MATERIALS MANAGEMENT

INTRODUCTION

Materials management encompasses acquisition,shipping,receiving,evaluation,warehousing and

distribution of all goods,supplies,equipment for an organization.

Acquisition is through purchase, lease or rent; warehousing is the storage of goods, supplies and
equipment, and inventory control and distribution is delivery or pick up of goods and supplies.

Some of the services like pharmacy, dietary service, maintenance and certain ancillary services like
radiology and lab perform their own materials management.

Their purchases require technical competence and knowledge that purchase department normally
does not have.

Whether decentralization is good or bad may entirely depend on the integrity and ability of the
department head and on internal control procedures instituted by the hospital.

LOCATION

 Ideally the major divisions of materials management should be located in one area of the
hospital. The department generates moderate traffic of hospital staff and vendors to and
from outside the hospital.
 For vendor traffic, the purchase department should have sub waiting area with outside
entrance routing it through main lobby and administrative corridor.
 The department should have easy access to multipurpose room that can be used for product
display and demonstration.

Aim and Advantages of Materials management

To ensure there is adequate stock of items all the time, so that there is continuous supply but at
same time not too much. These items are properly stored, controlled, easily retrievable and
distributed to the user units whenever needed.

Advantages:

 Improved accountability
 Better coordination and better performance
 Analysis of data
 Better teamwork

Operative Goals of Materials Management

 Optimum materials acquisition: The purchase of materials must be governed by most

effective purchase, storage, handling and usage practices.
 Optimum inventory turnover: Inventories of all items must be maintained at the optimum
level.
 Good vendor relationship: Organization’s relationship with its suppliers have a direct bearing
on its ability to procure materials on best possible terms.
  Materials cost control: Must be economical. There must be a continuous cost reduction.
Program.
 Effective issue and distribution
 Elimination of losses and pilferages.

FUNCTIONS OF MATERIALS MANAGEMENT

 Material planning and budgeting: This requires need assessment, demand estimation,
preparing budget for material procurement, forecasting various levels of inventories and
preparing indents
 Purchasing
 Receiving and inspection
 Stocking and distribution
 Inventory control
 Cost reduction
 Value analysis: To identify the costs which are not directly responsible for value addition and
to eliminate such costs
 Disposal

MATERIALS MANAGEMENT PROCESS

 Demand forecasting and planning

 Purchasing
 Receipt, Inspection and stores
 Inventory control
 Issue and distribution
 Disposal and Condemnation
 Minimizing losses and pilferage

1. Demand, forecast and planning:

 Should take into consideration the concept of standardization(grouping together items of

similar specifications)It ensures non duplication of inventory, efficient use of materials
 In an inventory high cost or high usage items should receive greatest degree of forecasting
attention
 Forecast is an estimate of demand expected in the future by the following methods in
hospitals
 LAST PERIOD METHOD: forecasts for the next period by seeing the level of demand that
occurred in previous period
 ARITHMETIC AVERAGE: Takes the average of all past demand in arriving at forecast

2. Purchasing procedure

 Identification of need
 Drawing up standards and specifications, quality, quantity with full description.
 Preparation of indents.
 Selection of right source that is supplier.
 Inviting quotations.
 Preparing comparative statements (includes basic price, freight charges, taxes, quantity,
payment discounts).
  Determine right price, availability and delivery time.
 Shortlisting.

Purchasing procedure

 Issuing purchase order(It contains purchase order reference number and date, Suppliers
name and address, Description of materials,Quantity,Packing,Price and total value,
Inspection at receiver’s site,Acknowledment,Mode of payment and warranty)
 Follow up
 Arrangement of receipt,inspection,rejection and replacement of defective pieces
 Verification of invoices
 Payment of bills
 Maintenance of records

VALUE ANALYSIS

 It takes into consideration the quality of material in relation to value and price.
 For example where a CFL lamp is specified for purchase, its cost is Rs 45 and life three
hundred hours, another lamp on enquiry the purchase department comes to know though
the cost is Rs 85 but its life is not less than eight hundred hours in any case.
 Value analysis shows second one is costlier but gives better value for money. So the
purchase of second one is beneficial.

