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Journal of the Academy of Hospital Administration


Author(s): K. Padma, K.T. Reddy

Vol. 18, No. 1 (2006-01 - 2006-12)

K. Padma(1), K.T. Reddy(2)

Key Words: Administration, Procurement, Negotiation, Rate contract, Limited period enquiry.


The fast developing Indian economy has placed before the hospital administration a tremendous challenge and responsibility. Good health economic practice is important to improve the allocation of resources, optimum utilization and identify cost effective technologies. Due to increasing specialization, changing technology and increased expectation of consumers and employees the hospital requires better co-ordination and organizational adaptability. The administrator’s expertise is that of an integrator, structuring the perceptions among staff and consumers, so that change can be effected without destroying organizational integration. Hospitals desire to update technology and competition among the health care organizations should always be weighed with the benefit to the organization and improvement in quality of care.

Every health care organization requires a continuous stream of material and supplies for providing quality care to patient. There are numerous individual items of materials required for running a hospital, larger the size of the hospital, greater the number of items required. The efficiency of a hospital partly consists in maximizing the quantity of patient care per unit of cost while maintaining satisfactory levels of quality and consumer satisfaction. It can be appreciably improved by focusing proper attention on a system like material management, over which hospital administration has a great deal of control. In many organizations resources are always scarce and play a key role because 30-40% funds are spent on material and 40-60% funds are spent on manpower. The importance lies in the fact that any significant contribution made by the administrator in reducing material cost will go a long way in improving the profit and the rate of return on investment. Administration personnel are involved in planning for material, studying their demand, estimation, procurement, stocking and controlling material in an optimum manner and to provide a pre-decided quality services to the customer/patient at a minimum cost, with the goal of better accountability, better coordination and better performance.

Operative goals of an administrator are:

  1. optimum material acquisition
  2. optimum size of inventory
  3. optimum inventory turnover rate
  4. good vendor relationship
  5. material cost control
  6. effective issuing and distribution
  7. elimination of losses and pilferage.

Today the trend is gradually switching over to the concept of planning material requirement with ultimate goal of achieving just in time procurement. The present day buyers have to interact with the vendors more frequently and spend more time for negotiation.

Table 1: Thought of Change

S.No. Old Realities New Realities
1. Customer choice limited Un-limited
2. Quality dictated by supplier Dictated by customer/ provider
3. Price based on cost price + profit Price determined by customer/provider
4. Supplier market Buyer market
5. Quality is the responsibility of quality control department Quality is everyone’s responsibility and basic consumer right.
6. Problem detection Prevention, a way of life


Purchasing is one of the important functions of administration and the goals of purchasing are to purchase at a right price, right quality, right quantity, right contractual terms, right time, right source, right material, right place, right mode of transportation, right attitude, with techniques such as value analysis, material intelligence, purchase research, SWOT analysis, purchase budget, lead time analysis, etc.

Fig. 1. Budgeting


(For larger image, click here)

Difficulty in procurement of medical supplies is due to enormous variation in specification for the standard item, the number of standards that exist in the world and many sources of supply for each standard.


Procurement of the material depends on (1) prioritization of purchase of material (2) fixing the price (3) calling for tenders/quotations (4) evaluation of the tenders/quotations 5) placement of orders 6) ensuring receipt of material (7) making the payment.


Procurement by negotiation is a battle of wits and art of embodying sophisticated tactics and maneuvers by both the buyer and the suppliers. It is an art of arriving at common understanding through bargaining on the essential points for the contract such as delivery, specification, price and payment terms, etc. Because of the inter relationships of these factors with many others it is a difficult art and requires the exercise of executive judgment, tact and commonsense and the bargaining power will definitely be influenced by the preparedness of the buyer as well as the place and time of negotiation.

Principles for Negotiations: (1) put yourself in supplier shoes (2) negotiation is essentially an artful communication (3) let the suppliers do most of the talking (4) let the supplier save face (5) satisfy the supplier needs (6) talk to the proper person (7) build up confidence (8) take one point at a time.

Nizam’s Institute of Medical Science was established (NIMS) in 1964 and has grown into a University in Hyderabad A.P. India and is one of the pioneer and major referral medical center with about 100 beds with staff around 2000. In 2005 bed occupancy rate was 83%, total admissions 30,481, total hospital days 2,88,002, total operations are 18, 111 and average length of stay 9.5 days.


The store division is one of the supportive service as the name suggests, supplying surgical items, general items, linen and stationary items to the different departments in the institute.

The main surgical store in the hospital has been segregated into surgical stores, general stores, linen and stationary stores. Purchasing is an exceedingly important activity and is a vital part of the top management in today’s progressive hospital. A good purchasing system will reduce the cost of the procurement by the effective standardization procedure and effective evaluation. A comparative study of some of the surgical items was done to know the benefits of the changed procedures in administration i.e. the Rate contract vs. Limited period enquiry.

Rate contract is a contract agreed upon fixed terms and conditions between the hospital and suppliers for a period of two years and this procedure was followed for the procurement of materials during 2000-2004. At present for the last one year the procedure was changed to limited period enquiry in which every time in need of materials, fresh quotations (tenders) are called for not more than a period of three months. This resulted in a saving of an average up to 20 to 30% on annual expenditure.

During the Limited period enquiry the administrator has to be careful with the transaction because there may be dummy/supporting quotations by the suppliers, there may be negative feed back and mis-understanding from the branded companies and other staff/persons during the negotiations.

