CONTENTS

1. Introduction to materials management

1.1 Definition
1.2 Inventory control
1.3 Objectives of inventory control
1.4 Types of inventory
1.5 Costs involved in inventory control
1.6 Models in inventory
2. Forecasting
2.1 Quantitative forecasting techniques
2.2 Need and importance of forecasting
2.3 Types of forecasting in decision making
2.4 Types of errors in forecasting
3. Literature review
3.1 Literature review of inventory model
3.2 Literature review of forecasting model
3.3 Review of GAP Analysis
4. Problem definition and Development
4.1 EOQ for purchase model
4.2 HML Analysis
4.3 Data collection and calculation
4.4 Optimal ordering policy for deteriorating items having
deterioration rate
5. Results and conclusion
6. References

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 1. INTRODUCTION TO MATERIALS
MANAGEMENT

1.1 Definition:

● Material may be defined as equipment, apparatus and supplies procured,

stocked and utilized by an organization.
● Management is a process which is applied to convert inputs into outputs
(goods and services) or a process of planning, organizing, staffing,
directing and controlling, usually by a manager.

1.2 Inventory control:

Inventory means all materials, supplies, tools, products and finished

products recorded in a book by an organization and kept in the stock, warehouse
or plant for some period of time.

Inventory control refers to a systematic approach, which ensures the

continuous supply of required quantity and quality of inventory.

1.3 Objectives of inventory control:

1. To reduce the minimum idle time due to shortage of materials and spare
parts.
2. To offer maximum service and satisfaction to customers.
3. To minimize as much as possible capital investment and cost of storage.
4. To maintain reasonable safety stock.
5. To maintain necessary inventory records.

1.4 Types of Inventory:

Transportation Inventories: They arise due to the transportation of inventory

items to the various distribution centers and customers from the various

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production centers. The amount of transportation inventory depends on the time
consumed in transportation and the nature of demand.

Buffer Inventories: These are maintained to meet the uncertainties of demand

and supply.

Anticipation Inventories: These are built in advance by anticipating or

foreseeing the future demand. For eg., production of crackers before the Diwali
festival; electric fans or coolers before the onset of the summer season.

Decoupling Inventories: The inventories used to reduce the interdependence of

the various stages of a production system are known as decoupling inventories.

Lot size Inventories: Generally, the rate of consumption is different from the
rate of production or purchasing. Therefore, the items are produced in larger
quantities which result in lot size, also known as cycle inventories.

1.5 Costs involved in inventory control:

Purchase/ Item cost: It refers to the cost associated with an item, whether it is
manufactured or purchased. The purchase price will be considered when
discounts are allowed for any purchase above a certain quantity.

Ordering/set-up cost: These costs include the fixed cost associated with
obtaining the goods through placing of an order and purchasing, manufacturing
or setting up machinery before starting the production.

Carrying/Holding cost: The cost associated with carrying or holding the

goods in stock is known as holding or carrying cost per unit of goods for a unit
of time. Holding cost is assumed to vary directly with the size of inventory as
well as the time for which the item is held in stock. The following components
constituted the holding cost.

1. Invested capital cost

2. Record keeping and administrative cost
3. Handling cost
4. Storage costs
5. Depreciation costs
6. Taxes and insurance

If P is the purchase price of an item, I is the stock holding cost per unit time as a
fraction of stock value, then the holding cost C = IP

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Shortage cost or stock out cost: The penalty costs that are incurred as a result
of running out of stock on shortage are known as shortage or stock out cost.
These are denoted by the SI unit of goods for a specified period. If the unfilled
demand for the goods can be satisfied at a later date (backlog case), these costs
are assumed to vary directly with the shortage quantity and the delay in time. If
the unfilled demand is lost (no backlog case), shortage cost becomes
proportional to the shortage quantity.

1.6 Models in inventory:

It can be classified as:

Static inventory models: It is applicable in cases where only one order can be
placed to meet the demand. Repeat orders are either impossible or too
expensive.

Examples: perishable goods like bread, vegetables etc., seasonal products like
umbrellas, raincoats, sweaters, coolers, crackers etc.

