December 22, 2012

MH0052 [Hospital Organisation Operations & Planning] Set2 Q4

Q4. Explain CSSD and its activities in detail.

General Stores
Materials are essential resources to achieve the objectives of any health care organization and key to the development. In the hospital setting the expenditure on material and supply accounts to about 40%. In the absence of materials required for health care activities the manpower deployed becomes non functional. Therefore, it is of great importance that materials of right quality are supplied in right quantity at right time and place of use.

Storage System
The storage system in general stores may be broadly classified under 3 heads
  1. Receipt system
  2. Physical update & maintenance system
  3. Issue system

In a growing organization / industry, the system should not only permit matching of present requirements with existing facilities but also take care of future growth potential & demands.

Objective of the general stores
The main objective of the stores function is to render service to the users. 
They may be enumerated as follows
1. Receive the material, check them for quality, co-ordinate for inspection & quality checks & prepare the goods receipt notes.
2. Accept the past materials, prepare rejection notes & complete the formalities for payment of bills.
3. Take stock of accepted materials, store in pre-determined respective places.
4. Issue vouchers to be prepared, make actual issues as and when necessary.
5. Keep the purchasing department well informed through systematic indents & other reports.

Organizing the whole procedure is essential in order to have easy storage, prevent pilferage, proper identification & quick retrievals with minimum time & effort. To achieve this, stores location & layout must be considered & the job analysis of the personnel involved should be done. 

Apart from this the following routine activities must be attended to-
  • Establish, maintain & update a rationalized system of codification.
  • Analyze the consumption & issues from stock records in order to establish norms.
  • Highlight abnormal consumption, accumulation, obsolescence & surpluses.
  • Arrange for periodic reviews, physical verification & ensure proper accounting.
  • Supervise for smooth functioning.

Stores Location and Function:
Storage system has to accommodate for the inputs of material, components brought in from outside sources, the in-process inventories & the outflow of finished goods to customers. The systems efficiency is assessed in terms of unit cost of moving goods through storage sites or storage over a given period.

The design, size & location of a storehouse must therefore be, an integral part of wider systems design & management strategy. It must be realized that, what happens in the storehouse affects the whole range of other activities.

Development of Storing:
The degree of mechanization affects layout, while scarcity of space affects height. The need for rapid over picking means an easy accessibility to stock, but it weighs against economy of space. Therefore any storage system is a compromise between the use of space & use of time.

There are three basic ways of storing:
1. Fixed location: This means that the stock can be found immediately without a complex system of recording, hence there can be considerable waste of space.
2. Random location: In this case space is better utilized but goods & elaborate records have to be kept about the location of materials.
3. Zoned location: In this case goods of a particular product group are stored in a given area. They may be randomly stored in a zoned location or according to fixed location.

In large mechanized/automated storehouses, fast moving & sometimes medium &slow moving are grouped together. This is to assign most suitable types of storage & materials handling equipment to different kinds of stock movement. Fast moving items are stored near to the input/output end so as to reduce travel time & speeding up throughout.

Centralization and Decentralization:
Though centralization has its own merits like, helps to ensure economy, better control & reduced manpower needs, it has its demerits like difficulty in rendering service to various work centers scattered in different locations.

Decentralized storehouse in advantageous to workshop, lying scattered in wide areas. However reversal of flow wastes money & counter flow is likely to result in congestion & accidents.

Classification and Coding:
The need for classifying & coding is essential in order to prevent unnecessary stocking of items, misleading nomenclature, faulty numbering & use of trade/brand names to describe the same item. A standard numerical coding is necessary for the purpose of use in purchase, stores and issue & other purposes in order to symbolize such fundamental & particular characteristics.

The Systems:
The following systems of codification are in common use:
  • Alphabetical system
  • Numerical system
  • Decimal system
  • Combined alphabetical & numerical system
  • Brisch system
  • Kodak system

Alphabetical system: 
In this system alphabets become the basis & codes are allotted to each item in alphabetical order

Numerical system: 
This system has numbers like, simple numbers, block numbers or dash/stroke numbers.

Decimal system: 
Under this system of codification within the range of ten numerals 0-9 some significance is attached with every code, thus the whole range of items can be codified without difficulty.
X- Sub-group
X- Group
X- Class

Two-digit decimal:
X- Sub-group
X- Group
X- Class

Combined alphabetical & numerical system: 
This system uses a combination of both alphabets & numbers. It allows the use of alphabets to a limited extent & then use of number codes.

