This document discusses inventory management techniques used in the pharmaceutical industry. It begins with key inventory terms like safety stock, lead time, and reorder level. It then covers reorder quantity methods, including the fixed order quantity and two-bin systems. The document focuses on the economic order quantity model, explaining how to calculate EOQ using an algebraic formula that considers factors like annual consumption and carrying costs. Finally, it briefly introduces other inventory models like production quantity, quantity discount, probabilistic, and fixed period models.

1. INVENTORY
MANAGEMENT
Presented by:-
Chiranjibi Adhikari,
M. Pharm. 1st
year,
P.G. Pharmaceutics,
Mallige College of Pharmacy.
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2. CONTENTS
 INTRODUCTION
 REORDER QUANTITY METHODS
 ECONOMIC ORDER QUANTITY
 INVENTORY MODELS
 REFERENCES
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3. INVENTORY MANAGEMENT
 Inventory management is defined as the scientific
method of finding out how much stock should be
maintained in order to meet the production demands
and be able to provide right type of the material at
right time in right quantities at competitive prices.
 Inventory is actually money which is available in the
shape of materials ,equipments , storage space ,
work time etc.
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4. KEY INVENTORY TERMS
Safety Stock:
 Safety stock or the buffer stock is an ideal quantity of
material that has to be always maintained and it is
drawn only in the emergency situation.
Lead Time:
 It is the time lapse between placement of an order and
receipt of items including their approval by quality
control department.
 This is counted on past experiences.
 Procurement of material has a long lead time . 4

5. Reorder Level:
 It indicates that level of material stock at which it is
necessary to take the steps for the procurement of
further lots of material.
 The reorder level is slightly more than minimum
stock level to guard against abnormal use of item and
abnormal delay in supply.
 Reorder level= Maximum lead time × Maximum uses
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6. REORDER QUANTITY METHOD
The quantity of items is to be ordered so as to continue
production without any interruption in future.
Fixed order quantity method:-
o When the stock level drops to a pre-determined point,
i.e. re-order level, then the order of fixed quantity of
material is placed.
o Fixed order quantity is calculated using Economic
Order Quantity (EOQ) formula.
Reorder level quantity=
Safety stock +(usage rate x lead time)

7. Fixed order quantity method has following
advantages:
1. Each material can be procured in the most economical
quantity.
2. Purchasing and inventory control personnel
automatically devote attention to the items that are
needed only when required.
3. Positive control can easily be exerted to maintain total
inventory investment at the desired level simply by
manipulating the planned maximum and minimum
value.
Disadvantages: The orders are raised at irregular
intervals which may not be convenient to the suppliers.
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8. Reorder quantity systems
1. Open access bin system:-
 The bin is filled with items to the maximum level as
and when required.
 Open bins with items are kept at places nearer to the
production line.
 The operators use items without making a record.
 The system is usually restricted to C-items, i.e. 70%
of all items with small inventory value.
E.g. Postal department where a fixed quantity of
stamps is kept. At the end of each week, the
quantities are examined and brought back to the
maximum level

9. 2. Two –bin system:-
 Two bins are filled with items at different levels,
when the first one is exhausted, it indicates the
time for reorder.
 The 2nd
one is a reserve stock during lead-time
period.
 This is normally applicable to hospital &
community pharmacies.
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10. ECONOMIC ORDER QUANTITY (EOQ)
 It is defined as the quantity of the material to be
ordered at one time .
 This quantity is fixed in such a manner as to
minimize the cost of ordering and carrying the
stock so that only correct quantity of the material is
to be purchased .
 There should be no over stock or under stock and
balance should be made between the cost of
carrying and the cost of carry out .
 EOQ formula is widely used for computing the
minimum annual cost for ordering and stocking
each item.

11. EOQ depends upon the two type of costs:
A. Procurement cost -
 Receiving quotations.
 Processing purchase requisition.
 Follow up and expending the purchase order .
 Receiving the items and inspecting the items .
 Processing vendors invoice .
B. Carrying cost -
 Interest on the capital investment .
 Cost of the storage facility.
 Cost involved in deterioration .
 Cost of insurance property tax .