PRINCIPLES OF PURCHASING

 RIGHT QUALITY.
 RIGHT QUANTITY.
 RIGHT PRICE: VALUE=Quality/Price. To get more value, price has to be negotiated and lower
the price greater the value can be achieved, Quality being constant.
 RIGHT TIME: Should delivered to the user unit exactly at the time of need.
 RIGHT PLACE: It has to be mentioned in the purchase order itself where the supplies would
be made.

FUNCTIONS OF PURCHASE DEPARTMENT

 Writing product specifications for all equipment and goods to be purchased and adhering to
them.
 Procuring equipment and supplies through centralized purchasing.
 Receiving and accounting for equipment, goods and supplies.
 Stocking supplies for adequate periods of time only, No overstocking and no out of stock
situations.
 Standardizing and evaluating all products.
 Vendor evaluation.
 Distributing goods and supplies to departments that have requisitioned them.
 Controlling unofficial and unauthorized purchasing and inventories in departments.
 Market research for new material.
 Quality assurance.
 Inspection of supplies.
 Coordination with other functions of materials management like. Transportation, receiving,
stocking, inventory control, accounting, disposal of surplus and scrap.
 Coordination with other departments of the organization.
 TYPES OF PURCHASING:
 Centralized
 Decentralized
 Combined purchasing

1. Advantages in Centralized purchasing:

 Quantity discounts are made possible by consolidating the purchase requirement of the
entire hospital.
 Standardization and product evaluation can be achieved with centralized purchase.
 It eliminates duplications of time, effort, personnel and facilities for purchase related
function.
 It controls unauthorized purchasing and unofficial inventories (Basically the consumable
goods maintained in user departments is considered unofficial inventory.).
 Purchase officer is responsible for all purchasing functions.

SUPPLIER /VENDOR SELECTION

 Methods for selecting vendors:

 Past experience with suppliers
 Interview with representatives of the suppliers
 Trade journals and magazines
 Telephone directories
 Consulting trade agencies
 Inviting quotations and tenders
 Advertising in newspaper

VENDOR EVALUATION

Hospitals demand the following from vendors

 Competitive pricing with quality.

 Timely delivery of goods.
 Low ordering, storing, receiving and distributing costs.
 Vendor should maintain an inventory close to hospital and has reliable transportation to
move it in a timely fashion.
 Vendor should provide complete, up to date product information.

PURCHASING CYCLE

 Need for material is recognized

 Demand is estimated
 Specifications spelt out
 Indents forwarded to purchase department
 Purchase plan is chalked out
 Suitable source is selected
 Rates and terms and conditions are finalized
 Purchase order is prepared and dispatched to suppliers
 Supplier’s acceptance is obtained
 Follow up action for timely delivery and right quantity
 Receipt, inspection against specifications
 Verification of supplier’s invoice
  Payment of bills
 Maintenance of records

TEN GOLDEN RULES OF MATERIALS MANAGEMENT

 Rule one: Successful material management is built upon effective management system and
good supervision.
 Rule two: Purchase order is often called the umbilical cord of purchasing process. For
internal control and smooth flow of goods, the receiving store, the accounts and requesting
department should receive copies of purchase order. The original goes to the vendor and
copy of it to purchasing file. Initiation of every purchase order costs money, it should be cost
effective. If the cost of initiating a purchase order is Rs 50 or 75 and the cost of ordered
commodities is Rs 100, it does not make business sense to continue this way.
 Rule three: Centralize the purchasing system. It eliminates uncontrolled purchases by
departments, secures a reduction in prices through improved purchasing methods, results in
improved allocation of space and reduces inventory costs and staff time.
 Rule four: Negotiation is the key to sound purchasing. Every purchase officer should learn
the art of negotiation.
o Never purchase at the list price.
o Negotiate for a bulk price for the quantity of the hospital would need for the whole
year, and then get the price for any quantity you want to purchase.
o Always ask for discount regardless of how much you buy.
o Always get a price protection (protect your investment from fluctuating prices) on
the agreed price.
o Try to get at least a month’s time to pay the invoice.
 Rule Five: There should be effective receiving system with responsibility. Fundamental rule is
that functions of purchasing, receiving and paying of invoices should be handled by three
different persons.
 Rule six: Establish an optimum level of inventory but effective inventory control programme
 Rule seven: Establish effective and result oriented requisition and distribution system. The
goal of distribution system is the right item to right place at right time in right quantity and
at least total cost.
 Rule eight: Establish written policies and procedures.
 Rule nine: If you want to buy the right supply in right quantity at the right pace and time,
and standardization, cost containment and evaluation of all products and services is a good
place to start with.
 Rule ten: Go for contract purchasing through prime vendors whenever possible. That is buy
the entire categories from single source on negotiated terms of quantity, quality, price and
time.

