MATERIALS MANAGEMENT

AND
ECONOMIC ORDER QUANTITY

1
2 CONTENTS
1. INTRODUCTION
2. IMPORTANCE OF MATERIALS MANAGEMENT
3. RESPONSIBILITY OF MATERIALS MANAGEMENT
4. MATERIAL IS MONEY
5. AIMS OF MATERIALS MANAGEMENT
6. OBJECTIVES OF MATERIALS MANAGEMENT
7. COMPONENTS OF MATERIALS MANAGEMENT
8. ADVANTAGES OF MATERIALS MANAGEMENT
9. MM AT HIMS, HASSAN
10.CONCLUSION
11.REFERENCES
3 INTRODUCTION

 Materials Management is the systematic and scientific process of planning,

implementing and controlling the efficient and effective flow and storage of resources

from point of origin to point of consumption to meet the consumer’s requirements.

 MM ensures a continuous supply of good quality materials at the lowest possible

price, at the same time keeping the inventory(Is the stock on hand at any given time

that is accountable but remain unused or unconsumed) to the minimum, so that the

capital is not blocked in the inventory and at the same time , materials don’t go for

shortage.
4 WHY IS MATERIALS MANAGEMENT IMPORTANT?

 Financially: Large proportion (25-40%) of health expenditure is on

materials.

 Economic constraints in the purchase and distribution of materials in

the organization.

 Complex requirement: Medical and non-medical items are more in

number.

 There is need and potential for increased efficiency and

effectiveness.
5
RESPONSIBLITIES OF MATERIALS
MANAGEMENT
Every department of the organization has a significant role to
play in controlling the cost on the materials. It is an
integrated and co-ordinated approach. Thus MATERIALS
MANAGEMENT is a Concept of involving overall
organizational structure and unifying it into single
responsibility
6 MATERIAL IS MONEY
 Materials that are locked up in the stores unused are nothing but money. So the
objective of materials management is to reduce the cost we incur on Materials.
 There are two types of cost relating to materials,
(a)Cost on Material- taxes, packing cost, transportation cost etc
(b)Cost of Material- cost+ profit=Final Price

Raw
material value

cost price

Profit
7 AIMS OF MATERIALS MANAGEMENT

To get the supplies at

 1. The Right quality

 2. The Right quantity

 3. The Right time

 4. The Right place

 5. For the Right cost

8 OBJECTIVES OF MATERIALS MANAGEMENT

 To obtain correct quality of materials at lowest possible cost with

right quality of purchase

 High inventory turn over and Low storage cost

 Maintain continuous supply

 Cordial relationship with suppliers and vendors

 Low pay roll costs

 Good records

 Avoid wastage
9 MATERIALS MANAGEMENT CYCLE

Condemnation And Material Planning

Disposal And Budgeting

MATERIAL
MANAGEMENT Purchase &
Value Analysis CYCLE Procurement

Inventory Receiving And

Control Inspection

Storage And
Distribution
10 COMPONENTS OF MATERIAL
MANAGEMENT

1. Material Planning And Budgeting

2. Purchase
3. Receiving And Inspection Of Stores
4. Storage And Distribution
5. Inventory Control
6. Value Analysis
7. Condemnation And Disposal
11 01.MATERIAL PLANNING AND BUDGETING

Budgeting

Forecasting
Techniques for 1.Time series analysis
planning
2.Visionary Forecast
1.Bill of Materials
explosion 3.Moving average
method
2.Past consumption
Analysis

Planning
and
Budgeting
12 02. PURCHASE
Strategic activity-involves wide range of managerial
functions from planning to product improvement to capital
management to profit improvement
Purchase of
supplies
&Dev. Of
new sources
of supplies

Jobs of Market
research for
Quality purchase new
assurance dept. material

Co-
ordination
with other
depts.
13 OBJECTIVES OF PURCHASE DEPARTMENT

Reduction of
cost of all
supplies

Right source
Train of supplies
personnels with good
quality

Objectives

Purchase
Enquiry on
order to
complaints
suppliers

Follow up for
timely
delivery
14 TYPES OF PURCHASING

• At hospital level by MM Department

CENTRALISED • Ensures better control

• At user departmental level

DECENTRALISED • Faster in process

• Same management control

GROUP
• Chain of hospitals with same governing
PURCHASES body
 PURCHASE CYCLE
15

Need recognized,
demand estimated

Purchase record
Specification file

Tender/enquiry/
imports
Suppliers records
16 PURCHASE CYCLE contd…

Follow up

Invoice
check
17  Requisition - Purchase requisition should include
1. Quantity
2. Delivery period
3. Material indent form
4. Work order reference
5. Signature of indenting officer

