory System
Periodic Review Inventory System
Computerized Hospital Inventory System
Just-in-time
FIFO Method
Inventory Management practices
Accountability or Responsibility
Receipts of Deliveries
Inspection of Deliveries
Warehousing
Requisition, Issuance and Utilization
Transfer of Property Accountability
Property Custodianship
Physical Inventory Taking
Property Repair and Maintenance
Disposal of Hospital Property
Insurance of Hospital Property
Problems encountered and possible solutions

PROCESSES
Survey
Documentary search
Interview
Statistical Analysis
Frequency and Percentage
Ranking
Weighted Mean
ANOVA
Likert Scale

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Feedback

OUTPUTS
Policy Recommendations for:

Figure 2. Conceptual Paradigm

The input contains the leading variable regarding the profiling of the
management and the members of the Supply and Procurement Division involved
in the inventory management; the Veterans Memorial Medical Centers
perspective on specific topics, the benefits that inventory management provides
to the organization, the inventory systems used, and their practice of managing

13

inventories; and the problems encountered by the said organization and its
possible solutions.
The second frame contains the methods and procedures to be used to
analyze those variables by making questionnaires, conducting interview,
research and the use of statistical tools.
The third frame encloses the output. It contains policy recommendations
that the researchers suggested for the improvement of the inventory
management practices of Veterans Memorial Medical Center to provide better
health care services, to efficiently utilize their inventory, and to come up with
possible solutions on the problems.
The arrows include the workflow of information in the research process.
The feedback loop connects the output to the process involved, as well as to the
input, making the system continuous.

Statement of the Problem

This research aimed to determine the perception of the management and
the members of Supply and Procurement Division of the Veterans Memorial
Medical Center in their inventory management practices. Furthermore, the profile
of the respondents, which includes the management involved and its members;
the perspective of Veterans Memorial Medical Center on specific topics, the uses
of inventory management, classification of inventory control systems, the
problems encountered and possible solutions; and any significant relationship

14

between the profile of the respondents and the leading variables also form part of
the research.
This research sought to answer the following questions:
1.0

2.0

What is the profile of the respondents in terms of the following:

1.1

Age;

1.2

Gender;

1.3

Civil Status;

1.4

Educational Attainment;

1.5

Position/Designation;

1.6

Department/Bureau/Division; and

1.7

Number of years in the Company?

What is the perspective of the organization in terms of the following:

2.1

Type of Organization;
2.1.1 For Profit
2.1.2 Non-profit

2.2

Size of the Company;

2.2.1 Level 1
2.2.2 Level 2
2.2.3 Level 3
2.2.4 Level 4

2.3

Gross Profit of the Company; and

2.4

Number of Years in Operation

2.5

Inventory Management System

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3.0

What are the uses of inventory management in Veterans Memorial

Medical Center in terms of the following:

4.0

3.1

Inventory Balance;

3.2

Inventory Turnover;

3.3

Accurate Planning;

3.4

Warehouse Organization;

3.5

Employee Efficiency;

3.6

Inventory Order;

3.7

Inventory Tracking;

3.8

Time Saving; and

3.9

Cost Cutting?

What are the opinions of the inventory management team on the system
used by the Veterans Memorial Medical Center in terms of the following:

5.0

4.1

Perpetual Inventory System;

4.2

Periodic Review Inventory System;

4.3

Computerized Hospital Inventory System;

4.4

Just-in-time; and

4.5

FIFO Method?

What are the Inventory Management Practices in terms of the following:

5.1

Accountability or Responsibility;

5.2

Receipts of Deliveries;

5.3

Inspection of Deliveries;

5.4

Warehousing;

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5.5

Requisition, Issuance and Utilization;

5.6

Transfer of Property Accountability;

5.7

Property Custodianship;

5.8

Physical Inventory Taking;

5.9

Property Repair and Maintenance;

5.10

Disposal of Hospital Property; and

5.11

Insurance of Hospital Property?

6.0

What are the problems encountered and possible solutions?

7.0

Is there a significant relationship between the profile of the respondents

and the lead variables?

Hypothesis
The null hypotheses tested are:
There is no significant relationship between the profile of the respondents
and the following lead variables:
1.
2.
3.
4.

Uses of inventory management;

Opinions of the inventory management team on the system used;
Inventory Management Practices; and
Problems encountered and possible solutions.

Scope and Limitations

This study involved the discussion of the Perception of Veterans Memorial
Medical Center in their Inventory Management This was made to determine how
well the Inventory Management is implemented within the organization; and how
it affects the efficiency of the utilization of the Inventory Management.

17

The respondents of the study were composed of 30 employees from the

Supply Division and Procurement Division of the Veterans Memorial Medical
Center. The survey was completed through the purposive sampling method in the
respondents. The self-administered questionnaires were distributed on August
2015 and were re-collected on following days after distribution.

