CHAPTER 1

THE PROBLEM AND ITS BACKGROUND

Introduction

An inventory is a detailed itemized list of assets held by an organization or

institution. To be worthwhile, an inventory must be continually maintained and

updated to reflect the current status of each asset. Every health-care facility has

different requirements for the information about each item that needs to be

included in an inventory. Competent inventory management seeks to control the

costs associated with the inventory from the perspective of the total value of the

items included. In health care, WHO strives to "ensure improved access, quality

and use of medical products and technologies".

The Veterans Memorial Medical Center aims to be an integral part of the

community health services utilizing both hospital and community resources. In

connection to this, development of an effective inventory management is

paramount to achieve this objective. To enhance productivity, one must attain a

clever technique of minimizing outlays and of raising revenues to be used to

further expand operations and provide better-quality type of service. Particular

with this, different models and methods can be used to manage inventory. Not to

mention, this fast-paced generation proves to be helping in the discovery of new

technologies and approaches in line with the subject matter – inventory

management.

To keep its integrity, the employment of inventoriable items and utilization

of equipment is vital towards meeting the organization's responsibility of

providing services to its members and beneficiaries/patients. Thus, this requires

that the organization invest not only in the development of its inventory

management system but also in the education and training of employees to

facilitate continuous improvement in the performance of both employees and the

system. One important concern is the building up of total quality management all

over the organization so as to create an environment that will solidify current and

future operations, as well as relationship inside and outside the organization.

Background of the Study

Like other enterprises, for-profit or not-for-profit, hospitals in the

Philippines are essentially engaged in the conversion of resources into desired

outputs in the process of production. As in other production processes resources

can be combined and utilized in various alternative ways to produce the same set

of outputs. The decisions involved in the conversion of resources into outputs are

called managerial decisions. Taken broadly, this includes the activities of

planning, organizing, implementing, and controlling the conversion process. In

economics, managerial decisions can be evaluated in terms of the efficiency by

which resources are utilized to attain the goals of the organization.

As a token of appreciation to the Filipino soldiers who helped and stood by

them during World War II, Veterans Memorial Hospital, presently called as

Veterans Memorial Medical Center, was constructed as a present of the

2

American people to the Philippines. The 80th Congress of the United States of

America passed Public Law 865 in July 8, 1948 which provided $9.4 million for

the construction of a hospital facility with the land donated by the Filipino people .

The law was implemented in the country by an agreement between the U.S. and

the Philippines signed by then Pres. Elpidio Quirino and the U.S. Ambassador to

the Philippines Myron Cowen. Various amendments have been introduced and

the latest is Republic Act 6948 which has liberalized the definition of veterans

which now included the Armed Forces of the Philippines (AFP) retirees.

Likewise, the hospitalization benefit was extended to the veteran dependents.

With the passing of Republic Act 6948, the AFP retirees and their independents

extended benefits of the Public Law (http://www.vmmc.gov.ph/index.php/about.

Retrieved August 20, 2015).

Executive Order No. 620 dated May 4, 2007, created the Urban Triangle

Development (TriDev) Commission and aims to rationalize and speed up the

development of the East and North Triangles and the Veterans Memorial area of

Quezon City, as a well-planned, integrated and environmentally balanced, mixed-

use development model. Under the Executive Order No. 620, the Urban Triangle

Development Comission was tasked to: (a) Oversee the preparation of the

Master Development Plan for the 250 hectare area of the QC-CBD, for the

purpose of transforming this into a well-planned, integrated and environmentally

balanced, mixed-use development; and (b) Manage, control and direct the

implementation of the Master Development Plan (Executive Order No. 620-A,

s. 2007. Retrieved August 21, 2015).

3

In spite of this, news came out that the government planned to sell the hospital

and build a new hospital for veterans at a place where the land is still cheap.