Products Standardization

 One way to cost containment in materials management is to establish product

standardization. It is essential to establish a process to evaluate products due to
proliferation of products and rapid changes in technology.
 A purchase committee should be in charge of product evaluation and standardization to
identify the products that are best suited for use by hospitals after considering factors such
 as cost, standardization, availability and source. Other objectives are to eliminate wasteful
duplication of products and achieve economy through standardization.
Prime Vendor Contract:

 Hospitals can save large amounts of money by entering into an agreement to

purchase majority of a given supplies from one vendor
 This type of purchase on negotiated terms of quantity,quality,price and time which
can help hospitals get the best deal in a fraction of time
 The prime vendor warehouses the supplies and releases them as and when needed
 Amount of time spent by materials manager and his staff on purchase related
activity would be reduced drastically
 With less vendors, receiving process is more efficient and free of fraudulent
activities

STORES

 Stores management “to receive material, to protect them while In storage from damage and
unauthorized removal, to issue the material in the right quatities,at the right time to the
right place and to provide these service promptly and at least cost”
 The central store is responsible for receiving,unpacking,storing and distributing supplies
used in the hospital. Inventory control is one of the primary responsibility
 Most common materials stored are: medical-surgical items,dressings,house keeping items,
office supplies, stationery
 Materials usually kept in respective departments are drugs,IV solutions and sets, Laboratory
supplies ray supplies, all processed sterile supplies, food items. Linen may be kept in a
separate linen store
LOCATION
 Central stores should be on ground level and should be close or accessible to
unloading dock ,as far as possible away from other traffic
 The receiving office, equipped with a platform scale and unpacking area should be
adjacent to unloading dock
 Stores must be a restricted area
 In storage area pay attention to the atmospheric conditions e.g.: chemicals,
radiographic films,vaccines,some other injectable rubber goods need to be stored in
temperature between 20 and 10 degree Celsius. Many other items are stored at cool
temperature below 20 degree Celsius. Cool and cold room conditions should be
available in all medical stores

Objectives of stores

 To ensure uninterrupted supply of materials and stores without delay to various production
and service departments of the organization.
 To prevent overstocking and understocking of materials.
 To protect material from prilferage,theft fire and other risks.
 To achieve primary goal of patient care, stores should carry optimum inventory
 To minimize storage costs.
 To ensure proper and continuous control over materials.
 Maintaining the value of materials.
 Service to user departments.
  Establishing co-ordination with other departments.
 Advising materials Manager

TYPES OF INVENTORY

Inventories may be classified as official and unofficial

OFFICIAL INVENTORY

 Official inventory is that which is brought into a storage space or unit, counted controlled
until it is dispensed to a using departments
 Eg;- medical and surgical items, dressing linen, x-ray supplies, laboratory supplies, house
keeping items, processed sterile supplies
 Pharmaceutical items - fluids Dietary items like cereals, pulse…..etc

UNOFFICIAL INVENTORY

 It is those supplies that have been expensed and dispensed from the central stores to the
various departments and units where they are stored until used. Most hospitals never count
or rarely control this stocks.
 Unofficial inventory exists in all supply consumer departments such as nursing units
laboratories, anesthesia department, surgery department, emergency department,
radiology department, maintenance department, administrative officers.

MANAGEMENT AND CONTROL OF INVENTORIES

1. ABC Analysis(depending on the annual consumption value)

 Principle: A small number of items represent a large percentage of cost value. A large
percentage of items represent only a small portion of cost value.
 The items in the list are them rearranged in descending order of annual consumption cost
,beginning with item of highest value at the top and ending with item of lowest value at the
bottom
 It helps in selective control

2.VED analysis

 Depending on the criticality the items are classified as vital,essential and desirable
 Absence even for short period can hamper the work of hospitals-Vital items(larger safety
stock)
 Items whose absence cannot be tolerated for more than a day or so-hospitals-Essential
items(in between)
 Items which are definitely needed, but the work can continue even without them for a
substantial period of time(hardly any safety stock)
 HML(High,Medium and low cost) depending on the unit cost of item
 FSN(Fast moving,slow moving,non moving)-speed of consumption
 SBE(Scarce to procure,difficult to procure and easy to procure)-Procurement
difficulty,market availability

