GOAL: The goal of this lesson is to review for the pharmacist key elements of inventory management from selecting supply source to understanding purchasing terms and discounts to methods of inventory control.
OBJECTIVES: After completing this lesson the pharmacist should be able to:
1. List all the advantages and disadvantages of purchasing from different sources.
2. Explain discount terms and rates
3. Discuss purchasing policies and terms
4. Calculate inventory turn-over rates, economic order quality, re-order points and gross margin return on investment
5. Describe various control methods.
I. Objectives in Purchasing and Inventory Control
Sound purchasing and inventory control systems are based on clear objectives. Obviously, all pharmacies want to buy pharmaceutics at the lowest price at the lowest possible price and carry as little inventory as possible. To accomplish this, a pharmacy must establish specific operating objectives that take into account its unique circumstances. These objectives must balance efficient purchasing with optimal inventory levels. Factors to consider when establishing objectives include the type of pharmacy (retail vs. hospital), the desires of the consumer, the importance of buying terms, and desired inventory levels.
Purchasing objectives should cover:
· The variety of merchandise for the customers served;
· The quality of merchandise to meet the customers demands, taking into account the price they will pay;
· The quality of merchandise carried in inventory;
· The timing of purchases
· Purchasing sources;
· Price
· Costs associated with purchasingInventory control objectives should cover:
· Investment in inventory
· Level of customer service
· Balance of supply and demand
· Minimization of procurement and carrying costs
· Maintenance of and inventory control system
II. Major Purchasing Decisions
The first major purchasing decision encountered by the pharmacy manager is the establishment of purchasing budget. Established pharmacies can use experience from precious years when determining estimated purchases for the next accounting period. The previous year's budget can be used as a starting point, with adjustments made for expected charges in demand (either positive or negative), changes in product pricing, inflation and introduction of new products.
i. BudgetWhen establishing an initial budget for a pharmacy, the manager will need to consider such factors as the projected number of unite moved, the cost per unit, desired margin, inflation and case mix. Without a previous budget as a reference the initial budget will be a case of educated guess work and the pharmacy manager should be prepared to make changes in the budget when the inevitable unexpected occurrence presents itself. The important point is for the pharmacy manager to adjust the budget to account for the occurrence in future budgets.
ii. Sources of Supply
One of the major decisions of the pharmacy manager is that what source will supply merchandise to the pharmacy. Several options are available: purchase direct form manufacturers through a wholesales, or via a rack jobber. Most pharmacies today purchase through a wholesaler, Typically a pharmacy will obtain the majority of its products through one wholesaler (a prime vendor) as a back-up for when the whole saler is out-of-stock of an item or des not carry a particular item. Some items are not stocked by wholesalers, in which case a direct account with the manufacturer should be established.
When making decision regarding source of supply several criteria should be considered.There are:
Reliability financing Financing Price stability Stability Quality risk Risk Order processing time innovation Innovation Service and investment and Investment Guarantee 1. Manufacturers
There was a time when most pharmacies maintained a direction account with each major manufacturer. In today's health care environment, the modern wholesaler is able to provide service that makes many direct accounts unnecessary. However, for various reasons, a pharmacy may still need to maintain some direct accounts. For example, it may be possible to purchase some items at a better price via a direct account. Or a manufacturer may provide promotional assistance and advise. Finally, there are those items only available directly from the manufacturer.
Direct accounts can usually be established by contacting the customer service office of the manufacturer by telephone. A credit application, with references, is generally required, and can usually be submitted by fax. Most manufacturers require the pharmacy to supply a copy or its license, DEA Certificate, and Federal Tax ID number. The local pharmaceutical representative of the company can be very valuable in assisting in establishing the account.
2. Wholesalers
Most products in today's pharmacy are obtained through wholesaler. By purchasing through a wholesaler, the pharmacy eliminates the need to have accounts with each individual manufacturer. Wholesalers are also able to provide product to the pharmacy much sooner than the manufacturer, which allows the pharmacy to maintain a smaller inventory. In addition to products, wholesalers also provide various other services that make them valuable to pharmacy.
