PROCEDURE OF MATERIAL MANAGEMENT SYESTEM

The following procedural steps are being taken in material management:-

1. Planning and Budgeting /Demand Estimation

Since the materials are essential resources to achieve the objectives of health care organization,
the health administrator required to plan the material management system in such a way to
ensure adequate supply of material to improve expected demand pattern with minimum amount
of money blocked in procuring non productive manner. It is great importance that materials of
right quality should be supplied to consumers in right time and at right place of use.

First step in handling the problems of supply is that of determining requirement needs. it
involves three factors:-

a) The kind of articles needed

b) The quality of each articles needed
c) The time and frequency are delivery
One should make a special, careful and technical study of material needs and on
the basis of such study formulate procurement programe. Supporting data should
 be given for their request for appropriations and an accurate rendered of how
money is granted have been expanded.

Pre-requisites

Demand estimation depends on cost reduction; lay out proper specification and value analysis.

Cost Balance

Cost of the material has actual cost, carrying cost that includes storing to distribution cost.
Carrying cost has 20-30% of the cost it includes interest of capital (15) %, storage cost (Racks ,
Almirah, building) man power cost, deteriotion cost pilferage cost, obsolescence, insurance cost;
stock out cost; ordering cost; (staff, building, furniture, stationery). If stock increases carrying
cost automatically will increase. Similarly if ordering cost is increased, carrying cost
automatically will increase. Similarly if ordering cost is increased, carrying cost will increase.

Carrying cost and order cost is the economy order supply.

Whereas:

Economy order quantity = 2AS/I

A= Annual consumption

S= ordering cost

I= Inventory cost (carrying cost)

Optimum review period is the number of orders that should be given.

Optimum review period = 288X cost/order/inventory cost X carrying cost

To balance these costs is the aim of material management.

Material Specification

Character of the material required need to specify. The following are the advantages of material
specification:

I. Classification of material: it classifies the material in a precise and definite way, the exact
character of the articles required, their quality or grade, the nature of their constructing
and all other needed special attributes.
II. Facilitation of work: it facilitates the work of the service in calling for its supply of
articles, since, with the specification once made , reference thereafter can be made to
them by general title or number, thus avoiding the necessity of setting forth time in detail
the nature of article required.
III. Lessen the purchase procedure: it lessens greatly the work involved in the purchase of the
article and also make it possible accurately to check deliveries for the purpose of securing
assurance that the articles purchased correspond in character and quality to the onces
ordered.

Value Analysis

It is an organized approach to identified non essential cost is incurred. This process is essential
for cost reduction and is also related to standardization. It examines the facts of function and cost
of item used in order to determine whether the cost can be reduced without compromising on
quality.

PROCUREMENT

INTODUCTION

After determining supply requirement, the next step in the material management is securing or
procuring the needed articles. State governments have laid down detailed rules and regulations
regarding procurements of materials. Many states have medical stores which are centralized
agencies for procurement of drugs and supplies .State governments also use a system of fixed
rate contract or running rate contract. It has various operations like:

 Selecting the vendors

 Arranging upon the purchase price.
 Time and place of delivery.
 Verifying deliveries.
 Settlement and payment of vendor’s remuneration claim.

The process of buying goods or services from an external provider. It covers everything from
determining the need for new goods to buying, delivering and storing them.

DEFINITONS

According to Jogindra Vati

“Procurement is defined as the process of obtaining goods and services from preparation and
processing of a requisition through to receipt and approval of the invoice for payment.”

According to Defense Acquisition University

“It is the act of buying goods and services for the government”.
OBJECTIVES OF PROCUREMENT SYSTEM

1. Acquire needed supplies as in expensively as possible.

2. Obtain high-quality supplies.
3. Assure prompt and dependable delivery.
4. Distribute the procurement workload to avoid period of idleness and overwork.
5. Optimize inventory management through scientific procurement procedures.

PROCUREMENT PROCESS

Management in any company must understand the art of obtaining products and services.The
procurement cycle follows specific steps for identifying a requirement or need of the company
through the final step of the award of the product or contract.Following a proven step-by-step
technique will help management successfully achieve its goals.

