INVENTORY CONTROL IN PHARMACEUTICAL SUPPLY CHAIN

 

OBJECTIVES

 

1. Discuss why inventory control is important for pharmacies.
2. Understand the objectives of inventory control within a pharmacy.
3. Become familiar with some of the more common purchasing concepts.
4. Become familiar with some of the methods for controlling inventory.
5. Discuss purchasing policies and their value within the pharmacy.
6. Discuss some of the different models for inventory control.
7. Having a working knowledge of some of the most common receiving and storage

policies.

WHY INVENTORY CONTROL IS IMPORTANT?

Among the many pharmacy management functions performed in a pharmacy, few have

more direct impact than purchasing policies and inventory control. Sound purchasing

and inventory control are closely interrelated because one cannot be effective without the

other. Purchasing requires knowing the right quality and quantity to buy, when to order,

at what price, and from what sources. Inventory is simply the result of this buying.

Some kind of inventory control system is essential to carry out the purchasing function

effectively. For example, one must know how much of a given item is in stock at a given

time in order to decide whether it is time to reorder.

A pharmacy’s inventory represents its single, largest investment. Consequently,

no other asset has the potential to devastate a pharmacy as much as poorly controlled

inventory. In an average pharmacy, cost of goods sold account for approximately 68% of

total expenditures. For every 1% change in an average pharmacy’s costs of goods, profits

may increase or decrease by slightly more than 20%. Thus, the sheer magnitude of

dollars involved make seemingly minor inefficiencies in purchasing and inventory

control matters of great importance to both cash flow and profitability.

Despite the highly visible nature of purchasing and inventory control, they seldom

are given the quality of attention they deserve. As a daily activity, purchasing commonly

is viewed more as a routine buying process than an investment process with far-reaching

consequences. And the mundane nature of inventory control makes it one of the more

frequently deferred activities of pharmacy technicians.Ironically, the sophisticated and efficient purchasing programs offered by manywholesaler suppliers have perhaps contributed to the lack of attention. Supplier systems are designed to relieve the time-consuming but routine aspects of purchasing and inventory control, while simultaneously providing valuable data to help make more knowledgeable purchasing and inventory control decisions. Unfortunately, many pharmacies see these systems as vehicles for minimizing the time spent on the whole realm of purchasing and inventory control rather than a way to reallocate time to their more fundamental responsibilities.

 

INTRODUCTION

 

The objective of an inventory control system is to make inventory decisions that

minimize the total cost of inventory. This is not to be confused with minimizing

inventory. It is often more expensive in a pharmacy to run out of an item than to simply

keep more units in stock. For example, in a retail pharmacy, if a customer is unable to

obtain their medication, they may go somewhere else and the pharmacy may lose future

purchases. In a hospital pharmacy, if you run out of an item, you might be required to

obtain it by a more expensive method (over-night delivery, hot-shot, ect.).

Most pharmacy inventory decisions involve replenishment – how much to order

and when to order. In this course we will look at several models for minimizing the total

cost of inventory, including the popular method of Economic Order Quantity (EOQ).

This particular method attempts to balance the carrying cost inventory with the cost of

running out. As we look at each of the inventory control models, it is important to keep

in mind the different types of cost associated with pharmacy inventory: (1) carrying costs,

(2) shortage costs, and (3) replenishment costs. Each of these costs is discussed later in

the course.

Many of the models we will discuss make certain assumptions that do not hold

within the operations of a hospital pharmacy. For instance, the “costs” associated with

running out of a drug product used in critical care might involve increased morbidity and

mortality, which is not an acceptable situation. Given that, the basic concepts of these

inventory control models can be applied to hospital pharmacies when appropriate.

 

INVENTORY CONTROL

 

Inventory control is the process of managing inventory in order to meet customer

demand at the lowest possible cost and with a minimum of investment. Unlike many

factors in pharmacy, inventory is controllable. The pharmacy decides how much

inventory investment to make, when to reorder, and in what quantities.

A successfully implemented inventory control program takes into account such

things as purchasing goods commensurate with demand, seasonal variation, changing

usage patterns, and monitoring for pilferage. The challenge of productive inventory

management is to support an upward trend in sales while keeping the investment at the

lowest level consistent with adequate customer service.

There are several objectives of inventory control:

• Minimization of the inventory investment.
• Determination of the right level of customer service.
• Balance of supply and demand.
• Minimization of procurement costs and carrying costs.
• Maintenance of an up-to-date inventory control system.

Unfortunately, it may be impossible to achieve these objectives concurrently. For

example, to best satisfy the needs of patients, a pharmacy may have to carry a wide range

of both prescription items and front-end merchandise. In a hospital pharmacy,

prescribers may want the pharmacy to stock several therapeutically equivalent drugs.

