System Audit for Small Hospitals: Suggestions for Using a Purchase System

The Purchase System

The objective of the purchase system is to make sure that the requirements of hospitals are purchased at the best possible prices, are available and are always accountable. The various aspects of a purchase system include planning, allocating funds, preparing, purchasing, receiving, storing and distributing the purchased materials.

Although NABH might not give too many guidelines about the purchase system (1), it is important for the organization. The profitability of the organization is dependent on a good purchase system. NABH standards ROM 3 a,b,c,d and ROM 4 a,b are some of the standards given. At the end of this article are forms that you can use as templates for implementing your purchase system.

The process is as follows:

  1. The various departments of the hospitals prepare a detailed budget of their needs (Form 1). To start with, this could be obtained from the previous year’s audit reports. Departmental meetings and meetings with the administrative staff are also useful for this.
  2. A senior person of the administration then allocates the money that is available for the department (Form 1).
  3. Indents are placed for the weekly requirements, as the need arises. This simply means telling the administration or the stores that these items are needed (Form 2).
  4. The person in charge of the stores checks these indents and gives the materials if they are available in the stores, and if they are budgeted for the particular department (Form 3).
  5. If the items are not available, then approval for purchase is obtained (Form 4) from the purchase manager, if budget and allocation are available. The finance manager decides on any new allocation. The person approving should have all the data that are necessary for approval, like the previous purchase price (if previously purchased), 3 quotes independently obtained, the convincing need of the item in the department, etc., all as solid proof.
  6. The purchase order is then prepared. (By the way, purchase orders need to have a number!) Prior to preparation of the purchase order, home work is required for getting information about the prices from various places through independent sources, as mentioned in point no. 5. They are recorded, and with that information, the telephone is used for negotiating the prices for purchase. Two copies of a purchase order are prepared, one with the price and the other one without the price, with the name of the item, place for purchase, etc. This way, the person going for purchase could get the item at a lower price, if he/she can (Form 5).
  7. Any material (including courier) which comes in to the clinic/hospital should be entered at the gate. The entry should have the details like the courier’s name, parcel number, entry time, invoice number, etc.

After the entry, the security will seal the back side of the invoice and write the Gate Inward No. behind it, and then send the material along with the sealed invoice to the stores. (Some meaningful work for the gate keeper, at last!) One usual excuse is that the invoice was inside the parcel. In such case, the gate keeper shall open the box in the stores, under the supervision of stores in charge, and get the necessary details.

A sample gate seal:

gate seal

  1. The purchased goods are then kept at the quarantine stores (Form 6). After verification with the purchase order and checking the quality (QC), the items are then accepted to the main stores and given Goods Received numbers (GR No). Any items to be returned should be sent back from the quarantine stores, even before giving the GR No. In other words, any item you find inside your campus with a GR No. is an approved item which can be traced back to its purchase approval, and even to its request.
  2. Even in the same bill, different items will have a different GR No. For example, say Life Buoy soap and Lux soap, even if they come in the same bill, will have two different GR Nos. (It may sound useless, but when the system starts running and you need fine tuning, you will need it! Trying to change at a later stage is really hard, and it’s hard even in corporate.)
    All the items will have the GR number labeled/painted/stuck on the item.
  3. The items purchased are listed and presented during the weekly administrative committee meeting of the officers (or heads of the department) for transparency and ratification (Form 7).
  4. The various departments would have a stock consumption register that indicates how the items were used and how much is remaining. This register should have the details shown below (Form 8).
  5. The above system is for non-medical items, and the system used for the Pharmacy is slightly different.

For the Pharmacy, the indenting starts with generation of a [s2If !is_user_logged_in()]…

[/s2If][s2If is_user_logged_in()] purchase order in the following way. Use of computers is of great benefit.

