document contains what is inventory control and methods of inventory control

1. Inventory control
NITHIN MANOHAR R
M.Pharm,(PhD),MSc.Psychology,
Asst.Professor
Dept Of Pharmacy Practice
Pushpagiri College Of Pharmacy

2. Introduction
• Inventory represents the quantities of goods like
medicines, surgical items and other patient care objects
that are held in stock.
• Inventory control also known as stock control, refers to
the regulation of stock and flow of materials and
components in an efficient, effective and economical
manner.

3. Objectives of inventory control
• Protection against fluctuation demands.
• Better use of resources, especially the finance.
• Control of stock volume.
• Control of stock distribution.
• Balance stock of different products.
• Maximum customer services.
• Properly record the stock volume.

4. Methods of controlling stock
• Setting inventory levels
i. Maximum level
ii. Re-order level
iii. Danger level
iv. Minimum level
v. Zero level/Exhaust bin level

5. i. Maximum level: it is the level above which stock
should not be permitted to rise. The level is fixed
based on various factors like storage facilities, shelf life
and demand for the item. This maximum stock level is
fixed in such a way that further marginal increase in the
stock can result in heavy additional capital cost or can
cause damage to the item due to the unavailability of
storage space.
ii. Re-order level: this is the level at which new order has
to be placed with the supplier or the manufacture. In
the case of fast moving items, factors like changes in
demand, delivery time have to be analysed regularly.

6. iii. Danger level/warning level: This is the level at which
deliveries of the outstanding orders have to be
speeded up. This is the level at which normal activities
can be affected, if urgent steps are not taken to get the
ordered items from the suppliers.
iv. Minimum level: This is the level at which any further
use of the item will necessitate withdrawal from the
buffer stock or the reserved stock.
v. Zero level/Exhaust bin level: This is no stock level,
where the bin will be exhausted or empty. This is the
situation that should be avoided.

7. Methods of inventory techniques
1. ABC
2. VED
3. Lead time
4. Safety stock/Buffer stock
5. EOQ

8. 1. ABC analysis (Always Better Control)
• It is a selective inventory control technique in which
inventory (item) in a store is categorised into three groups
such as ‘A’ item, ‘B’ item and ‘C’ item depending upon
their percentage of annual consumption.
Annual consumption=Annual demand × items cost per
unit
a) A items (Highly important materials)
• More costly & valuable items are classified as A items.
The A items require strict & close watch and should be
monitored by top managers in the hospital pharmacy i.e.,
the chief pharmacist.
• Purchasing department has to take maximum possible
efforts to reduce the lead time & expedite the delivery of
these items.

9. • These items should be ordered frequently but in smaller
size. Stock & issue records should be meticulously
mentioned in the drug store record books, in order to get
an updated stocks at any given time.
• The A items are accountable for about 70% of the total
annual consumption and comprises of 10% of the total
number of items.
b) B items (moderately important materials)
• Average usage value items are classified as B. These items
require a reasonable amount of control and supervision.
• The chief pharmacist can delegate the charge of these
items to a senior pharmacist.
• The B items are accountable for about 20% of the total
annual consumption and comprises of 20% of the total
number of items.

10. c) C items (least important materials)
• Low usage value items are classified as C items.
• C items comprising about 10% of the total annual
consumption cost and are accounts for 70% of the total
number of items.
• Since these items are too many and of lesser values, the
objective should be to reducing the ordering and stock keeping
cost to the minimum extent possible.
• Authority for purchasing them and their management in the store
can be delegated to the junior pharmacist.
Category % of annual
consumption cost
% of items
A items 70% 10%
B items 20% 20%
C items 10% 70%

11. A items B items C items
Maintain close
control
Maintain moderate
control
Maintain loose
control
Procured from many
sources
Procured from two or
three sources
Procured from two
sources
More effort to reduce
lead time
Moderate effort to
reduce lead time
Minimum effort to
reduce lead time
High consumption
value
Average
consumption value
Low consumption
value

12. Graphical method
• A more accurate and practical method of doing ABC
analysis is the graphical method.
• Plot the percentage of the total cumulative annual
consumption values on Y-axis and the no of items on the X-
axis.

13. Advantages of ABC analysis
• This method helps businesses to maintain control over
the costly items which have large amounts of capital
invested in them.
• The investment can be regulated and funds can be
utilized in the best possible manner.
• It helps in maintaining enough safety stock of C
categories of items

14. Disadvantages/Limitations
• Conflict with other cost systems. ABC cost allocation
differs from the traditional cost system allocation.
• This method needs more resources to maintain
compared to the traditional costing systems.
• This is a continuous process which needs added data
measurement and collection.
• It needs periodical assessment and updating.
• This analysis is built on the monetary value of the
materials in use. Other important factors are ignored.