This cannot be achieved by minimizing inventory investment. This is one of the

contradictory demands made upon the inventory control system. Other include:

1. Maintaining a wide assortment of stock – but one should not be spread too

thin on the rapidly moving ones.

1. Increasing the inventory turnover – but one should not sacrifice service level.
2. Keeping stock low – but one should not sacrifice service or performance.
3. Obtaining lower prices by making volume purchases – but one should not end

up with slow moving inventory.

1. Having an adequate inventory on hand – but one should not get caught with

obsolete items.

Successful inventory management involves simultaneously attempting to balance the

cost of inventory with the benefits of inventory.

What to Control

 

Despite the importance of inventory control in the overall management of a

pharmacy’s assets, there is no denying that this activity can be time-consuming and

expensive. And it is not uncommon to find even the most adamant supporters of

inventory control spending more for control than they would lose by having a less

efficient system. Normally, however, it is more likely that inventory is not being

controlled to the extent that it should, and money is being lost.

A preliminary step in the process of inventory control is to determine the

approximate costs of carrying inventory. These costs include such expenses as storage

costs, inventory risks, and the loss-of-opportunity costs associated with tying up capital.

Obviously, many of these costs are difficult to determine precisely. Nevertheless, it is

possible to approximate most of these for decision making purposes.

The costs of capital and opportunity are the most important of those associated

with holding inventory. By investing in inventory, other uses for money are lost – uses

which could provide greater returns. The most commonly used benchmark for measuring

the costs of capital is the prevailing interest rates. Ideally, this measure should be for an

investment of comparable risk, but that is seldom possible. Consequently, some nearly

risk-free investments, such as treasury bills, are often used instead.

Closely related to the costs of capital are the opportunity costs of using space for

one type of product rather than another. At times the difference between these costs may

appear insignificant. Yet, the costs of capital represent the fundamental decision as to

whether to invest in inventory, while the opportunity costs concern what types of

inventory are held.

Irrespective of what the actual costs are of holding specific items in inventory,

there is little doubt that some items need to be controlled more than others. Some cost

more, and therefore represent a greater financial investment. Some are dated and have

only a relatively short shelf life, and others may be important for other reasons (such as

critical life-saving drugs used in a hospital).

 

PURCHASING CONCEPTS

 

Now that we have identified “what” and “why” of inventory control. We should

take a look at a few of the concepts surrounding purchasing.

ABC Classification System

The ABC classification system groups items according to annual sales volume, in

an attempt to identify the small number of items that will account for most of the sales

volume and that are the most import ones to control for effective inventory management.

In this system, inventory can be labeled as being A, B, or C products. This gives

recognition to the varying importance of different types of pharmacy inventory.

Consequently, classifying merchandise into A, B, and C items allow the pharmacy to

better identify and control items of greater importance. For example, approximately 20%

of the inventory items should receive much greater attention than the remaining 80%

since they may account for 90% or more of inventory investment. Loss of control over a

few of these items is considerably more serious than loss of control over a large number

of other items.

 

Table 1

 

Typical ABC Classification System

Class % of Dollars

A 70 – 80

B 15

C 5 – 10

 

A items would be considered the most important to control, where as C items

would be considered the least important to control, and not worthy of the more elaborate

system used to control A items. B items would be somewhere in the middle and their

control would depend on the actual cost of inventory control.

 

 

Lead Time

 

The Lead Time is the interval between placing an order and having it ready for

dispensing. When calculating lead times in a pharmacy, you must consider the amount of

time to stock the shelves, compound, or mix.

Safety Stock

 

Safety stock is the extra units of inventory carried as protection against possible

stock-outs. The safety stock must be carried when the pharmacy is not sure about either

the demand for the drug or the lead time or both. In the case where the demand is

uncertain, safety stock is the difference between the maximum usage and the average

usage multiplied by the lead time. For example, assume that a pharmacy is faced with an

uncertain usage of Lisinopril. Lead time is constant at two days. Normal daily usage is 7

bottles but it can go as high as 10. The store would compute the safety stock as follows:

 

Maximum daily usage: 10 bottles

Average daily usage: 7 bottles

Excess 3 bottles

Lead time x 2 days

Safety Stock 6 bottles

 

Reorder Point

The reorder point is the inventory level at which it is appropriate to replenish

stock. The calculation is as follows:

Reorder Point = Average Usage Per Unit X Lead time + Safety Stock

First, multiply average daily (or weekly) usage by the lead time in days (or

weeks) yielding the lead time demand. Then add safety stock to this to provide for the

variation in lead time demands to determine the reorder point. If average usage and lead

time are both certain, no safety stock is necessary and should be dropped from the

formula.