Dynamic inventory models: It is applicable for items where repeat orders can
be placed to replenish stock. These are further classified as

a) Deterministic models:
1. Purchasing models with and without shortages.
2. Manufacturing model with and without shortages.
b) Probabilistic models

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 2. FORECASTING

The forecasting techniques can be classified into qualitative techniques and

quantitative techniques. These are presented below. Qualitative techniques used
subjective approaches. These are useful where no data is available and are
useful for new products. Quantitative techniques are based on historical data.
These are more accurate and computers can be used to speed up the process.

2.1 Quantitative forecasting techniques:

i) Simple moving average method:

A simple moving average is a method of computing the average of a

specified number of the most recent data values in a series.

The formula to compute the simple moving average (SMA) is as follows.

1
Mt¿ n {D t-(n-1) + Dt-(n-2) +…… Dt-2 +Dt-1 + Dt}

Where Mt - simple moving average at the end of period t (it is to be used as a

forecast for period t+1)

Dt - actual demand in period t.

n - number of periods included in each average.

Comments:

1. In most cases, this method is applied to forecast for only one period into
the future.

2. The forecaster must wait until demand entries are available for making
the first forecast.

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ii) Weighted moving average:

Equal weights were assigned to all periods in the computation of the

simple moving average. The weighted moving average assigns more weight to
some demand values (usually the more recent ones) than to others. Table shows
the computation for a 3 months weighted moving average with a weight of 0.5
assigned to the most recent demand value, a weight of 0.3 assigned to the next
most recent value and a weight of 0.2 assigned to the oldest of the demand
values included in the average.

Time Demand Moving Forecast

(Dt) Average
(t,months) (Ft)
(Mt)

1 120

2 130

3 110 118

4 140 129 118

5 110 119 129

6 130 126 119

Weight MAt = ∑ W iDi

i=1
❑
0.2∗120+0.3∗130+0.5∗110
Weight MA3 ¿ 0.2+0.3+ 0.5
=118

Where i = 1, 2, 3 if we use three period moving averages,

i = 3 corresponds to the most recent time period and i = 1 corresponds to the

oldest time period.

Wt - weight for the time period t.

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For example, W1= 0.2, W2= 0.3, W3= 0.5

iii) Simple exponential smoothing:

Another form of weighted moving average is the exponential smoothed

average. This method keeps the running average of demand and adjusts it for
each period in proportion to the difference between the latest actual demand
figure and the latest value of the average.

Ft = Ft-1+α (Dt-1 – Ft-1)

Where

⚫ Ft - Smoothed average forecast for period t.

⚫ Ft-1 - Previous period forecast.

⚫ α -Smoothing constant, weight given to previous data.

⚫ Dt-1 - Previous period demand.

⚫ If α is equal to 1, then the latest forecast would be equal to the previous

period actual demand value. The preferred range for α is from 0.1 to 0.3.

iv)Adjusted exponential smoothing:

The simple exponential smoothing forecast is a smoothed average positioned

on the current period. It is taken as a next period forecast. In reality, trends exist
in the demand pattern of many businesses. Hence, due recognition should be
given to make corrections in the demand forecast for trends also.

⚫ Adjusted exponential smoothed forecast model actually projects the next

period forecast by adding a trend component to the current period
smoothed forecast, Ft.

⚫ Ft+1= Ft + Tt

⚫ Where Ft =α Dt-1 + (1-α )(Ft-1 + Tt-1)

⚫ Tt = β (Ft – Ft-1)+(1- β ) Tt-1

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 ⚫ α ∧β are smoothing constants. The trend adjustment T t utilizes a second
smoothing coefficient, β .

v) Double moving average:

Let the moving average period = n

First single moving average = M1(n)

=(D1+D2+….Dn)/n

Subsequent single moving average for any period = M1(t)

[ D (t )−D ( t−n )]
= M1(t-1)+
n

First double moving average =M2(2n-1)

={M1(1)+M1(2)+…..+M1(2n-1)}/n

Subsequent double moving average = M2(t)

M 1 ( t ) −M 1(t −n)
=M2(t-1)+
n

Forecast for any future period Z from period

t(Ft+Z)=2M1(t)-M2(t)+(2Z/(n-1))[M1(t)-M2(t)]

2.2 Need and importance of forecasting:

Forecast is an estimate of an event which will happen in future. The event

may be demand of a product, rainfall at a particular place , population of a
country, or growth of a technology. The forecast value is not a deterministic
quantity. Since it is only an estimate based on a past data related to a particular
event, proper care must be given in estimating it.