15. 2. VED analysis (Vital, Essential, Desirable)
• VED stands for vital, essential and desirable. In the VED
analysis of store items, importance is not given on the total
amount spent on a particular item as in the case of the
ABC analysis. The utility, criticality and essentiality of
the items are the dominating factors in the VED analysis.
a) Vital items
• Vital or V drugs are those which are lifesaving for which
there are no other suitable substituents.
• The regular supply of those drugs is mandatory or crucial
in providing basic health sources.
• Eg: Adrenaline, which is used in anaphylactic shock,
injections of aminophylline, saline injections etc.

16. b) Essential items
• Essential or E items are those which are unavoidable for
the functions of the store or service.
• The E drugs are effective against severe but nevertheless
significant form of illness but are not absolutely vital in
providing basic health care.
c) Desirable items
• If an item is not too important, it will included in D group.
• They are used for minor or self limiting illness.
• Their efficacy's in the treatment may be questionable.

17. • In some countries, VED classification is known as VEN
classification. Here N representing non essential replaces D.
In other countries like Latin America, the VED
classification is represented by three categories of medicine.
i. Category 1- essential medicine
ii. Category 2- basic medicine
iii. Category 3- complementary medicine.

18. 3. Lead time
• Average duration of time between placing of an order
and the receipt of items is known as lead time.
• When the order quantity is decided, one has to consider
lead time. In developed countries, lead time is generally
less as the have better communication and transportation
facilities as compared to developing and underdeveloped
countries.
Lead time=servicing time + delivery time + receiving time.

19. • Servicing time- time taken for placing an order. It includes
time for obtaining quotations, time for negotiating price,
time for visiting potential suppliers and time for letting
contract.
• Delivery time- it is the time taken by the supplier for to
comply certain order.
• Receiving time- this includes time for uncrating goods,
time for inspection of goods, time for movement of goods
to store and time for entering goods in stock.

20. 4. Safety stock or buffer stock
• This stock protect against the variation in demand and
procurement period. It is used in emergencies.
• A good procurement system necessitates the use of items
from this buffer stock. The buffer stock is highly useful in
the case of epidemics, accidents or similar unforeseen
tragedies.
Reasons for carrying safety stock
 Protect against unforeseen variation in supply. For eg: if
your supplier is unexpectedly closed for a week, we can
fulfil the order to customers with safety stock.
 Prevent disruptions in manufacturing on deliveries.
 Avoid stock out to keep customer service and satisfaction
high levels.

21. Buffer stock= [m-a]×n
Where,
m=maximum consumption per day
a=average consumption per day
n=lead time in days
If m buffer stock
n buffer stock

22. 5. Economic order quantity (EOQ)
• One of the most effective techniques for determination of
quantity.
• This concept is in existence for about fifty years and is
used widely in commercial firms that use perpetual
purchasing method.
• The basic objective of EOQ is to have an ideal order
quantity for any item and to economise on the cost of
purchase (deals with both, how much to purchase and
when to buy).
• EOQ is fixed mainly after taking into considering the
following costs,
i. Ordering cost
ii. Carrying cost

23. i. Ordering cost
• It is also known as purchasing cost or acquisition cost. It
is the cost of placing an order and securing the supplies. It
varies from time to time depending upon the number of
orders placed and number of items ordered. The more
frequently the orders we placed and fewer the quantities
purchased for each order, the greater will be the ordering
cost and vice versa. It involves the cost of inviting
quotation and their screening, deciding the supplier
issuing of the purchase order, follow up etc.
ii. Carrying cost
• It represents cost included on holding inventory in hand. It
is the cost of physical storage of inventory + the
opportunity cost of the money tied up on the inventory, it
is also known as holding cost.

24. • It includes storage cost such as warehouse rents,
insurances, spoilage costs, store keeping cost etc.
EOQ=
Where,
U=annual consumption in unit
O=ordering cost
C=unit cost
H=holding cost or inventory carrying cost.

25. University questions
1. List out the various inventory control techniques and
its application with a detail explanation about ABC
analysis. (10)
2. EOQ, buffer stock and lead time (5)
3. Enumerate various methods of inventory control.
Explain any three inventory control methods. (10)

26. 26