Inventory management
It is defined as the systemic control and
regulation of purchase, storage, usage of
materials in such a way to maintain an even flow
of materials and at the same time avoiding
excessive investment on inventories.
Types
• ABC analysis
• Economic Order Quantity method
• VED analysis
• Lead time
• Safety stock method
• Reorder quantity level
ABC analysis
• ABC method stands for “Always Better Control”.
• In this method, the materials are divided into three
groups A, B, C according to the cost of materials.
• Group ‘A’ materials : These items cover 10% of the
total inventories and 70% of the total investment.
• Very essential items are purchased and kept in stock so
as to minimize the investment on these items.
• These items should be properly handled and stored.
• Group ‘ B’ materials : These items cover 20%
of the total inventories and 20% of the total
investment.
• These products can be handled by junior officers.
• Group ‘C’ materials : The items coming under
this group are less of less cost.
• These items cover about 70% of the total
inventories and 10% of the total investment.
• These products can be handled by clerical staff.
Advantages
• The investment in inventories can be
regulated and the funds can be utilized in the
best possible manner.
• This method allows strict control of drugs over
Category A drugs.
• Helps to maintain the safety stock of Group
C materials.
• It helps to reduce the storage cost of the
materials
Sl no Cost Consumption
In rupees
1 908 171
2 105 590
3 15 880
4 315 150
5 27 700
6 9 900
7 64 670
8 455 180
9 27 437
10 216 800
• Step 1 : Total cost = Unit cost* Consumption
i.e : 908* 171 = 155258
• Step 2: Sum of total cost
• Step 3: % total cost = total cost*100/ Sum of total
cost
• i.e % of total cost = 155258*100 = 25.28%
614047
• Step 4: Descending order
• Step 5: % cumulative cost
• Step 6 : Category
Sl no Cost Consumption Total % Descendi Cumulative
In rupees cost total ng order Cost
cost
1 908 171 15,528
2 105 590 61,950
3 15 880 13,200
4 315 150 47,250
5 27 700 18,900
6 9 900 8,100
7 64 670 42,880
8 455 180 81,900
9 27 437 11,799
10 216 800 1,72,800
4,74,307
• Category A - 0- 70%
• Category B - 70% - 90%
• Category C - 90% - 100%
Sl no Cost per unit Annual consumption
1 0.42 39
2 1.57 49
3 8.5 80
4 4.38 213
5 25.65 265
6 6.5 994
7 0.68 2068
8 2.21 4658
9 9.79 1506
10 2.6 549
11 3.23 318
12 7.76 169
Economic Order Quantity (EOQ)
• EOQ is defined as ideal order quantity at which
ordering cost and carrying cost is minimum.
• When we purchase any drugs or drug related
products mainly it consists of 3 types of ‘costs’.
[Link] cost
2. Ordering cost
3. Carrying cost
[Link] cost – The fixed cost of each drug
product.
Ex ; MRP of 1 Paracetamol strip is 10 rs
2. Ordering cost – The cost which is associated with
purchase or order of materials.
This includes, Communication+ Transportation +
Documentation+ Inspection
3. Carrying cost – The cost for holding of inventories in
store .
This includes; Storage cost + Insurance + Security
EOQ Formula
A = Annual demand
O = Ordering cost
C = Carrying cost
EOQ Formula
• Calculate the EOQ if,
• Annual consumption is 6000 units
• Ordering cost is 60/-
• Carrying cost is2/-
• Calculate EOQ, If
• Annual consumption is 25000 units
• Ordering cost is 32/-
• Carrying cost is 6.40/-
Advantages and limitations
Advantages
•Reduces holding and carrying costs
•Enables better inventory management
Disadvantages
•Calculations
•Forecast of Accurate Demand may not be
always possible
VED analysis
The VED criticality analysis is performed by classifying the
inventories into Vital (V), Essential (E) and Desirable (D)
categories.
The drugs critically needed for the survival, are part of national
programmes and those that must be available all the times as
their non availability can seriously affect the image of the health
centre were included in the “Vital” category.