These include: customized price stickers, product shelf labels, electronic order-entry, and purchase analysis reports. Other valuable services include the storage of goods until they are wanted, rapid delivery, financing through the extension of credit, and enabling the pharmacy to maintain a smaller inventory.
The availability of various purchase analysis reports allows the pharmacy manager to control inventory more precisely. These reports can be used to determine if purchases are meeting sales needs; provide an item purchase history; list purchases by manufacturer or drug category; and provide contract compliance.
Wholesalers operate by selling products to retailers at the wholesale price plus a service charge, which is a percentage of the invoice amount. Contract pricing available to a pharmacy will be loaded by the wholesaler into its computer. The wholesaler will then sell the product to the pharmacy at the contract price and collect the difference between the contract price and its normal price through a "charge back" system with the manufacturer. The service charge covers the costs of the wholesaler plus provides their profit. The service charge the pharmacy pays is determined by the volume of merchandise purchased from the wholesaler, with large buying groups, health maintenance organizations and hospital groups able to obtain the lowest service charge. The service charge is usually in the range of 1-3%, but with increased competition, service charges of 0% or even negative charges, are possible. The wholesaler is able to operate on such a small margin because of the large volume of merchandise it moves and because of deals made available to it form manufacturers.
The wholesaler will provide the pharmacy with an electronic order entry device such as a Telxon unit for placing orders. The pharmacy then places and order by keying the product number and the quantity desired into the device. This can be done all at once, or the pharmacy can enter orders into the unit throughout the day before transmitting them. When it is time to transmit the order, the device is simply connected to a regular phone and the order is transmitted over the telephone line. For a small monthly fee, most wholesalers provide a more sophisticated system using a personal computer (PC). The wholesaler provides the hardware and software to perform computerized order entry. This system allows the pharmacy manager to view the entire catalog of the prime vendor before placing the order. The pharmacy manager can determine which items are available, and if less expensive alternative items are available. This computer system can also supply the pharmacy manager with inventory reports on demand.
a. Prime Vendor
A prime vendor is a formal arrangement wherein a pharmacy agrees to make all (or the great majority) of its purchases through a single wholesaler. A contract between the pharmacy and the wholesaler stipulated that a particular percentage of purchases or a specific dollar amount of purchase would be placed with the wholesaler. In exchange for the guaranteed business, the wholesaler offers a reduced service charge to the pharmacy. Other services available form the prime vendor include the availability of compressive purchasing data; electronic or computer order entry equipment; a committed level of service; and honoring on any contract prices available to the pharmacy.
The use of a prime vendor allows the pharmacy manager to establish a just-in-time inventory system, the objective being to purchase frequently in amounts that meets needs until the next order is placed.
The use of bar-coded product stickers, electronic order entry devises, inventory and purchase reports, and computer systems supplied by the prime vendor allow the pharmacy manager to order small quantities frequently and minimize inventory on hand. The reduced inventory decreases the amount of capital tied up in inventory, improves cash flow, and decreases the amount of storage space dedicated to inventory.
Pharmacies may purchase direct from manufactures. But doing so usually entails purchasing in large quantities that must be carried in inventory for some time, thereby increasing inventory-carrying costs. By purchasing more frequently in small quantities, the pharmacy reduces its inventory carrying costs. Because the prime vendor honors the manufactures contract price, the pharmacy manager has the benefit of buying at a contract price but not having to buy large quantities.