Table 2: Differences between limited period enquiry and rate contract

Rate contract Limited period enquiry
Rate contract is the term used for fixing a particular rate for the supply of material under an agreement between suppliers and management It is shorter version of rate contract for 3 months and prevailing on market rates, the contract is extendable and changed.
Fixed rate, fixed period, quantity and quality are fixed approximately. Margin for negotiation
Cannot change to demand Can change to demand
Cannot change to market price during the contract period and no scope for negotiation Monitoring of the market and continuous change of price
Long term Short term
Documentation once in 2-3 years Documentation about every 3 months
More time consuming Less time consuming
Single supplier has a chance More suppliers have chance
If the supplier cuts his price for one customer he must do it to all his customers and he may find it extremely difficult to negotiate The suppliers who face limited competition from others will react differently in pricing

Table 3: Difference between Rate contract vs. Limited enquiry in some costly items

Item name No’s Rate
Coroflex stent 312 32,400 10,108,800 23,625 73,71,000 27,37,800
Ave stent 48 29,700 14,25,600 23,625 11,34,000 2,91,600
Cypher stent 204 1,37,200 2,79,88,800 93,000 1,89,72,000 90,16,800
Peripheral stent 24 33,480 8,03,520 32,625 7,83,000 20,520
Angioguard 12 43,200 5,18,400 40,500 4,86,00 32,400
Driver stent 744 46,400 3,45,21,600 42,125 3,13,41,000 31,80,600
Duraflex stent 240 24,750 59,40,000 23,625 56,70,000 2,70,000
St. jude heart valve 240 63,000 1,51,20,000 43,000 1,03,20,000 48,00,000
Coroflex blue stent 216 38,500 83,16,000 37,500 81,00,000 2,16,000
Total Rs.10,47,42,720   Rs.8,41,77,000 Rs.2,05,65,720
US$2,327,616   US$1,870,600 US$ 457,016


Surgical stores deals with 300 different categories like, instruments, sutures, other surgical items, bandage, cleaning material, enmel wares, patient furniture, hospital furniture, textile synthetic fabric, woolen articles, general items, all medical forms and medical documentation, civil, electrical mechanical and electronic items. Total purchase value of the items is Rs. 19,78,86,000 (US $4,397,467) the comparative data of some of the costly items and the bulk items, amount saved has been analyzed and it showed that 10% of the revenue was saved on the some of these items which approximately leads to 20-30% saving on the total surgical items.

Fig. 3: The difference between Rate Contract Vs Limited Period Enquiry in Bulk Items

difference between Rate Contract Vs Limited Period Enquiry in Bulk Items

(For larger image, click here)

Table 4: Difference between Rate contract vs. Limited enquiry in some bulk items

Item name No’s Rate
Cotton rolls 2,40,084 48.5 1,16,44,074 40 96,03,360 20,40,714
I.V. Cannuala 7,0812 24 16,99,488 15 10,62,180 6,37,308
2 ml syringes 2,29,620 1.4 3,21,468 1.29 2,96,210 25,258
10 ml syringes 2,00,424 2.39 4,79,013 2.13 4,62,979 16,034
Masks 3,28,800 2.45 8,05,560 1.9 6,24,720 1,80,840
Caps 1,69,200 1.8 3,04,560 1.7 2,87,640 16,920
Crepe bandages 6” 3,780 105.6 3,99,168 101 3,81,780 17,388
Crepe bandage 4” 8,208 23.3 1,91,246 22.5 1,84,680 6,556
Sheathes 13,860 475 6,583,500 418 57,93,480 7,90,020
Spiral CT films 240 6680 1,603,200 6350 15,24,0 79,200
X-ray film 10×12 780 800 6,24,000 690 5,38,20 85,800
Total Rs. 2,46,55,277   Rs. 2,07,59,229 Rs. 38,96,038
US$547,895   US$461,316 US$ 86,578


After implementing limited period enquiry procedure for the year 2005 the Institute saved approximately US $543,594 per year (Rs. 2,44,61,730) on the surgical items selected for the study, the items for comparison had similar specification and quality. The time is short 3-6 months, number of bidders are less, each negotiation is an independent transaction, variations can be accommodated and reasonable price can be negotiated for the quality specified, selection on price and quality can be achieved and there is continuous monitoring and evaluation on the design and quality of the material, to ensure that the suppliers will execute the contract on time, to develop sound relationship with the competent suppliers and the administrator should always be familiar with the market trends.


  1. Mc.Gibbony JR. Principles of Hospital Administration, 2nd edition, GP Putnam and Sons, New York 1969.
  2. Mac Eacharan, Malcol M.T., Hospital Organization and Management, 1962, Physician Record Company, Illinois, USA.
  3. Chandorkar A.G., Hospital Administration and Planning, Ist edition 2004.
  4. Rosenstein AH, Health Economics and Resource Management, A model for hospital efficiency, Hospital and Health Services Admn, 1991, 36:314-29.
  5. Gopalkrishnan P., Sundaresan M., Administration an integarted approach, April 2003.
  6. Sakharkar BM, principles of Hospital Administration and Planning, 1998.
  7. Donald W. Dobler, Lamrle & Junior David N Burt, Purchases Administration Text and Cases 1989.

(1) K. Padma is Post Graduate Resident, Department of Hospital Administration, NIMS, Hyderabad, AP, India.
(2) K.T. Reddy is Deputy Director, NIMS, Hyderabad, AP, India.
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