Colonel Zulfiquer Ahmed Amin

M Phil, MPH, PGD (Health Economics), MBBS

Armed Forces Medical Institute (AFMI)

 Definition:
Material Management is the coordinated function responsible to
plan for, acquire, store, move and control materials to provide
customer service in accordance with organizational goals.

'Materials Management' is a term used to connote “controlling

the kind, amount, location, movement and timing of various
commodities used in production by industrial enterprises”.
It includes the functions of procurement, materials handling and
storage, production and inventory control, packaging, transport and
associated information systems and their application throughout
the supply, manufacturing, service and distribution sectors."
 Introduction
Materials constitute 60 to 70 % of the expenses in any activity,
hence the efficient buying , utilization and re-buying to meet the
need or demand for achieving a desired output, at the optimum
cost and in the least time, with meeting or exceeding the
expectations of the customer or consumer needs proper material
management system in vogue.
Major portion of fixed cost of a hospital is its materials. Recurring
expenditure of a hospital includes:
-60%- On salary of employees
-30-35%- On materials
-5-7%- On non-material resources.
Thus, an effective material management can contribute in efficiency
of a hospital.
 Aim of Material Management
Right material,
in right quantities,
at right time,
at right price,
from right sources,
at a least cost.
 IMPORTANCE OF MATERIAL MANAGEMENT

1) Optimum materials acquisition.

2) Greater promise as a cost reducing device.
2) Result in improved production capacity of plants.
3) Saving of labour time.
4) Reduction in inventories and storage space.
5) Reduction in damage to materials.
6) Smooth flow of production.
7) Easier production control.
8) Better utilization of resources.
9) Effective issue and distribution.
10) Elimination of losses and pilferage.
Economy of Material Management
 Material management process

1. Demand forecasting and planning

2. Purchasing
3. Receipt inspection and stores
4. Inventory control
5. Issue and distribution
6. Disposal and condemnation
7. Minimizing losses and pilferage
Demand Forecasting and Planning
Methods of Forecasting Demand
 Naive Forecasting (Last Period Demand)

-Naïve forecasting assumes that demand in the next time

period will be the same as demand in the last time
period.
-For example, if a retailer sells 600 BP Machines in
February, the naïve forecast would be for demand of 600
BP Machines in March.
-This approach rules out all the types of fluctuation –
trends, seasonality, random variation and cycles.
 Arithmetic Average Method

• This method simply takes the average of all past demand in arriving
at forecast.
• The arithmetic average works well in a stable situation where the
level of demand does not change. It will not adequately respond to
changing trends in demand and neglects seasonal fluctuations.
 Moving Average Forecasting
- 3-Month Moving Average = (M1+M2+M3) / 3
- A three month moving average, for instance, takes the average
demand per month for the three preceding months and updates
the calculation each month.
- Instead of using the most recent period to forecast demand for the
next period, a moving average uses the average demand from a
series of preceding periods to forecast the next period’s demand.
- The moving average mitigates the effects of random variations.
- The moving average is a good technique when forecasting for
products that are in a trend and have relatively stable demand
patterns.
 Standardization of Demand
Standardization is grouping together items of
similar specification, use or application to enable
hospital to chose one out of the many similar
options.
It ensures:
- Non-duplication of inventory
- Variety reduction
- Economical purchase cost
- Efficient use of materials
Procurement
 Methods of Purchasing

2 methods of purchasing:
1. Centralized: All purchases are made centrally.
2. De-centralized: User departments purchase
according to their needs.
 Advantages of Centralized Purchasing

• Lower purchasing cost

• Quantity discounts
• Lower inventory cost
• Better management control
 Purchasing Procedure

• Drawing up specification
• Inviting quotations
• Preparing comparative statement
• Shortlisting
• Issuing purchase order
 Open tender (Inviting Quotations)
•Public bidding, resulting in low prices.
•Published in newspapers.
•Term - 4 weeks.
•Quotations must be sent in the specific forms that are sold,
before the time and date mentioned in the tender form.
•In technical items, ‘two packets or two bins’ system is
followed (Ideally). Offers are given in two separate packets.
- Technical bid
- Financial bid
Cont……
•First technical bid is opened & short listed.
•Then financial bid of selected companies are opened & lowest is
selected.
•Delayed tenders and late tenders are not accepted.
•Quotations are opened in presence of indenting department,
accounts and authorized persons of party.
•Validity of tenders: The period within which a bidder’s offer is
considered legally binding. After this period, the bidder is at liberty to
change their bid if the contract has not been signed. Generally 90
days.
 Some Terminologies
Earnest money
2 % of the tender amount or as decided has to be paid along with all
quotations. In case of default 1/5 is withheld
Restricted or limited tender
- From limited suppliers (about 10)
- Lead-time is reduced
- Better quality.
Negotiated procurement
- Buyer approaches selected potential suppliers and bargain directly.
- Used in long time supply contracts.
Direct procurement
- Purchased from single supplier, at his quoted price
- Prices may be high
- Reserved for 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 Contract
- In finance, a spot contract, spot transaction, or simply spot, is a
contract of buying or selling a commodity, security or currency for
immediate settlement (payment and delivery) on the spot date, which
is normally two business days after the trade date.
- 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 and the
difference in cost is recovered from the first supplier.
 Receipt and Inspection