Example:

Demand = 1,000 vials per year

Store open 311 days/year

Daily demand = 1,000/311 = 3.2154 vials per day

Lead Time = 2 Days

R = dL = (3.2154)(2) = 6.43 rd, 7 vials per day

 

 

 

Inventory Turnover Rate

 

One method of assessing the effectiveness of an inventory control system is the

turnover rate. The inventory turnover rate represents the average number of time the

inventory is sold and placed during a given period (usually a year). In general, a high

turnover rate indicates that product usage is “good” relative to the average amount of

inventory kept in stock. A low turnover rate indicates that products are not being used at

a proper rate relative to average inventory.

Inventory turnover rate is calculated by dividing the inventory cost into annual

purchases. The average pharmacy’s inventory turnover rate does not exceed 10 turns.

Most pharmacies average between 8-10 turns per year. A pharmacy purchasing AED100K

per month will save AED20,000 in on-hand investment dollars (or cash flow savings) with

each single digit increase in the inventory turnover rate.

 

Example:

 

Inventory Turnover Rate = Annual purchases at cost

Avg. On-hand Inventory

AED1,200,000 (AED100K X 12)

AED150,000

= 8 inventory turns per year

An increase form 8 to 9 turns will drop the average on-hand inventory from AED150,000 to

AED130,000 or a cash flow savings of AED20,000.

AED1,200,000

AED130,000

= 9.2 inventory turns per year

A pharmacy that purchases AED50,000 per month or AED600,000 per year in purchases

will save AED10,000 for each single digit increase in inventory turns.

This reduction in the on-hand inventory investment is the equivalent of an interest free

loan to the pharmacy.

The Economic Order Quantity

 

The shortage cost is what is lost if the stock is insufficient to meet all demand.

This cost can be the most difficult to measure and is often handled by establishing a

“service level” policy. For example, a certain percentage of demand will be kept in

reserve or “safety stock”. One of the methods evaluated for computing shortage costs is

based on the item’s average acquisition price, since this is the minimum measure of how

much a pharmacy is willing to spend to avoid a shortage. Shortage costs are also

computed using the cost to operate a pharmacy. This method is based on the assumption

that the value of a pharmacy’s capabilities is equivalent to the amount of money the

pharmacy is willing to spend to operate. There are several other mathematically

intensive, time weighted methods for calculating these costs, but the point to remember is

there is a cost for running out of items in your pharmacy and you should consider those

costs as you seek to control your inventory.

Replenishment Cost (R Cost)

 

The replenishment cost is the cost of issuing, receiving and paying for a line item on a

vendor purchase order. The cost of reordering inventory (also known as the “R” Cost)

includes:

• Deciding what products need to be replenished
• Issuing the purchase order
• Expediting the purchase order (if necessary)
• Processing the receiving paperwork for shipment
• Approving the vendor’ invoice for payment
• Processing the vendor’s payment

The cost of reordering is calculated by dividing the total annual cost of purchasing

stock line items by the number of purchase order line items for stock products issued by

the past year:

Annual Cost of Issuing Purchase Order Line Items

====================================

Purchase Order Line Items Issued in the Past Year

Note that the cost of reordering is not calculated for a whole purchase order or

each piece purchased. The R cost is expressed per purchase order line item. The theory

is that it probably takes the same amount of time and effort to purchase a product

regardless of whether you by 10, 50, or 1,000 pieces. Even so, the cost per piece drops

rapidly as the quantity purchased increases. For example, if the cost of reordering is

AED5.00 per line item and we buy one piece, that one piece has to “absorb” the entire AED5 R

Cost. But if five pieces are ordered, each piece only has to absorb AED1 of the AED5 R Cost.

Methods for Controlling Inventory

 

There are various methods for controlling inventory and each has advantages and

disadvantages. The open-to-buy (OTB) budget method limits purchases to a specific

amount of funds available for purchasing pharmaceuticals during a specified period. The

emphasis of the OTB method is financial control of the pharmacy inventory. Although it

is useful in monitoring and adjusting the dollar value of the inventory, it should be

combined with other methods for a total inventory control system.

The primary emphasis of the short-list method is to provide accurate and timely

inventory information to the person responsible for order placement. The short list

identifies the items that are in short supply. It is the most common feedback and control

mechanism in use, but it is best suited for settings where duplicate or reserve stock is

maintained and monitored by more rigorous methods.

The main objective of the minimum and maximum method is to determine

when and how much to order of each item. It also provides limited dollar control. The

major disadvantage of this method is the time it requires to establish the minimum and

maximum levels and to update them regularly to reflect changes in demand.

The stock record card method is used to record information on the movement of

goods in and out of the storage area. Stock cards can also be used to monitor inventory

levels and facilitate order initiation. It is probably the optimum method to be used alone.

