Inventory Management

Lecture 21 - 22
Dr. Bilal Anwar
 Inventory
Inventory everywhere:
• my desk drawer
• piles of coal in a Tokyo steel plant
• supply room, retail stores
• vast global network of industry
• inventories in transit
• inventories in the service industries
• immense scale, $1.1 billion in March 1999 in the USA
 Inventory
• Inventory is the stock of items held to meet future
demand.
• Equipment inventory is part of the management cycle
of medical equipment
• Inventory starts after procurement or receipt of
donations and is the main input to a medical
equipment management program
• Inventory is a primary component of a Computerized
Maintenance Management System (CMMS) and
assists to organize the maintenance of equipment
 Definition
• An inventory is a detailed itemized list of assets  held by an
organization or institution
– Must be continually maintained and updated to reflect the current
status of each asset
– Depending on the nature of the organization and its assets,
different details are tracked and updated as changes occur
• Medical equipment inventory is a list of the technology on
hand, including details of the type and quantity of
equipment and the current operating status
– Accessories, consumables and spare parts inventories are directly
correlated with the main medical equipment inventory
 An Inventory Disaster!
• Imagine the following scenario, in which the healthcare
supply chain manager has to explain to a member of senior
management why the emergency room found itself without
the syringes.

… Sorry sir, but when she (the patient) came into the ER, we were out of
syringes. Our anticipation stocks were depleted because we hadn’t
corrected the ordering patterns for seasonal variations. Then, the snow
delayed shipments from supplier, and our safety stocks just weren’t good
enough! You know we usually order in bulk to take advantages of large
economic lot size and lower our ordering cycle. Our last order was
especially large because we wanted to hedge against predicted price
increases! In the final analysis, our inventory just wasn’t sufficient to
permit smooth operations…
 The COO’s Response
(i.e., Inventory objectives and requirements)

I hope you do realize that it is your duty to

both maintain a high level of customer service
and minimize the costs of ordering and
carrying inventory! All I ask of you is that you
make two fundamental decisions-- when to
order and how much to order.
 Importance
• Equipment inventory is an essential part of an effective
health-care technology management (HTM) system and
may be used to:
– Develop budgets for capital purchases, maintenance and running
costs
– Build and support an effective clinical engineering department
– Support a medical equipment management programme
– Plan the stock of spare parts and consumables
– Support equipment needs assessment
– Record equipment purchase, receipt, retirement and discard
– Support facility risk analysis and mitigation, and emergency and
disaster planning
 Key elements
• Types of inventories
– National, regional, facility
– Medical equipment, consumables, spare parts, workshop
tools & test equipment
• Items included in an inventory
– Some facilities may include every piece of equipment
– Facilities may establish inclusion criteria
• Risk assessment (equipment function, physical risk, maintenance
requirements, incident history)
• Mission criticality & utilization rates
• Facility needs & usage rates
 Key elements
Data included in an inventory:
• Inventory identification • Condition/operating status
number • Power requirements
• Type of equipment/item • Operation/service
• Brief description of item requirements
• Manufacturer • Date inventory updated
• Model/part number • Maintenance service
• Serial number provider
• Physical location within • Purchase supplier
facility • Other info as needed
 Key elements
• An inventory is effective only when it is
comprehensive and accurate
• Inventory is updated whenever there is any change
or addition of information and during annual audits
and reviews
• Three stages of inventory management:
– Initial data collection
– Information update (due to any change in information)
– Annual audit/review
 Key elements
• Inventory may be paper- or computer-based
– Keeping a paper-based record back-up is good practice
• Once the inventory has been established, it can be a
very helpful tool within the clinical engineering
department and the health-care facility as a whole
• Inventory can be used as a tool in:
– Forecasting and developing budgets
– Planning and equipping a technical workshop
– Determining required staffing
– Identifying training needs
 Key elements
• Inventory can be used as a tool in (cont’d):
– Managing service contracts
– Running an effective medical equipment management
programme
– Planning for spare parts and consumables orders
– Performing needs assessment
– Developing replacement and disposal policies and goals
– Developing purchasing and donations goals
– Performing risk analysis, management and mitigation
– Planning for disasters and emergencies
– Making a case for equipment standardization
 Challenges
• Change of mindset
– Any change will always be met with resistance
– Collecting and updating data, assigning numbers, organizing
paperwork and/or information may be seen as ‘extra work’
– Workers might be unclear on the purpose or benefit of the
work
– Staff leading inventory data collection should encourage
workers and explain benefits for collecting and maintaining
inventory data
• Lack of manpower or time for initial data collection
– Dedicate one person or a certain amount of time each week
to inventory data collection
 Challenges
• Lack of budget
– Inventory may involve extra costs for supplies, such as
paper, inventory stickers/labels, computers, files
– Evaluate ‘bare minimum’ vs ‘nice-to-have’
• Ex: printing inventory ID # with market vs. inventory
stickers/labels
• Ex: paper-based vs. computer-based inventory system
– In dire need, responsible department should evaluate
current budgets and attempt to re-allocate funds or
request
 Challenges
• Determining the inventory identification number
system
– Sequential numbering: 1, 2, 3...
• Simplest method
• Does not give any information about the machine
– Coded numbering: identifies unique features of the
equipment
• Tells information about the machine
• May be complicated; department must agree on and understand
codes
– Barcodes: barcode stickers label each piece of equipment
• Can easily access detailed information about the equipment remotely
• Requires barcode stickers, barcode reader and appropriate software
 Challenges
• Handling/discarding unused or obsolete equipment
discovered during inventory
– When performing initial inventory, equipment that is unused,
obsolete or beyond repair may be discovered
– The facility can use this inventory data collection process to
‘clean house’ and remove all such devices
– The disposal process may be complicated and lengthy, but
facilities should attempt to push through the process to
eliminate hazards and unnecessary clutter
– Donating equipment to local biomedical technician
programmes is an excellent way to discard of equipment while
supporting healthcare technology programme development
 Challenges
• Maintaining/updating inventory
– Inventory data collection is fairly easy and straightforward
and is probably the simplest step in developing an
effective medical equipment management program