12. The size of an economic buying quantity or economic
purchase lot depends on many factors such as :-
 Inventory carrying cost
 Cost of purchasing & receiving
 Average consumption
 Annual sales rate
 The unit cost and quantity discount
 Availability of storage accommodation

13. TABULAR DETERMINATION OF
EOQ
Per ordering cost = 4
10 % is invested for the inventory carrying cost
1000 is the Annual Usage Value
Annual Carrying Cost = 10
100
X 1000 X
1
Or no.

15. GRAPHIC REPRESENTATION
OF EOQ
Annual ordering Cost
Carrying Cost
Total Annual Cost
Ordering no
CosttoOrder&Carrying
EOQ

16. EOQ MODEL PROVIDES A LEVEL OF INVENTORY AT
WHICH THE COMBINED COST OF PROCURING &
CARRYING INVENTORY ARE MINIMUM.
100 200 300 400 500
10
20
30
40
50
Total cost
Carrying
cost
Procuring costs
Min
cost
Order quantity
Costperperiod
EOQ

17. ALGEBRAIC
METHOD
EOQ =
2 a b
c s
a = Annual consumption
b = Buying cost per order
c = Cost per unit
s = Storage cost
(It include inventory carrying cost)

18. WEAKNESS OF EOQ FORMULA
 If usage of material varies unpredictably, as often does,
no formula will work well.
 EOQ formulas are only as accurate as the order cost and
carrying cost information.
 It is not an easy job to estimate the cost of acquisition and
cost of possession accurately.
 Items purchased to order, and items subject to rapid
production improvement will be restricted from EOQ use.
 Critical supply items will be ordered in greater than
normal quantities. The time of supply of quantities
selected will over-ride EOQ.
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19. INVENTORY MODELS
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1. Fixed order quantity method
A. Production quantity model
B. Quantity discount model
2. Probabilistic models
3. Fixed order period models

20. 1 A. PRODUCTION QUANTITY
MODEL
 Allows how much to order and when to order .
 It is suited for the production environment .
• Materials produced and used immediately.
• Provides production lot size .
 It has a lower holding cost
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21. 1 B. QUANTITY DISCOUNT MODEL
 It answers how much to order and when to
order.
 It allows quantity discounts.
 Reduced price is there when items are
purchased in larger quantities .
 Trade off is lower between lower price and
increased holding cost
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22. QUANTITY DISCOUNT SCHEDULE
Discount
Number
Discount
Quantity
Discount
(%)
Discount Price
(P)
1 0 to 999 No
discount
$5.00
2 1,000 to
1,999
4 $4.80
3 2,000 and
over
5 $4.75
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23. 2. PROBABILISTIC MODEL
 It answers how much and when to order .
 Allow the demands to vary.
 Follows normal distribution.
 Consider service level and safety stock.
 Service level = 1- probability of stock out
 Higher service level means more safety stock.
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24. PROBABILISTIC MODEL
WHEN TO ORDER .
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Reorder
Point
(ROP)
Optimal
Order
Quantity
X
Safety Stock (SS)
Time
Inventory Level
Lead Time
SS
ROP
Service
Level P(Stockout)
Place
order
Receive
order
Frequenc
y

25. 3. FIXED PERIOD MODEL
 Answers how much to order .
 Orders are placed at fixed intervals.
 Inventory brought up to the target amount .
 Amount of order varies
 No continuous inventory count.
 Possibility of stock out between the interval.
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26. REFERENCES
 Pharmaceutical production and management by
C.V.S. Subrahmanyam, Vallabh Prakashan, First
edition: 2005, Page no. 292-321.
 Industrial Pharmacy by Dr. Shyamala Bhaskaran,
Birla Publications, First Edition : 2009-2010, Page
no. 194-212.
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