The most effective system of inventory control is one employing a combination of

these methods tailored to meet the institution's needs and available resources.

Purchasing Policies

 

Purchasing policies should be flexible and reflect the pharmacy’s objectives and

plans. They must leave room for discretion to allow the pharmacy to respond to

unanticipated events such as unusual demand fluctuations and special price incentives

offered by suppliers.

When developing a purchasing policy, it might be helpful to consider the

questions in Table 1-1.

Assessing Purchasing Policies and Procedures

 

• Have you ever reviewed existing purchasing procedures to see if they meet your

needs?

• Do you have specific policies and procedures regarding who is authorized to

purchase goods or services? Receive salespersons’ calls? Place requisitions?

Process records?

• Have you ever discussed your purchasing function with other pharmacies or with

professional organizations to obtain suggestions or techniques?

• Have you ever visited or investigated your existing or potential vendors to verify

that they can meet your requirements in terms of price, quality, quantity, and

service?

• Does your volume of purchasing for any particular item warrant your dealing

directly with its manufacturer?

• Do your vendors have regular and competent sales personnel?
• Have you had problems with suppliers in regard to shortages? Backdoor selling?

Delivery delays? Unsolicited favors and gifts?

 

Selecting Vendors

 

The objective of careful vendor selection is to find the one most satisfactory

source, or a number of alternative sources with adequate comparable qualifications. Thus

succeeding orders for the same item can be placed with these same suppliers with

confidence in the original selection. In other words, the decision as to a source of supply

contemplates a continuing relationship.

Several criteria should be considered in selecting vendor sources, including:

• Reliability. Will the vendor fulfill all promises?
• Price and quality. Who provides the best product at the lowest price?
• Order-processing time. How fast will a delivery be made?
• Functions provided. Will the vendor provide storage, market information, and

other functions, if needed?

• Guarantee. Does the vendor stand behind the products?
• Financing. Does the vendor provide credit?
• Long-run relations. Will the vendor be available over an extended period of time?
• Innovativeness? Are the vendor’s product lines innovative?
• Risk. How much risk is involved in dealing with the vendor?
• Investment? How large are total investment costs?

The real test of vendor selection is the test of experience, or satisfactory performance

 

Working With Wholesalers

 

Selecting and working with capable wholesalers is a significant function of

purchasing. Probably no one is more important to the operation of a pharmacy than the

wholesaler. Yet many pharmacies have not recognized that good supplier relationships

result in wholesaler goodwill. Instead, wholesalers are often treated in a suspicious and

even ill-mannered fashion. It is mutually advantageous to have a positive buyer-seller

relationship. There have been numerous instances when an unexpected problem or

emergency was solved with the help of a friendly wholesaler.

The question of how many wholesalers to use has no definitive answer. It

depends on many factors. Many buyers have found it advantageous to spread purchases

among many wholesalers to gain the advantage of the most favorable prices and best

delivery schedules. Another reason for relying on several wholesalers is that it gives

buyers an opportunity to continually evaluate alternative sources of supply, to have

greater assurance of supply reliability, and to keep wholesalers competitive with one

another.

On the other hand, several distinct advantages of concentrating purchases from

one wholesaler can also be cited. For example, the argument for doing the bulk of buying

from a single wholesaler is that in times of shortages, the primary vendor will take better

care of its customers. Other possible advantages include receiving more attention and

help from a wholesaler who know it is receiving most of the pharmacy’s business; having

a smaller inventory investment; having larger purchase orders; which may permit larger

discounts; and simplifying credit problems. These advantages are convincing arguments

as to why it is often better for a pharmacy as to why it is often better for a pharmacy to

concentrate its purchases and work closely with a few wholesalers.

Purchasing policy in most pharmacies traditionally requires at least two supply

sources for each item as being in the best interest of the company. Whether there should

be more than two, and how many, is a matter of purchasing judgment. It depend partly

on the importance of the item, on competitive conditions in the industry, and on the

quantities involved, which might make it practical to divide the business among several

vendors.

Purchase Timing Decision

 

Decisions concerning the timing of purchases must closely coincide with demand

and minimize the amount of inventory investment. One means of doing this is to

establish stock levels at which new orders must be placed. The stock levels are called

reorder points. Determining reorder points depends on the length of order lead time,

usage rate, and the amount of safety stock to be kept on hand. Order lead time is the time

span from the date an order is placed to the date the merchandise is received and put on

the shelf. Usage rate refers to average usage per day, in units. Safety stock is the amount

of extra inventory kept on hand to protect against running out of stock owing to

unexpected demand and delays in delivery. Safety stock should be planned in accordance

with the pharmacy’s policy toward running out of merchandise. The formula for when to

reorder, assuming the pharmacy incorporates safety stock into its planning, is:

Reorder point = (usage rate x lead time) + safety stock

Ideally, orders should be placed at the precise point in time at which usage during the

order lead time will have depleted the inventory on hand, so that no safety stock is

needed. Unfortunately, “ideal” conditions seldom, if ever occur.