Step 1: Need recognition

Step 2: Specific need

Step 3: Source options

Step 4: Price and terms

Step 5: Purchase order

Step 6: Delivery

Step 7: Expediting
 Step 8: Receipt and inspection of purchases

Step 9: Invoice approval and payment

Step 10: Record maintenance

Step 1: Need Recognition

The business must know, when it needs a new product, whether from internal or external
sources. The product may be one that needs to be reordered or it may be a new item for the
company.

Step 2: Specific Need

The right product is critical for the company. Some industries have standards to help and to
determine specifications. Past numbers help to identify these for some businesses. Other
industries have no point of reference. The company may have ordered the product in the past. If
not, then the business must specify the necessary product by using identifiers such as color or
weight.

Step 3: Source Options

The business needs to determine where to obtain the product. The company might have an
approved vendor list. If not, the business will need to search for a supplier using Pos or research
a variety of other sources such as magazines, internet or sales representatives. The company will
qualify the suppliers to determine the best product for the business.

Step 4: Price and Terms

The business will investigate all relevant information to determine the best price and terms for
the product. This will depend on the company if it needs commodities or specialized materials.
Usually the business will look into three suppliers before it makes a final decision.

Step 5: Purchase Order

The purchase order is used to buy materials between a buyer and seller. It specifically defines the
price, specification, and terms and conditions of the product or service and any additional
obligations.

Step 6: Delivery
The purchase order must be delivered usually by fax, mail, personally, email or other electronic
means. Sometimes the specific delivery method is specified in the purchasing documents. The
recipient then acknowledges receipt of the PO.Both parties keep a copy of file.

Step 7: Expediting

Expediting of the PO addresses the timeliness of the service or materials delivered. It becomes
especially important if there are any delays. The issues most often noted include payments dates,
delivery times and work completion.

Step 8: Receipt and Inspection of Purchases

Once the sending company delivers the product, the recipient accepts or rejects the items.
Acceptance of the items obligates the company to pay for them.

Step 9: Invoice Approval and Payment

Three documents must match when an invoice requests payment is done, i.e.the invoice it, the
receiving document and the original PO.The agreements of these documents provide
confirmation from both the receiver and supplier. Any discrepancies must be resolved before the
recipient pays the bill.Usually; payment is made in the form of cash, check, bank transfers, credit
letters or other types of electronic transfers.

Step 10: Record Maintenance

In the case of audits, the company must maintain proper records. These include purchase records
to verify any tax information and Pos to confirm warranty information. Purchase records
reference and future purchases as well.

FLOW OF PROCUREMENT DECISION

The following steps are taken for taking decision for procurement of materials.

 Need assessment
 Finding the budget
 Prioritization of purchase of equipment , machinery etc
 Standards and specification development
 Placing of indent by the head of department
 Consideration of indent
 Choose procurement method
 Receipt of tenders
 Opening of tenders
 Evaluation of tenders
  Placement of orders
 Follow up of orders
 Receipt and inspection of material
 Invoice approval and payment

