Hospital pharmacy services Inventory control Definition, various methods of Inventory Control ABC, VED, EOQ, Lead time, safety stock

1. DOCTOR OF PHARMACY
IV YEAR
HOSPITAL PHARMACY
14T00402
Chapter 5b
Hospital pharmacy services
Inventory control
Definition, various methods of Inventory Control
ABC, VED, EOQ, Lead time, safety stock
Dr.V.CHANUKYA Pharm- D

2. INTRODUCTION
INVENTORY
 The term inventory means itemized list of goods with their
estimated worth, specifically an annual account of stock taken in
any business.
 The goods include includes raw material, work-in-process,
finished goods.
INVENTORY CONTORL
 Inventory Control is the process by which inventory is measured
and regulated according to predetermined norms such as economic
lot size for order or production, safety stock, minimum level,
maximum level, order level etc.

3. OBJECTIVES OF INVENTORY CONTROL
 To meet unforeseen future demand due to variation in forecast
figures and actual figures.
 To meet the customer requirement timely, effectively, efficiently,
smoothly and satisfactorily.
 Tomeet the time lag for transportation of goods.
 Tomeet the technological constraints of
production/process.
 To average out demand fluctuations due to seasonal or cyclic
variations.

4.  To balance various costs of inventory such as order cost or set up
cost and inventory carrying cost.
 To balance the stock out cost/opportunity cost due to loss of sales
against the costs of inventory.
 To minimize losses due to deterioration, obsolescence,
damage, pilferage etc.
 Toreduce loss due to changes in prices of inventory items.
 Togain economy of production or purchase in lots.
 Tosmoothen the production process.
OBJECTIVES OF INVENTORY CONTROL

5. FACTORS AFFECTING INVENTORY CONTROL
 Type of product
 Type of manufacture
 Volume of production

6. BENEFITS OF INVENTORY CONTROL
 Ensures an adequate supply of materials
 Minimizes inventory costs
 Facilitates purchasing economies
 Eliminates duplication in ordering
 Better utilization of available stocks
 Provides a check against the loss of materials
 Facilitates cost accounting activities
 Enables management in cost comparison
 Locates & disposes inactive & obsolete store items
 Consistent & reliable basis for financial statements

7. INVENTORY COSTS
 TYPES OF INVENTORY COSTS
 Ordering (purchasing) costs
 Inventory carrying (holding) costs
 Out of stock/shortage costs
 Other costs

8. ORDERING COSTS
 It is the cost of ordering the item and securing its supply.
 Includes-
 Expenses from raising the indent
 Purchase requisition by user department till the
execution of order
 Receipt and inspection of material

9. INVENTORY CARRYING COSTS
 Costs incurred for holding the volume of inventory and
measured as a percentage of unit cost of an item.
 It includes-
 Capital cost
 Obsolescence (out of date drugs)cost
 Deterioration cost
 Taxes on inventory
 Insurance cost
 Storage & handling cost

10. OUT-OF-STOCK COSTS
 It is the loss which occurs or which may occur due to non
availability of material.
 It includes-
 Break down/delay in production
 Back ordering
 Lost sales
 Loss of service to customers, loss of goodwill, loss due to lagging
behind the competitors, etc.

11. OTHER COSTS
 Capacity Costs
 Over-time payments
 Idle time payments
 Set-up Costs
 Machine set-up
 Over-stocking Costs

12. INVENTORY CONTROL MODELS

13. INVENTORY CONTROL TECHNIQUES
• Inventory control techniques are the tool available for smooth
running of the business enterprises.
• The inventories should be maintained at a level lying between
the excessive and the inadequate. This level is known as the
“OPTIMUM LEVEL” of inventories.

14. INVENTORY CONTROL TECHNIQUES
The common and widely used techniques are:
• ABC ANALYSIS (Always Better Control)
• VED ANALYSIS (Vital, Essential, Desirable)
• EOQ (Economic Order Quantity)
• Lead Time
• Safety stock
• Others include Buffer stock, Perpetual inventory control
system, SDE classification, HML Classification, FSN
Classification, SOS classification, XYZ Classification

15. IMPORTANT TERMS
• Minimum Level – It is the minimum stock to be maintained for
smooth production.
• Maximum Level – It is the level of stock, beyond which a firm
should not maintain the stock.
• Reorder Level – The stock level at which an order should be placed.
• Safety Stock – Stock for usage at normal rate during the
extension of lead time.
• Reserve Stock - Excess usage requirement during normal lead time.

16. • LEAD TIME : It is the time taken between the placing of
order and receipt of drug to the department. The longer the
lead time the larger is the safety stock, resulting in excess of
investment in inventories.
• BUFFER STOCK : The quantity of stock kept as reserve to
guarantee against un fore seen demands is known as buffer
stock. This stock protects against variation in demand and
procurement period. It is used in emergencies.

17. ABC ANALYSIS
• In this technique the materials are divided into 3 groups. A,B,C
according to the cost of the materials and money value.
• It is also known as Selective Inventory Control Method (SIM).
• This method is a means of categorizing inventory items according
to the potential amount to be controlled.
• ABC analysis has universal application for fields requiring
selective control.
• A items - A few costly items come under this category these items
require proper storage and handling, overstock is avoided.
• B items - These are neither costly nor cheap.
• C items - Cheaper in cost.