To establish effective safety stock policies, it is necessary to make a trade-off

between two opposing factors: the cost of carrying safety stock and the cost of being out

of stock. Normally, inventory carrying cost is easier to measure than the cost of running

out of inventory. It includes (1) capital costs (inventory investment and investment in

assets required by inventory), (2) inventory service costs (insurance and taxes), (3)

storage space cost (warehousing costs), and (4) inventory risk costs (obsolescence,

damage, pilferage).

Out-of-stock costs are the costs incurred by the pharmacy when an item is

demanded but is not immediately available. The cost of a stock-out is determined by the

reaction of the customer (patients, prescribers).

Another dimension of the timing issue in purchasing is whether buying will be

conducted at random points in time or restricted to defined periods. Left unrestricted,

purchasing can become a daily activity conducted in bits and pieces, and hurriedly on a

time-available basis. As such, purchasing control tends not to be very stringent, as no

consideration is given to monetary investments in inventory or the trade-offs in the use of

limited purchasing dollars.

 

Purchase Terms Decisions

 

Pharmacies must negotiate the best deal they can with each supplier to improve

profit. Five factors are especially important in supplier negotiations: (1) quantity

discounts, (2) cash discounts, (3) trade discounts, (4) promotional discounts, and (5)

return goods policies.

Unfortunately, not all deals may be worthwhile. The quality of a cash or quantity

discount, for example, depends on the amount of discount being offered, the carrying cost

of holding inventory, the price charged for the item, and the time it takes to turn the

merchandise into sales. Most important, a deal can only be profitable when the sale, not

the purchase, is completed. Thus, a 25% discount on an item that will not be used is not

much of a deal. On the other hand, a 1% discount on merchandise that is sold and

replaced weekly may represent a very good deal for the pharmacy.

Quantity Discounts are reductions in price allowed for buying certain quantities.

They are generally expressed in terms of total dollars purchased. Another variation of

quantity discounts is cumulative discounts. They represent discounts calculated at the

end of specified time periods. For example, a 10% discount may be offered if a

pharmacy’s purchases total over a certain dollar amount. These discounts tend to build

loyalty to a single supplier.

The disadvantages of taking quantity discounts, however, must be considered.

Larger purchases increase the risks of loss resulting obsolete products – expired because

it could not be sold with reasonable speed. Additionally, large purchases serve to

increase the dollar investment in inventory. If the pharmacy faces cash flow problems,

these can be critical problems.

 

Deciding on Models of Inventory Control

 

Although inventory control systems can and should be developed to suit the

specific needs of a particular pharmacy, they can be conveniently classified as being

visual, periodic, or perpetual systems. Each can be used effectively in a pharmacy,

depending on the particular situation.

Visual System

The least expensive and generally the least effective system of inventory control

is the visual system. With this system, one simply looks at the number of units in

inventory and compares them with a listing of how many should be carried in stock.

Shelf stickers can be coded for this to make the process easier. When the stock on hand

falls below the number desired, an order for more merchandise is placed. Generally, this

type of system is used for the less expensive and least important items in the pharmacy,

i.e., the C items referred to earlier.

The primary advantages of the visual system of inventory control are that it is

relatively inexpensive, takes little time, and does not have to be conducted by personnel

who have special skills. Often lacking the formality of other systems, visual inspections

can be made when convenient and in very short periods of time, thereby keeping the costs

very low.

Despite theses advantages, there are some serious drawbacks to the use of a visual

system. Because of its tendency to informality, the system is not used as frequently or

with the precision it requires. Perhaps even more important, visual systems commonly

focus on impending stock-outs rather than on excess inventory. It is much easier to spot

empty places on the shelves, than it is to identify slow-moving merchandise or excess

 

inventory. Furthermore, visual systems focus on unit levels only. They do not consider

dollar investments in inventory.

However, even with these potential problems, this system is commonly used in

pharmacies since technicians use the stock and thereby conduct visual inspections

frequently. Furthermore, replacement stock typically can be obtained quickly. So long

as the inventory manager reevaluates minimum quantity levels with reasonable frequency

and determines EOQs in advance, this system is a low-cost, somewhat trouble-free means

of keeping loose control over some inventory. Nevertheless, it ordinarily will not provide

sophisticated controls or produce data necessary for optimal efficiency.