 Purchase plan – includes materials needed, budget needed and al

specifications and to be approved by authority concerned.
 Selection of suppliers – Past experience, Interviews, trade journals,
magazines, ads, tenders etc.
18  Tender system
Principle:
purchasing right quality items at right price and from right
source and to purchase items at competitive price without
compromising quality.
Types:
I. Single tender
II. Limited tender
III.Open tender
IV.Global tender
 Steps in tender system :
19 1. Specifications of item to be purchased
2. Vendor list is made
3. Competitive bids invited from vendors
4. Bids received- Technical and financial
5. Evaluation of bids
6. Price negotiation with selected vendor
7. Issue of purchase order and supplier’s acceptance
8. Supply of items
9. Inventory action including inspection and distribution
 Purchase order- Legal contract for purchase of materials including price, quantity,
quality, terms and conditions, delivery time frequency etc. It includes
20
1. Purchase order, reference no. and date
2. Supplier name and address
3. Quotation reference
4. Description of materials – Brand name, size
5. Quantity
6. Packing
7. Price and total value
8. Freight charges and dispatch mode
9. Inspection at receivers site
10.Acknowledgement
11.Mode of payment
12.warranty
21 ECONOMIC ORDER QUANTITY
 “It is the quantity at which ordering cost and inventory carrying
cost will be equal and summation of these two costs will also be the
lowest”

ECONOMIC ORDER OF
QUANTITY(EOQ)

PURCHASING CARRYING
COST COST
22 EOQ
23

EOQ = 2UA
IC

 U=ANNUAL USAGE IN UNITS

 A= PURCHASE COST PER ORDER/ ACQUISITION COST
 I= CARRYING COST OF INVENTORY IN PERCENTAGES
 C= UNIT COST OF ITEM
24
 This formula is based on three assumptions:

 1. Price will remain constant throughout the year and quantity

discount is not involved.

 2. Pattern of consumption, will remain the same throughout.

 3. EOQ will be delivered each time the stock balance is just reduced
to nil
25
26
 OBJECTIONS IN EOQ:

1. Order cost and inventory cost difficult to calculate

2. It is applied without taking into consideration of falling demand or

rise in price

3. Inconvenient quantity
27 03. RECEIVING AND INSPECTION OF
STORES
1. Confirm if the consignment belongs to the organization
2. Check for correctness of specifications
3. Materials not in confirmity with purchase order quarantined
4. Materials in confirmity with purchase order entered in inward
register and in main ledger of the inventory
5. Materials sent to main stores.
6. Countersignature by the stores manager.
28 04. STORAGE AND DISTRIBUTION
 Proper drug storage:
i. Avoid contamination or deterioration
ii. Avoid Disfiguration of labels
iii. Maintain integrity if packaging
iv. Prevent pilferage, theft, losses
v. Prevent pests infestation
vi. Proper arrangement of drugs on shelves
vii.Bin cards and stock identification cards to be maintained
viii.Distribution- FIFO and FEFO principle
29

 Distribution system in hospitals:

a) Requisition system

b) Par- level transfer

c) Total supply cart exchange system

30 05. INVENTORY CONTROL

 Inventory : sum total of materials in hand(ie)materials lying in the

stores, the entries have been made on stock ledgers and are being
accounted for and not been used for rendering the services.

 Economics: if there are huge stocks, their maintenance and storage

space is a problem. It amounts to locking up money which could
have been utilized more gainfully. There is danger of expiry date or
pilferage.
31 INVENTORY CONTROL…

 Is basically a scientific system which indicates as to what to order ;

when to order, how much to order, how often to order so that the

purchasing costs and storing costs are kept as low as possible

without interference with supply

 Official inventory and unofficial inventory

32 TERMINOLOGIES IN INVENTORY CONTROL:

 Lead time: Duration of time between placing an order & receipt of

material.