3. Rack Jobbers
Rack jobbers are usually used for specialty items that require timely inventory control. Examples of items may be purchased from a rack jobber are magazines, greeting cards, and cosmetics. Usually a representative of the rack jobber company has a contract to come to the pharmacy at specific intervals and restock or exchange items on their "racks." The pharmacy is only charged for the merchandise that has "sold" since the last visit. In reality the pharmacy is charged for any items not on "the rack" since the last visit. This includes items that may have been stolen as well as items that belong on the rack but have been left in another part of the store. The advantages to having rack jobber arrangement is that your employees are not required to maintain the inventory on the rack, and you are not charged for the items until the leave the rack. One disadvantage to the system is that the markup on rack jobber items is usually lover than the markup on an average item.iii. Bid Purchasing
Substantial savings on the cost of pharmaceuticals may be realized through the use of bid purchasing. In the bid purchasing process, a pharmacy announces to manufacturer that it is accepting bids on certain products and that it will not only purchase fro the manufacturer that submits the lowest bid for the product. When soliciting bids, it is important for the pharmacy to include specifications in the bid language for product quality and vendor service. Then, in evaluating bids, each vendor must demonstrate that it meets those specifications before the bid for that product will be considered. The prospect for losing all sales to the pharmacy if the product I s not the lowest bid is a strong incentive to the manufacturer to reduce its price.
The bid purchasing is most effective when purchasing drugs available from multiple sources. Therefore, it mostly applies to generic drugs; Manufacturers of patented, brand name medications that are only available from one source have little incentive to offer a reduction in price. However, most manufacturers offer contact pricing for large volume purchases. In addition, a healthcare entity, through it formulary system, may bid similar products of the same therapeutic category against one another in order to obtain favorable pricing.
iv. Cooperative Buying Groups
Because manufacturers consider volume when submitting bids, those entities that are able to demonstrate high usage of a product are able to receive a lower bid. In order to take advantage of this, many hospitals and community pharmacies have joined buying groups. The buying group is able to pool the members buying power in order to obtain lower bid prices from manufacturers. For a monthly fee, a pharmacy is able to join the buying group. In return, because it represents many pharmacies, a buying group is able to obtain preferable contract pricing for members of the group. Buying groups may also provide other services, such as negotiation of contract prices or advertising for group members. The buying group also provides economics of scale for its members in that the buying group provides the bidding function rather than each individual member.
III. Timing and Term Decisions
i. Timing
The timing of purchasing must coincide with consumer demand as well as minimize inventory investment. One method of determining when to place an order is by using a reorder point. A reorder point is the minimum stock level of an item that will be carried before an order is placed for that item. The factors involved in determining reorder points are length or order lead time, usage rate, and amount of safety stock. Order lead-time is the time from when an order is placed to when it is put up in inventory. Usage rate is the number of units of an item used per time period (usually per day). Safety stock is the minimum amount of stock to be on hand at all time. The recorder points is calculated as follows:
Recorder point = (usage rate * lead time) + safety stock
For example, suppose a pharmacy moved ten units of an item per day and the pharmacy manager has decided to always keep at least 20 units of the item on hand. By ordering from its prime vendor, the pharmacy was able to get next day delivery. The order point would be:
Recorder point = (10 units/day * 1 day) + 20 units
Recorder point = 30 units
For this item, whenever the quantity on hand was 30 units or less, the pharmacy would place an order. In establishing safety stock levels, a compromise must be made between the cost of carrying safety stock, and the cost of being out of stock. Inventory carrying costs include capital costs (inventory), service costs, (insurance and taxes), storage costs (warehousing) and risk costs (expiration, damage, pilferage). Out-of- stock costs are more difficult to quantify, but are determined by the reaction of the consumer when an item is not available. The reaction of the consumers may be to return when the item is available, to purchase the item from a competitor, or to transfer all purchases if out-of-stocks occur to frequently.
The Economic Order Quantity (EOQ) equation is another method of determining when to buy and how much to buy. It can be used for ordering specific products direct from the manufacturer. In order to calculate the EOQ, the pharmacy manager must know the procurement cost, or cost of placing an order, and the carrying cost of inventory. Procurement costs include the costs of purchasing, receiving goods, and maintaining inventory records. These costs are fixed regardless of the size of the order. Carrying costs include interest, insurance, taxes, handling, warehousing, and shrinkage. If money has been borrowed to purchase inventory, interest payments may consist of a large portion of carrying costs. Even if money has not been borrowed, if it were not tied up in inventory, it could be invested elsewhere. Therefore, the prevailing interest rate is often used as an approximation of carrying costs. Total costs are lowest when procurement costs equal carrying costs. The equation for determining EOQ is:An example of using this equation is as follows:
If orders are placed more often than once a week, yearly procurement costs are higher than yearly carrying costs, and if orders are placed less often than once a week yearly carrying costs are higher than yearly procurement costs.