 

Periodic System

 

A more elaborate means of inventory control is through a periodic system. With

this inventory control process, as its name suggests, stock on hand is counted at

predetermined intervals and compared to the minimum desired levels. If the stock is

below the minimum desired, an order is placed. Evaluation of inventory levels is made

on a more formal basis than with a visual system, so the system tends to be more precise.

Additionally, stock control cards (or stock record cards) are sometimes used to keep

records on how many units have been used and how many are on order. With this

system, then, analysis can be made of fast- vs. slow-moving items, and the dollar

investment in inventory. Accordingly, it tends to be much better than visual systems for

control of more important inventory when conducted at least semiannually. While

periodic systems are more accurate, they are also more expensive than visual systems,

and accordingly tend to be used mostly for B and sometimes A items.

Ordinarily, one will find periodic systems to be cost-justifiable. The most serious

limitation of such systems, however, is their measurement at a single point in time. Thus,

one could have significant variations in inventory levels which would not be evident from

a periodic audit. Additionally, the timing of review may affect inventory levels,

depending on how much usage fluctuates on a seasonal basis. Because of this, some

pharmacy owners use intermittent visual audits between more formal, semiannual,

periodic inventory audits.

 

Perpetual System

 

The most elaborate and accurate basic inventory control system is the perpetual

system. With this system, inventory is monitored at all times. In this way, it is possible

to determine at a moment’s notice how many units of each item are in stock. This type of

system provides the best opportunity to control both the number of units and the dollar

investment in inventory. Certainly, the greatest drawback of perpetual systems is that

they are the most expensive to maintain. Furthermore, they generate inordinate amounts

of data – far more than one is likely to use. Some pharmacies become overwhelmed by

the mass of data that they tend to ignore the data altogether.

 

 

 

 

RECEIVING AND STORING PHARMACEUTICALS

 

Receiving is one of the most important parts of the pharmacy operation. A poorly

organized and executed receiving system can put patients at risk and elevate health care

costs. For example, if the wrong concentration of a product was received in error, it

could lead to a dosing error or delays in patients’ receipt of therapy. Misplaced products

or products not in stock also jeopardizes the patients’ care and increases health care costs.

To avoid these unfavorable outcomes, pharmacy technicians should become familiar with

the process for receiving and storing pharmaceuticals.

The Receiving Process

 

When orders arrive from either the manufacturer or the wholesaler, they should be

accompanied by either an invoice or a packing slip that lists what the pharmacy is being

charged for. As you remove the items from the box and place them into inventory, it is

critical that you check them against this list; otherwise, the pharmacy may not receive

everything it will be asked to pay for.

Also be sure to follow any internal pharmacy procedures concerning the receipt of

inventory. For instance, you may need to confirm receipt of the order in the pharmacy

computer system, either through manual entry or by bar-coding the incoming items.

Unless you let the computer know that the order has been received, it will reflect an

incorrect inventory level and may keep trying to order more product even though an

adequate amount is on hand.

The Storing Process

 

Once the product has been properly received it must be properly stored.

Depending on the size and type of pharmacy operation, the product may be placed in a

bulk, central storage area or into the active dispensing areas of the pharmacy. In any

case, the expiration date of the product should be compared with the products currently in

stock. Products already in stock that have expired should be removed. Those products

that will expire in the near future should be highlighted and placed in the front of the

shelf/bin. The newly acquired products will generally have longer shelf lives and should

be placed behind packages that will expire before them. This technique is referred to as

stock rotation. Stock rotation is an important inventory management principle that

encourages the use of products before they expire and helps prevent the use of expired

products.

 

 

 

 

 

Product Handling Considerations

 

Pharmacy technicians usually spend more time handling and preparing

medications than pharmacists. This presents pharmacy technicians with the critical

responsibility of assessing and evaluating each product from both a content and labeling

standpoint. It also provides the technician with an opportunity to confirm that the

receiving process was performed properly.

Since pharmacy technicians handle so many products each day, they are in a perfect

position to identify packaging and storage issues that could lead to errors. The three main

issues to pay close attention to are:

• Look-alike Products. Stocking products of similar color, shape, and size could

result in error if someone fails to read the label. All staff members should be

alerted to look-alike products.

• Misleading Labels. Sometimes the company name or logo is emphasized on the

label instead of the drug name, concentration, or strength.

• Product Storage. Storing products that are similar in appearance adjacent to one

another can result in error if someone fails to read the label.

It is essential to alert other staff members to products that fall into one of these

categories.

Drug Recalls

 

Pharmaceuticals will occasionally be recalled by a manufacturer and/or the Food

and Drug Administration (FDA) for reasons such as mislabeling, contamination, lack of

potency, or other situations affecting the product as packaged or labeled. It is imperative

that a pharmacy have a system for a rapid removal of all products affected by recalls.