In any industrial enterprise, forecasting is the first level decision activity.

That is the demand of the particular product must be available before taking up
any other decision problems like, materials planning, scheduling, type of
production system (mass or batch production) to be implemented, etc.

So, forecasting provides a basis for coordination of plans for activities in

various parts of a company. All the functional managers in any organization
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will base their decisions on the forecast value. So, it is vital information for the
organization. Due to this reason proper care should be exercised while
estimating forecast values.

In business, forecasts may be classified into technology forecasts,

economic forecasts and demand forecasts.

Technology forecasts: Technology is a combination of hardware and software.

Hardware is any physical product while software is the know-how, technique or
procedure. Technology forecast deals with certain characteristics such as level
of technical performance, rate of technical advances.

Technical forecast is the prediction of future characteristics of useful

machines, products, process, procedure or techniques. Based on the importance
of this activity, the Government of India has established a "Technology
Information Forecasting and Assessment Council (TIFAC)", under the Ministry
of Science and Technology to promote action oriented studies and forecasting in
selected areas.

Economic Forecasts: Government agencies and other organizations involved in

collecting data and prediction of estimates on the business environment. This
will be useful to government agencies in predicting future tax revenues, level of
business growth, level of employment, level of inflation,etc. Also, these will be
useful for business circles to plan the future activities based on the level of
business growth.

Demand Forecasts: The demand forecast gives the expected level of demand
for goods or services. This is the basic input for business planning and control.
Hence, the decisions for all the functions of any corporate house are influenced
by the demand forecast.

2.3 Types of Forecasting in Decision Making:

Forecasting in different functional areas of management such as

marketing, production, finance and personnel play a crucial role for planning
ahead. The various types of forecast in each of the aforementioned areas are as
follows:

Marketing:

● Demand forecast of products

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 ● Forecast of market shares
● Forecasting trend in prices

Production:

Forecast of

● Materials requirements
● Trends in material and labour cost
● Maintenance requirements
● Plant capacity

Finance:

Forecast of

● Cash flows
● Rates of expenses
● Revenues

Personal:

Forecast of

● Number of workers in each category

● Labour turnover
● Absenteeism

2.4 Types of errors in forecasting:

Demand forecast influences most of the decisions in all the functions.

Hence, it must be estimated with the highest level of precision. Some common
measures are inevitable to measure accuracy of a forecasting technique. This
measure may be an aggregate error (deviation) of the forecast values from now
actual demand. The different types of errors which are generally computed are
as presented below.

Mean Absolute Deviation (MAD)

n

MAD = ∑ ¿ Dt−Ft ∨¿
i=1
¿
❑

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Dt= Actual demand for the period t

Ft=Forecast demand for the period t

n=number of time periods used

Mean Square Error (MSE)

n

MSE = ∑ ( Dt−Ft ) 2
i=1
❑

Dt = Actual demand for the period t

Ft = Forecast demand for the period t

n = Number of time periods used

Mean Forecast Error (MFE)

n

MFE = ∑ ( Dt −Ft )
i=1
❑

Dt = Actual demand for the period, t

Ft = Forecast demand for the period, t

n = Number of time periods used

Mean absolute percentage error (MAPE)

n
1
MAPE =  ∑ ¿ Dt −Ft∨ ¿ ¿ x 100
n i=1 Dt

Dt = Actual demand for the period, t

Ft = Forecast demand for the period, t

n = Number of time periods used

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 3. LITERATURE REVIEW

3.1 Literature review of inventory model

1. Deteriorating inventory model for chilled food: by Ming-Feng

Yang and Wei-Chung Tseng
Deterioration is defined as decay, damage, spoilage or perishability and its
effect can't be disregarded in the inventory model. This model was developed
by assuming a single product and single vendor by taking pork sandwiches as
products in this research. The time horizon is infinite without shortages and lead
time is assumed to be 0.The deterioration rate of pork sandwiches and the time
at maximum growth rate of pork sandwiches is different which temperature.

