Investigating Reasons for Holding Excess Inventories at Directorate General of Medical Supplies (Oman)

Investigating Reasons for Holding Excess Inventories at Directorate General of Medical Supplies (Oman) 1 INTRODUCTION The government and Ministry of Health (MOH) in Oman have been spending an enormous amount of money on pharmaceutical industry (medicines). According to census 2014, the total population in Oman is about 4 million out of which 56% is Omani population. Oman Gross Domestic Product (GDP) in 2015 was about $70.25 billion (£52.5 billion) out of which 2.4% is spent on health sector (£1.3 billion). They have also been investing in the distribution of these medicines to the different delivery points (hospitals, health centres) and the final customers (patients). To improve the pharmaceutical logistics, they have created a single (central) distribution centre called Directorate General of Medical Supplies (DGMS) that supplies and distributes the medicines to the different hospital pharmacies on a regular basis (monthly or bimonthly supply). CITATION Min11 \l 2057 (Health, 2011) The medical supply chain system in DGMS is illustrated in Figure 1. It starts at DGMS (step A) when an order from a primary, secondary or tertiary health institution arrives (step B). The quantity requested is determined, according to the previous month consumption, stock available at the institution and the stock availability at DGMS [step C]. Based on the determined quantity, the issuing process takes place by pharmacist (step D). To avoid mistakes another pharmacist re-checks the issued quantity (step E) and packs them to be loaded (step F) and then delivered to the requesting institution (step G). One of the major aims of this supply chain design is to ensure effective service and to reduce inventory by minimising the final cost. Inventory can be defined as the amount or value of resource or materials on hand which includes finished goods (medicines), work in process and spares and stores. The buying processes of the medicines do not end upon the ordering and receiving of the medicines. It also requires managing the inventory due to the dynamic nature of the demand from the hospitals CITATION Pet04 \l 2057 (Peterson, 2004). BA CQuantity determination Order arrives DGMS (Single warehouse) FEDLoading the issued stock Re-checking the issued quantity Medication issue according to the determined quantity GDelivery point Figure.1 illustrates supply chain system in DGMS from receiving an order to delivery of the Health services To balance demand and supply, it is very important to devise an ordering policy that reflects the ever-changing actual stock situation CITATION Gup13 \l 2057 (Gupta, et al., 2013). This is known as inventory management. This would include the monitoring of material moved into, and out of, stockroom locations and agreement of the inventory balances CITATION Kum15 \l 2057 (Kumar & Chakravarty, 2015). In medical stores (DGMS), a medical inventory management system is used where it helps to control the stock movement. Excess inventory can have a negative impact on the financial aspect of the organization (that is, MOH Oman). Whereas stock should be kept to a minimum, a sufficient quantity of medications has to be maintained for patient care when needed. Therefore, the supplier (DGMS) should have a purchasing system that balances between cost concerns and the availability of stock CITATION Pet041 \l 2057 (Peter son & Kelly, 2004). Also, excess inventory requires additional space for storage which has a direct impact on the organisation to provide more spaces. (Kaplan & Norton, 2003) Nevertheless, DGMS maintains too much stock (inventory), which raises the total cost and distorts the pharmaceutical logistics. Therefore, the main purpose of this project is to investigate the reasons for holding excessive inventories in DGMS. The main focus is on the inventory system that DGMS uses and in the work process (how they work, the demand ordering system, and the demand - supply relationship). Directorate General of Medical Supplies (DGMS) should become more aware of the significance of strategically utilizing supply chain management in making decisions that can enhance the overall performance. To the best of our knowledge, there are no published studies that have analyzed the problem of excessive inventories in DGMS in Oman. Therefore, this report has focused on other countries studies on reasons why excessive inventories are held. However, there is no such study conducted in Oman. In this research project, the six sigma DMAIC approach methodology will be used. DMAIC is a quality strategy driven by data that is used to improve the processes (Fig.2). DMAIC is an acronym for five interconnected phases, which are Define, Measure, Analysis, Improve and Control CITATION Bor09 \l 2057 (Borror, 2009). In this project DMAIC will be used as follows: DMAIC step Project approach Define What is excess inventory? ( already defined) Measure What medicines will be used and how to measure excess inventory of these medicines in summer 2016 Analyse Based on questionnaire and interview, the data will be analyzed in summer 2016 Improve This suggestion for improvement comes after analysis of data and will suggest how excess inventory can be reduced Control How to maintain balanced inventory without excess Define Measure YesAnalyse Redesign Modify design Improve Control Fig.2 shows DMAIC approach 1 LITERATURE REVIEW This chapter will review a study that has not been done so far regarding the research question in Oman. Previous studies on reasons for holding excessive inventories of some medicines have been carried out in other countries. 