NETHRADHAMA Super Speciality Eye Hospital

DR. SUMAN SHREE R.MBBS, MD, DNB, PGDHHM, PGDMLS

CEO & DIRECTOR, HOD ANESTHESIA DEPT.

ECONOMIC ORDER QUANTITY (EOQ)

Order quantity that minimizes total

inventory holding costs & ordering

costs

One of the oldest classical production

scheduling models

The framework used is the Wilson

EOQ Model or Wilson Formula

Customer & Quality Focus

o Following ABC analysis the Purchase & Stores Department (Voice of Internal Customer) highlighted the shift of non-clinical inventory item patient file from Category B to Category A

Factors critical to quality (CTQ) –

- Quality of patient file (design, thickness, patient & eco- friendly etc)

-Providing necessary hospital information (scope of services etc)

ABC ANALYSIS 2009-10

ABC ANALYSIS 2010-11

ABC ANALYSIS

A Category materials

Consists of 5% of total items, accounts for 80% of Total

Monetary Value, requires strict control

B Category : Consists of 15% of total items, 15% of

Total Monetary Value, requires intermediate control

C Category : Consists of 80% of total items, account for

5% of Total Monetary Value, requires minimum control

Result of ABC Analysis

„A‟ Category ( High Annual Value items)

includes

-Clinical items such as Intra Ocular Lenses

(IOLs)& implants

Non - Clinical item under A Category

Patients Files- Anomaly- Cause of Concern

DIAGNOSTIC APPROACH

Each Project is a structured approach to

Problem Solving involving the five steps;

Defining the Problem – Define Phase

Measuring the Problem – Measure Phase

Analyzing the Root Causes – Analyze Phase

Implementing the Improvements – Improve Phase

Sustaining the Gains – Control Phase

Monitoring the performance – Continuous

improvement Phase

Problem Statement:

As a part of the yearly exercise of the ABC Analysis for the

years 2010-11 and 2011-12, it was found that Patient Files

have come under “A” Category.

Patient Files were under B Category As per ABC Analysis

2009 – 2010

Define Phase

Project Charter

Business Case

Material Costs

30 – 40% of the total hospital Costs.

Containment has a tremendous potential in making the hospital costs bearable to patients.

Management expects

Procurement with economical prices without compromising quality & patient satisfaction.

Increased savings enhances financial viability

Money blocked in dead / slow moving stock to be avoided.

Project Charter

Project Goals:

Strive to bring Patient Files from A Category to B Category

(ABC Analysis)

Quantity of Files to be ordered in most economic way (EOQ)

Continuous cost reduction programme without compromising

the quality of Files

Project Charter-Scope

Process Boundaries

Process Start Point: Receiving Indent for Patient Files

Process Stop Point: Issue of Material (Patient Files) to the

Internal Customer

Impacted Functions

Registration

Stores & Purchase

Finance & Accounts

Assumptions

Ordering cost is constant

Rate of demand is known

Lead time is fixed

Purchase price is constant

Replenishment is instantaneous

Only one product is involved

SCOPE

Measure Phase

Data Source

Annual Consumption, Price of Material and

Material Receipt Records

Tally Software Application

HR Payroll Software

Summary of Collected Data

Data Characteristics

The Data Observed were for 2009–10, 2010–11 and

2011–12 for ABC Analysis

For EOQ Calculations, Patient File data was analyzed

for 2011-12

MEASURE PHASE

26000 30464 33235

540800607756

642764

0

100000

200000

300000

400000

500000

600000

700000

2009-10 2010-11 2011-12

Comparison of Consumption & Expenses for

Patient Files

Consumption Expenses

DESIGN OF OLD FILE

ANALYSIS PHASE

Brainstorming Exercise

Steps undertaken

Need of EOQ of Patient Files

Negotiation of Price based on EOQ with existing vendor

If not Negotiable – Change the Vendor

Slight Modification in Files to be done, if required, to reduce the cost

Frequency of ordering to be reduced based on EOQ

[ observed that Patient Files were ordered almost every alternate month for quantity – 5000Nos]

EOQ Model

Tool adopted for calculation of EOQ

Classical Wilson Model was adopted to calculate EOQ

Quantity to be ordered in order to minimize total inventory cost.