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 2. Analysis of different inventory control techniques: a case study
in a retail shop: by S .K. Biswas, C .L. karmarkar
The inventory of materials constitutes the most significant part of current
assets and working capital in any organization. A small saving in inventory will
mirror a crucial edge in the benefit of organization. This model uses ABC
analysis which is widely used inventory categorization techniques for managing
stock the material that should be managed. This technique is based on Pareto
principle and works in dividing items into three categories A, B and C in order
of the level of significance. "A" denotes items that are very expensive and
require tight control, "B"  items are important and require moderate control, "C"
items  are less important as compared to A and B. The main objective of this
classification scheme is to draw managers' attention on the critical few (A-
items) and not on the trivial many (C-items). Annual consumption for different
items is considered in this analysis.

3. Inventory model for deteriorating items with quadratic

demand, partial backlogging under inflation and permissible
delay in payments: by Raman Patel
An inventory model for deteriorating items with quadratic demand under
inflation and permissible delay in payments is considered. Holding cost is a
linear function of time. Shortages are allowed and are partially backlogged.
Sensitive analysis is considered with the assumptions that deteriorated units can
neither be repaired or replaced during the cycle time and the replenishment rate
is infinite and instantaneous. The demand of the product is declining as a
quadratic function of time.

4. An inventory model for constant deterioration under selling

price demand rate using backlogging: by K.Geetha, N.
Anusheela
In this study, the inventory model over a period of fixed planning for a
deteriorating item having a selling price demand rate in which shortages are
allowed and are partially backlogged is investigated. The demand rate is price
dependent and the replenishment rate is infinite and instantaneous. Sensitive
analysis is done to this model which shows that when the deterioration cost
increases the total cost decreases.

5. Optimal ordering policy for deteriorating items having

constant demand and deterioration rate: by Sarbjith singh
This study desires an optimal ordering policy for perishable products.
Here the demand considered is constant demand and items considered have a
constant rate of deterioration. By doing the sensitivity analysis it is observed

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that as the ordering cost increases the number of inventory cycles decreases.
The point, at which optimal solution is obtained, is the point where the ordering
cost is equal to the sum of holding and deterioration cost, which is aligned to the
EOQ model result, where optimal order quantity is obtained at the point where
ordering cost is equal to holding cost for the cycle.

6. Economic order quantity for perishable items having

exponentially increased demand: by Sarbjith singh
This study considers perishable items whose deterioration starts
immediately after procurement with constant rate of deterioration. The goods
considered in paper are fast moving goods whose demand is increasing at a very
rapid pace. So the demand has been considered as exponentially increasing
demand without shortages. The deterioration of items starts immediately after
procurement and replenishment rate is infinite. By mathematical calculations an
EOQ model is derived with minimum total cost.

3.2 Literature review Of Forecasting

1. Yokum, J. & J.S. Armstrong (1995) ‘ Beyond Accuracy: Comparison of

criteria Used to Select Forecasting Methods’, International Journal of
Forecasting, 11, p. 593.

The complexity and uncertainty that exists in today’s business environment

creates many problems to every function of a company. This also affects supply
chain management which its initial target is to meet the needs of the final
consumer by supplying the right product at the right place, time and price.This
complexity elevates forecasting accuracy and effectiveness as an elusive target.
Many companies are, however, making significant, improvements by using an
approach that supports and facilitates the concept of supply chain management
by improving the forecasting practices.