3.1 Information system (IS) in a Medical store: The aim of a medical store is to manage and protect stored items from theft, loss, excess, wastage and to manage reliable medicine supply system supplied by the manufacturer/supplier to the user. To achieve the aims, an effective management system has to be applied with three key component elements (Fig.3) CITATION Wor12 \l 2057 (WHO, 2012): * An inventory control system: Effective inventory control system is important for any firm. This helps to reduce investment in inventories, reduce the cost of storage, decrease loss from any damage, keep sufficient inventories, ensure effective transport of inventories with receipt and effective dispatch functions. Besides, it allows forecasting future inventory needs; although forecasting is never 100% accurate, having an effective inventory control system can give a sort of semi correct inventory (Ogbo & Ukpere, 2014). * Warehouse management system which aims to look at the physical flow of medical items (goods) within the system, including issues, receipts, arrangement, checking and storage. Different procedures, systems and methods steps wise (chain influx) to material processing from the start of the source to the final consumer come under warehouse management CITATION Ban91 \l 2057 (Bancroft, 1991). Different Medical stores provide different management system according to their capabilities and facilities CITATION Man08 \l 2057 (Mangan, et al., 2008). Also, medical stores & warehouses represent about 20% of the final cost of logistics and act as the end point in the supply chain for orders related to assembly, sending products to final consumer and giving additional valuable services, CITATION Bak07 \l 2057 (Baker & Halim, 2007). As a consequence, warehouses play important role in gaining effective performance by monitoring the following CITATION Nyn \l 2057 (Nynke, et al., 2002): ¯ Product information, ¯ Lead time ¯ Resource ¯ Operational processes * Performance monitoring system which aims to ensure that the system is operating in an effective way Components of effective management system Performance monitoring systemWarehouse management systemInventory control System Fig.3 Components of effective management system (WHO, 2012) The information system is crucial for management; however, it might be costly, but the cost can be balanced versus the cost of inappropriate inventory control. Implementation of computerized technologies such as Enterprise resource planning (ERP), Radio Frequency Identification (RFID) and others has been found to improve the process of an overall medical store management system including inventory control CITATION Tse11 \l 2057 (Tseng, et al., 2011). DGMS Oman uses in-house built information technology called Al-Shifa system to control such type of management CITATION AlG14 \l 2057 ( Al-Gharbi, et al., 2014). This type of technology has interacted system between DGMS and end user (health institutions in Oman) but not with the supplier. Two types of information systems in managing medical store exist. These are information system between the medical store and supplier & medical store and consumers (hospital pharmacies). DGMS Oman uses quite a different approach of information system management from the one recommended by WHO. This is due to the available, convenient way of getting the stock from the supplier (Table.1). WHO DGMS * Start of order date * Award date to the supplier (for tenders) * Credit information letter * Date & information of shipment * Arrival of stock * Clearing date * Issuing date * Start of order date * Order quantity * Information about the supplier * Date & information of delivery * Information about lots * Arrival of stock * Clearing date Table.1 Type I information system: Difference between WHO & DGMS CITATION Wor12 \l 2057 (WHO, 2012) CITATION Min11 \l 2057 (Health, 2011) Type 2 information system in DGMS includes the following information: * Date of Order * Quantity requested * Quantity approved to be issued * Issue date * Delivery date The information system is known practically as a group of connected components which gather (input), handle (process), and disperse (output) datum & information and gives findings as feedback to correlate with aim & objectives CITATION Lau96 \l 2057 (Laudon & Laudon, 1996). Input activity results from the capturing of raw data and entering it into the operational system by mean of barcode or manual. Input is followed by processing that characterizes the data storage, comparison, calculations, and other activities which are performed by the system to turn the collected data into beneficial information. The reports which are obtained from the system and used for making decisions are referred to as the output stage, which is a final stage. Information system design might be manual or a computerized system that facilitates effective communication with suppliers, sharing of information CITATION Sta03 \l 2057 (Stair & Reynolds, 2003) and allows any correction action if needed. Whether the system is manual or computerized, it should offer and include stock records. Appendix 1 shows manual and computerized stock card system. A stock record is a record that provides information about suppliers, consumers, prices, stock issues, receipts, loss, and balance. A stock record as a stock card has to be recorded for each product (medicine) separately and frequently. This ensures providing all executions related to an item. On one hand, computerized stock record system proves to be fast, easy and reliable. However, human errors can still arise as a result of wrong stock quantity entry. In DGMS, such type of errors requires higher authority permission to correct the stock in the system, which is time-consuming CITATION Min11 \l 2057 (Health, 2011). A drug is used to diagnose, cure, treat and prevent disease, which is an important part of the medical field. Inventory management is a challenging task in most medical stores. Excess inventory raises the cost, whereas shortage may have an impact on the cost of procurement. Financial implications of procurement are determined by the cost of finished product. Shortage disrupts purchase cost, and also affect once the supply is disrupted. In case the shortage shuts down the production line, the financial impact of procurement may be high. Thus, it is essential to assess the proper levels of inventory which acts as safety stock versus supply and demand. According to Letikanya and Lee (as cited in Ogbo, &Ukpere, 2014), inventory management can also be referred to as the prevention of excess inventory. Excess in either direction (positive or negative) can determine inventory management or