That means these old soldiers and their families will have to travel far to get

hospitalization. With the high cost of transportation, thanks to a permissive

administration, that is like making our war heroes go through another Death

March. But, looking at how it looks now, the new government has eliminated this

plan and is continuously supporting the institution

(http://opinion.inquirer.net/inquireropinion/columns/view/20080326-126432/Govt-

selling-Veterans-Memorial-Hospital. Retrieved August 25, 2015).

Theoretical Framework

Different theories and principles about inventory have arisen ever since

the system was invented in the early ages of trade and manufacturing. Most of

them have evolved from simple ideas to fundamental concepts which are now

being applied in many different firms. The adoption of these concepts has one

common goal: to be efficient in handling and delivering inventory. With this, we

associate materials cost of handling, storing, freight charges, discounts, etc. For

this study, some of the most important concepts will be discussed as follows:

1. Repairable Inventory theory

Repairable inventory theory involves designing inventory systems for

items which are repaired and returned to use rather than discarded. Such

systems are composed of items which are typically less expensive to repair than

4

to replace, and are considerably more complicated than traditional inventory

systems. The typical problem is concerned with the optimal stocking of the

repairable parts and the location of these stocks, given that there may be multiple

locations. An added dimension to the problem is the determination of the size

and location(s) of the repair capacity for these parts. Further, different

performance measures may be used, such as cost, backorders, and availability.

There are many complicating factors in the design of repairable inventory

systems, for example, not all failed units can be repaired and put back into

service, and some will be condemned and have to be replaced by new

procurements. Various solution approaches have been developed to solve the

problem, few have been implemented in practice, and no single model has

addressed all or most of the complicating factors. Recent trends in the repairable

inventory environment, environmental trends and regulations, and trends in

product design are calling some of the assumptions of earlier models into

question (Repairable inventory theory: Models and applications. Retrieved 27,

2015).

2. Perishable Inventory Theory

Smallbusiness.chron.com defines perishable inventory as to items a

company sells that lose their value over time until they eventually are rendered

worthless. Whether it is milk that turns sour, a bouquet of flowers that withers or a

ticket that goes unsold, companies use inventory management strategies to

make sure their products don't expire before they're purchased.

5

The performance of any perishable inventory system, in terms of outdating

and shortages, strongly depends on how the issuing and ordering of products is

controlled. The ordering policy prescribes when and how-many to order at the

production department or at an external supplier. The issuing policy prescribes

which items are taken from stock upon meeting the demand.

Figure 1. Perishable Inventory Theory

2.1 Deterministic models – EOQ, Camp’s formula, and ELS. In

1913, Harris introduced one of the first mathematical inventory models: the

6

economic order quantity (EOQ). According to Erlenkotter, the EOQ formula

became since 1922 also known as Camp’s formula and since 1934 as Wilson’s

economic lot size formula (ELS). The EOQ formula sets the optimal order

quantity for a nonperishable product in a deterministic problem setting, based on

a linear cost structure with both fixed and variable cost components.

2.2 Stochastic single-period problems: Newsboy model,

Christmas-tree model. One of the first articles on a stochastic inventory model

dates back to the early fifties of the last century. In 1951, Morse and Kimball

present a one-period problem with stochastic demand. The model is often called

the Newsboy model and is solved by the so-called Newsboy equation. Later it

became also known as the Christmas tree model. Kraiselburd describes the very

interesting history of the Newsboy problem. In fact, the model comes from

classified research for the Navy during World War II. Many of the references to

the work of Morse and Kimball recall military applications (mainly inventory

problems) rather than the problem of a newsboy deciding on the number of

newspapers to buy. Over the years the model is extended and applied to various

one-period decision problems. The Newsboy model can be seen as a first

stochastic inventory model for perishables with a fixed shelf life of one period.