Another method that considers when to make and order is the open-closed-to-buy system. This system limits purchasing to defined periods such as the first two days of the week or month. During this time the pharmacy is in an open-to-buy mode and purchases may be made. At all other times the pharmacy is in a closed-to-buy mode and purchasing does not take place. Performing the purchasing function in the defined time period results I the becoming a more deliberate process as additional consideration can be given to what is being bought and what price is being paid. Another form of the the open-closed-to-buy system places specific dollar limits on purchasing for a predetermined time period. Known as an open-to-buy budget system, this system determines how much to spend on purchases during a period. Once the limit has been reached, the pharmacy moves into a closed-to-buy condition until the next period. The first step in the open-to-buy budget system is the formulation of an annual purchase budget. This budget should be based on the cost of goods sold during the previous 12 months. The principle under which the open-to-buy budget system operates is that each month's purchases are adjusted based on the increases or decreases in sales of the previous month in comparison to the corresponding month of a year past. At the end of each month, the following month's purchase budgets are adjusted according to the previous month's actual sales and purchases. If sales are greater than expected, the next month's purchase budget is adjusted upwards. If purchases were greater than the budget is adjusted downward. The total adjustment is the sum of the purchase and sales adjustments. At the end of each month, the pharmacy manager compares his adjusted purchase budget with actual purchases, with the differences being the monthly balance in the budget. The value of the open-to-buy budget system is that it is much easier to make small monthly adjustments to purchases rather than one large adjustment when the physical inventory is taken. The pharmacy manager maintains the inventory investment at the desired level. It should be remembered that this system provides control over the dollar amount of inventory and not of any individual line item.
ii. Terms
1. Terms of Sale
The major points in terms of sale are discounts, date of payment, credit policy, and return goods policy. Terms of sale are readily available from manufacturers and wholesalers and are often included on the invoice as a formal potion of the sales contract. The term dating refers to the period of time allowed for the taking of discounts ad the date when the bill becomes payable. The following are some of the more common terns, with definitions that are encountered in pharmacy
DEFINITIONS THAT ARE ENCOUNTERED IN PHARMACY: PAGES 1 2In extra dating, an additional period of time is allowed before the ordinary dating period begins.
2. Discounts
Discounts are an important, though sometimes overlooked piece of the overall equation for determining profitability of a pharmacy.
a. Trade Discounts
A trade discount is one that is given by the manufacturer to the wholesaler. It is given for performing distributive services that the manufacturer would have to provide. Trade discounts are usually passed on, at least in part, to the retailer.b. Quantity Discounts
A quantity discount is a reduction in price that is achieved through having bought a certain quantity of an item. Quantity discounts may be expressed either in dollars purchased or in number of units ordered.
Before taking quantity discounts, the pharmacy manager must consider the consequences for making large purchase. Larger purchases may result in larger inventory, which may not turn over or may even expire. Also, large purchases increases the amount of capital tied up in inventory and may adversely affect the pharmacies cash flow.
c. Cash Discounts
A cash discount is one that is offered for prompt payment of bills. Suppliers offer cash discounts in order to attract cash with which they can pay their own expenses. Cash discounts also reduce the supplier's credit risks and losses from bad debts. Most suppliers have credit terms of 15 to 30 days, some longer, with a cash discount available for payment within 10 days. The astute pharmacy manager takes advantage of cash discounts by paying invoices promptly.A sales term of "1/10, net 30" means that a 1% cash discount is available if the invoice is paid within 10 days, with the full invoice amount due in 30 days. When annualized, cash discounts can by a significant amount, the preceding example having a value of 18% a year.