control. The ability of organizations to produce and meet their supply need is dependent on how well they manage to control the inventory. As technology progresses, managing inventory has become an easier job. One of the most promising product information systems uses radio frequency to transmit manufacturer and product information through radio waves. Inventory management entails monitoring stock movement into and from the stockroom as agreed by the records in the inventory. Excess inventory is perceived as a bad management practice that is associated with the cost at the expense of profit. Study of excess inventories in other countries shows that the excess is as a result of poor procurement and distribution methods. Most countries use national level medical stores, regional level medical store and district level medical stores to procure and distribute medicine. This system is challenging due to the nature of incoherent and irregular communication between such agencies. In Burkina Faso, drug procurement alone could take up to eight months (Saouadogo&Compaore, 2010). The amount of time taken by various players within the chain contributes to excess inventory as the agency orders in bulk to (or "intending to") bridging the gap between purchase and delivery time. Appropriate inventory management at different levels of the supply chain is suitable for managing excess inventory. The very many tiers within the supply chain in National Level Medical Store ( NLMS) and health center (HC), which hold inventory and process orders from the lower tiers contribute to high stock levels, significant labor and higher inventory cost. They also provide a logistic task for healthcare workers within the chain in Nigeria. Poor infrastructure, insufficient information about consumption, lack of information about current stock levels as well as poor planning all causes excess inventory. In Nigeria, stock management is manual and uses first-expired-first-out (FE-FO) strategy (Federal Ministry of Health, 2010a). Other issues that have plagued the Nigerian agencies and contributed to excess inventory include lack of a clear monitoring and tracking system that can be used to monitor drugs issued and dispatches made. Research also shows that the use of decentralize warehouse guidelines also contributes largely to excess inventory (Bossert et al., 2007). 3.2 Reasons for holding excess inventories Poor information management of stock can lead to excess inventory which is undesired in most circumstances. Such poor management will have a direct impact on efficiency and staff workload. Besides, it increases the wastage and requires more capacity in warehouse for storage. Demand and supply are proportionally related and such relation has to be maintained even during unpredictable demand seasons. Excess inventories may have negative or positive impact on medical store that manages the medicine inventories which depends on upon the circumstances. 3.2.1 Reasons for holding excess inventory across board According to Deveshwar, & Modi, (2013). Most institutions find themselves holding excess inventory due to inferior management practices. That is they rely on simple control mechanism that is not backed up by quantitative techniques. Use of quantitative mechanisms like Economic Order Quantity (EOQ) Model aids quickly decision-making and ease the process of delivery. Additionally, other institutions hold excess inventory in order to satisfy unexpected demand. They use inventory as a buffer stock to cater for the demand when it is high. The technique is used mostly with drugs that are seasonal but are produced uniformly as other drugs. Anticipated stock outs is another reason for holding excess inventory. In the wake of uncertainty with the vendors, institutions hold excess inventory to shield against delays in supply and unexpected demand for particular medicines. Moreover, institutions also but in large quantity to minimize purchasing cost. Schneller &Smeltzer (2006) argue that institutions find themselves with excess inventory because of manual procurement. They go ahead to give a solution to the problem by advocating the use of e-procurement which significantly reduce purchasing cost by consolidating supplier network and creation supplier partnership. Excess inventory is also blamed on lack of supply chain management education by staff involved in the supply chain management (Lauer 2004). For instance, clinics in Malaysia are required to monitor and manage their inventory thus the skills required by the supply center determines how much inventory is released to these clinics. 3.2.2 Positive impact of excess inventory: Effective management of medical store is essential to prevent excess or shortage of many stored medical items. Excess inventory is unacceptable unless there is justification that excess stock level is a prerequisite for safety requirements. Sometimes excessive inventory might be better compared to the shortage, as it can be the management policy to avoid a shortage. Drug shortage has an impact on clinicians, different health care institutions and patients CITATION Ste11 \l 2057 (Stein, 2011). There are many reasons for drug shortage, which differ from country to country. Manufacturing problems & disturbance within the supply chain are two factors for such shortage CITATION Fox09 \l 2057 (Fox, et al., 2009). Manufacturing problem includes unavailability of active ingredients (raw material) of the medicine CITATION Fox03 \l 2057 (Fox & Tyler, 2003). Excessive inventory might be a better backup than a shortage. This is true if excess medicine stock is the drug that is used for treatment and cure of life threating diseases. Besides, shortage of these drugs might have direct impact on patient health by causing replacement of effective and safe to use medicine with alternatives CITATION Fox09 \l 2057 (Fox, et al., 2009). Moreover, some medicines might not have alternatives to be used and supplied CITATION Jen \l 2057 (Jensen, et al., 2002). Therefore it is important to buy a reasonable amount of such type of drugs even if the stock is in quite an excess amount to avoid the shortage. Delay in delivery time is a limitation wh...