3.EOQ analysis

 Method used to determine the quantity or units of each item to be ordered

 Quantity at which cost of ordering an item and inventory carrying costs are nearly equal
 Ordering cost: Costs incurred to get materials into inventory of hospital
  It comprises of salaries and wages of involved personnel,postal,telephone
bills,advertisement,stationery, travel of stores personnel
 Inventory Carrying cost(Holding cost):Cost associated with maintaining materials in the
stores. It arises out of the following
 Cost of storage(rental,power,security)
 Salary and wages of stores personnel
 Insurance
 Losses due to pilferage
 Deterioration and obsolescence
 Loss of interest on money deadlocked in inventory

FACTORS WHICH INFLUENCE ORDER QUANTITIES

 Internal lead time is the time required for organizational formalities to be completed
.Time required for preparation of issue of tender, obtaining quotations, making
comparative statements, initiating purchase orders, time for it to reach suppliers
 External Lead Time is the time taken by the supplier for getting the materials ready,
its dispatch, transportation and actual delivery at the hospital
 The total lead time can be computed by working out the time taken in internal and
external procurement processes.
 The external lead time cannot be avoided but it may be minimized by....
o Timely reminders and follow up
o Expediting Maintaining good relations with the suppliers
o Penalty for delayed supplies

Minimum stock holding and Safety buffer stock

 High value items should have very low stock, low value items have high quantum of
minimum stock, medium value items fall in between
 Shelf life affects the minimum stock handling of an item to great degree
 Items for short shelf life of 6 to 12 months the very minimum will have to be held with a
system for faster reordering
 Safety buffer stock:Quantity of stores that one must set apart as insurance against variations
in demand and procurement period,for unforeseen reasons and to avoid stock out
 BS=(Max daily consumption-Average daily Consumption)*Lead time

Ordering systems

 Reorder level: Means balance stock level of an item at which fresh order has placed to avoid
a stock out situation
 Reorder level=(Avg consumption per day*lead time)+Buffer Stock
 Reorder point: Point in stock level at which order is initiated
 There are 2 types of Inventory Ordering System
o CYCLIC ORDERING SYSTEM
o FIXED ORDERING SYSTEM

CYCLIC ORDERING SYSTEM

o It is a Time based system.

 o Stock position is reviewed at definite intervals of time with regard to availability,
consumption rate etc in order to place orders.
o The quantity ordered each time will vary according to the stock position and its future
requirements based on past years rate of consumption.
o This system suits well for materials whose purchases are planned months in advance.
o It works well for the materials which show an irregular or seasonal variation
o In this system, there is no provision for unforeseen demands.
o It does not admit the adoption of ordering based on economic order quantity formula.
o It tends to peak the purchasing work round the reviewing dates.

FIXED ORDER QUANTITY SYSTEM

 It is based on the fixed quantity ordered rather than on time factor. Frequency of ordering
varies
 The order is placed when stock reaches a predetermined level and not at definite intervals.
 This system permits ordering the optimum quantity required for each item, based on price
and rate of consumption.
 e.g: Two Bin System(sufficient stock to meet consumption before placing of next order is
held in one bin and other bin contains stocks sufficient to meet probable consumption
during the period of replenishment.( two bin system in inventory management is a system of
using two inventory bins in order to reduce the risk of production stock depletion)

Functions of stores

 Receipt
 Storage
 Retrieval
 Issue
 Records
 Housekeeping
 Control
 Surplus management
 Verification
 Interaction and coordination

Receiving area

 Entry point for all materials coming to the hospital/Careful check should be made and errors
detected
 Some of the common receiving errors are Supplies not ordered are shipped, Items are
changed or substituted without prior approval of purchase department, outdated or
defective materials are sent and there are shortages in supply
 Receiving person: should check quantity(number of packages and weights against shipping
or packing slip)
 Check quality(inspect the materials and containers, record any damage)
 Verify receipt of materials against the supplier’s packing slip and purchase order