– Records must be updated every time there is a change

– A clear process on when and how to update records will

simplify the workflow
QUESTIONS
List examples of types of equipment that
could/should be included/excluded in an
inventory. Why?
• A list of data included in an inventory was
presented
– Why are each of these items important?
– What other data could be included in an
inventory and why?
• For your setting, discuss:
– Pros and cons of paper- and computer-
based inventory systems
– Which inventory numbering system might
be most appropriate?
– How might an inventory be used as a tool?
– Personal experiences with medical
equipment inventory
 Inventory
Inventory management answers three
questions:
– How much to hold
– How much to order
– When to order
 Functions of Inventory
• To meet anticipated demand
• To level process flow
• To protect against stockouts
• To take advantage of order cycles
• To help hedge against price increases or to take
advantage of quantity discounts
• To decouple process steps
 Effective Inventory Management
• Classification system
• Inventory tracking system
• Reliable forecast of demand
• Knowledge of lead times
• Reasonable estimates of:
– Holding or carrying costs
– Ordering or setup costs
– Shortage or stockout costs
 ABC Classification System
• Classifying inventory according to some measure of
importance and allocating control efforts accordingly
• Pareto Principle
High (80%)
- A very important A
- B moderately Annual
$ volume
important of items
B
- C least important
Low (5%)
C
Many
Few Number of Items
(50%)
(20%
)
 ABC ANALYSIS
• (ABC = Always Better Control)
• 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 inventory.
• About 10 % of materials consume 70 % of resources

• About 20 % of materials consume 20 % of resources

• About 70 % of materials consume 10 % of resources

 ‘A’ ITEMS
– Small in number, but consume large amount of
resources
– Must have:
• Tight control
• Rigid estimate of requirements
• Strict & closer watch
• Low safety stocks
• Managed by top management
 ‘C’ ITEMS
• Larger in number, but consume lesser amount
of resources
• Must have:
• 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
 ANNUAL COST CUMMULATIVE
ITEM % ITEM COST %
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
S HEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
 ‘B’ ITEM
Intermediate
• Must have:
• Moderate control
• Purchase based on rigid requirements
• Reasonably strict watch & control
• Moderate safety stocks
• Managed by middle level management
 Inventory Tracking
• Track additions and removals
– Bar-coding
– Point of use or point of sale (POS)
– RFID
• Physical count of items
– Periodic intervals
– Cycle count
– Find and correct errors
 Effective Inventory Management
• Inventory counting systems can be either:
– Periodic
– Perpetual
• Batch
• Line
 Inventory Counting Systems
• Periodic System
Physical count of items made at periodic intervals