As with other discounts, the pharmacy manager must weigh the pros and cons of cash discounts. Though the positives can be obvious, cash discounts may have a down side. Generally speaking, they should be taken advantage of unless the pharmacy is experiencing a cash flow problem. In that instance, taking advantage of cash discounts may only add to the pharmacy's cash flow difficulties.
d. Promotional Discounts
Promotional discounts may be offered for participating in certain advertising or merchandising activities associated with particular product. The discount may be available as an actual cash payment or as an extra amount of product as "free goods." Promotional discounts are often a good way for a pharmacy to take advantage of advertising it could not otherwise afford.e. Serial Discounts
The term "serial discount" refers to the practice of combining trade, quantity, and cash discounts. When calculating the total discount, it is important to remember that each discount is calculated in series (therefore serial) beginning with the largest discount.
The net payment amount for this item would be calculated as follows:Formula Calculations: Trade Discount Quantity Discount Cash Discount
f. Buying Into Deals
On some occasions, the availability of a deal may trigger the purchase of a product by a pharmacy manager. For example, if contract pricing on an item is about to expire, the pharmacy manager may decide to purchase the item before the reorder point is reached in order to take advantage of the pricing. Or if special terms are available on a product that is sold by the pharmacy, the pharmacy manager may evaluate the deal to determine if it is worthwhile. If the deal does not require the manager to purchase more inventory than the pharmacy uses in a reasonable period of time, and if cash flow allows then the pharmacy manger may decide to purchase during the deal period even if he has an adequate supply of inventory of the product on hand.
3. Returned Goods Policies
Another important term of sale is the return goods policy of the manufacturer or wholesaler. Most companies place limitations on returned goods, the most common being opened packages, improperly handled items held over a specified period of time. In order to maintain an efficient returned goods system, a pharmacy should maintain a series of containers in the inventory area labeled for the manufacturer from which and item was purchased. Once it has been decided to return an item, it should be removed from inventory and placed in the appropriate bin.
IV. Major Inventory Control Decisions
Effective inventory control manager inventory in a way that meets consumer demand while minimizing cost and investment in inventory. A successful inventory control program takes into account sales, seasonal variation, changing movement patterns, and monitoring for pilferage.
Some of the general principles that the pharmacy manager should attempt to follow when controlling inventory are:
Maintain a wide assortment of products Increase inventory turnover Maintain as low an inventory as possible Obtain low prices through volume purchases Maintain an adequate amount of inventory on hand. As with the purchasing principles, these principles must also be balanced. A wide assortment of stock should be kept on hand, but should not include items that do not move. A high inventory turnover rate and low stock level are generally desired, but too high of a turnover rate can mean too much rime is spent ordering merchandise, and a low stock level may result in out-of-stock and lost sales.
One of the important concepts when dealing with inventory control is that of inventory carrying cost. The inventory carrying cost includes storage costs (rent, taxes, insurance), interest, obsolescence (expired drugs), pilferage, price reductions, deterioration/damage, and lost opportunity costs associate with tying up capital. Though difficult to determine precisely, it is possible to make and estimate of these for the purposes of management decision-making. One of the most important factors to consider is the capital cost associated with holding inventory. Because capital has been invested in inventory, it is now available for investment in other places. The prevailing interest rates are generally used for comparison when determining the capital cost of inventory. Another factor to consider is the cost of using space for one type of merchandise rather than another. The cost of capital helps determine whether or not to invest in inventory, and the opportunity costs determine what types of inventory are stocked.