2. Wallace T. & Stahl B., (2005), ‘Sales & Operation Planning- The Next
Generation’, pp.6
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S&OP is a tool to balance demand and supply at the volume level. It deals with
rates of sales and production, aggregate inventories and backlogs. It is typically
expressed in product families or other aggregate groupings; it answers the
question ‘how much’. At the mix level the matter is about which individual
products run first, second, third and which customer orders will ship when. It
answers the question ‘which ones’ giving the details.Another important mission
for S&OP is to tie together the company’s operational plans with its financial
plans. The financial plans represent, critically essential evident, to deliver X
amount of revenue and profit dollars for a specific period of the year. These
commitments are made to some very important people such as the corporate
office, the board of the directors, the Wall Street and ultimately to owners of the
business: the stockholders.

3. Wisniewski M. (2006), Quantitative Methods for Decision Makers (4th

Edition), Prentice Hall, p. 295

Under limited circumstances it may be possible to produce forecasts based on

observed patterns of some similar variable in the past (Wiśniewski, 2006).The
concept of this method based on the ‘product life-cycle’ which assumes that the
most of the products follow the reasonable stages of introduction, growth,
maturity, decline (Lancaster G.A. & Lomas R.A., 1985) as the figure 2.1 shows.
The product life-cycle theory has been applied in many industries and has
proved useful in identifying future strategies for products and services.

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 4. PROBLEM DEFINITION AND DEVELOPMENT

To develop an inventory model with constant demand and constant

deterioration rate for medicines by collecting required data and calculating
optimal Variable cost and optimal Number of Orders to be placed in a given
period thereby reducing total cost of inventory.

Survey has been done and data required for the study is collected and the
below mentioned methodologies are applied for the data, for the calculation of
the outputs.

4.1 HML Analysis:

The High, Medium & Low (HML) analysis is similar to ABC analysis
except the difference is that instead of Annual consumption value used in ABC
classification cost per unit criterion is used in HML analysis. The items under
this classification scheme are arranged in descending orders of their unit price.
The classification of the items based on unit price is decided completely by the
management. It helps managers to make decisions on buying policies which
means H & M items should not be ordered more than required quantity. The
frequency of stock checking is also initiated by this method. Most valuable
items require frequent stock checking.

4.2 Data Collection & Calculation:

Necessary data for this study were collected from S D Eye Hospital
Mehdipatnam (Govt of Telangana). The proposed methodology was applied on

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 the medicines divided into three groups (general, lifesaving and emergency
medicines).

HML Analysis for General medicines.

Holding Ordering
Demand cost per cost per
Item per year Unit cost year order EOQ TCv TC t n Category

HPMC 0.3% 20000 149.6 0.188 30 2523.12 30.188 2992030 0.126 7.926 H

HPMC 0.7%
(Lubricating
eye drops) 30000 122.4 0.154 25 3118.67 25.154 3672025 0.104 9.619 H

Framycetin
skin cream 600 80.25 0.101 20 1532.11 20.101 48170.1 0.812 0.391 M

Hyaluronida
se injection 3000 77.2 0.097 15 961.89 15.097 231615.1 0.32 3.11886 M

Aluminium
hydroxide 800 35.2 0.044 10 600.62 10.044 28170.04 0.75 1.331 L

HML Analysis for lifesaving medicines.

Holding Ordering
Demand per Unit cost per cost per
Item year cost year order EOQ TCv TC t n Category
Ranibizumab 19604. 19604854.
Injection 1000 48 24.701 350 168 374.701 7 0.168 5.952 H
Amphotericin
Injection 10 126 0.158 200 158.73 200.158 1460.15 15.873 0.063 M
Insulin Injection 500 59.05 0.074 180 1555.4 180.074 29705 3.110 0.3214 M
Mannitol
Injection 1500 17.57 0.022 150 4508.5 150.022 26505 3.005 0.332 L

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 Dextrose
Injection 200 16.58 0.02 90 1312.7 90.020 3406.02 6.5636 0.152 L

HML Analysis for emergency medicines.

