Inventory Classification in Pharmaceutical Industry

This article analyses the annual drug expenditure at Hospitals using ABC-VED analysis in order
to identify drug categories requiring greater supervisory monitoring. Inventory control
techniques ABC, VED and ABC-VED matrix analysis were utilized to study the drug expenditure
at the hospital. The data was collected for the financial year 2005–6.

Out of the 348 drugs, around 12.93 per cent of the drugs were found to account for 69.45 per
cent of the annual drug expenditure (45 drugs) and were classified as category A drugs. Another
19.54 per cent of the drugs (68 drugs) consumed 20.48 per cent of the budget (B category),
while the remaining 67.53 per cent (235 drugs) accounted for only 10.07 per cent of the annual
drug expenditure (C category). Forty-three drugs (12.36 per cent) were classified as vital drugs,
and 164 (47.12 per cent) and 141 (40.52 per cent) were considered essential and desirable
drugs respectively. Based on ABC-VED matrix analysis, around 22.99 per cent of drugs were
classified as category I, accounting for 74.80 per cent of the total drug expenditure. Category II
drugs (41.67 per cent) consumed 21.68 per cent of the total drugs budget, while the remaining
35.34 per cent drugs (category III) accounted for only 3.52 per cent of the total drug
expenditure.

It was concluded that the use of inventory control techniques needs to be made a routine
practice in health care. Substantial improvement could be brought about not only in patient
care, but also in the optimal use of resources by judicious practice of these methods.

Introduction

About one-third of the annual hospital budget is spent on buying materials and supplies,
including medicines. [1] The pharmacy is one of the most extensively used therapeutic facilities
of the hospital and one of the few areas where a large amount of money is spent on purchases
on a recurring basis. This emphasizes the need for planning, designing and organizing the
pharmacy in a manner that results in efficient clinical and administrative services. The goal of
the hospital supply system is to ensure that there is adequate stock of the required items so
that an uninterrupted supply of all essential items is maintained. A study conducted by the
Department of Personnel and Administrative Reforms in India has revealed that not only does
the quantity of medicines received fall short of the requirement but also the supply is often
erratic. Even common medicines are out of stock and remain so for a considerable period. [3] Of
the various explanations for non-availability of even simple medicines in the third world
countries, a large number are related to materials management. A study from a 1,500-bedded
state-funded hospital has claimed that review and control measures for expensive drugs
brought about 20% savings.

Inventory control in hospital pharmacy is very essential in a developing country like India. As
resources are limited, it is essential that the existing resources be appropriately utilized. With
the existing drug budget, if rational drug use and improved drug management practices are
followed, more number of patients can be served. It is essential that health managers use
scientific methods to maximize their returns from investment at a minimal cost.

Drug inventory management stresses on cost containment and improved efficiency. Each item
may be considered critical and there is a perceived need to supply very high levels of
service. There is no denying that stocking hospital pharmaceuticals and supplies can be
expensive and tie up a lot of capital, and bringing efficiencies to such important cost drivers -
often 30-40% of a hospital's budget - can present meaningful savings. Thus, a hospital materials
manager must establish efficient inventory system policies for normal operating conditions that
also ensure the hospital's ability to meet emergency demand conditions. But, it is impossible
and unnecessary too to monitor every drug used in the health system. High-cost and high-
volume drugs come in priority, whose intervention is likely to cause the greatest clinical and
economic impact. In the whole process, it is important to trace the costliest medicinal products
first, those that consume the major portion of the budget, and then design a strategy to further
study and identify their use pattern. The study of use pattern will help in designing appropriate
corrective measures. ABC analysis is an important tool used worldwide, identifying items that
need greater attention for control.

ABC analysis is a method of classifying items or activities according to their relative importance.
It is also known as "separating the vital few from the trivial many" because, for any group of
things that contribute to a common effect, a relatively few contributors account for a majority
of the effects. The analysis classifies the items into three categories: the first 10-15% of the
items account for approximately 70% of cumulative value (cost) (category A), 20-25% are
category B items that account for a further 20% of the cumulative value and the remaining 65-
70% are category C items, amounting for a mere 10% of the total value.