i. Deciding What to ControlA typical pharmacy carries thousands of line times. Because of the shear number, it is not reasonable to calculate reorder points or economic order quantities for each line item in the pharmacy. For various reasons, some items need to be controlled more than others. Some are expensive, some have a short shelf life, some are critical, and others may be important for other reasons. The ABC system of inventory control determines how much attention to devote to controlling specific line items. Under the system, "A" merchandise is the most important to control and includes high-cost items and essential items. "A" merchandise should receive the most emphasis of the pharmacy manager's inventory control efforts. On the other hand, "C" merchandise is the least important to control and is not worthy of elaborate control mechanisms. "B" merchandise falls between "A" and "C" in importance and the control mechanisms employed. For most pharmacies, an ABC analysis will show that approximately 80% of the dollar amount invested in inventory is tied up in 20% of the line items. These would be the "A" items. These items should be carefully monitored, with reorder points and economic order quantities calculated and used. The "B" items generally account for less than 10% of the inventory value, and make up about 30% of the line items. The "C" items account for less than 10% of the inventory value, but compose about 50% of the line items. Items in this category should be periodically evaluated to determine whether they should remain in inventory.
ii. Inventory Turnover RateAn important tool in measuring the effectiveness of an inventory control system is the inventory control system is the inventory turnover rate. The inventory turnover rate is the average number of times inventory is moved and replaced during a period (usually a year). In general a high turnover rate indicates that inventory is moved well, while a low rate decreases the average inventory investment, which frees this capital for together business opportunities.
Inventory turnover rate is calculated by dividing cost of goods sold by average inventory. After having calculated the turnover rate for the pharmacy, the pharmacy manager can then compare that rate to the industry standards for similar pharmacies. Inventory turnover rates will vary depending on the type of pharmacy involved and the sales volume.
According to the latest information available fro the Lilly surveys, the average inventory turnover rate for community pharmacies reporting tin 1993 was 6.0, while for the average inventory turnover rate for hospital pharmacies reporting for 1992 was 12.5
iii. Formulary ManagementIn organized healthcare settings such as hospital, long-term care facility or health-maintenance organization, a formulary is a list of drug products compiles and approved by the medical staff for the treatment of patients within that healthcare setting. By prescribing only those drugs on the formulary, the pharmacy can reduce the number of items and the total dollar investment in inventory. Formulary status may also be used as a tool to obtain competitive bids for tow or more different products within the same therapeutic class. For example, the Pharmacy ad Therapeutics Committee of a hospital may decide to carry only one injectable H2-antagonist on the formulary. The hospital would then solicit bids from the manufacturers of Zantac, Tagamet, Pepcid and Axid with the offer of formulary status for the product with the lowest bid.
iv. Substitution
Products with the same active ingredients in the same strength and dosage from are generic equivalents. For many brand products, generic substitutes are available for a fraction of the cost of the brand name. By using generic products, pharmacies can greatly reduce inventory investment. The ability to substitute equivalent generic products for formulary items is another tool for reducing inventory investment under a formulary.
Another took is therapeutic substitution (or therapeutic interchange). Continuing the example if h2-antagonistis, the medical staff, though the Pharmacy & Therapeutics Committee may approve a policy where-by an order for any of the injectable H2-abtagonists is automatically filled with the formulary product.
v. Gross Margin Return on Investment
Gross margin return on investment is an accounting ratio that the pharmacy manager can use to assist in making decisions. The ratio incorporates both profit and turnover criteria into a single measure of inventory performance. Gross margin return on investment is calculated as:
GMROI=gross margin ($)/ average inventory at cost ($)
The gross margin return on investment can be used when the pharmacy manager is trying to decide whether to add a product line to inventory.
V. Methods of Inventory Control
The three basic methods of inventory control are the visual, periodic and perpetual systems. The visual system is simply that, a visual inspection of what is on the shelf. It may include a comparison with a listing of how many units should be carried. When the stock falls below the level, and order is placed. The visual system is simple, inexpensive and requires no special training. However, visual systems are imprecise and tend to focus on impeding stock-outs rather than excess inventory. Furthermore, visual systems do not consider the monetary investment in inventory.
Somewhat more elaborate is the periodic system. In this system, stock on hand is counted at periodic intervals and compared it the desired inventory levels. Items that fall below the desired level are then orders. Because on evaluation of inventory levels is made on a more formal basis, this system tends to be more precise than the visual system. it is more expensive. Therefore it is sometimes reserved for "A" inventory items.