• Perpetual Inventory System

System that keeps track of removals
from inventory continuously,
thus monitoring current levels of
each item
 Inventory Counting Systems (Cont’d)
• Two-Bin System - Two containers of inventory;
reorder when the first is empty

• Universal Bar Code - Bar code

printed on a label that has
information about the item
to which it is attached
0

214800 232087768
 Inventory Counting Systems (Cont’d)
• Universal Product Codes (UPCs). The UPCs have been
around since late 1970s and are used in industry. A UPC
can have up to 20 character numbers that uniquely
identify a product, for example, of pharmaceutical or
medical-surgical supply, using bars with different variety
and thickness that can be read by scanners. The order
of the information in UPCs identifies the type of
product, its manufacturer, and the product itself.

0
214800 232087768
 Inventory Counting Systems (Cont’d)
• Only 26 percent of medical-surgical products can be scanned
on nursing units, and only fifty percent of drugs have bar codes
for unit doses.
• According to the final regulation issued by the Food and Drug
Administration (FDA) in 2004, drug manufacturers must adopt
bar coding to single-dose units within two years, and hospitals
must eventually implement bedside scanning systems.
• The FDA estimates, however, that it may take up to two
decades for all hospitals to implement such systems because of
their high costs: from $.5 to $1 million. Only a few more than
100 hospitals currently them.
 Inventory Counting Systems (Cont’d)
• Yet bar code systems would significantly improve the
quality of patient care through reduction of medication
errors. It is estimated that over a 20-year period, fully
implemented bar code systems would prevent about .5
million medical errors. Moreover, by improving the cost-
efficiency of medical supply management, hospitals
would also reap $90 billion in savings, which would help
to pay for the technology (Becker, 2004).
 Lead Time
• Inventories are used to satisfy demand requirements, so reliable
estimates of the amounts and timing of demand are essential. It is
also essential to know how long it will take for orders to be delivered
(Stevenson, 2002, p.547).
• Now that healthcare organizations increasingly rely on their vendors
to maintain adequate inventory levels in their facilities, their data
relevant to demand must be transferred to their vendors.
• Healthcare managers also need to know the extent to which demand
and lead time (the time between submitting an order and receiving
it) may vary; the greater the potential variability, the greater the
need for additional stock to avoid a shortage between deliveries.
 Costs of Inventory
Holding (carrying costs)-- interest, insurance,
depreciation, obsolescence, deterioration, spoilage,
warehousing costs
Ordering costs-- associated with ordering and
receiving inventory
Shortage costs-- when demand > supply on hand;
opportunity costs of lost customers loss of goodwill;
death of a patient and potential lawsuits
 Effective Inventory Management
The A-B-C Approach: Classifying inventory according to some measure
of importance and allocating control efforts accordingly.

A relative importance classification

60
system
% of – A - very important (15-20% of
Annual 40 items; 60-70% of $$$s)
dollar A
– B - moderate
volume 20 – C - least important (60-70% of
B
0 items; 10% $$$s)
Tightest controls and management
20
% of C should be on A items
Items 40 Inventory Models seek to find the
best balance between these goals.
60
Chapter 11: Quantitatve
Methods in Health Care Yasar A. Ozcan 40
Management
 Table : A-B-C Classification Analysis
Item Annual Unit Annual Percent
A-B-C
Demand Cost costs of Total
Classification

1 20800 2.50 52000 1.2% C

2 83200 0.50 41600 1.0% C

3 9100 37.50 341250 8.0% B

4 13000 3.50 45500 1.1% C

5 13000 1.75 22750 0.5% C

6 790 1290.00 1019100 24.0% A

7 78000 2.25 175500 4.1% B

8 114400 0.65 74360 1.8% C

9 66040 0.95 62738 1.5% C

10 6240 12.50 78000 1.8% C

11 11440 2.00 22880 0.5% C

12 18200 1.50 27300 0.6% C

13 910 1300.00 1183000 27.9% A

14 315 2700.00 850500 20.1% A

15 65000 3.75 243750 5.7% B

Total Annual Costs 4240228

 EOQ Model
ECONOMIC ORDER QUANTITY model--
It answers the question, “How much should I
order?” by allowing you to determine an
optimal order quantity in terms of minimizing
the sum of certain annual costs that vary with
order costs.
 EOQ Formula Derivation
D= Annual demand (units)
C= Cost per unit ($) Total cost = (Q/2) x I x C + S x (D/Q)
Q= Order quantity (units) inv carry cost order cost
S= Cost per order ($)
I = Holding cost (%) Take the 1st derivative:
H= Holding cost ($) = I x C
d(TC)/d(Q) = (I x C) / 2 - (D x S) / Q²