Recall notices are sent in writing to pharmacies by the manufacturer of the

product or b drug wholesalers. These notices indicate the reason for the recall, the name

of the recalled product, and instructions on how to return the product to the manufacturer.

Upon receipt of the recall notice a pharmacy staff member, usually a pharmacy

technician, will check the pharmacy and the institution to determine if recalled products

are in stock. If none of the recalled products are in stock, a note indicating “none in

stock” is written on the recall notice and filed in a recall log to document that the recall

was properly addressed. If a recalled product is in stock, all products should be gathered,

packaged, and returned to the manufacturer according to the instructions on the recall

notice. The package should be reviewed by the pharmacist in charge prior to sending it.

If patients have received a recalled product, the pharmacist in charge must take the

recommended action. Upon completion of all activity regarding the product recall, a

summary of actions taken should be written on the recall letter and filed in the

pharmaceutical recall log. Keep in mind that it may be necessary to order more stock to

compensate for those items that were recalled. In some instances, the recall may

encompass all products and it will not be possible to order replacement stock.

Controlled Substances

 

Controlled substances have specific ordering, receiving, storage, dispensing,

inventory, record keeping, return, waste, and disposal requirements established under the

law.

There are two principles regarding controlled substances that the pharmacy

technician should know: ordering and receiving schedule II controlled substances

requires special order forms and additional time (1-3 days), and these substances are

inventoried and tracked continuously. This type of inventory method is referred to as a

perpetual inventory process. Pharmacists and, in some institutions, pharmacy technicians

work with pharmacist to manage inventory, dispense, store, and control narcotics and

other controlled substances.

Expired Drugs

 

The most common reason drugs are returned to the manufacturer is because they

are expired. The process for returning drugs in the original manufacturer packaging is

straight forward and not particularly time consuming if done routinely. Returning

expired products to the manufacturer or wholesaler prevents the use of these products,

while enabling the department to receive either full or partial credit for them. To return

products, pharmacy personnel must complete the paperwork required by the

manufacturer/wholesaler and package the products so that it may be shipped.

Technicians often perform these duties under the supervision of a pharmacist. Some

pharmacies contract with an outside vendor that completes the paperwork and

coordinates the return of these products for an agreed upon fee.

Pharmaceuticals compounded or repackaged by the pharmacy department cannot

be returned and must be disposed of after they have expired. It is important to dispose of

these products for safety reasons. Proper disposal prevents the use of sub-potent products

or products where sterility can no longer be guaranteed. The precise procedure for

disposal is dependent upon the type and content of the products.

 

CONCLUSION

 

The movement of pharmaceuticals into and out of the pharmacy requires an

organized, systematic, and cooperative approach. The pharmacy technician plays a vital

role in maintaining the functionality of these systems. Pharmacy technicians’ familiarity

with product conditions and uses puts them in a position to identify quality and care

issues that can strengthen the purchasing and inventory control system.

An effective purchasing and inventory control system requires all pharmacy staff

to understand and actively participate in the system, however, certain staff are responsible

for managing the pharmacy inventory and purchasing system. As the primary handlers of

medication in the pharmacy medication preparation system, pharmacy technicians’

performance is critical to the success of the purchasing and inventory control system.

The job of any manger in the business sector is to create an environment in which

the financial and human resources of the firm are used to generate profit. Even in a small

pharmacy, considerable financial resources are invested in the goods for sale. With drug

prices being as high as they are, several hundred thousand dollars are tied up in the

inventory, equipment, and fixtures of each pharmacy.

As a worker whose job handling your pharmacy’s inventory, you can help make

the best use of this investment. In addition, in hospital pharmacies and larger community

stores, some technicians specialize in purchasing; they spend the majority of their time

checking inventory levels, placing orders, and following up on items not received.

 

 

GLOSSARY OF TERMS

 

 

Cost of Goods Sold (COGS) The pharmacy’s acquisition cost - what is paid to

buy the product. For the purpose of this text,

COGS is the replacement cost.

Cycle Stock Working inventory. The portion of inventory that

creates a service level. Cycle stock does not include

safety stock or stock purchased as a result of

forward buying opportunities.

Days Inventory on Hand The number of selling days covered by inventory

before an out-of-stock occurs.

Economic Order Quantity The precise amount of a product needed to cover

(EOQ) demand without tying up cash in unnecessary

inventory.

Formulary A list of drugs stocked in a hospital or managed

care pharmacy, or a list of drug products from

which managed care physicians select an

appropriate medication for patient treatment. There

are two types of formularies. In an open formulary,

all products are covered. In a closed formulary,

only drugs on the formulary are covered.