The perpetual system is the most elaborate and more accurate method of inventory control. Under the perpetual system, inventory is monitored at all times, and it is possible to determine the number of units in stock of any time at any time. This system provides the best control of both number of units and dollars. However, it is the most labor intensive and most expensive. The use of computer systems makes the perpetual system available to most pharmacy managers.
In reality, most pharmacies employ a combination of all three systems in the operational procedures of pharmacy. A visual system may be employed to place routine orders, with a periodic system in place to monitor the entire inventory. Certain items such as controlled substances, expensive items, or items of a critical nature may be controlled using a perpetual system. When combined with purchase history reports from the wholesaler, the pharmacy manager has a wealth of data available to control inventory.
i. Weeding Out Slow Moving InventoryOne advantage of an effective inventory control system is its ability to detect slow moving items. Items that are not turning over sufficiently fast may not be appropriate for the pharmacy's market, may be merchandised incorrectly, or may have been purchased in too large of quantity originally. Products that have been determined to be slow movers should be evaluated periodically for removal from inventory. Some of the factors that should be used in making such and evaluation are the product's expiration date, the gross margin return on investment, the product's relationship to other products in inventory, and movement activity. In some instances, a loss leader for example, it is desirable to keep a slow moving product in inventory.
ii. Bar CodingThe bar coding of products allows data to be collected accurately and rapidly. When used with appropriate computer software, bar coding can greatly improve inventory control. By employing bar codes, the pharmacy manager can accurately and instantaneously collect valuable data on inventory throughout the pharmacy.
iii. Receiving, Stocking, MarkingWhen goods are received in the pharmacy, each invoice should be inspected for several things. It should be determined that the goods were received in good condition, that the correct quantity of each item was reciev3ed, that the terms of sale are correct, and that the extension is accurate. Expiration dates should be checked, and any product that expires with in 30-120 day returned to supplier. The goods should then be marked with the cost per unit, source, date received, and the retail price. The merchandise is then placed in inventory with the products placed behind older products. This is called "rotating the stock", and it helps ensure that the products are relatively fresh and "in sate" when sold.
iv. Computerized Inventory Control
With the widespread use of computers, more and more inventory management functions are becoming automated. Most pharmacies now utilize electronic order entry devises to electronically place orders with wholesalers. For a reasonable fee, most wholesalers provide a PC based system, which allows the pharmacy manager to have immediate access to the quantity and price of all merchandise available through the wholesaler. Many computer systems in pharmacies today have the capability of maintaining a perpetual inventory for each item stocked in the pharmacy. The computer may then be used to monitor inventory levels fall to predetermined level. However to maintain the inventory properly, the computer records must be updated product is returned to stock because it was not used. Computers also increase the data and reports available to the pharmacy manager for inventory control purposes. Computer systems use sales and inventory data to calculate economic order quantities and reorder points, and to identify slow moving and reorder points, and to identify slow moving items that should be dropped from inventory.
VI. Special Considerations
Sometimes, the type of product or location of the inventory increases the complexity of inventory management. Three examples that will be discussed are controlled substances, investigational drugs, and products located at satellite pharmacies.
i. Controlled SubstancesControlled substances, such as narcotics, require special procedures. Because of the potential for diversion, this type of inventory should be closely tracked, and physical inventory is required at least every 2 years, although most pharmacies conduct a physical inventory more often than is required by law. Schedule II controlled substances require a special DEA order form that must be signed by an authorized pharmacist.
ii. Investigational DrugsInvestigational drugs also require special considerations. Investigational drugged are used according to a compassionate-use protocol or for an investigational study. Special handling requirements are usually out-lined before the use of the agents begins, usually with strict accounting for every dose administered. Many times these products are kept under lock and key, and may only be obtained by those professionals involved in the study.
iii. Satellite PharmaciesWhen some of the inventory is physically located at more than one site, inventory management may be more complex. If the institution has both an inpatient pharmacy and an outpatient pharmacy that is open to the general public, inventory purchasing and maintenance of inventory records must be maintained separately.
VII. Questions