Receipt of Shipments
Upon receipt of the goods at Central Receiving (CR), the unit will
make a visual inspection where possible to determine any damages
to the items. Where there is visual damage CR will notify first the
Purchasing Department, then the Purchasing Department will notify
both the Vendor and the requesting Department of the damages. At
the direction of the Purchasing Department, the damage to the
goods will not be accepted by CR. If there is no visible damage to the
goods, CR will then match the packing slip with their copy of the
purchase order, to determine whether the order is complete.
Inspection
All materials, equipment, supplies, and services are subject to
inspection and test. Items or services that do not meet specifications
may be rejected. Failure to reject upon receipt, however, does not
relieve the vendor of liability for latent or hidden defects
subsequently revealed when goods are put to use or tested. If latent
defects are found, the vendor is responsible for replacing the
defective goods within the delivery time originally stated in the
solicitation and is liable for any resulting expenses the institution
incurs.
Storage Method
 Storage

First-In, First-Out. (FIFO)

 Stores management takes care:

1. That the required material is never out of

stock;
2. That no material is available in (much) excess
than required;
3. To purchase materials on the principle of
economic order quantity so that the associated
costs can be minimized; and
4. To protect stores against damage, theft, etc.
 Location and Layout of Stores

Location:
1. Location of the stores should be carefully decided and planned so
as to ensure maximum efficiency.
2. The best location of stores is one that minimizes total handling
costs and other costs related to stores operation and at the same
time provides the needed protection for stored items and materials.
3. Store location depends upon the nature and value of the items to
be stored and the frequency with which the items are received and
issued.
4. In general, stores are located close to the points of use.
5. All departments should have easy access to the stores and
especially those which require heavy and bulky materials should
have stores located nearby.
6. In big industries having many departments, it becomes often
necessary to set up sub-stores conveniently situated to serve
different departments. This leads to the concept of decentralized
stores.
7. In decentralized stores system, each section of the industry (e.g.,
foundry, machine shop, forging, etc.) has separate store attached
with it; whereas in centralized stores system, the main store
located centrally fulfills the needs for each and every department.
 Layout

1. A good stores layout practice is one which usually brings the

point of origin, store-room and point of use in adjacent and proper
sequence for best flow of material.
2. Stores layout should be planned with the following objectives:
(i) To achieve minimum wastage of space.
(ii) To achieve maximum ease of operating.
What is 'Inventory'
Inventory is the raw materials, work-in-process
products and finished goods that are considered to be
the portion of a business's assets that are ready or will
be ready for sale.

INVENTORY CONTROL
Process of ensuring that appropriate amounts of stock
are maintained by a business, so as to be able to meet
customer demand without delay, while keeping the
costs associated with holding stock to a minimum.
 Functions of Inventory Control:
- It may be more economical to purchase an item on demand than to
maintain an inventory.
- At the same time , a certain minimum amount of each item must be
held to minimize the chances of total stock-out.
- Inventory control helps in maintaining an optimum level of the idle
resource at a least possible cost.
- To provide maximum supply service, consistent with maximum
efficiency and optimum investment.
- To provide cushion between forecasted and actual demand for a
material.
 Control of Inventories

Stock control, otherwise known as inventory control, is the coordination

and supervision of the supply, storage, distribution, and recording of
materials to maintain quantities adequate for current needs without
excessive oversupply or loss. The goal of inventory control is to maximize
profits with minimum inventory investment, without impacting customer
satisfaction levels.

• ABC Analysis
• VED Analysis
• SDE Analysis
• HML Analysis
• FSN Analysis
• Economic Order Quantity (EOQ)
 ABC (Always Better Control) Analysis
-This is based on cost criteria.
-It helps to exercise selective control when confronted with large
number of items
-It rationalizes the number of orders, number of items and reduce the
inventory.
Classifi % of % of Controls
cation items value
A 10 70 High level, low safety stocks, frequent physical verification,
minimum Economic Order Quantity (EOQ), close schedule
control and review.
B 20 20 Control not as tight as “A”, but more than for “C”.

C 70 10 Inexpensive items purchased in large quantities, at lesser

interval, minimize clerical effort to control, large safety stock
Example of ABC Analysis
'Just In Time - JIT'
Just-in-time (JIT) is an inventory strategy companies employ to increase
efficiency and decrease waste by receiving good,s only as they are needed
in the production process, thereby reducing inventory costs. This method
requires producers to forecast demand accurately.
This inventory supply system represents a shift away from the older ‘just-in-
case’ strategy, in which producers carried large inventories in case higher
demand had to be met.
Lean Stock (Inventory) Management
Distributors make money by selling their inventory to their customers but
for many the inventory is their largest investment that cannot be used until
it is sold. They can have considerable capital tied up the inventory which is
costing them in bank charges, factory space, heat, lighting, handling and
recording costs, and the product becoming obsolete. The ideal goal for a
company should be to have an inventory as close to zero as possible.
 VED analysis
Based on critical value and shortage cost of an item.
Vital:- Those items , the absence or shortage of which, even for a
short period can seriously hamper the work of the hospital
Essential:- Those items , the absence or shortage of which
cannot be tolerated for more than a day or so.
Desirable:- Those items , which are definitely needed, but the work
can continue even without them foe a substantial period of time.