Holding Ordering
Demand cost per cost per
Item per year Unit cost year order EOQ TCV TC T n Category

Dexamethasone 150 20741.33 26.134 260 54.63 286.134 3111485.634 0.364 2.74 H

Sevoflurane 100 4383.75 5.525 200 185.09 205.52 438580.523 0.85 1.17 M

Travoprost Eye Drops 1500 457.74 0.576 150 883.3 150.57 686760.576 0.588 1.698 L

Latanoprost Solution 600 180.08 0.226 70 608.44 70.226 108118.226 1.014 0.986 L

3050.5
Ophthalmic solution 6000 122.81 0.154 120 5 120.157 736980.154 0.508 1.96 L

4.3 Development of EOQ model

Amount added to stock in cycle = Amount consumed from stock

Q = Dt

Total Variable Cost = Carrying cost + Ordering cost

TVC = Average inventory level * Carrying cost

No.of orders placed per period * Ordering cost

Q D
TVC = 2 Ch + Q Co

Q* = √ ❑

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 Q∗¿
Optimal length of inventory replenishment cycle = t* = D ¿

D
Optimal no.of ordered to be placed in the given period =N* = Q∗¿ ¿

Optimal Total Variable Cost =TVC* = √ ❑

Optimal Total Inventory Cost = TC = Dt + TVC*

4.4 Optimal Ordering Policy for Deteriorating Items Having

Deterioration Rate:

An attempt has been made to frame an inventory policy for deteriorating

products with deterioration rate. This derives the mechanism by which the
wholesalers/retailers can decide about their cycle period and economic order
quantity, without doing any mathematical modeling.

Model description and analysis:

In this model constant demand rate β is considered with a constant rate of

deterioration α, depletion of the inventory occurs due to customers demand as
well as due to deterioration of the items. For any prescribed period the inventory
at any time t is given by the following nonlinear differential equation

dI(t)/dt+αI(t) = −β,  0≤t≤T (1)

Solving Equation (1), we obtain I (t) during the time

period ( 0≤t≤T0≤t≤T ) as

I(t)=−β/α+Ce−αt,  0≤t≤ T (2)

Using the condition, at the time, t=T  i.e. at the end of a cycle, I(T)=0 , we

obtain

I(t)=β/α(eα(T−t) -1),  0≤t≤T (3)

At time t=0, when the order is received i.e. cycle starts, I(0)=Q (Quantity
Ordered) and Equation (3) gives the ordered quantity as

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Q=β/α(eαT−1) ( 4)

The ordered quantity depends upon the demand, cycle time and the rate of
deterioration. To determine the optimal order quantity known Q (Economic
Order quantity), we have to derive the total variable cost equation for the
proposed model first and also check the feasibility of the derived model.
Since the total demand during cycle period T is βT, and the quantity ordered is
Q, so anything less than Q which is not used is the deteriorated products. Hence,
the amount of materials which deteriorates during one cycle is

TD=Q−βT=β/α(eαT−1)−βT (5)

The total variable cost will consist of the following

1) The ordering cost of the materials is fixed at S dollars/order for the proposed
financial year. It consists of the cost of procurement and inbound logistics costs.

2) The deterioration cost is given by c*TD using Equation (5) as the number of

units deteriorated is D and the cost price of each unit is c, which comes out to be

D=c[β/α(eαT−1)−βT] (6)

3) The holding cost is the function of average inventory, it can be defined as

keeping costs, which includes storage cost, insurance cost, cost of capital and it
is given by

H=h∫0TI(t)
Which, upon simplification, yields

H=βh/α2(eαT−1−αT) ( 7)

Total variable cost function for one cycle is given by the sum of all the three
costs, i.e. ordering cost, deterioration cost and holding cost which is given by
Equations (5), (6) and (7). It is defined as variable cost as it changes with the
ordering quantity and the demand.

TVC=A+D+H

It consists of two components, one is ordering cost and the other is carrying
cost, carrying cost consists of holding and deterioration cost in this model. If the
items considered are non-perishable items then the total variable cost will
consist of only two costs, i.e. ordering cost and holding cost, which are the costs
considered in the classical EOQ model. Hence the above model will represent
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the classical EOQ model, where EOQ will be given by the point where the
holding cost and the ordering cost per cycle are equal.