 Need Assessment: - Assess the need for having the equipment/item in the department.
 Finding the Budget: -There should be specific budget provision for purchase of materials.
However specific indents can be made without specific budget provision for the current year
with approval of Head of Institution.
 Prioritization of purchase of Equipment, Machinery, etc.:- Correctly assess the
requirement of equipment/material to be purchased including infrastructure requirement. A
committee can be formulated for this purpose. Depending on the cost of the
material/equipment, that can either be purchased by the department or sent indent to the
central store.
 Standards and Specification Development: - Get a detailed specification and standard of
product as per the requirement before placing indent.
 Placing of indent by the head of Department: - Place indent by specifying a detailed
description of equipment, specifications including whether the requirement is fresh or
additional or replacement, the estimated cost, its utility and approximate period of equipment
to become operational from the date of arrival.
 Consideration of Indent:- The indent along with the enclosures will be sent to the store
department which will verify its stock and render a no-stock certificate wherever applicable.
The indent is sent to purchase department which will check it for its correctness of details
and place it before relevant standing Purchase committee. After getting the approval by the
purchase committee, the indent item is considered for purchase.
 Choose Procurement Method: - There are various modes of procurement: open tender,
limited tender, negotiated procurement and single tender.
The Open tender method
This method is followed for all high cost items. The notice inviting tender should be short,
clearly worded. It should give a brief description of the item to be procured, the qualification
of suppliers, the date of receipt of tender, the date, time, venue of opening the tenders. This is
public bidding, resulting in low prices, published in newspapers. Term is usually of 4 weeks.
Quotations must be sent in the specific forms that are sold, before the time & date mentioned
in the tender form. In technical items, ‘two packets or two bins ‘system is followed. Offers
are given in two separate packets: technical bid and financial bid. Validity of tenders is
generally 90 days. Two % of the tender amount or as decided has to be paid along with all
quotations as earnest money. In case of default 1/5 is withheld.
The limited restricted tender method
The tenders are invited from limited suppliers. The lead-time is reduced in this type of
tenders.
 Negotiated tender
Procurement by negotiation is a battle by both the buyer and the suppliers. It is an art of
arriving at common understanding through bargaining on the essential points for the contract
such as delivery, specification, price and payment terms, etc keeping in mind ethics and
objectives of negotiation. It should not be at the cost of quality. Maintain relation and try to
have win-win situation. Follow principle of negotiation as given below:-
 Put yourself in supplier shoes.
 Negotiation is essentially an artful communication.
 Let the supplier do most of the talking.
 Let the supplier save face.
 Satisfy the supplier needs.
 Talk to the proper person.
 Build up confidence.
 Always ask for discount.
 Take one point at a time.
 Negotiate bulk price.

Direct procurement

It is practical when purchase is done from single supplier at his quoted price. It is reserved for
proprietary materials, or low priced, small quantity and emergency purchases.

Rate contract

Firms are asked to supply stores at specified rates during the period covered by the contract.

Spot Purchase

It is done by a committee, which includes an officer from stores, accounts and purchasing
departments.

Risk Purchase

If supplier fails, the item is purchased from other agencies & the difference in cost is recovered
from the first supplier.

Receipt of tenders

Tenders are received either by post or through courier or by hand. The tenders should be dropped
in the tender box. If received open within due date, may be accepted at the risk of bidder. The
tenders received late, shall be marked as late or delayed. These tenders are filed and not opened
at all and be returned to bidders in the original envelop without opening.
Opening of tenders

The tenders should be opened by the committee. A separate notice may be given to bidders
before opening the bid. The officer opening the tender will read out particulars of the tender.

Evaluation of tenders

Evaluation of tenders is made in a scientific and logical manner. A neat comparative statement of
the tenders opened shall be made. It should contain details like rate, delivery schedule,
make,taxes etc.The conditional tenders should not be accepted. Negotiations can be done only
with the lowest bidder wherever necessary.A separate evaluation can be made for technical and
financial bids.The tenders are also be called for discussion.The idea is to arrive at a threshold
level of acceptability above which all the bidders shall be treated on par.The bidders who
technically acceptable shall be allowed to withdraw their price bids and send again a revised bid
in a sealed envelope or to adhere to original price bid sent.These price bids are opened,evaluated
and the contract awarded to the lowest evaluated bidder.

Placement of Orders

Once the purchase proposal is approved, the purchase officer prepares the purchase orders and
arranges to send it to the vendor. The purchase order shall contain the make and model of the
item with description,rate,quantity ordered, amount and terms and conditions.

Follow up of Orders

Once the order has been placed, be in touch with supplier.

Receipt and Inspection of Material

The material received at the entry point is checked thoroughly for quantity, quality by the
indenter. The materials received are also verified against the supplier’s packing slip and purchase
order. Record in the receiving report all the discrepancies between the materials, incomplete
supply etc.The report should carry the signature of the receiver and the date. Enter the serial
number of the item in the receiving report.

Invoice Approval and Payment

After the approval of invoice the payment is done to supplier by the finance department of the
institute.
Procurement process for consumable items

 The consumable or non stock materials are ordered by description.

 Consumable materials are entered without a material number, but rather a short text
description as the main identifiable characteristic.
 The purchase requisition is subject to approval,bassed on predefined parameters,prior to
being converted to a purchase order and issued to a vendor
 There is no inventory in the system.