18. ABC ANALYSIS

19. ABC Analysis
•
Percent
of
annual
currency
usage
AItems
B Items
C Items
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 – | | | | | | | | | |
Percent of inventory items
10 20 30 40 50 60 70 80 90 100

20. Procedure for ABC Analysis
1) Make the list of all items of inventory.
2) Determine the annual volume of usage & money value of each item.
3) Multiply each item’s annual volume by its rupee value.
4) Compute each item’s percentage of the total inventory in terms of
annual usage in rupees.
5) Select the top 10% of all items which have the highest rupee percentages &
classify them as “A” items.
6) Select the next 20% of all items with the next highest rupee percentages &
designate them “B” items.
7) The next 70% of all items with the lowest rupee percentages are “C”
items.

21. ADVANTAGES OF ABC ANALYSIS
• Helps to exercise selective control
• Helps to point out obsolete stocks easily.
• In case of “A” items careful attention can be paid at every
step such as estimate of requirements, purchase, safety
stock, receipts, inspections, issues, etc. & close control is
maintained.
• In case of “C” items, recording & follow up, etc. may be
dispensed with or combined.
• Helps better planning of inventory control.
• Provides sound basis for allocation of funds and human
resources.

22. DISADVANTAGES OF ABC ANALYSIS
• Proper standardization & codification of inventory items needed.
• Considers only money value of items & neglects the
importance of items for the production process or assembly
or functioning.
• Periodic review becomes difficult if only ABC analysis is recalled.
• When other important factors make it obligatory to concentrate
on “C” items more, the purpose of ABC analysis is defeated.

23. VED CLASSIFICATION
• VED: Vital, Essential & Desirable classification
• VED classification is based on the criticality ofthe inventories.
• Vital items – Its shortage may cause havoc & stop the work in organization. They
are stocked adequately to ensure smooth operation.
• Essential items - Here, reasonable risk can be taken. If not available, the plant
does not stop; but the efficiency of operations is adversely affected due to
expediting expenses. They should be sufficiently stocked to ensure regular flow
of work.
• Desirable items – Its non availability does not stop the work because they can
be easily purchased from the market as & when needed. They may be stocked
very low or notstocked.

24.  It is useful in capital intensive industries,
transport industries, etc.
 VED analysis can be better used with ABC analysis
in the following pattern:
Category “V” items “E” items “D” items
“A” items Constant control
& regular follow
up
Moderate stocks Nil stocks
“B” items Moderate stocks Moderate stocks Low stocks
“C” items High stocks Moderate stocks Very low stocks

25. ECONOMIC ORDER QUANTITY (EOQ)
• EOQ or Fixed Order Quantity system is the technique of ordering
materials whenever stock reaches the reorder point.
• Economic order quality deals when the cost of procurement and
handling of inventory are at optimum level and total cost is
minimum.
• In this technique, the order quantity is larger than a single
period’s requirement so that ordering costs & holding costs
balance out.

26. Cost
(Rs.)
Tc (Total Cost)
Carrying Cost
(Q/2)H
DS/Q (Ordering Cost)
EOQ
Order Quantity Size (Q)

27. ASSUMPTIONS OF EOQ
• Demand for the product is constant
• Lead time is constant
• Price per unit is constant
• Inventory carrying cost is based on average inventory
• Ordering costs are constant per order
• All demands for the product will be satisfied (no back orders)

28. WEAKNESSES OF EOQ FORMULA
• Erratic usages
• Faulty basic information
• Costly calculations
• No formula is substitute for commonsense
• EOQ ordering must be tempered with judgment

29. BASIC FIXED ORDER QUANTITY MODEL (EOQ)
Holding
Cost
T
otal Annual Cost =
Annual
Purchase
Cost
Annual
Ordering
Cost
+ Annual +
S
Q
D
H
Q
TC DC
2
H
EOQ
2DS
TC = Total annual cost
D = Demand
C = Cost per unit
Q = Order quantity
S = Cost of placing order/setup cost
H = Annual holding and storage cost
per unit of inventory

30. FSNANALYSIS
• FSN: Fast moving, slow moving & non moving
• Classification is based on the pattern of issues
• from stores & is useful in controlling obsolescence.
• Date of receipt or last date of issue, whichever is later, is taken to
determine the no. of months which have lapsed since the last
transaction.
• The items are usually grouped in periods of 12 months.
• It helps to avoid investments in non moving or slow items. It is
also useful in facilitating timely control.

31. • For analysis, the issues of items in past two or three years are
considered.
• If there are no issues of an item during the period, it is “N” item.
• Then up to certain limit, say 10-15 issues in the period, the item
is “S” item
• The items exceeding such limit of no. of issues during the period
are “F” items.
• The period of consideration & the limiting number of issues vary
from organization to organization.

32. SDE Classification:
• The SDE is based upon the availability of items.
• Here ‘S’ refers to ‘Scarce’ items
• ‘D’ refers to ‘Difficult’ items
• ‘E’ refers to ‘Easy to acquire’
• This is based on problems faced in procurement, were some
strategies are made on purchasing.

33. SOS Analysis:
• ‘S’ stands for Seasonal items and ‘OS’- Off Seasonal items.
• In general it is merit to seller to buy seasonal items at lower price
and keep inventory and sell them at high price during Off seasons.
• If not the seller has to buy the goods at higher prices during
Off seasons.
• Decisions are taken based on the fluctuations and
availability.

34. XYZ Analysis
• This classification is based on the value of inventory of materials actually
held in stores at given time.
• This helps to control the average inventory model value.
• ‘X’ items which are 10% of no.of items stored, but accounting for 70% of the
total inventory value.
• ‘Y’ items are 20% of no.of items stored and account for 20% of total inventory
value.
• ‘Z’ items are 70% of no.of items stored and account for 10% of the total value.
• This analysis focuses on efforts to reduce the inventory of these items.