Significance of the Study

This study would benefit several areas of Veterans Memorial Medical
Center. It primarily intended to give additional information to help assist the
following individuals and organization.
Veterans Memorial Medical Center. This study will be useful as it
described the significant issues concerning the Inventory Management and its
efficiency on the utilization of the Inventory Management.
The Management and Members. This study would be beneficial as it
contributed additional information regarding the existing system, allowing them to
improve the practices currently implemented.
Other Staffs and Employees. The employees will be assisted in
comprehending the idea behind the companys Inventory Management System. It
will give them a new grasp of what really is going on within the company and its
operations. Furthermore, this will also serve as an instrument on reminding them
to work with a high level of professionalism, expertise and discipline for they will
have a clear view of what is implemented.

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Management as a Whole. This study will contribute to the managements

continuous improvement relating the practices employed throughout the
organization. This will also be beneficial to the development of the Inventory
Management of the organization.
Public. Information on how well the organization manages its Inventory to
provide better health care for the beneficiaries. Greater appreciation would
develop among ordinary citizens.
Academe. May this thesis be marked as a quality scholastic work that can
help not just the Department of Accountancy but also the University.
Researchers. This study aided the researchers to be aware of what is
going on in the current setting in connection with the topic. It has given them a
new sphere of knowledge and widened their proficiency about the subject matter.
Future Researchers. This study will be a useful resource material for
individuals with the same interest for the field who would aspire to conduct
additional researches specifically about the issues relating to the Inventory
Management System.

Definition of Terms
The following terms are defined operationally for better understanding:
Age. Refers to the respondents span of life when the study was
conducted. Brackets ranging from 30 years old below, 30 to 34 years old, 35 to

19

39 years old, 40 to 44 years old, 45 to 49 years old, and 50 years old and above
were provided.
Beneficiaries. For this research, the beneficiaries [patients] include the
World War II Veterans and their relatives, the employees, and other public/private
patients.
Bidding. Refers to the process where a quotation is specifically given to a
prospective purchaser upon his request, usually in competition with other
offerors/vendors.
Civil Status. The condition of the respondent either single, married,
widowed or separated.
Educational Attainment. Refers to the academic achievement of the
management people whether it is a bachelors degree, with a masters units,
masters degree, doctoral units, or doctors degree.
Gender. Refers to the sexuality of the respondent whether it is male or
female.
Inventory. For hospitals, inventories would include supplies and materials
in stock, including medicines, drugs, medical supplies, office supplies,
housekeeping supplies, engineering supplies, IT supplies, commissary supplies
and miscellaneous supplies; and equipments, including all unexpendable
property, other than land, structures and fixed facilities, non-expendables
supplies and equipment, technical and scientific equipment, fire fighting
equipment, telephone, radio and cable equipment.

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Inventory Management. Refers to the practice concerning overseeing

and controlling of the ordering, storage and use of components that an
organization will use.
Non-Profit Organization. A corporation or an association that conducts
business for the benefit of the general public without shareholders and without a
profit motive; Nonprofit organizations include churches, soup kitchens, charities,
political associations, business leagues, fraternities, sororities, sports leagues,
Colleges and Universities, hospitals, museums, television stations, symphonies,
and public interest law firms.
Number of Years in Company. Pertains to the length of service rendered
by a respondent whether it is below 1 year, 1-5 years, 6-10 years, 11-15 years,
and 16 years and above.
Position in the Company. Refers to the respondents position on work in
the organization.
Procurement.
Procurement Division. This is responsible for the procurement of
supplies, materials, drugs and medicine and equipment needed in the operation
and maintenance of the Medical Center.
Profile of the Respondent. In this research, it refers to the respondents
age, gender, civil status, educational attainment, position/designation;
department/bureau/division, and the number of years they have been working in
the medical center.

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For Profit Organization. This refers to a business or other organization

whose primary goal is generating profit, as opposed to a non-profit organization
which focuses a goal such as helping the community and is concerned with
money only as much as necessary to keep the organization operating. Most
companies/businesses are considered as for profit organizations; this includes
anything from retail stores to restaurants to insurance companies to real estate
companies.
Respondents. These are the individuals intentionally considered to be the
subject of the study who was inquired to answer the questionnaire such as the
Administrative Officer IV, Administrative Officer III, Administrative Officer II,
Administrative Officer I Administrative Assistant III, Administrative Assistant II,
Administrative Assistant I, Administrative Aide II, and Administrative Aide I under
the Supply and Procurement Division of the medical center.
Size of the organization. In this research, as per DOH Administrative
Order 205-0029, this refers to the size of the organization with regards to the
scope of services they provide, the inventories they hold, and the size/capacity of
the hospital whether Level 1, Level 2, Level 3, or Level 4.
Supply Division. This refers to that division responsible for the inventory,
storage and distribution of supplies and equipment, and procurement of
miscellaneous services necessary for the maintenance and operation of the
hospital.

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