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Material Management in Hospital
Col Zulfiquer Ahmed Amin
M Phil, MPH, PGD (Health Economics), MBBS
Armed Forces Medical Institute (AFMI)
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.
Aim of Material Management
in right quantities,
at right time,
at right price,
from right sources,
at a least cost.
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.
Material Management Goal
1. Optimum materials acquisition
2. Optimum inventory turnover rate
3. Good vendor relationship
4. Material cost control
5. Effective issue and distribution
6. Elimination of losses and pilferage
Recurrent Expenditures of Hospital
For delivery of effective healthcare services, it is necessary
Right material at right time at right place in right quantity
should be made available to perform the assigned
activities in an effective and efficient manner
Recurring expenditure of a hospital:
60%- On salary of employees
30-35%- O materials
5-7%- On non-material resources.
Material management process
1. Demand forecasting and planning
3. Receipt inspection and stores
4. Inventory control
5. Issue and distribution
6. Disposal and condemnation
7. Minimizing losses and pilferage
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
-For example, if a retailer sells 600 pairs of booths in
February, the naïve forecast would be for demand of 600
pairs of boots in March.
-This approach rules out all the types of fluctuation –
trends, seasonality, random variation and cycles.
-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
Moving Average Forecasting
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
- Non-duplication of inventory
- Variety reduction
- Economical purchase cost
- Efficient use of materials
Methods of Procurement
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
• Drawing up specification
• Inviting quotations
• Preparing comparative statement
• Issuing purchase order
It means stocking adequate number and kind of stores,
so that the materials are available whenever required
and wherever required. Scientific inventory control
results in optimal balance
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.
Management and Control of Inventories
• ABC Analysis
• VED Analysis
• SDE Analysis
• HML Analysis
• FSN Analysis
• Ordering Cost
• Inventory Carrying Cost
• Economic Order Quantity (EOQ)
• Lead Time
• Safety Stock
• Reorder Level
• Stock Turnover
ABC (Always Better Control) Analysis
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
-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 & reduce the
-Small in number, but consume large amount of
Rigid estimate of requirements
Strict & closer watch
Low safety stocks
Managed by top management
Purchase based on rigid requirements
Reasonably strict watch & control
Moderate safety stocks
Managed by middle level management
Larger in number, but consume lesser amount of
Ordinary control measures
Purchase based on usage estimates
High safety stocks
ABC analysis does not stress on items those are
less costly but may be vital
Based on critical value & 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
Economic Order Quantity
• Ordering cost:
– Salaries and wages of involved persons
– Postal, telex, telephone and other similar bills
– Entertaining the vendors/suppliers
– Travel of store personnel
• Inventory carrying cost:
– Cost of storage
– Salary and wages of store personnel
– Stationary, forms, paperwork,
– Loss of interest money deadlocked in inventory
– Deterioration and obsolescence
– Losses due to pilferage
Total annual cost (TC)
= Purchase cost (RP) + Order cost (RC/Q) + Holding cost(QH/2)
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
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:
= 200 units
The total annual cost = RP+HQ = (1600x15) + (8x200) = Tk. 25,600.00
The number of orders to place in one year when the lead time is 2 weeks =
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
Factors which influence Order Quantities
Minimum Stock Holding:
– High value items should have very low stock
– Low value items can have high quantum of minimum 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
Safety Buffer Stock:
– Is the quantity of stores that one must set apart as an insurance
against the variations in demand and procurement period, for
unforeseen reasons, and to avoid stock-out.
– It is calculated by multiplying the difference between maximum
and average consumption rate per day/week/month with the lead
time for the item. It is the level at which fresh supply should
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.
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
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
-Accepting sub-standard goods
-Making fraudulent payments
5. Developing system of internal audit
6. Strict policies and procedures guiding purchase, receipt, storage
7. Proper monitoring