Receipt
  Any item of goods or material that enters the organization always enters through the stores.
Similarly, every item unless specifically excluded, has to leave through the store. Stores is
the final account keeper of all materials.
 Materials sent by any supplier after the security clearance comes to the stores. Stores check
the document carried by the carrier, known as Delivery challan, against the copy of the
purchase order placed on the supplier by the organization.
 Received materials checked for quantity,specifications,batch number,package size(if not
found conformity with purchase order such materials separated and intimated to suppliers
 The materials which are in conformity with purchase order are posted in inward register and
material receipt note is prepared(It will tell about the history of supplies at the time of
receipt)
 The materials after making entries in the stock register are sent to main stores where they
are arranged in cupboards/racks. Cold temperature items like vaccines will be stored in cold
room/refrigerator
 After making entries in stock register, it should be submitted to store manager for
countersignatures on each and every entry
 Once the adequacy is established and quantity is verified the material is sent for testing for
quality parameters.
 Sometimes quality control tests are elaborate and time consuming. If the policy of receipt is
to unload the material subject to quality control acceptance, it is cleared for unloading.
 Unload material is kept on the hold if not yet cleared by quality control department. If the
material is rejected it is sent back to the supplier after clear documentation.

Indenting of stores

Different types of indents prevalent

1. Annual indent: Prepared and submitted once a year and the requirement is based for one
complete year
2. Supplementary indent: Despite of all precautions the demands could not be ascertained
accurately due to non availability of adequate funds, the demanded quantity could not be
approved in full that becomes the basis for preparation and submission of Supplementary
indent in future
3. Emergency indent: Due to unforeseen circumstances like epidemics, disaster or acute
shortage of items emergency indents are prepared and submitted
4. Local Purchase indent: Despite of all the above indents the local authorized chemists are
appointed for drugs and other supplies to the hospital. The specialist of the hospital tend to
prescribe new items, therefore local purchase are essential for such items
5. Purchase Committee

Storage

 Once the unloaded material is approved by the quality control department, as per the
quality plan in the quality system, it is moved to the specific place in the stores layout.
 The material is so stored that it becomes easy to retrieve and issue subsequently.
 Storage should also ensure protection against deterioration, damage and pilferage.
 Detailed system is adopted for location and labeling of items while in storage. Storage plan is
made keeping in mind,
1. Nature of the product
2. Volume and weight
 3. Movement frequency
4. Point of use

Retrieval

 Easy and quick irretrievability of items that are demanded by the internal customers.
 Easy identification maximum space utilization and minimum handling are key factors to
retrieval functions.

Issue

 Full filling costumer demand for the item in minimum time, keeping quality high and cost
minimum is issue.
 An internal customer doesn’t pay the price but he has to fulfill requirement of authorization
for the demand.
 A duly authorized indent or requisition for the item is the key.

Records

 Maintain records of receipt and issue.

 Updating the stock levels as per movement of materials.
 Basic records of store are bin card and stock register.

STOCK TURNOVER

 It has to be ensured items are used up before their date of expiry .A stock detail register
containing date of expiry of each consignment will help in guarding against holding
outdated material on shelves and a control on turnover of items with short shelf life.

Housekeeping

 Maintenance of cleanliness in the store and ensuring principal of place for everything and
everything in it’s place is fully implemented.
 Good housekeeping ensures satisfactory work practices.

Control

 Taking measures to ensure plan is being adhered to.

 Any changes in consumption pattern or replenishment pattern are closely monitored for
corrective action.
 Materials movement is watched to identify nonmoving material for disposal. Effective
control puts into effect management objective of ‘no shortage and no excess’.

Surplus Management

Primary Sources of Surplus:

The followings are the three primary sources of surplus:

(A) Surplus from Scrap and Waste.

(B) Surplus obsolete or damaged Machines/Equipment

  Effective disposal system for unneeded material to reduce inventory cost and proactive
measures to eliminate deterioration and obsolescence.
 Obsolete items are good in all respect but have no useful role in the company due to
changes that have occurred in the course of time.
 Surplus items are those that have accumulated due to faulty planning, forecasting and
purchasing. Hence a usage value is associated With these items.
 Scrap is wastage generated due to process like turning, boring drilling etc., Also due to bad
manufacturing

LAYOUT OF STORES

 Making effective use of space: Adjustable, fixed location racking system with shelves provide
suitable storage facility
 Racks can be open or close ended. Shelves should be easily adjustable in height. Backing can
be provided for the items slipping out from one shelf to another
 Small items like spares are held in bins
 Using an effective stock location method: Each item on the inventory of the stores is best
identified by a code number based on the generic name of the item
