INVENTORY CONTROL

INVENTORY MANAGEMENT: Inventory management is defined as the scientific method

of finding out how much stock should be maintained in order to meet the production demands
and be able to provide right type of material at right time in right quantities at competitive
prices.
Inventory is actually money which is available in the shape of material , equipment, storage
space , work time etc.
Drug store management is based on principles of inventory control. mismanagement of stores
and non-applicability of Scientific and Modern techniques has been identified as the root cause
of material storage in majority of hospitals.
Objective of Inventory Control
(i) To supply drug in time.
(ii) To reduce investment in inventories and made effective use of capital investment.
(iii) Efforts are made to procure goods at minimum price without bargaining the quality.
(iv) To avoid stock out and shortage.
(v) Wastage are avoided
Techniques of Inventory control / Methods Used for Analysis of Drug Expenditure
(i) ABC analysis
(ii) VED analysis
(iii) EOQ
(iv) Lead time
(v) Buffer stock
(i) ABC analysis
ABC analysis is an inventory categorization technique. It is a basic tool with a selective
approach for concentration upon the items. As ABC analysis the items are divided into three
categories—
"A items" with very tight control and accurate records,
"B items" with less tightly controlled and good records, and
"C items" with the simplest controls possible and minimal records.
The ABC analysis provides a mechanism for identifying items that will have a significant
impact on overall inventory cost, while also providing a mechanism for identifying different
categories of stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the
inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
'A' items are very important for an organization. Because of the high value of these 'A' items,
frequent value analysis is required. In addition to that, an organization needs to choose an
appropriate order pattern (e.g. 'just-in-time') to avoid excess capacity. 'B' items are important,
but of course less important than 'A' items and more important than 'C' items. Therefore, 'B'
items are intergroup items. 'C' items are marginally important.
There are no fixed thresholds for each class, and different proportions can be applied based on
objectives and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will
typically account for a large proportion of the overall value, but a small percentage of the
number of items.
Examples of ABC class are
'A' items – 20% of the items accounts for 70% of the annual consumption value of the items
'B' items – 30% of the items accounts for 25% of the annual consumption value of the items
'C' items – 50% of the items accounts for 5% of the annual consumption value of the items
Another recommended breakdown of ABC classes:
"A" approximately 10% of items or 66.6% of value
"B" approximately 20% of items or 23.3% of value
"C" approximately 70% of items or 10.1% of value
(ii) VED analysis is an inventory management technique that classifies inventory based on
its functional importance. It categorizes stock under three heads based on its importance and
necessity for an organization for production or any of its other activities. VED analysis stands
for Vital, Essential, and Desirable.
V- Vital Category
As the name suggests, the category “Vital” includes inventory, which is necessary for
production or any other process in an organization. The shortage of items under this category
can severely hamper or disrupt the proper functioning of operations. Hence, continuous
checking, evaluation, and replenishment happen for such stocks. If any of such inventories are
unavailable, the entire production chain may stop. Also, a missing essential component may be
of need at the time of a breakdown. Therefore, order for such inventory should be before-hand.
Proper checks should be put in place by the management to ensure the continuous availability
of items under the “vital” category.
E- Essential category
The essential category includes inventory, which is next to being vital. These, too, are very
important for any organization because they may lead to a stoppage of production or hamper
some other process. But the loss due to their unavailability may be temporary, or it might be
possible to repair the stock item or part.The management should ensure optimum availability
and maintenance of inventory under the “Essential” category too. The unavailability of
inventory under this category should not cause any stoppage or delays.
D- Desirable Category
The desirable category of inventory is the least important among the three, and their
unavailability may result in minor stoppages in production or other processes. Moreover, the
easy replenishment of such shortages is possible in a short duration of time.
(iii)EOQ
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to
minimize inventory costs such as holding costs, shortage costs, and order costs. The formula
assumes that demand, ordering, and holding costs all remain constant.Formula and Calculation
of Economic Order Quantity (EOQ)

The goal of the EOQ formula is to identify the optimal number of product units to order. If
achieved, a company can minimize its costs for buying, delivery, and storing units. The EOQ
formula can be modified to determine different production levels or order intervals, and
corporations with large supply chains and high variable costs use an algorithm in their
computer software to determine EOQ.
EOQ is an important cash flow tool. The formula can help a company control the amount of
cash tied up in the inventory balance. For many companies, inventory is its largest asset other
than its human resources, and these businesses must carry sufficient inventory to meet the needs
of customers. If EOQ can help minimize the level of inventory, the cash savings can be used
for some other business purpose or investment.

(iv) Lead time

The lead time is the sum of the supply delay and the reordering delay. The lead time is the
applicable duration to calculate the lead demand, the safety stock or the reorder point through
a direct quantile forecast. The longer the lead time, the higher the total inventory level or the
larger is the safety stock, resulting in excess of investment in inventories. As far as possible
efforts should be made to decrease the lead time for effective inventory control.
(V) Buffer stock
Buffer stock is used in emergency to meet the unforeseen demands . in other words it refers to
minimum quantity of a particular item which must be kept in the stores of all time. Buffer
stocks can be calculated using the following formula ;Buffer stocks= (Maximum consumption
rate / day average- consumption rate / day)X lead time
Buffer stocks needs following factors to be taken into consideration like;
(i) Lead time
(ii) Nature of item and rate of consumption
(iii) Availability of substitutes
(iv)Re-order level
(v) Stock out cost
Modern Computerization of Inventory Control
Presently national information centre (NIC) is working hard to prepare software which would
facilitate proper control of inventory through the implementation of accepted principles of
material management such as ABC analysis, "Last is the first out" etc. It would minimize the
chances of validity of drugs expiring while in storage by the transfer of stocks from the surplus
to deficit depots. Computerization will serve following purposes:
(i) Less investment
(ii) Less storage
(iii)Fast supply of drug
(iv) Control on Issue of Drugs
(v) Minimum wastage
(vi) Prompt payments
Reorder Level
The reorder level is the level of the stock of a particular item, held by the firm, when an order
is needed to be placed for avoiding the risk of being out of stock. It is based on the average
time taken by the supplier for replenishment, maximum usage of the item during the
replenishment time, and safety stock requirement. It is also known as reorder point. Reorder
level is the stock level of a particular item of inventory, at which a firm needs to place an order
for the fresh supply or replenishment of the item. It gives a signal regarding when to place a
new order for the fresh supply of an inventory item. The internal factors involved in reorder
level are maximum usage during the lead time, safety level, and replenishment period. Whereas
the external factor involved in reorder level is lead time taken by the supplier. The main risk
factor in reorder level is being out of stock and some other risk factors are disruption in
production and foregone sales.
The following formula is used for estimation of reorder level:
Reorder level = (Average daily usage rate x Average lead time in days) + Safety level