 Minimum order level :Average daily consumption x Lead time

 Buffer Stock: Minimum quantity of supplies set apart as an

insurance against variations in supply and demand

 Re-order level: stock level at which fresh order is placed.

Minimum order level + buffer stock

 Maximum order level: Maximum amount of materials that can be

stocked in the inventory
33 TECHNIQUES OF INVENTORY CONTROL

ABC ANALYSIS
(ABC = Always Better Control)
 based on annual costs of the items.
 Pareto’s Law
 The drugs are arranged in descending order according to the amount
of expenditure incurred. The cumulative cost should be calculated
beginning from first item at the top of the list.
 About 10 % of materials consume 70 % of budget

About 20 % of materials consume 20 % of budget

About 70 % of materials consume 10 % of budget

 ANNUAL COST CUMMULATIVE
ITEM % ITEM COST %
34 ABC [Rs.] COST [Rs.]
1 90000 90000
10 % 70 %
A 2 50000 140000
3 20000 160000
N 4 7500 167500
20 % 20 %
A 5 7500 175000
6 5000 180000
L
7 4500 184500
Y 8 4000 188500
9 2750 191250
S
10 1750 193000
I 11 1500 194500

S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
SHEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
35
VED ANALYSIS

 Based on critical value & shortage cost of an item, Items are

classified into:
 Vital:
• Shortage cannot be tolerated.
 Essential:
• Shortage can be tolerated for a short period.
 Desirable:
 Shortage will not adversely affect the organization
36  Matrix of ABC and VED analysis

V E D

A AV AE AD
AV

B BV BE BD

C CV CE
CV
 SDE ANALYIS
37  Based on availability
Scarce - Managed by top level management; Maintain big safety
stocks
Difficult - Maintain sufficient safety stocks
Easily available - Minimum safety stocks
FSN ANALYSIS
 Based on utilization - Fast moving , Slow moving , Non-moving.
HML ANALYSIS
 Based on cost per unit – Highest, Medium, Low
GOLF CATEGORY – govt, ordinarily available, locally available, foreign
SOS CATEGORY – seasonal, off seasonal
38 06. VALUE ANALYSIS

 Organised and systematic study of every element of cost in a

material to make certain it fulfils its function at lowest possible

 Technique for cost reduction

 Value ratio

value = function

cost
39 07. CONDEMNATION AND DISPOSAL
CONDEMNATION
 Criteria for condemnation:
The equipment has become:
1. Non-functional & beyond economical repair
2. Non-functional & obsolete
3. Functional, but obsolete
4. Functional, but hazardous
5. Functional, but no longer required
40
 PROCEDURE FOR CONDEMNATION

1. Verify records.

2. Find out the reasons

3. Committee declares those items as condemned and make

recommendations for disposal

4. Removal from inventory register

5. Write off sanction of the authority before disposal

41
 DISPOSAL

1. Circulate to other units, where it is needed

2. Return to the vendor, if willing to accept

3. Sell to agencies, scrap dealers, etc

4. Auction

5. Local destruction
42 ADVANTAGES OF MATERIALS MANAGEMENT

Improved accountability
Better co-ordination
Better performance
Analysis of data
Economic improvement in the organization
43 CONCLUSION
 Material management is an important management tool which will
be very useful in getting the right quality & right quantity of
supplies at right time, having good inventory control & adopting
sound methods of condemnation & disposal will improve the
efficiency of the organization & also make the working atmosphere
healthy any type of organization, whether it is Private, Government
,Small organization, Big organization and Household.
44 REFERENCES

 Joshi DC; Hospital administration; 1st edition; Jaypee medical

publishers; p119-45

 Sathe P V; Epidemiology and management for health care for all;

3rd edition ;Vora medical publications; p130-41.

 AFMC, Pune; Textbook of Public Health and Community Medicine;

1st edition ; p333-39

 Pragna Bai; Hospital administration and management; 2nd edition;

p104-111
45
KDLWS-Karnataka Drug Logistics and Warehouseing
Society, Bangalore India. Ministry of Health and Family
Welfare, Government of Karnataka 2013.
Sakharkar; Principles of hospital administration and
planning; 2nd edition;256-68
46

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