2.3 Stochastic multi-period problems: (s, S) policies and

Bellman’s principle of optimality. Soon after the introduction of the Newsboy

problem, the sequential ordering of a nonperishable product over multiple

products was studied. The multi-period problems appeared to be significantly

7

more complicated when fixed order costs apply. In 1951, Arrow, Harris and

Marschak presented in Econometrica the so-called (s, S)-type inventory control

with stochastic demand. In 1952 and 1953, Dvoretzky, Kiefer and Wolfowitz,

studied the optimal parameter values of the (s, S) strategy. Most of the studies

on multi-period problems rely on solving functional equations. The proof that the

optimal policy for non-perishables is of the (s, S) type was first given in 1960 by

Scarf, for a wide class of problems with a linear cost structure. The study of the

optimal control of inventories boosted after the introduction of Bellman’s principle

of optimality in the fifties. According to Arrow, he generalized some previous work

on sequential analysis and announced a new technique called Dynamic

Programming (DP). The recursive nature of solving a sequential decision

problem was already addressed by Arrow, Blackwell and Girshick in 1949.

Anyway, DP became a new tool of finding optimal strategies for various decision

problems. In 1960, Howard introduced a special class of sequential decision

problems called Markov decision problems (MDP). In particular, Howard and

Bellman deserve the credits for the successful introduction of this field of study.

Nevertheless, due to the dimensionality of the state space, the multi-period

perishable inventory problem was still considered too complicated to solve.

(s, S)-policy – When fixed ordering costs apply, a threshold s for ordering

is included. Orders are placed only when the stock position is at s or below. Most

commonly, the order size is then derived from a fixed order-up-to level S. When

the stock position is above s, no order is placed. This policy is commonly called

an (s, S) policy.

8

2.4 (Multi-period) Stochastic Perishable inventory models. Virtually

all inventory studies before 1960 dealt with non-perishables or with perishables

that last for one period only. The inventory management of perishables over

multiple periods is considerably more complicated, since products are not only

removed from stock to meet the (stochastic) demand but also because they

become outdated. The study of inventory management of perishables started

already in the sixties with the thesis of Van Zyl and articles Pierskalla and

Pierskalla and Roach. In the seventies the research of perishable inventory

models flourished and resulted in papers by Cohen, Nahmias and Pierskalla and

many others. Most studies are on issuing policies and approximations of the

outdating and shortages under specific ordering policies, or on finding good

parameter values for order-up-to S and for (s, S) policies.

In some numerical studies, in which outdating and shortage figures are

low, one claims simple rules to be nearly optimal. The question to what extent

these rules are optimal in other cases remained unanswered. A number of

features, that may be relevant in real-life perishable inventory problems, were not

included in these studies. Moreover optimal stock-age-dependent policies were

hardly studied, in these (early) years. Two exceptions are the studies by Fries

[47] and Nahmias [98]: in which some properties of the optimal solution are

proved. Numerical approaches to compute optimal strategies for realistic sized

problems were doomed to fail at that time. Solving the underlying MDP is

seriously hampered by insufficient computer power and the curse of

9

dimensionality in the state space: the number of possible states is too large to

solve problems of real size.

2.5 Simulation of perishable inventory systems. In the 70s,

computer simulation rapidly became a more-and-more useful tool to analyze

complex dynamic systems. Where the analytical models need to be relatively

simple to allow its mathematical analysis, problems could now be studied at a

reasonable realistic level by simulation. This different, say more practical, line of

research was carried out by quite some researchers and practitioners. Simple

order-up-to S rules were simulated to find out whether they yield low shortage

and outdating figures under different issuing policies. For simple rules with one or

two parameters search algorithms were developed to find optimal parameter

values. Analytically obtained insights on the convexity of the cost function proved

to be very useful in streamlining the optimization process. Despite the modeling

flexibility of simulation, there is always a tradeoff to make between the degree of

realism to add to a model and the required accuracy of the outcomes, given the

speed of the computer(s) on which the simulation is executed. This trade-off is

inherent to simulation. Since computers were not that fast that time as compared

today, the level of detail in mimicking a real inventory systems was quite limited;

in the early simulation studies the existence of different, limited-compatible blood

groups is simply left-out. Most likely, this also explains why no periodic ordering

policies are simulated with different order-up-to levels S1,...,SD of each of the D

periods. In only a few studies stock-age-dependent ordering rules were

10

developed that acknowledge the perishability of the products. For example, in

1972, Pinson, Pierskalla and Schaefer test by simulation what-they-call modified

order-up-to S rules. These rules were developed based on common sense

arguments to reduce shortages and outdating. Setting new stock-age-dependent

rules requires insight into the perishable inventory problem. Simulation is one

way to obtain these insights.