Number of Orders = D / Q To optimize: set d(TC)/d(Q) = 0

Ordering costs = S x (D / Q)
DS/ Q² = IC / 2
Average inventory
units = Q / 2 Q²/DS = 2 / IC
$ = (Q / 2) x C
Q²= (DS x 2 )/ IC
Cost to carry
average inventory = (Q / 2) x I x C Q = sqrt (2DS / IC)
= (Q /2) x H
Economic Order Quantity

2 D S
EOQ 
H
D= Annual demand (units)
S= Cost per order ($)
C= Cost per unit ($)
I = Holding cost (%)
H= Holding cost ($) = I x C
 EOQ Model Equations
2 D S
Optimal Order Quantity  Q * 
H
D
Expected Number Orders  N 
Q*
Working Days / Year
Expected Time Between Orders  T 
N
D
d D = Demand per year
Working Days / Year S = Setup (order) cost per order
H = Holding (carrying) cost
ROP  d  L
d = Demand per day
L = Lead time in days
 EOQ
Example
You’re a buyer for SaveMart.

SaveMart needs 1000 coffee makers per year.

The cost of each coffee maker is $78. Ordering
cost is $100 per order. Carrying cost is 40% of
per unit cost. Lead time is 5 days. SaveMart is
open 365 days/yr.

What is the optimal order quantity & ROP?

 SaveMart EOQ

2 D  S
EOQ 
H
D= 1000
2  1000  $100
S= $100 EOQ 
C= $ 78 $31.20
I= 40%
H= CxI
H= $31.20 EOQ = 80 coffeemakers
 Independent Demand Inventory Models
• Introduction
The average manufacturing company spends over one-half of
its sales revenue on inventory. Because of the large investment
and expenditure required for acquiring and controlling
inventories and their effect on profits, successful companies
devote a great deal of attention to inventory management.
• How much inventory is enough?
- Marketing department wants large inventory, it does not
like stock outs.
- Finance department likes low inventory and high turnover
to minimize funds tied up in inventories.
 Inventory Management
Inventory: An idle resource of any kind that has potential
economic value
- raw materials
- component parts
- work-in-process
- finished products, etc.
Reasons for carrying inventory
1) To provide service
- finished good inventory to meet demand and keep customers happy
- work-in-progress inventory to increase flexibility by decoupling production
stages and keep machines running
- raw material inventory keeps production moving
- protection against uncertainty
 Inventory Management
2) To save money
- buying in large quantities allows spreading of fixed costs such as
ordering costs and obtaining quantity discounts.
- stocking of seasonal items allow production smoothing or
work-load balancing.
“The aborigine knew nothing of inventory control, and, quite
possibly his 20th century corporate counterpart is equally as
unenlightened. The changeover from inventory to inventory control
bears no date. Some concerns plunged into the healthful waters of
scientific management of inventories well before the first world
war. Others are still on the shore contemplating on the advisability
of wetting their toes. (Benjamin Melnitsky).
 Inventory Management
• History
1915 F.W.Harris (Westinghouse)
Lot size formula (EOQ model); independently
developed by Wilson and sold to many companies as
an integral part of an inventory control scheme.
1931 F.E. Raymond (MIT)
Wrote the first full length book.
WWII Christmas tree problem (Newsboy problem)
Whitin’s stochastic extension of the EOQ model.
Early Computer made it possible to handle large data
requirement
1950’s Of the inventory models, Whitin published a book on
stochastic inventory models in 1953.
 Inventory Management
1958 Arrow, Karlin and Scarf published their now classical
book, which is a definitive work on inventory theory,
inspired a great deal of research for next decade.
Mid Material requirement planning (MRP)
1970’s Books by Orlicky, Wight in 1974
 Functions of inventory control

• To provide maximum supply service, consistent with

maximum efficiency & optimum investment.

• To provide cushion between forecasted & actual

demand for a material
 Economic order of quantity
EOQ = Average Monthly Consumption X Lead Time [in months]
+ Buffer Stock – Stock on hand

Lead time: The period between the order time and the delivery time

ECONOMIC ORDER OF
QUANTITY(EOQ)

PURCHASING CARRYING
COST COST