The limitation of ABC analysis is that it is based only on monetary value and the rate of
consumption of the item. In a hospital, an item of low monetary value and consumption may be
very vital or even life saving. Their importance cannot be overlooked simply because they do
not appear in category A. Therefore, another parameter of the materials is their criticality.

VED analysis is based on critical values and shortage cost of the item. Based on their criticality,
the items could be classified into three categories: vital, essential and desirable. There could be
serious functional dislocation of patient care services in hospital when vital drugs are not
available even for a short period. If essential items are not available beyond a few days or a
week, the functioning of the hospital can be adversely affected. The shortage of desirable items
would not adversely affect patient care or hospital functioning even if shortage is prolonged.

A combination of ABC and VED analysis (ABC-VED matrix) can be gainfully employed to evolve a
meaningful control over the material supplies. Category I includes all vital and expensive items
(AV, BV, CV, AE, AD). Category II includes the remaining items of the E and B groups (BE, CE,
BD). Category III includes the desirable and cheaper group of items (CD).

In the present study, ABC, VED and ABC-VED matrix analysis of the pharmacy store of PGIMER,
Chandigarh (a 1,500 bed tertiary care teaching, research and referral health institute catering to
the major portion of northern India), was performed to identify the categories of drugs needing
stringent management control.

The specific objectives of this study were to:

1. analyze the annual consumption of items of pharmacy and expenditure incurred on

Materials and Methods

The data of annual consumption and expenditure incurred on each item of the pharmacy for
the financial year 2007-08 were collected. The data were then transcribed in an MS Excel
spreadsheet. The statistical analysis was carried out using the MS Excel statistical functions.

ABC analysis

The annual expenditure of individual items was arranged in descending order. The cumulative
cost of all the items was calculated. The cumulative percentage of expenditure and the
cumulative percentage of number of items were calculated. This list was then subdivided into
three categories: A, B and C, based on the cumulative cost percentage of 70%, 20% and 10%,
respectively.
VED analysis

The VED criticality analysis of all the listed items was performed by classifying the items into
vital (V), essential (E) and desirable (D) categories. The items critically needed for the survival of
the patients and those that must be available at all times were included in the V category. The
items with a lower criticality need and those that may be available in the hospital were included
in the E group. The remaining items with lowest criticality, the shortage of which would not be
detrimental to the health of the patients, were included in the D group. The VED status of each
item was discussed with justification by a group comprising of physician, surgeon, pediatrician
and pharmacist.

ABC-VED matrix analysis

The ABC-VED matrix was formulated by cross-tabulating the ABC and VED analysis. From the
resultant combination, three categories were classified (I, II and III). Category I was constituted
by items belonging to AV, AE, AD, BV and CV subcategories. The BE, CE and BD subcategories
constituted category II, and the remaining items in the CD subcategory constituted category III.
In these subcategories, the first alphabet denotes its place in the ABC analysis, while the second
alphabet stands for its place in the VED analysis.

Results

The drug formulary of the hospital consisted of 421 items. The total ADE of the pharmacy on
items issued in 2007-08 was Rs. 40,012,612.

ABC analysis

On ABC analysis, 13.78% (58), 21.85% (92) and 64.37% (271) items were found to be A, B and C
category items, respectively, amounting for 69.97% (Rs. 27,996,865), 19.95% (Rs. 7,981,331)
and 10.08% (Rs. 4,034,416) of ADE of the pharmacy [Table 1] and [Figure 1]. The cut-offs were
not exactly at 70/20/10%, and differed marginally, which is permissible. [18]

VED analysis

The findings of the VED analysis of the present study are given. About 12.11% (51), 59.38%
(250) and 28.51% (120) items were found to be V, E and D category items, respectively,
amounting for 17.14% (Rs. 6,857,814), 72.38% (Rs. 28,963,447) and 10.48% (Rs. 4,191,351) of
ADE of the pharmacy.