Process Flow for Consumable Items

It include the following steps

 Request, approval, and purchasing of non-stock materials and services.

 Approval of purchase requisitions for descriptive, on-stock materials and services.
 Goods receipt of non-stock materials
 Request, approval and Purchase Order creation for services.
 Service entry sheet creation and approval.
 Invoice processing
 Facility period-end reporting

PURCHASING

MEANING

Purchasing means to buy various materials by paying money or its equivalent from
suppliers/vendors. Purchasing is one of the important functions of administration. Purchasing
process is made up of several steps or activities. Each step takes information, processes it and
turns into output to feed into the next step.

The purchasing process may vary from organization to organization, but the major fundamental
remain the same. In this process, the materials are brought and acquired using some standardized
specification. The act of purchasing is a fundamental function in the supply cycle. Purchasing is
a store responsibility for the needed materials of the right time and at the right place in the most
economical manner. This also includes selection of sources of supply, finalization of terms of
purchase, placement of purchase order, follow up, maintenance of smooth relation with
suppliers, approval of payment of suppliers, evaluating and rating suppliers.

The inventory management system provides trigger points for material purchases. Inaccuracies in
the inventory quantities may result in ordering delays or over ordering materials for production.
The purchasing department orders materials when the quantity reaches a specific amount.
Vendor lead times are a factor in determining the quantity necessary to trigger a purchase.
KEY STEPS OF PURCHASING

The key steps of purchasing are request to purchase/requisition, supplier selection, purchase
order, fulfillment, order receipt, supplier invoice/payment:

1. Purchase/requisition: Identify the need; what to buy and how much of it and when it is
needed to delivery.
2. Supplier selection: Identify supplier, price and lead time.
3. Purchase order: Raise purchase order and send to supplier. The purchase officer identifies
the items to be procured, the quantity required and price being paid.
4. Fulfillment: Supplier procures the items and sends to buyer.
5. Order Receipt: Items are checked for quality and quantity as per the order placed.
6. Supplier invoice/payment: The supplier sends the invoice which is processed by the
finance department before supplier is paid.

PRINCIPLE OF PURCHASING

1] Purchasing is based on need assessment

2]The ultimate aim of purchasing is right quality, right quantity, right price, right source and at
right time to the right place with right mode of transportation, right attitude, with right
techniques such as value analysis, material intelligence, purchase research, SWOT analysis,
purchase budget, lead time analysis etc.

3] Centralize the purchase system.

4] Back up of good systems management.

POINTS TO REMEMBER WHILE PURCHASING

 Proper specification
 Invite quotations from reputed suppliers
 Comparison of offers based on basic price, freight & insurance, taxes and levies
 Quantity & payment discounts
 Payment terms
 Delivery period, guarantee
 Vendor reputation
 Short listing for better negotiation terms
 Seek order acknowledgement

POINTS TO REMEMBER WHILE PURCHASING EQUIPMENT

 Latest technology
 Availability of maintenance & repair facility, with minimum down time.
  Post warranty repair at reasonable, cost.
 Upgradeability
 Reputed manufacturer
 Availability of consumables
 Low operating costs
 Installation
 Proper installation as per guidelines.

Receipt and Inspection

It is done when the stores orders are received in the store. Material inspection is necessary to
ensure quality of materials received. Whenever an item is delivered the same is verified in
the presence of the store incharge, representative of the supplier and representative from the
purchase committee of the hospital. Verification is done to ensure that the item is as per the
order placed, etc.
Receipt of supply in
specific locations

Verification of supply against

supplies invoice

Is verification
cleared? Yes/No

Supplier invoice is not Suppliers invoice is forwaeded to the

acknowledged security department for clearance

Items is returned Store incharge approve the invoice

immediately and forward it for recording

Actions are taken as per the terms

of the MOU
 Transaction is recorded in the goods
inward register

Invoice is forwarded to account for

payment and the same is recorded in the
bill dispatch counter

INVENTORY

INTRODUCTION

Inventory control in hospitals is more than just procurement and usage.The proper controls and
processes can save millions in healthcare costs by enabling a hospital to efficiently order and
store just the right amount of supplies needed for patient cases while tracking cost,tier pricing
and patient charges associated with supplies.

