Role of ABC Analysis in Hospitals

Introduction about Role of Inventory Control in a Hospital:

About one-third of the annual hospital budget is spent on buying materials and supplies, including medicines. The pharmacy is one of the most extensively used therapeutic facilities of the hospital and one of the few areas where a large amount of money is spent on purchases on a recurring basis. This emphasizes the need for planning, designing and organizing the pharmacy in a manner that results in efficient clinical and administrative services. The goal of the hospital supply system is to ensure that there is adequate stock of the required items so that an uninterrupted supply of all essential items is maintained. 

Inventory control in hospital pharmacy is very essential in a developing country like India. As resources are limited, it is essential that the existing resources be appropriately utilized. With the existing drug budget, if rational drug use and improved drug management practices are followed, Large number of patients can be served. It is essential that health managers use scientific methods to maximize their returns from investment at a minimal cost.

Meaning of ABC Analysis:

ABC analysis is a method of classifying items or activities according to their relative importance. It is also known as “separating the vital few from the trivial many” because, for any group of things that contribute to a common effect, a relatively few contributors account for a majority of the effects. The analysis classifies the items into three categories:

• The first 10-15% of the items account for approximately 70% of cumulative value (cost) (category A),
• The Second 20-25% are category B items that account for a further 20% of the cumulative value and
• The remaining 65-70% are category C items, amounting for a mere 10% of the total value.

Why we have to do ABC Analysis in our Hospital:

1. To analyse the annual consumption of items of pharmacy in our Hospital
2. To analyse the annual expenditure incurred on items of pharmacy for the whole year
3. To evolve a priority system based on ABC matrix analysis
4. To identify the item categories requiring greater supervisory monitoring in our Hospital Pharmacy.

Importance of ABC Analysis in Hospital Pharmacy:

ABC analysis popularly known as “Always Better Control” is a very useful approach to material management based on Pareto's principle of “Vital few and trivial many” based on the capital investment of the item. According to Pareto's theory 10% items consume about 70 % of budget (Group A). The next 20% consume 20 % of financial resources (Group B) and remaining 70 % items account for just 10% of budget (Group C).

This necessitates application of scientific inventory management tools for effective and efficient management of the pharmacy stores, efficient priority setting, decision making in purchase and distribution of specific items and close supervision on items belonging to important categories. ABC analysis identify the items requiring stringent control for optimal use of funds and elimination of out-of-stock situations in the hospital stores.

Comparison of items:

A class items	B class items	C class items
High consumption value	Moderate consumption value	Low consumption value
Very strict control	Moderate control	Low control
No safety stocks	Low safety stocks	High safety stocks
Maximum follow up and expediting	Periodic follow up	Follow up and expediting in exceptional cases
Rigorous value analysis	Moderate value analysis	Minimum value analysis
Must be handled by senior officers	Can be handled by middle management	Can be fully delegated
Frequent ordering	Once in three months	Bulk ordering in 6 months
Weekly control statements	Monthly control reports	Quarterly control reports
Accurate forecasts in material planning	Estimates based on past date on present	Rough estimates for planning

Some Benefits to Adopt ABC Analysis in Your Hospital Pharmacy:

End of Life Management:

Every product goes through four phases during its life span; launch, growth, maturity and decline. Once the product reaches the maturity stage it is bound to decline sooner or later. Customer demand plays a vital role in end of life management. With the concept of ABC analysis, inventory planners can forecast the demand for products beforehand and manage the stock levels accordingly. 

Supplier negotiation:

It is obvious that the hospital would make most money by negotiating with suppliers of the class A category since 70% – 80% of the money is spent on them. An offer may look lucrative from afar but never accept the very first one. Make a counter offer in return. Wait for the supplier to revise his numbers. If the supplier is not willing to budge, you can still make the most of the deal by negotiating other features like providing post purchase services, reducing the down payment, free shipping etc. The negotiation needs to be a win-win approach, the supplier needs to make reasonable profit from the deal while helping your hospital get desired quality product and services.

Inventory optimization:

Optimizing inventory is a popular benefit of ABC analysis as it allows inventory planners to organize high priority items aligning to patient requirement. Depending on the demand fluctuations the inventory is stocked to cater to high demand items and also carrying low stock for undesirable items.

Strategic Pricing:

ABC analysis of inventory helps in setting the prices very strategically for products which bring more value to the hospital. The hospital will have to monitor those products which are highly desirable to patients and have an escalating demand. Based on that data, the hospital can increase the price of these items by a few extra money which will make a huge impact on the profit. Another strategic pricing option to consider is to consolidate suppliers or consider transferring business to a single supplier. Purchasing more goods from a single supplier will reduce carrying costs and complexity costs associated with them.

Resource Allocation:

Resource allocation with ABC analysis is a continuous process requiring periodic tracking of class A items. Since these items are of utmost value, the stock level must always align with the patient demand. In case a class A item is no longer desired by the customers or has fairly lower demand, the item needs to be moved to a lower classification B or C.

Customer Service Levels:

Not all products can be treated the same or achieve same customer service levels. The service levels for different products depends on multiple factors like the item cost, quantity sold and margin on the product. There is no point crowding your warehouse with low margin products which are sold once in a while. ABC analysis allows planners to set service levels based on the product classification, which improves the overall supply chain performance carrying less safety stock. 

 Limitation of ABC Analysis:

The limitation of ABC analysis is that it is based only on monetary value and the rate of consumption of the item. In a hospital, an item of low monetary value and consumption may be very vital or even lifesaving. Their importance cannot be overlooked simply because they do not appear in category A. Therefore, another parameter of the materials is their criticality.

Conclusion of the topic:

Hospitals stores need to implement inventory management techniques to reduce the number of stock-outs and internal lead time. The methodology of ABC analysis techniques to focus on the most important part of the inventory can advise hospital managers the means of prioritizing their inventory. Such prioritization may enable them to concentrate their efforts on the “vital few.” Hospitals need to look at their own processes and determine steps are redundant and can be eliminated. This can decrease the internal lead time.This will ensure that stock-outs are avoided in hospitals. 

Written by:

Dr. Praveen Bajpai

Director of Ingenious Healthcare Consultants Pvt. Ltd.
Founder of Skill Sathi

MBA in Hospital administration, PG Diploma in Quality Accreditation, PG Diploma in Medico Legal System, M. Phil in Hospital Mgmt. from BITS Pilani, P.hD in Management, Certified NABH Auditor, Certified NABL Auditor, Certified Auditor for Clinical Audits, Green Belt in Six Sigma, Certified in Hospital Infection Control Practices, Certified trainer for International Patient Safety Goals, Certified Auditor for JCI 7th Edition Standards 

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