Forward Buying, Purchase of a larger quantity of a product than

Investment Buying required for current needs in anticipation of a price

increase. Can also apply when taking advantage of

a special discount or free-goods offer.

Free Goods Products supplied without charge on an order for a

specified amount of merchandise. Free goods are

usually obtained by sending the invoice to the

manufacturer.

Gross Margin Dollars, Amount of profit earned between the pharmacy’s

Gross Profit Dollars cost of goods and selling price before rebates,

discounts, returns, etc.

Gross Margin Percent Typically referred to as Gross Margin. Gross

Margin is profit expressed as a percent of sell.

Example: Item sells for: $ 1.00

Cost of Item .80

Profit ($) .20

GM = Profit / Sell Price (.20 / 1.00),

therefore, GM = 20%

Inventory Accounting Different ways of valuing the pharmacy’s inventory

Methods as it leaves the pharmacy for the customer. The

three methods most commonly used are FIFO (first

in, first out), LIFO (last in, first out), and NIFO

(next in, first out). A description of how these

methods affect inventory follows in the example

below.

Example: Inventory Unit Cost

One $1

Two $1

Three $1

Four $1

Five $2

FIFO (first in, first out): The product on the shelf

cost the pharmacy $1. A week later the

manufacturer had a price increase to $2. The

pharmacy has four units that it purchased at $1 and

one unit that it purchased at $2. As the product

goes out the door to the customer, the pharmacy

will charge $1 plus mark-up until it reaches the

inventory that cost $2. Then it will charge $2 plus

the mark-up.

LIFO (last in, first out): Using the same scenario as

above, all parameters are the same; except when the

product goes out the door, the pharmacy charges $2

plus the mark-up even if the product was acquired

at $1. This means we use the last acquisition price

to the pharmacy for all units of inventory.

Inventory Accounting NIFO (next in, first out): Again, using the same

Methods (cont.) scenario as in the above example, all parameters are

the same except the manufacturer has announced a

price increase to $3, to occur thirty days from now.

When the product goes out the door, the pharmacy

charges $3 plus mark-up even though it acquired the

product at $1 and $2. This means the pharmacy

uses the next acquisition price (replacement cost)

for all units including those purchased for $1 and

$2.

Inventory Turn A turn describes how often inventory moves out or

“turns over.” Inventory turns are calculated by:

Cost of Goods Sold / Merchandise Inventory =

Turns. Merchandise inventory is inventory

available for sale.

Item Ranking A system to rank items by demand either by dollars

or by units.

Just-In-Time A method of inventory management where orders

are placed so those new goods arrive as the last

units from the prior shipment move out.

Landed Cost The total cost of product after taking into account

all discounts, allowances, advertising dollars,

promotional moneys, etc.

Lead Time A factor used in ordering, based upon the number of

days from the time an order is placed to the time it’s

available in inventory.

Mark-Up Also known as cost-plus. Mark-up is the

percentage added to the cost of a product to

determine its selling price. Mark-up is also profit,

expressed as a percentage of cost.

Example: Item sells for $1.00

Cost of item .80

Profit ($) .20

Mark-up = Profit / Cost (.20 / .80),

therefore, Mark-up = 25%

 

Net Inventory Total merchandise inventory less accounts payable.

Order Point A level of product in unit and days on which buyers

base purchasing decisions. When on-hand and onorder

are below the order point, an order must be

placed.

Example: Order Point = 100

On-hand = 50, On-order = 49,

Total = 99; order is placed.

On-hand = 50, On-order = 51,

Total = 101; order is not triggered

until the sum of on-hand and

on-order is at or below 100

Overstock Inventory on-hand in excess of the order point.

Owned Inventory The same as net inventory. The total merchandise

inventory, less the accounts payable suppliers.

Payment on Consignment Payment to the supplier due only after merchandise

has been sold.

Payment Terms The time limit for paying an invoice and the cash

discount allowed, e.g., 2% 30 days, net 31 days.

There are many different payment terms.

Some examples of terms used are:

Semi-monthly: The pharmacy pays one-half of its

receivables on the first half of the month and the

remainder during the second half of the month.

Invoices dated 1st - 15th Due: 25th

Invoices dated 16th - EOM Due: 10th

Weekly terms: Invoices for any given week are due

Price Protection The protection of existing inventory obtained from

the manufacturer against loss by price reduction.

Typically given in the form of a rebate. This should

always be sought on new generic equivalent drugs.

Safety Stock Supply of an item kept on hand to compensate for

variations in lead time and item demand.

Standing Order An order containing the same products to be

shipped each time during the cycle. Shipped on the

time frame established by the pharmacy: weekly, biweekly,

monthly, etc.

Stock Keeping Unit Each item is identified by a separate SKU.

(SKU)