Merits and Demerits of Codification
  • Helps in accurate identification, prevention of duplication and variety reduction.
  • Helps in mechanical recording, accounting, pricing and costing of materials.
  • Locating and indexing for inspection are also made easier.

  • Codes are sometimes misunderstood & when this happens finding the exact code is difficult.
  • Large numbers of items are coded in one group, this leads to confusion.
Materials Accounting
The primary basis for material accounting is cost. Materials are ordered on a continuous basis & there is no prescribed procedure which is used in the determination of materials cost for accounting purposes.

For this purpose, the following records & documents are maintained:
1. Bin card
2. Stores ledger
3. Stock identification card
4. Materials received note
5. Materials requisition slip
6. Materials return slip
7. Materials transfer note

Bin card
It is a record of movement of materials against each kind of stock with respect to daily transactions. It shows daily receipts, issues & balance quantity in hand.

1. Exact position of materials is known, as against each receipt & issue.
2. Information regarding stock level & the quantity balance on hand is immediately known.
3. Code number and full description of the materials is given on the card.
4. Serves as a check on stock ledger & helps physical verification of stores

Stores ledger
When bin cards do not show the details of information, stores ledger is the alternative. It gives the following information as against the bin cards:
Supplier name & address
Quantity ordered each time, invoice no. & price
Expected delivery with due date in remarks column.
Stock levels.

Stock identification card
These cards are kept in the stores against each bin or rack. They contain the following information:
Material code no. & full description.
Respective stores ledger folio & bin card no. 

Materials received note
When materials are passed on to the stores after proper verification & approval by inspection, the materials & supplies are taken into stock through material received note.

Materials requisition slip
Materials are requested by the user department through this document. Stores dept must check the following points:
1. M.R slip is signed by the authorized person
2. Proper code no. & description of the material required to be marked
3. Quantity issued is entered immediately, signed & verified by the stores.
4. The requisition is prepared in triplicate, one copy each for issuing authority/stores record/stock accounts.

Materials returned note
Materials are returned by the user department back to the stores through this document

Materials transfer note
This document is used when materials are transferred from one user department to another user department

Flow of Costs and Inventory Valuation
Inventory has both physical (i.e. goods flow) & financial (i.e. cost flow) characteristics. The former is factual & objective, the latter is a subjective estimate.

The following methods are in use for assumed flow of costs for accounting.
1. FIFO method (first in, first out)
2. LIFO method (last in, first out)
3. Average cost method
4. Specific cost method

FIFO Method
In FIFO method the assumption is that materials are issued from the oldest stock & their unit cost also represents the cost at time of purchase on the stock ledger. However when prices are subject to change this method does not match costs against revenue on a current cost basis. This causes distortion in the income statement.

LIFO Method
Under this method, the cost of inventory on hand represents the oldest inventory at purchase cost of old inventory, i.e. the current revenues represent the current replacement cost; the underlying purpose being to match the current revenues against current costs. During inflation, LIFO means lower profits. Such inventory income is unrealistic because it ignores the need for replenishment at higher prices.

Average Cost Method
In order to provide realistic basis for inventory valuation and the cost of goods sold, the Average cost method is used. Average cost methods commonly used are of three types, Simple Average, Weighed Average and Moving Average. It works on the principle of determining the average cost of each item during the period of a given time.

Specific Cost Method
It provides a more realistic valuation of ending inventory as well as flow of costs. It has the flexibility of being suitable for either a periodic inventory system or perpetual inventory system, the objective of which is to indicate inventory at all times through physical verification of inventories round the year in order to reconcile the current balances with stores ledger.

Inventory Control and Management
In simple terms inventory control means a stock of goods.

Inventories are materials or resources of any kind having some economic value, either awaiting conversion or use in future.
It is also defined as an ideal resource of any kind having economic value.

Inventory involves money in terms of storage space, personnel, insurance, security, deterioration & obsolescence. Sometimes it may be economical to purchase an item on demand than to maintain an inventory. Conversely a certain minimum amount of each item must be held to minimize the chances of total stock-out.

The purpose of inventory control is to determine appropriate levels of holding inventory, the ordering sequence & the quantities so as to minimize the total cost incurred.

The management & control of inventories, incorporates certain concepts and technique as follows:
  • ABC analysis
  • VED analysis
  • Ordering cost
  • Inventory carrying cost
  • Economic order quantity
  • Lead time
  • Safety stock
  • Re-ordering cost
  • Stock turnover

Economics of materials control is a matter of self-preservation in todays competitive environment. Since material control is a matter of rupee control, stringent control must be placed on higher value items.

Paretos law: 
According to this law, The significant items in a given group normally constitute a small portion of the total items in the group and the majority of the items in the total will, in aggregate be of minor significance. 