MEANING

Inventory is defined as the blocked working capital of an organization in the form of materials,
as this is the blocked working capital of organization, ideally it should be zero. But we are
maintaining Inventory.

It is the stock to ensure uninterrupted supplies, the idle resources which have future economic
value and cushion between estimated and actual demand of materials.

Inventory is “anything that is brought and held prior to use”.

Inventory means all the materials, parts, suppliers, expenses, and in process or finished products
recorded on registers/books by an organization and kept in its stocks for some period of time.

IMPORTANCE OF MAINTAINING INVENTORY

 It provides and maintains good customer’s service.

 Enables smooth flow of materials through production process.
 Provides protection against the uncertainty of demand and supply.
 Ensures a reasonable utilization of equipment and effort.
 Possibility of discount, if purchased in bulk.
 INVENTORY CONTROL

MEANING

Inventory control is the process by which inventory is measured and regulated according to
predetermined norms such as economic lot size, for order, safety stock, minimum level,
maximum level, maximum level, order level etc.

Inventory control means stocking adequate number and kind of store, so that the materials are
available whenever required and wherever required. Scientific inventory control results in
optimal balance. It is a scientific system which indicates what to order, when to order, how much
to order, how much to stock.

Inventory control means keeping a track of inventory, so that the materials are available when
needed.

Inventory control measures and regulates to predetermine the size for order, safety stock,
minimum level of order, and maximum level of order.

Inventory control is concerned with minimizing the total cost of inventory.

INVENTORY SYSTEM

A set of policies and controls that monitors levels of inventory and determines way levels should
be maintained, when stocks will be replenished and how large orders should be.

INVENTORY MANAGEMENT SYSTEM

Inventory management system provide information to efficiently manage the flow of materials,
effectively utilize people and equipment, coordinate internal activities and communicate with
coustomers.Inventory Management does not make decisions or manage operation; they provide
the information to managers who make more accurate and timely decisions to manage their
operations.

OBJECTIVES OF INVENTORY CONTROL

 To supply the materials in time.

 To give maximum client’s service by meeting their requirement timely, effectivel,
efficiently, smoothly and satisfactorily.
 To reduce or minimize investment in inventories.
 To minimize idle time by avoiding stock out and shortages.
 To avoid shortage of stock.
 To minimize the losses due to deterioration, obsolescence, damage of stock.
 To meet unforeseen future demand.
 To average out demand fluctuations
  To balance various inventory costs such as carrying cost, order cost, etc.

IMPORTANCE OF INVENTORY CONTROL

 To provide maximum supply service, consistent with maximum efficiency &

optimum investment.
 To provide cushion between forecasted & actual demand for a material.
 To have optimum level of inventory: not too large, not small.
 To estimate duplication in ordering.
 To take care of fluctuations in demand and lead time.
 To take care of increasing price tendency of commodities or relate in bulk buying.
 To increase transportation efficiently.
 To minimize the inventory costs.
 To minimize waiting time.
 To provide a check against the loss of material.
 To better utilization of stocks available
 To facilitate cost accounting activities.
 To locate and disposes inactive and obsolete store items.

TYPES OF INVENTORY COSTS

The following are inventory costs:

ORDERING COST

It is the cost of ordering the item and securing its supply. It includes the expenses for raising the
indents, purchase requisition by user department till the execution of order, and receipt and
inspection of item, the salaries and wages of store personnel employed, the rent of store
,stationery and other consumables used by the store ,etc.

INVENTORY CARRYING (holding) COST

This is the cost incurred for holding the volume of inventory and measured as a percentage unit
cost of an item. It includes capital cost, obsolescence cost, deterioration cost, tax on inventory,
insurance cost, storage and handling cost, the salaries and wages of store personnel employed,
the rent of store, stationery and other consumables used by the store, etc.

OUT OF STOCK/SHORTAGE COST

It is loss which occurs or which may occur due to non availability of materials. It includes break
down or delay carrying out the work, back ordering, loss of good will, etc.

OTHER COSTS

Other costs include capacity cost: overtime payments, layoffs and idle time; set up cost and over
stocking costs.