• The inventories with a lower criticality need
and those, whose shortage can be tolerated for
a short period at the health centre, were
included in the “Essential” group.
• The remaining inventories with lowest
criticality, the shortage of which would not be
detrimental to the health of the patients, were
included in the “Desirable” group.
Safety stock
• Inventories are generally divided into
“ working stock” and “safety stock”
• If the demand is stationary or if there is no
much variation in demand there is no need for
stocking of inventories.
• When demand increases, safety stock level can
also be increased. Depending on the demand
one can decide the safety stock.
• If there is more demand on particular goods,
then such goods can be stocked.
• The safety stock of a drug depends upon its
lead time, usage value and its carrying cost.
Lead time
• Lead time method : The interval between the
initiation of acquiring a material and the
actual receipt of material is known as lead
time.
• The lead time is longer in public sector than in
private sector. Because in public sector the
rules and regulators are rigid than in private
sectors.
Advantages of safety stock
• Protect against unforeseen variation in
supply
• Compensate for forecast inaccuracies
• Prevent disruptions in manufacturing or
deliveries
• Avoid stock outs to keep customer service and
satisfaction levels high.
Reorder level
It is the inventory level at which an entity
should issue a purchase order to replenish the
inventories.
Types of reorder quantity method
1. Fixed quantity level
2. Two bin system
It can be calculated by,
Reorder level = Average daily usage * lead time
Example, if average daily use of Pantoprazole is
100 units and lead time is 2 days then,
Reorder level = Average daily usage * Lead time
= 100 * 2
= 200 units.
• If average daily use of Cefixime is 125 units
and lead time is 5 days then calculate reorder
level.
• If average daily use of Aceclofenac is 536 units
and lead time is 96 hours then calculate
reorder level.
Two-bin reorder system
• A two-bin reorder system is a simple way to
manage inventory levels and avoid running
out of products.
• It works by dividing inventory into two bins,
one for active use and one for reserve
Objectives
Purchase of Drugs and Pharmaceuticals
Principles of purchase procedure
1. Right Quality
2. Right Quantity
3. Right Price
4. Right Source
5. Right Time
Purchase procedure
1. Determination of Requirement
The materials to be purchased for particular
period are well planned for the purpose of
their regular and continuous use.
• Prepared by department pharmacist.
• Approved by Head of the Department.
Parts of purchase requisition
•Type of material to be purchased
•Time of requirement
•Quantity to be purchased
•Description of quality
•Source of Supply
(i) Direct from wholesalers and manufacturers
(ii) Emergency purchases from local market
[Link] tenders - Generally tender system is
followed in hospitals to select the supplier.
3. Finalising vendor - The lowest bidder is
chosen for supplying the order.
IV. Purchase Order
After selecting the supplier, the chief pharmacist
or any other suitable authorised person
prepares a purchase order giving detailed
description, specification, packaging, price and
quantity needed etc. of the items
Number of purchase order copies varies from hospitals
to hospital but usually seven copies are prepared and
(a)The original copy is sent to the supplier.
(b) One copy for accounts section.
(c) One copy for purchase department.
(d) One copy for the concerned department.
(e) Fifth and Sixth copy for concerned receiving
department
(f) Seventh copy as reference copy.
Prepared by, Approved by,
General terms and conditions
associated with purchase order
• Deliveries must be made inside the hospital premises.
• Prepare all transport charges.
• The hospital will not be responsible for goods supplied which
are not on this order form, not duly signed by the purchase
officer
• All consignments are subject to inspection.
• Installation and Demonstration, if required, is essential.
• No packing, forwarding or any other charges will be paid
extra.
V. Receipt of Acknowledgment
After placing the order to supplier by sending a
copy of purchase order, the supplier in turn
sends acknowledgement of the order stating
that he will be able to supply the goods with the
terms and conditions which are mentioned in
the purchase order.
• On receipt of drugs, there should be a system
in the stores whereby the received drugs are
properly checked.
• Random sampling can be done to make sure
that products confirm to the tendered
specifications like date of expiry and visible
sign of deterioration , such as change of
colour, caking etc.
Procurement and stocking