A small number of items represent a large percentage of the cost value. Conversely, large percentage of the items represents only a small portion of the cost value. The procedure adopted to determine varying levels of control is called ABC-analysis.

The list of all items in the store & the current annual consumption of each item (in Rupees) are taken down from the records available in the Stores / Purchase dept. The items in the list are then re-arranged in the descending order of annual consumption cost (highest to lowest)

An analysis of this list will show that:
The first 10% of the items account for approx.70-75% of the annual consumption cost. These are categorized as A items.
The next 20% of the items account for approx. 20-30% of the annual consumption cost. These are categorized as B items
The remaining 70% of the items account for only 10-15% of the annual consumption cost. These are categorized as C items

Low value items require low investment cost even to increase the level of safety stock. Hence large quantities can be purchased & because of higher stock the physical inventory can be lengthened. Conversely high value items require higher investment cost. Safety stock should be as low as possible and economical purchases should be made, close controls of these items should be ensured. Without ABC-analysis the ordering policy may be to order all items once in 3 months, in which case the stock position may become chaotic.

Summary of ABC-analysis:

Other Classifications
VED Analysis (Vital, Essential, Desirable)
HML Analysis (High cost, Medium cost, Low cost)
FSN Analysis (Fast, Slow, Nonmoving)
SDE Analysis (Scarce in market, Difficult to procure, Easy to procure)

Economic Order Quantity (EOQ)
It is that quantity at which, the cost of ordering the requirements of an item and the inventory carrying costs are nearly equal i.e. when the sum of the two costs is the lowest. In other words, it seeks to strike a balance between purchase costs and the cost of holding inventory. 

Advantages of EOQ
1. Helps in finding appropriate levels of holding inventories.
2. Facilitates the function of ordering sequence and the quantities so as to minimize the total material costs. 

In order to understand EOQ method two important costs must be considered and analyzed. 

Ordering Cost
In most cases, ordering cost is hidden under overheads. Ordering costs include many variables and are not easily measurable.
They include salaries / wages of the involved personnel
Postal / Telephone / Telex and similar bills
Entertaining Vendors / Suppliers
Travel by Stores Personnel (staff)
In general the ordering cost per order may vary between Rs.15 to Rs.40, which is quite acceptable.

Inventory Carrying Cost
It is obvious that holding excess inventories will result in an increase in the cost of storage, space, maintenance, electricity, insurance and other holding charges along with money tied up in holding it. However there are tangible and intangible costs and problems in carrying too little inventory.

Some inventory carrying costs are as follows.
Cost of storage / Insurance
Salary / Wages of stores personnel
Stationary forms / Paper work
- Loss of interest on money deadlocked in inventory
- Deterioration and Obsolescence
- Losses due to pilferage

Inventory carrying cost is expressed as a percentage of the average investment in inventory. The total inventory carrying cost may range from 1% - 5% of the total inventory cost of a health organization.
EOQ Formula
TC = RP + (RC / Q) + (QH / 2)

Factors Influencing Order Quantities
Lead time
It is the period that elapses between placing an order and receiving the supplies in stores.
Administrative lead time: Time required for preparing purchase requisitions, obtaining quotations, initiating purchase order etc. It also includes checking and inspection of materials on arrival, recording and sending the material to the appropriate stores.
Delivery lead time: It is the time taken by the supplier in getting the materials ready, transport of materials from his warehouse and actual delivery to the user organization.

Minimum Stock Holding
The guiding principle is that high value items should have a very low stock (since orders are closely followed up). Low value items can have high quantum of minimum stock. Medium value items fall in between. Shelf life affects the minimum stock holding of an item to a great extent.

Safe Buffer Stock
This is the quantity of stock that is set aside as insurance against variation of demand and procurement period for unforeseen reasons and to avoid stock out.

Reordering Systems
Reordering Point: The reordering level is equal to the minimum stock plus requirement during lead time. 
It is given by the formula B = RL / 12, where B = Reordering point; 
R = Annual demand (units); L = Lead Time (months)

Cyclic System: In this system the physical position is reviewed at fixed intervals. Orders are placed depending on the stock in hand and rate of consumption, i.e. ordering interval is fixed but the quantity ordered varies each time. Ideal for A value items and high value B items.

Two-Bin System: In this case sufficient stock to meet consumption before placing of the next order is held in one bin and the other bin contains stock sufficient to meet probable consumption during the period of replenishment. Here, the order quantity is fixed but the frequency of the order varies. Fixed order quantity is suitable for C items and low value items.

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