HOW TO ACHIEVE CONTROL

Inventory control can be achieved through

1. Purchasing items at economic price at a proper time and in sufficient quantity.

2. Provision of suitable and secured location with sufficient space.

3. Inventory identification system.

4. Up to date and accurate record keeping.

MAJOR ACTIVITIES OF INVENTORY CONTROL

 Planning
 Procurement
 Receiving and inspection
 Storing and issuing the inventories
 Recording the receipt and issuing of inventories
 Physical verification
 Follow up functions
 Material standardization and substitution

FACTORS IN INVENTORY CONTROL DECISION MAKING PROCESS

There are three main factors in inventory control decision making process;

1. The cost of holding the stock

2. The cost of placing an order

3. The cost of shortage i.e., what is lost if the stock is insufficient to meet the demand.

TECHNIQUES OF INVENTORY CONTROL

Various techniques are available to decided in inventory control:

1. Items quality
2. Quantity
 3. Price
4. Source
5. Delivery
6. Methods
7. People

INVENTORIES CLASSIFICATION

The following analysis and classification techniques are available for inventory control:-

Selective controls are:

1. ABC Analysis(always Better , Control)

2. VED Analysis(vital , Essential, Describle)
3. HML Analysis( High , Medium , Low)
4. XYZ Analysis
5. FSN Analysis(Fast , slow moving and non moving)
6. SDE Analysis( Scarce , Difficult , Easy)
7. GOLF Analysis
8. SOS Analysis

ABC Analysis

ABC analysis helps us in segregating the items from one another and tells us how much valued
the items are and controlling it to what extent is in the best interest of the organization.

ABC classification is a system categorization of items/inventory in three classes with each class
having a different management control associated and is based on cost factor or on their annual
consumption value.

ABC analysis popularly known as “Always Better Control” or alphabetical approach,is a very
useful approach to material management based on Pareto’s principle of “Vital few and trivial
many “based on the capital investment of the item and on cost criteria or in simple term it is
based on annual consumption value of said item.( Annual Consumption value=Quantity
consumed X Cost of the item).

“ABC analysis is the process of classifying items by using values as measure”.

Pareto’s Theory
According to Pareto’s theory 10% items consume about 70% of budget(Group A).The next
20%consume 20% of financial resources (Group B) and remaining 70% items account for just
10% of budget (Group C).

It is also known as Selective Inventory Control(SIM),since this method is a means of

categorizing inventory items according to the potential amount to be controlled.

Based on ABC analysis average pattern of percentage of items and percentage of their respective
values may work out approximately as follows:-

‘A ‘Items

These are small in number, but consume large amount of resources and are managed by top
management. These items must have tight control, rigid estimate of requirenments,strict & closer
watch and require low safety stocks. These items consume major portions of funds.

‘B’ Items

There have moderate control. These items are purchased based on rigid requirements and
reasonably has strict watch and control. Safety stocks are maintained moderately. For these items
the management is done by middle level managers.

‘C’ Items

These items are larger in number, but consume lesser amount of resources and must have
ordinary control measures. The purchase is based on usage estimates but require high safety
stocks.

PRINCIPLES OF ABC ANALYSIS

 This analysis is depends on its annual consumption values other than unit cost.
 The limits for ABC categorization are not uniform but depend on the size of organization,
its inventory as well as number of items controlled.
 The analysis does not depend on the importance of items rather based on material price,
material credibility, and available status of material, material physical characteristic and
frequency of material usage.
 It also depends on degree and characteristics of controls to be exercised by the
management: the necessity of control, the necessity of which material to be placed under
control and the particular characteristics of material.

HOW TO CARRY OUT ACTUAL ANALYSIS?

Based on the annual usage, consumption value all the items in the store are tabulated. List down
each item and its consumption value separately and then rearrange the list in descending order
beginning with the items of highest value and ending with the item of lowest value.