ABC-VED matrix analysis

The ABC-VED matrix analysis shows that nine different subcategories (AV, AE, AD, BV, BE, BD,
CV, CE and CD) were studied using this analysis. These nine were further grouped into three
main categories, categories I, II and III.

There were 93 (22.09%) items in category I, 230 (54.63%) items in category II and 98 (23.28%)
items in category III, amounting for 74.21% (Rs. 29,691,956), 22.23% (Rs. 8,895,160) and 3.56%
(Rs. 1,425,496) of ADE of the pharmacy, respectively.

Discussion

Provision of care in tertiary care hospitals is sensitive to the timely availability of facilities,
including drugs. In case of drugs, besides the criticality factor, the cost factor must also be taken
into consideration, as can be seen from our study, where about 10% of the drugs consumed
about 70% of ADE of the pharmacy. This is the group requiring greater monitoring as it has
fewer drugs consuming most of the money. We also noted that not all the drugs in this group
were vital or essential. It also had drugs from the desirable category. Categorization of drugs by
the ABC-VED matrix model helps to narrow down on fewer drugs requiring stringent control.

ABC analysis

The present study showed that if ABC analysis is considered alone for drug inventory, it would
help effectively control the recommended 58 (13.78%) items in the A category, with almost
70% of ADE of the pharmacy, but it would compromise on the availability of items of vital
nature from B and C categories (35 items, 8.31%). The results of the study are comparable with
similar studies conducted in India [Table 3].[9],[17],[19],[20]

VED analysis

If VED analysis alone is considered, ideal control can be exercised on the identified vital and/or
essential items, accounting for 89.52% of ADE of the pharmacy. However, category A also
contains six desirable items with 3.34% of ADE of the pharmacy and hence it is not possible to
ignore the desirable group completely. The comparison with similar studies in India showed
high variation in the percentage of vital, essential and desirable items [Table 3]. [9],[17],[19],[20] This
could be because different institutes have different service profiles, depending on the specialty
services available.

ABC-VED matrix analysis

In a combination of ABC and VED analysis, the resultant matrix makes it possible to focus on 93
(22.09%) items belonging to category I for strict managerial control as these items are either
expensive or vital. The annual expenditure of these items was 74.21% of ADE of the pharmacy.
AV, AE and BV subgroups of category I consist of 68 items (16.15%) that are expensive (70.12%
of ADE), and their being out of stock is unacceptable as they are either vital or essential. To
prevent locking up of capital due to these items, low buffer stock needs to be maintained while
keeping a strict vigil on the consumption level and the stock in hand. A two-bin method of
ordering needs to be followed for these as this will eliminate the risk of item shortage. CV items
(19, 4.51%) are drugs of low cost but high criticality and take up 0.74% of ADE of the pharmacy.
Because this amount is negligible, these items can be procured once a year and stocked as their
carrying cost is low.

AD items (only six, 1.43%) consume 3.34% of the ADE. These items should be monitored for
economic order quality, and their order placement must be made after careful study of the
need. Rational use of items in this subgroup, including their removal from the list if possible,
can bring about substantial savings without affecting patient care.

Category II items (230, 54.63%) consumes 22.23% of the ADE. These items can be ordered once
or twice a year, thereby saving on ordering cost and reducing management hassles at a
moderate carrying cost and without blocking substantial capital. Category III items (98, 23.28%)
consume 3.57% of the ADE. These items can also be ordered once or twice a year, thereby
saving on ordering cost at a moderate carrying cost and without blocking substantial capital.

Conclusion

During the year 2007-08, items of approximately Rs. 40,012,612 were issued by the pharmacy
store of PGIMER. This necessitates application of scientific inventory management tools for
effective and efficient management of the pharmacy stores, efficient priority setting, decision
making in purchase and distribution of specific items and close supervision on items belonging
to important categories. ABC and VED analysis identifies the drugs requiring stringent control
for optimal use of funds and elimination of out-of-stock situations in the pharmacy.