EOQ MODEL = Annual Ordering Cost + Annual Inventory Holding Cost = minimal

Methodology For Deployment

Steps Undertaken:

Calculation of EOQ of Patient Files was done

Quotations were invited from multiple vendors

Negotiations was done for best price

Slight Modification in design of file was done

ANALYSIS PHASEMethodology

Calculation of EOQ, Denoted by Q, using the classical Wilson Method

Q = √2 DK / h D= Annual Demand (Consumption) of itemK = Ordering Cost Per Order H = Carrying (or Holding) Cost Per Item

Calculation of EOQ

Annual Demand (D)

Annual Demand(D) of Patient Files for the year 2011-12 is 33,235 Nos

Ordering Cost (K)

(It includes Purchase Officer salary, stores staff salary, stationery, phone expenses.)

In P.O.( Purchase Order) generation process-Salary of two purchase staff = Rs. 40,000 /month

Avg total no. of P.O. generated per month – 100

Per Order P.O. process contribution = Rs. 400 (40,000/100)

Calculation of Ordering CostMaterial Receipt (MR)Process

Salary of stores staff Rs. 20,000 /month

Avge Total no. of MR handled /month= 200 nos

Hence Per Receipt MR process contributed Rs. 100 =(Rs 20,000/200)

Miscellaneous Expenses like Stationery, fax, mail , telephone etc. assumed as Rs. 100 per Order

K= Rs. 400 + Rs. 100 + Rs. 100

Ordering Cost =Rs. 600Per Order

Carrying Cost

Calculation of Carrying Cost

Carrying Cost is considered according to the Industry Standards 2% of P, i.e. the cost of the item.

For Patient Files, P = Rs. 19.34 per No.

Hence h(Carrying Cost)=0.02*19.34 = Rs. 0.39 per No.

Final Calculation of EOQ

Final Calculation of EOQ

Q= √2*33235*600/.39

Hence Q = 10112 Pieces

Approximately 10,000 pieces (rounded off) per order is the Economic Order Quantity for Patient Files.

Graph showing the EOQ Calculation by Charting the Ordering Cost, Carrying Cost and Total Cost versus the Order Quantity

IMPROVE PHASE

DESIGN OF NEW FILE

35915 32950 38900

694596.1637253

752326

346579.75 329500389000

0

100000

200000

300000

400000

500000

600000

700000

800000

2012-13 2013-14 2014-15

Consumption Projected Cost Actual Cost

IMPROVE PHASE- ACTUAL SAVINGS

348016.35307753

363326

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

2012-13 2013-14 2014-15

Annual savings on Patient Files (INR)

365973.85340703

421676

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

2012-13 2013-14 2014-15

Annual savings on Patient Files (INR)

Considering 2.5% inflation

GRAPH SHOWING THE EOQ CALCULATION BY CHARTING THE ORDERING COST, CARRYING COST

AND TOTAL COST VERSUS THE ORDER QUANTITY

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

0 5000 10000 15000 20000 25000 30000 35000

Cost (R

s)

Order Quantity (Pieces)

EOQ Calculation for Patient Files For year 2015- 16

Ordering Cost

Carrying Cost

Total Cost

Direct/Tangible Benefits

Financial Gain for organization by adopting scientific way of inventory control and cost reduction

Accommodates quantity discounts either incremental or all units

Purchase price of Files are very economical

Ordering Quantity is fixed now i.e 10,000Nos to be increase to 14,000 for the financial Year 2015-16

This saved amount can be invested in some other area

Indirect/Intangible Benefits

Frequency of ordering is reduced from 7 times to 3 times compared to previous year. So ordering cost has been controlled

Motivation for other staff for cost reduction for organization without compromising on quality .

Duplication of work is minimized .

Socio-Economic Benefits

As cost of files are very economical it would help in

decreasing the burden transferred on end consumer i.e

patients which would have been costlier for them.

CONTROL PHASE

Annual Demand is monitored

Carrying Cost & EOQ is calculated whenever there is change in price

Frequency of ordering is controlled

Stock out is avoided

INNOVATIVE APPROACHES

Scientific Method of determining Purchase order Quantity

Using EOQ Formula (Wilson Model) First in healthcare Industry

Internal Lead Time reduced due to standardization of design of patient files by eliminating all variables

Widened the Horizon for sourcing the vendor

Holding & Sustaining the Improvements

Control plan has been developed & Deployed in the manner that the Ordering fixed quantity of Patient Files determined by the EOQ

calculations.

Frequency of ordering is fixed.

No drift in performance following the closure of the project by yearly monitoring and control.

The Annual demand for each item is recorded.

ABC & FSN analysis is done annually.

APPLICABILITY IN OTHER AREAS

The EOQ Analysis could be extended to other

high value materials in Category A & Top B

materials in ABC Analysis

Eg: Disposable Eye Drapes ,Disposable surgical,

Gloves, Post Operative Ophthalmic,

Medication Kits

Vision

Leadership in the Eye Care Domain

Mission

Vision Care Par Excellence