PROCEDURAL STEPS

 Collect all the data of inventory and prepare a list of all the items of stores indicating the
unit price of each item and annual consumption.
 Calculate their annual usage in Rs. (Annual consumption in units x unit costs in
RS=annual consumption value).For stores, it will be Quantity issued x unit rate of each
item.
 Arrange all these items in the descending order of total value of annual consumption of
each item in rupees.
 Mention the item numbers against their annual consumption.
 Calculate cumulative annual consumption value.
 Calculate cumulative annual consumption value percentage.
 Categorize items as per the consumption value(cost) percentage.
Those items which together form 70% of the total annual usage value or select the top
10% of all the items have the highest rupee percentage may be categorized as
‘A’items.These are item number 7 & 5.
Items that fall under 20% of the total annual-usage value or select the next 20% of all the
items

ADVANTAGES

 Provides a mechanism for identifying items that will have a significant impact on overall
inventory cost
 It helps in economizing ones effort to achieve greater results.
 It helps to segregating those items which ought to be given priority to maximize results.
 The usefulness of this management tool is that, by focusing on the ‗A‘category items,
70% results can be achieved with just 5% effort.
 Once A category items are identified, it is possible to devote more attention to these
items to minimize purchase costs and exercise control over consumption in a more
effective manner.
 Proper use of valuable time of store personnel.
 Simple no confusing formulas are involved

LIMITATION

 When number of items runs into several thousands, it is not convenient to compute and
carry out this analysis.
  More chances of deterioration in storage exist since class c items are purchased in bulk
and inventory on these piles up.
 Loose control on C may result in shortages.
 ABC focuses on money value and not on functional importance of such items, resulting
in shortages of critical items.
 ABC does not take into account variation of prices of items as time goes.
 ABC ignores market conditions, market availability, competitions, seasonal variations
etc.

VED analysis

In VED Method (vital, essential and desirable), each stock item is classified on either
vital, essential or desirable based on how critical the item is for providing health services. The
vital items are stocked in abundance; essential items are stocked in medium amounts and
desirable items we stocked in small amounts. Vital and essential items are always in stock which
means a minimum disruption in the services offered to the people.

THE VED METHOD OF INVENTORY CONTROL

In VED analysis, the inventory is classified as per the functional importance under the
following three categories:

 Vital (V)
 Essential (E)
 Desirable (D)

Vital:

Items without which treatment comes to standstill: i.e. non- availability cannot be
tolerated. The vital items are stocked in abundance, essential items and very strict control.

Essential:

Items whose non availability can be tolerated for 2-3 days, because similar or alternative
items are available. Essential items are stocked in medium amounts; purchase is based on rigid
requirements and reasonably strict watch.

Desirable:

Items whose non availability can be tolerated for a long period. Desirable items are
stocked in small amounts and purchase is based on usage estimate.
 Although the proportion of vital, essential and desirable items varies from hospital to
hospital depending on the type and quantity of workload, on an average vital items are 10%,
essential items are 40% and desirable items make 50% of total items available.

PURPOSES

 In a manufacturing organization, there are number of items which are very vital or
critical in production.
 Their availability must be ensured at all times for smooth production, so need to
be strictly controlled.
 Essential items follow vital items in their hierarchy of importance.
 Desirable items are least importance in terms of functional considerations, which
are loosely controlled at the lower level.

MATRIX OF ABC/ VED ANALYSIS

There can be combination of these two categories like a matrix combining ABC and VED
categories. This matrix is more relevant in the hospitals. The AV category becomes the most
important for inventory control because the items are very much cost consuming being a
category and also vital for uses. These items can be controlled by the top-level management. The
CD category items are not very costly and at same time of desirable category. These items can be
controlled at the lower level.

V E D

A AV AE AD

B BV BE BD

C CV CE CD

Advantages of VED analysis

1. It is useful for monitoring and conrol of stores and spares inventory by classifying
them into 3 categories viz, vital, essential and desirable.
2. Determine the criticality of an item and its effect on production and others
services.
3. It is used for classification of spare parts/items.
4. It is useful in controlling and maintaining the stock of various types.
 FSN analysis

 ‘Fast moving, slow moving, and Non-moving’

 Based on the consumption pattern of the items

Method

 Date of receipt or last date of issue whichever is later, is taken to determine the number of
months which has lapsed since the last transaction

Analysis

 For analysis, the issuing of items in past two or three years are considered
 No issuing of item during that period- labeled ‘N’

Item

 10-15 issues in that period-“ S” item

 Exceeding such limits of numbers of issues during that period- ‘F’ Item

ADVANTAGES

 Useful in controlling obsolescence

 Facilitates timely control
 Helps to avoid investment in non-moving or slow items

SDE ANALYSIS

Scarce, difficult, easy to obtain

S’- scarce items
 Which are difficult to obtain
 Generally imported
 Which are in short supply
 Managed by top level management

‘D’ difficult items

 Which are available indigenously but are difficult items to procure.