2.6 Optimal stock-age-dependent ordering policies for

perishables. Although it was known that an optimal policy for ordering

perishables should be stockage-dependent, the actual computation of an optimal

policy was not considered for perishables with a fixed shelf life of more than 3

days. At the start of the twenty-first century Blake et al., and Haijema, Van der

Wal, Van Dijk and Smit Sibinga numerically solved realistic (down-sized) Markov

Decision Problems of blood platelets pools (BPPs) with a maximal shelf life of up

to 7 periods. They apply independently an aggregation-disaggregation approach:

individual BPPs are aggregated into batches. Blake et al. focuses on the cost

reduction and the tractability at varying batch sizes. Haijema et al. study the

structure of the optimal policy (with one and two categories of demand) and

derive simple rules with nearly optimal parameter values (Solving large

structured Markov Decision Problems for perishable inventory management and

traffic control. Retrieved August 27, 2015).

11

Conceptual Framework

The conceptual framework discussed the flow of the study undertaken.

The study adapted the systems approach. The approach used the system of

three (3) frames composing the input used which went through the processes or

operation and emerged as output.

12

INPUTS

ProfileAge

GenderCivil Status

Educational AttainmentPosition

Department/DivisionNumber of years in the organization

Profile of the hospitalType of organizationSize of the Company

Gross Profit of the CompanyNo. of years in operation

Uses of Inventory ManagementInventory BalanceInventory TurnoverAccurate Planning

Warehouse OrganizationEmployee Efficiency

Inventory OrderInventory Tracking

Time SavingCost Cutting

Inventory Control SystemsPerpetual Inventory System

Periodic Review Inventory SystemComputerized Hospital Inventory System

Just-in-timeFIFO Method

Inventory Management practicesAccountability or Responsibility

Receipts of DeliveriesInspection of Deliveries

WarehousingRequisition, Issuance and UtilizationTransfer of Property Accountability

Property CustodianshipPhysical Inventory Taking

Property Repair and MaintenanceDisposal of Hospital PropertyInsurance of Hospital Property

Problems encountered and possible solutions

PROCESSESSurvey

Documentary searchInterview

Statistical AnalysisFrequency and Percentage

RankingWeighted Mean

ANOVALikert Scale

OUTPUTSPolicy Recommendations for:

Feedback

Figure 2. Conceptual Paradigm

13

The input contains the leading variable regarding the profiling of the

management and the members of the Supply and Procurement Division involved

in the inventory management; the Veterans Memorial Medical Center’s

perspective on specific topics, the benefits that inventory management provides

to the organization, the inventory systems used, and their practice of managing

inventories; and the problems encountered by the said organization and it’s

possible solutions.

The second frame contains the methods and procedures to be used to

analyze those variables by making questionnaires, conducting interview,

research and the use of statistical tools.

The third frame encloses the output. It contains policy recommendations

that the researchers suggested for the improvement of the inventory

management practices of Veterans Memorial Medical Center to provide better

health care services, to efficiently utilize their inventory, and to come up with

possible solutions on the problems.

The arrows include the workflow of information in the research process.

The feedback loop connects the output to the process involved, as well as to the

input, making the system continuous.

Statement of the Problem

This research aimed to determine the perception of the management and

the members of Supply and Procurement Division of the Veterans Memorial

Medical Center in their inventory management practices. Furthermore, the profile

14

of the respondents, which includes the management involved and its members;

the perspective of Veterans Memorial Medical Center on specific topics, the uses

of inventory management, classification of inventory control systems, the

problems encountered and possible solutions; and any significant relationship

between the profile of the respondents and the leading variables also form part of

the research.