TVC=S+cβ/α(eαT−1−αT)+hβ/α2(eαT−1−αT) ( 8)

Considering there are n cycles in a year, then the Total Variable Cost per
annum, TC, is simply given by
TC=S/T+cβ/αT(eαT−1−αT)+hβ/α2T(eαT−1−αT) (9)
This study aim is to derive the optimal order quantity (EOQ) which results in
the minimum inventory cost. Once we obtain the cycle time, we can easily
derive the economic order quantity and the number of cycles required per
annum. To obtain that we have to do the analysis of the total variable cost per
annum.

Analysis of Total Variable Cost:

The total variable cost is given by Equation (9), which consists of the
exponential function of αT that can be expanded in powers of αT. As α is the
deterioration rate, it is assumed to be very small and in most of the practical
cases α is assumed to be less than 10%. Hence, the higher power of will be very
small converging towards zero, therefore neglecting higher powers of α, the
total variable cost equation is given by

TC=S/T+cβ(αT/2+α2T2/6)+hβ(T/2+αT2/6+α2T3/24)

Taking the first order derivative of the total cost equation with respect to the
cycle time, T, we obtain

dTC/dT=−S/T2+cβ(α/2+α2T/3)+hβ(1/2+αT/3+α2T2/8)

Taking the second order derivative of the total cost equation with respect to the
cycle time, T, we obtain

d2TC/dT2=2S/T3+cβ(α2/3)+hβ(α/3+α2T/4)

which is convex, hence the optimal solution exists for the proposed model.
Considering the principal of maxima and minima and putting the first
derivative of the total variable cost equation equal to zero, which gives the point
of minima. Putting the value in the second derivative would give the positive
value as all the variables considered in the equation are positive. Hence, it is
proved the point obtained is a point of minima.
The above model can be converted into the classical EOQ (Economic
order quantity) model if nonperishable items are considered. Otherwise, also it
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follows the classical EOQ principle which states that the optimal order quantity
is obtained when ordering cost is equal to the carrying cost.
On the simplification of first order derivative obtained above, the following
equation is derived

3βhα2T4+8βα(h+cα)T3+12β(h+cα)T2−24S=0
which is a bi-quadratic equation and can be solved for the given values of the
constraints to get the optimal cycle time. Hence, the economic order quantity
(EOQ) can be obtained using Equation (4).
The following notations are used in developing the model for deteriorating
items having constant demand and deterioration rate.
α : Deterioration rate,

c : The unit cost per item

S : The ordering cost of inventory

β : The demand rate

T : Replenishment cycle time

h : The holding cost

TCv : Total variable cost

Q : Ordered quantity

Calculation for General medicines:

Holding Ordering
Demand Unit cost per cost per Det
Item per year cost year order rate Time t Q TCv TC n
299306
HPMC 0.3% 20000 149.6 0.188 30 0.005 0.056 1120 1060.2 0 17.85
HPMC 0.7%
(Lubricating eye 367307
drops) 30000 122.4 0.154 25 0.005 0.0516 1548 1077.6 8 19.37
Framycetin skin 439.86
cream 600 80.25 0.115 20 0.005 0.0462 27.72 4 48589.9 21.64
Hyaluronidase 403.99
injection 3000 77.2 0.0972 15 0.005 0.04 120 8 232004 25
Aluminium 309.62
hydroxide 800 35.2 0.0452 10 0.005 0.0326 26.08 2 28469.6 30.67

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Calculation for Life Saving Medicines:

Ordering
Demand Holding cost cost per
Item per year Unit cost per year order det rate Time t Q TCv TC N

Ranibizumab
Injection 1000 19604.48 24.701 350 0.005 0.0755 155.14 9269.17 19613749.18 6.445

Amphotericin
Injection 10 126 0.158 200 0.005 7.03 71.54 56.49 1316.499 0.139

Insulin Injection 500 59.05 0.073 180 0.005 1.39 690 258.248 29783.241 0.721

Mannitol
Injection 1500 17.57 0.0282 150 0.005 1.3454 2022 222.72 26577.725 0.743

Dextrose
Injection 200 16.58 0.0208 90 0.005 2.93 588 61.276 3377.2743 0.3404

Calculation for Emergency Medicines:

Holding Ordering
Demand cost per cost per Det
Item per year Unit cost year order rate Time t Q TCv TC n