Obviously “V” items will require sufficient safety stock than the
other two.
ABC and VED Classification Matrix
Terminologies in Inventory Control
 Inventory Control Systems

An inventory system controls the level of inventory by determining

how much to order (the level of replenishment), and when to order.
There are two basic types of inventory systems:
- a continuous (or fixed-order-quantity) system and
- a periodic (or fixed-time-period) system.
In a continuous system, an order is placed for the same constant
amount whenever the inventory on hand decreases to a certain
level, whereas in a periodic system, an order is placed for a variable
amount after specific regular intervals.
Continuous Inventory Systems
In a continuous inventory system (also referred to as a perpetual
system and a fixed-order-quantity system), a continual record of the
inventory level for every item is maintained. Whenever the
inventory on hand decreases to a predetermined level, referred to as
the reorder point, a new order is placed to replenish the stock of
inventory. The order that is placed is for a fixed amount that
minimizes the total inventory costs. This amount, called the
economic order quantity (EOQ), or Economic Production Quantity
(EPQ).
Periodic Inventory Systems
In a periodic inventory system (also referred to as a fixed-time-
period system or a periodic review system), the inventory on hand is
counted at specific time intervals; for example, every week or at the
end of each month. After the inventory in stock is determined, an
order is placed for an amount that will bring inventory back up to a
desired level. The disadvantage is less direct control. Such a system
also requires that a new order quantity be determined each time a
periodic order is made.
Economic order quantity (EOQ) is the order quantity of inventory that
minimizes the total cost of inventory management.

Inventory costs depends on Ordering costs and

Holding costs
• Ordering cost:
– Salaries and wages of involved persons
– Postal, telex, telephone and other similar bills
– Advertisements
– Stationary
– Entertaining the vendors/suppliers
– Travel of store personnel
• Holding Cost (Inventory carrying cost):
– Cost of storage
– Salary and wages of store personnel
– Insurance
– Stationary, forms, paperwork,
– Loss of interest money deadlocked in inventory
– Deterioration and obsolescence
– Losses due to pilferage
 2CR
Q
H
R= Annual demand in units
P= Purchase cost of an item
C= Ordering cost per order
H= Holding cost per unit per year
Q= Lot size or order quantity in units
F = Holding Factor
 Example:
United Hospital purchases 1,600 pairs (R) of surgical gloves each
year at a unit cost (P) of Tk. 15.00. the order cost (C) is Tk. 100.00
per order, and the holding cost (H) per unit per year is computed at
Tk. 8.00. The EOQ (Q) will be:

Q
2CR = 2  100  1600 = 200 units
H 8
R 1600
 The number of orders to place in one year   8
Q 200

R= Annual demand in units

P= Purchase cost of an item
C= Ordering cost per order
H= Holding cost per unit per year
Q= Lot size or order quantity in units
 Economic Production Quantity (EPQ)

Economic Production Quantity (EPQ), also called Economic

Manufacturing Quantity (EMQ), is similar to EOQ model with one
difference: instead of orders received in a single delivery, units are
received incrementally during production, that is, constant
production rate.
 Factors which influence Order Quantities
-Lead Time:
-Minimum Stock Holding:
– High value items should have very low stock
– Low value items can have high quantum of stock
– Medium value items fall in between
– In case of short life items, the quantity held can be very small.
– Shelf life effects the minimum stock holding of an item to a great
degree.
-Safety Buffer Stock:
– It is the level at which fresh supply should normally arrive.
– Quantity of stores that one must set apart as an insurance against
the variations in demand and procurement period, and to avoid
stock-out.
– Calculated by multiplying the difference between maximum and
average consumption rate per day/week/month with the lead
time for the item.
Issue and Distribution
Push Method: “Initiates production in anticipation of future
demand”
Pull Method: “Initiates production as a reaction to present demand
Obsolete: Out of Date
 Minimizing Loss and Pilferage

Lost, stolen, and misplaced equipment is creating significant

financial losses for hospitals while increasing costs for patients and
threatening the level of care they receive. Hospitals are susceptible
to a huge amount of theft by a large number of people.
In USA:
Patient theft alone costs hospitals at least $52 million-a-year.
 To reduce loss and pilferage
1. Access to all stores should be limited.
2. Locking and unlocking of stores and handling of keys should be strictly
controlled.
3. Intensive vigilance to prevent frauds involving purchasing personnel and
collusion with vendors.
4. Limiting or controlling following mal-practices:
-Control of commission under the table, specially for emergency
purchase
-Inflating prices
-Accepting sub-standard goods
-Making fraudulent payments
5. Developing system of internal audit
6. Strict policies and procedures guiding purchase, receipt, storage and
distribution
7. Proper monitoring