  1. For all items in the Pharmacy, an “ABC analysis” is carried out (Form 9). This is done by multiplying the sale price by quantity sold, and then arranging them in descending order. Great efforts are made to make profit from ‘A’ Category medicines (20% of medicines that give 80% of the income).
  2. Maximum and minimum stock is fixed for all the medicines (Form 10).
  3. Profit ratio is calculated for all the items, as follows: “Profit ratio = { (Maximum retail price – Purchase price) / Maximum retail price } x 100
  4. The first step toward purchasing is getting the current stock.
  5. Order quantity is prepared as follows: “Order quantity = Maximum stock – current stock”. The computer generates the orders only for medicines that have gone below the minimum stock.
  6. The purchase order is automatically generated, choosing by default the place where the best profit ratio is available.
  7. The subsequent steps are similar to the ones for the non-medical items. The difference is that batch numbers and expiry dates are entered, and short expiry ones are not accepted.

Although the system looks simple, following it makes a significant difference. At BMCH the profits from the Pharmacy went up from 25% to almost 55%. Getting quotes for prices through independent sources has resulted in purchase prices that are about 20 to 30% less, where one person was obtaining the quotes, although he was an honest and sincere man.

Planning and budgeting results in 10 to 15% savings, as items could be bought at wholesale rates at appropriate places, and when sudden trips to bigger cities are made, the things that need to be purchased and the money required could be obtained quickly.

Checking the goods received against the purchase orders eliminates the various ways in which the dealers cheat the customers (1). With telephonic enquiries, the shop keepers offer their best deal, as they are not sure whether the customer would come to their shop. They feel that once the customer comes to the shop they can convince them to buy at their prices. The medical representatives would also do the ABC analysis and try and make profits from the ‘A’ category items. A similar analysis could be carried out for non-medical items, too.

While negotiating for a better deal on non-medical items, keep the following in mind:

  • Keep a database of a year’s requirement, to tell the dealer the bulk of business it means.
  • Keep in mind that some big dealers give a bit more of reduction if the payment is ready cash.
  • Dealer margins on branded FMCG (fast moving consumer goods, like soaps, bleaching powder etc.) are around 10%, whereas local ones with quality can be around 30% or so.
  • Sometimes, negotiations happen in percentage wise, so have an idea of what your negotiation means in percentage terms, especially in the case of capital goods. This often ends up in some odd figure and helps to further push the deal in to a round figure.
  • Always try to contact the area marketing executive/manager of a brand, rather than a dealer. He has incentives on targets, whereas the dealer makes money from some other products as well. He can force a dealer for a better price, sometimes even direct supply!
  • Think like a business man, even a rupee matters!! – Be good stewards.
  • Price fluctuations do occur in the market; hence, have a market quote collected at least once in 6 months. (After all worth the run.)

Appendix 1: Forms


Dept budget


Dept budget approval


indent form


indent approval


purchase approval


purchase order


Quarantine stores


purchase entry


Stock consumption register


abc analysis


Maximum and minimum stock

gnanaraj Dr. J. Gnanaraj MS, MCh [Urology], FICS, FARSI, FIAGES is a urologist and laparoscopic surgeon trained at CMC Vellore. He has been appointed as a Professor in the Electronics and Instrumentation Engineering Department of Karunya University and is the Director of Medical Services of the charitable organization SEESHA. He has a special interest in rural surgery and has trained many surgeons in remote rural areas while working in the mission hospitals in rural India. He has helped 21 rural hospitals start minimally invasive surgeries. He has more than 150 publications in national and international journals, most of which are related to modifications necessary for rural surgical practice. He received the Barker Memorial award from the Tropical Doctor for the work regarding surgical camps in rural areas. He is also the recipient of the Innovations award of Emmanuel Hospital Association for health insurance programs in remote areas and the Antia Finseth innovation award for Single incision Gas less laparoscopic surgeries. During the past year, he has been training surgeons in innovative gas less single incision laparoscopic surgeries.

References (click to show/hide)

  1. Accreditation Standards for Hospitals. NABH. Third edition, November 2011.


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