Dexamethason
e 150 20741.33 26.134 260 0.005 0.1633 24.489 3182.81 3114382.319 6.125

Sevoflurane 100 4383.75 5.523 200 0.005 0.3815 38 1048.040 439423.0407 2.631
Travoprost Eye
Drops 1500 457.74 0.576 150 0.005 0.264 396 1135.798 687745.791 3.787

Latanoprost
Solution 600 180.08 0.226 70 0.005 0.1313 78.72 577.544 108625.5443 7.62

Ophthalmic
solution 6000 122.81 0.1547 120 0.005 0.228 1368 1052.368 737912.3684 4.385

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4.4 Results and Conclusions :

Case(i) HML ANALYSIS

 HML analysis helps managers to make decisions on buying policies which

means H & M category medicines should not be ordered more than required
quantity.

Case (ii) ECONOMIC ORDER QUANTITY (EOQ) OF PERISHABLE ITEMS

WITH CONSTANT DEMAND AND CONSTANT DETERIORATION RATE

In this study, an optimal ordering policy has been proposed which equips
wholesaler / retailers to decide their economic order quantity and the inventory
cycle time, which can help them in reducing their operating costs and costs
incurred due to decaying of medicines drastically. This model provides a simple
framework to wholesalers to derive optimal inventory levels.

➢ On comparing both the cases we observe that medicines without

deterioration have higher EOQs than the medicines with constant
deterioration.
➢ Medicines without deterioration should be ordered less number of times
as compared to the medicines with deterioration.
➢ Medicines with deterioration have very high variable cost and total cost
due to costs incurred due to deterioration of medicines.

The above three conclusions are justified by the graphs plotted.

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Comparing EOQs of both cases using graphs:

Lifesaving medicines

General medicines

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Emergency medicines

Comparing ‘n’ of both cases using graphs

General medicines

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Lifesaving medicines

Emergency medicines

Comparing Total Cost of both cases using graphs

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General medicines

Lifesaving medicines

Emergency medicines

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Conclusions :

The numerical conclusions for one medicine from each category compared to
both analysis is shown below:

General Medicine (HPMC 0.3%)

Parameters Without Deterioration Rate With Deterioration Rate

(HML Analysis)
EOQ 2523.12 1140

TOTAL COST 2992030 2993060

(Rupees)

TOTAL VARIABLE 30.18 1060

COST (Rupees)

NO.OF ORDERS 7.92 17.85

TIME INTERVAL 0.12 0.05

(Years)

Life saving Medicine (Ranibizumab Injection)

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 Parameters Without Deterioration Rate With Deterioration Rate
(HML Analysis)
EOQ 158 155.4

TOTAL COST 19604854 19613749.18

(Rupees)

TOTAL VARIABLE 374.7 9269.17

COST(Rupees)

NO.OF ORDERS 5.95 6.44

TIME INTERVAL 0.16 0.07

(Years)

Emergency Medicine (Dexamethasone)

Parameters Without Deterioration Rate With Deterioration Rate

(HML Analysis)
EOQ 64.63 24.48

TOTAL COST 3111485 3114382

(Rupees)

TOTAL VARIABLE 286.13 3182

COST(Rupees)

NO.OF ORDERS 2.74 6.12

TIME INTERVAL 0.36 0.16

(Years)

The below conclusions are made from the above shown tables:

➢ On comparing both the cases we observe that medicines without

deterioration have higher EOQs than the medicines with constant
deterioration.

30 | Page
 ➢ Medicines without deterioration should be ordered less number of times
as compared to the medicines with deterioration.
➢ Medicines with deterioration have very high variable cost and total cost
due to costs incurred due to deterioration of medicines.

6. REFERENCES

Books

1. OPERATIONS RESEARCH, fourth edition 2013 by S Kalavathy

31 | Page
 2. PRODUCTION AND OPERATIONS MANAGEMENT, third edition
2013 by R Paneerselvam

Journals

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using ABC and HML analysis, a case study on manufacturing industry.
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4. Mwangi , A .G.(2013).inventory management and supply chain

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