E’ easy items

 Easy to acquire
 Readily available in the local markets
ADVANTAGES
 Useful in the context of scarcity of supply.
 Vital to the lead time analysis.
 To determine the method of buying and to fix up the responsibilities of buyers.

HML analysis

High, medium, low

 The basic criterion of HML classification is the unit value of the item.
 Value is the basis of this analysis and not the annual consumption value.
 Unit value is the basis of this analysis and not the annual consumption value.
 H- unit value> 1000 (sanctioned by higher officials)
 M- unit value 100 to 1000
 L- unit value< 100

Advantages

 Used to keep control over consumption at departmental level.

 For deciding the frequency of physical verification.

XYZ Analysis

Criteria

 XYZ classification is based on the value of the inventory stored.

 The X items are those whose inventory values are heigh, while Z items are those
whose inventory values are low. And Y items are those which have moderate
inventory stocks.

Advantages

 Identify those few items which account for large amount of money locked up in
the stock.
 Helps to take steps for liquidation/reduction.

GOLF analysis

GOLF stands for Government, ordinary, local, Foreign.

 Criteria

GOLF analysis is carried out on the basis of source of material.

Method

A special procedure followed for procuring items, the ordinary procedure may not work
in respect of these items.

SOS ANALYSIS

‘S’ stands seasonal and OS stands for off seasonal items. The analysis identifies items
into:

 Seasonal but available only for a limited period

 Seasonal but available throughout the year.
 Off seasonal items whose quantity is determined on different consideration.

Strategies adopted for SOS items

Types of item strategy

Seasonal item which are Procure and stock for meeting the
available only for a limited needs of the full year
period

Seasonal item available The quantity required should be

throughout the year compared with the cost savings on
account of lower prices, if purchased
during season.

Off seasonal items Quantity is determined on different

consideration

INVENTORY ACCOUNTING SYSTEM

Organization may use either the perpetual system or the periodic system to record the
transaction involving inventory or account for inventory. So Inventory records are kept using
either one of these systems.

Perpetual Inventory System

Meaning

Perpetual means continuous. Perpetual inventory system implies continuous maintenance of

stock records and in its broad sense it covers both continuous stock taking as well as up to date
recording of stores books. Perpetual inventory system may be defined as a method of recording
stores balances after every receipt and issue to facilitate regular checking and to obviate closing
down for stock taking. This is a system where an organization keeps continuous, moment-to-
moment records of the number, value and type of inventories that it has.

Features

 This system updates inventory accounts after each purchase.

 Inventory subsidiary ledger is updated after each transaction.
 Inventory quantities are updated continuously.

Parts:-This system comprise of three parts: Bin card, store ledger, and continues stock taking.

Bin Card: - Bin card is a quantitative record of receipts, issues and closing balances of items of
stores.

Store Ledgers:-Store ledgers are very useful inventory control system. It consists of leaf card for
easy removal and insertion and useful in maintaining all costly items.

Continues Stock Taking: - In this method limited items are verified. The items are selected based
on their utility. Selected numbers of items are collected everyday and matched with the ledger
book and bin card.

Periodic Inventory System

Periodic means at certain points in time. A periodic inventory system implies when the quantity
of inventory on hand is determined on periodically such as once a month, quarterly or at the
beginning and end of each year, and does not have an accurate record of the inventories in
between these points. This system does not keep continuous, moment-to-moment records of
inventories.

Features

 All acquisitions of inventory during the accounting period are recorded by debits to a
purchases account.
 Inventory subsidiary ledger is not updated after each purchase of inventory.
 Inventory quantities are not updated continuously rather updated on a periodic basis.