This research sought to answer the following questions:

1.0 What is the profile of the respondents in terms of the following:

1.1 Age;

1.2 Gender;

1.3 Civil Status;

1.4 Educational Attainment;

1.5 Position/Designation;

1.6 Department/Bureau/Division; and

1.7 Number of years in the Company?

2.0 What is the perspective of the organization in terms of the following:

2.1 Type of Organization;

2.1.1 For Profit

2.1.2 Non-profit

2.2 Size of the Company;

2.2.1 Level 1

2.2.2 Level 2

2.2.3 Level 3

15

2.2.4 Level 4

2.3 Gross Profit of the Company; and

2.4 Number of Years in Operation

2.5 Inventory Management System

3.0 What are the uses of inventory management in Veterans Memorial

Medical Center in terms of the following:

3.1 Inventory Balance;

3.2 Inventory Turnover;

3.3 Accurate Planning;

3.4 Warehouse Organization;

3.5 Employee Efficiency;

3.6 Inventory Order;

3.7 Inventory Tracking;

3.8 Time Saving; and

3.9 Cost Cutting?

4.0 What are the opinions of the inventory management team on the system

used by the Veterans Memorial Medical Center in terms of the following:

4.1 Perpetual Inventory System;

4.2 Periodic Review Inventory System;

4.3 Computerized Hospital Inventory System;

4.4 Just-in-time; and

4.5 FIFO Method?

5.0 What are the Inventory Management Practices in terms of the following:

16

5.1 Accountability or Responsibility;

5.2 Receipts of Deliveries;

5.3 Inspection of Deliveries;

5.4 Warehousing;

5.5 Requisition, Issuance and Utilization;

5.6 Transfer of Property Accountability;

5.7 Property Custodianship;

5.8 Physical Inventory Taking;

5.9 Property Repair and Maintenance;

5.10 Disposal of Hospital Property; and

5.11 Insurance of Hospital Property?

6.0 What are the problems encountered and possible solutions?

7.0 Is there a significant relationship between the profile of the respondents

and the lead variables?

Hypothesis

The null hypotheses tested are:

There is no significant relationship between the profile of the respondents

and the following lead variables:

1. Uses of inventory management;

2. Opinions of the inventory management team on the system used;

3. Inventory Management Practices; and

4. Problems encountered and possible solutions.

17

Scope and Limitations

This study involved the discussion of the Perception of Veterans Memorial

Medical Center in their Inventory Management This was made to determine how

well the Inventory Management is implemented within the organization; and how

it affects the efficiency of the utilization of the Inventory Management.

The respondents of the study were composed of 30 employees from the

Supply Division and Procurement Division of the Veterans Memorial Medical

Center. The survey was completed through the purposive sampling method in

the respondents. The self-administered questionnaires were distributed on

August 2015 and were re-collected on following days after distribution.

Significance of the Study

This study would benefit several areas of Veterans Memorial Medical

Center. It primarily intended to give additional information to help assist the

following individuals and organization.

Veterans Memorial Medical Center. This study will be useful as it

described the significant issues concerning the Inventory Management and its

efficiency on the utilization of the Inventory Management.

The Management and Members. This study would be beneficial as it

contributed additional information regarding the existing system, allowing them to

improve the practices currently implemented.

Other Staffs and Employees. The employees will be assisted in

comprehending the idea behind the company’s Inventory Management System. It

18

will give them a new grasp of what really is going on within the company and its

operations. Furthermore, this will also serve as an instrument on reminding them

to work with a high level of professionalism, expertise and discipline for they will

have a clear view of what is implemented.

Management as a Whole. This study will contribute to the management’s

continuous improvement relating the practices employed throughout the

organization. This will also be beneficial to the development of the Inventory

Management of the organization.

Public. Information on how well the organization manages its Inventory to

provide better health care for the beneficiaries. Greater appreciation would

develop among ordinary citizens.

