The Bulk-Discount Trap in Hospital Procurement
An AIIMS-pattern teaching hospital consumes a disposable item at a steady 2,000 units a month - 24,000 units a year. The purchase price is ₹200 a unit. Each purchase order costs the stores department ₹2,000 in processing and freight, and stock is costed at a holding charge of 12% of unit price per year. The store presently places twelve equal orders a year. The supplier has now offered a 5% discount on any single order of 3,000 units or more. The store room holds at most 3,500 units of this item, and the item has an 18-month shelf life. The same discount offer covers everything the supplier sells, including a diagnostic reagent that has a 45-day shelf life and a steady demand of 600 units a month. The stores officer has to decide, item by item, whether the discount is worth taking, and the purchase committee wants the working shown rather than a yes or no.
1. Work out whether the consumable should be bought in 3,000-unit lots. Compare the total relevant annual cost, not just the discount.
Read the worked answer
Present annual cost (2,000-unit lots):
- Orders a year = 24,000 ÷ 2,000 = 12, so ordering cost = 12 × ₹2,000 = ₹24,000.
- Average stock = 2,000 ÷ 2 = 1,000 units; holding cost per unit = 12% of ₹200 = ₹24, so holding = ₹24,000.
- Purchase cost = 24,000 × ₹200 = ₹48,00,000.
- Total ≈ ₹48,48,000.
Proposed annual cost (3,000-unit lots at 5% off):
- Orders = 24,000 ÷ 3,000 = 8, so ordering = ₹16,000.
- Price = ₹190; holding per unit = 12% of ₹190 = ₹22.80; average stock = 1,500, so holding = ₹34,200.
- Purchase = 24,000 × ₹190 = ₹45,60,000.
- Total ≈ ₹46,10,200.
Saving ≈ ₹2,37,800 a year. Two checks matter. First, the decision does not hinge on the average-stock approximation: the purchase saving alone (₹2,40,000) exceeds the extra ordering-plus-holding cost (₹50,200 − ₹48,000 = ₹2,200) by a wide margin. Second, the physical constraints are satisfied: 3,000 units is inside the 3,500-unit capacity, and it is only about six weeks of consumption against an 18-month shelf life. Take the discount.
2. Apply the same test to the reagent. What is the largest order size that is actually usable, and what should the stores officer do?
Read the worked answer
The arithmetic that favoured the consumable is irrelevant here because shelf life, not price, binds first. Demand is 600 units a month; 45 days is about 1.5 months, so the most stock that can be held without expiry is roughly 600 × 1.5 = 900 units - and in practice less than that, because some of it must serve as a buffer while the next consignment is in transit.
A 3,000-unit order is five months of consumption. About 2,100 units would reach their expiry date on the shelf, so the effective price per usable unit rises sharply even after a 5% discount; the hospital would be paying ₹190 for a unit and throwing away two-thirds of it. The discount is offered per order, not as an annual rebate, so small monthly orders cannot be pooled to cross the threshold.
The officer should keep the monthly order at about 600 units, write to the supplier asking for a lower threshold or a rate-contract price applicable to smaller quantities, and record the reasoning so that a later audit does not read the decision as a failure to claim an available discount.
3. The committee asks what could make the favourable answer for the consumable wrong. Give the non-cost factors that a purely arithmetic comparison hides.
Read the worked answer
Four things can overturn it.
Working capital and storage risk: average stock rises from 1,000 to 1,500 units, and three such orders a year means large sums are locked in stores rather than in the hospital's account. If the item is theft-prone or bulky, security and space costs are real.
Supply reliability: a single large order concentrates risk. If one consignment is short-supplied or rejected on quality, the hospital has no second delivery for weeks; a stock-out of a consumable used in the OT or the ICU costs far more than ₹2.4 lakh.
Price validity: a 5% discount on a list price that has been quietly raised is not a discount. The quoted rate must be compared with the rate contract, GeM or the previous year's landed cost before the purchase cost is accepted as ₹190.
Demand and obsolescence: the calculation assumes a flat 24,000 units. If the item is being phased out, or if demand falls by roughly a tenth, the stock bought at the discount becomes dead inventory, and the saving disappears faster than the holding cost does.
A one-line record of these checks is what separates a defensible purchase file from a calculator output.