Academe. May this thesis be marked as a quality scholastic work that can

help not just the Department of Accountancy but also the University.

Researchers. This study aided the researchers to be aware of what is

going on in the current setting in connection with the topic. It has given them a

new sphere of knowledge and widened their proficiency about the subject matter.

Future Researchers. This study will be a useful resource material for

individuals with the same interest for the field who would aspire to conduct

additional researches specifically about the issues relating to the Inventory

Management System.

19

Definition of Terms

The following terms are defined operationally for better understanding:

Age. Refers to the respondents’ span of life when the study was

conducted. Brackets ranging from 30 years old below, 30 to 34 years old, 35 to

39 years old, 40 to 44 years old, 45 to 49 years old, and 50 years old and above

were provided.

Beneficiaries. For this research, the beneficiaries [patients] include the

World War II Veterans and their relatives, the employees, and other

public/private patients.

Bidding. Refers to the process where a quotation is specifically given to a

prospective purchaser upon his request, usually in competition with other

offerors/vendors.

Civil Status. The condition of the respondent either single, married,

widowed or separated.

Educational Attainment. Refers to the academic achievement of the

management people whether it is a bachelor’s degree, with a master’s units,

master’s degree, doctoral units, or doctor’s degree.

Gender. Refers to the sexuality of the respondent whether it is male or

female.

Inventory. For hospitals, inventories would include supplies and materials

in stock, including medicines, drugs, medical supplies, office supplies,

housekeeping supplies, engineering supplies, IT supplies, commissary supplies

and miscellaneous supplies; and equipments, including all unexpendable

20

property, other than land, structures and fixed facilities, non-expendables

supplies and equipment, technical and scientific equipment, fire fighting

equipment, telephone, radio and cable equipment.

Inventory Management. Refers to the practice concerning overseeing

and controlling of the ordering, storage and use of components that an

organization will use.

Non-Profit Organization. A corporation or an association that conducts

business for the benefit of the general public without shareholders and without a

profit motive; Nonprofit organizations include churches, soup kitchens, charities,

political associations, business leagues, fraternities, sororities, sports leagues,

Colleges and Universities, hospitals, museums, television stations, symphonies,

and public interest law firms.

Number of Years in Company. Pertains to the length of service rendered

by a respondent whether it is below 1 year, 1-5 years, 6-10 years, 11-15 years,

and 16 years and above.

Position in the Company. Refers to the respondent’s position on work in

the organization.

Procurement.

Procurement Division. This is responsible for the procurement of

supplies, materials, drugs and medicine and equipment needed in the operation

and maintenance of the Medical Center.

Profile of the Respondent. In this research, it refers to the respondents’

age, gender, civil status, educational attainment, position/designation;

21

department/bureau/division, and the number of years they have been working in

the medical center.

For Profit Organization. This refers to a business or other organization

whose primary goal is generating profit, as opposed to a non-profit organization

which focuses a goal such as helping the community and is concerned with

money only as much as necessary to keep the organization operating. Most

companies/businesses are considered as for profit organizations; this includes

anything from retail stores to restaurants to insurance companies to real estate

companies.

Respondents. These are the individuals intentionally considered to be the

subject of the study who was inquired to answer the questionnaire such as the

Administrative Officer IV, Administrative Officer III, Administrative Officer II,

Administrative Officer I Administrative Assistant III, Administrative Assistant II,

Administrative Assistant I, Administrative Aide II, and Administrative Aide I under

the Supply and Procurement Division of the medical center.

Size of the organization. In this research, as per DOH Administrative

Order 205-0029, this refers to the size of the organization with regards to the

scope of services they provide, the inventories they hold, and the size/capacity of

the hospital whether Level 1, Level 2, Level 3, or Level 4.

Supply Division. This refers to that division responsible for the inventory,

storage and distribution of supplies and equipment, and procurement of

miscellaneous services necessary for the maintenance and operation of the

hospital.

22