MASTER OF BUSINESS ADMINISTRATION (MBA)

2021/2014: section one

OPERATIONAL management

Inventory management operations and JIT in the

(Case of Axum Pharmaceutical) Organization

SECTION ONE STUDENTS – GROUP WORK

NAME ID NO.

 AMSALE BERHANU EMBA/031/14

 ATSEDE REGASSA EMBA/055/14

 HABTAM YIRGA EMBA/056/14

 HULUSEW TESHOME EMBA/115/14

 GENET SOLOMON EMBA/389/14

 BIZUHAN ABERA EMBA/416/14

 HILINA ADUGNA EMBA/426/14

Submitted to :- Habtamu Endiris (Ph.D)

Addis ababa, 2022
 Table of Contents Page No

1. What Is Inventory management?...........................................................................1

2. What Is JIT?...........................................................................................................1

2.1.Different Types of Inventory………………………………………………2

2.2.Why is the importance of Inventory Management?......................................2

3. The Objectives of Inventory Management……………………………………….2

4. Benefits of Inventory Management………………………………………….……3

5. Inventory Management Challenges……………………………………………….4

6. Inventory Management Process ………………………………………………..…4

7. How Inventory Management Works…………………………………………..…..4

8. Inventory Management Techniques and Terms…………………………………....5

8.1.ABC Analysis………………………………………………………………...5

8.1.1. What is ABC analysis?.........................................................................6

8.1.2. Categories of ABC Analysis………………………………….………7

8.1.3. Benefits of ABC analysis………………………………………..……8

8.2.Economic Order Quantity (EOQ)…………………………………….………9

8.3.FIFO and LIFO……………………………………………………….………9

8.4.Just-In-Time Inventory (JIT)……………………………………………...…..9

9. Inventory Management Practical in Axum pharmacy………………………..…….10

10. What Axum pharmacy applies to improve its Inventory Management?...................11

11. JIT (Just in Time) Model at Axum pharmacy………………………………………13

11.1 Benefits or advantages of JIT in Pharmacy service………………………….14
12. Conclusions ………………………………………………………………………....15
13. Recommendations………………………………………………………….……..….16
 Acknowledgment
I would like to thank our Instructor for his initiation to have such an assignment. Because

it helps us to develop our knowledge of Inventory management operations and JIT and

which will help us to upgrade our skill.

 Abbreviation
WIP:- Work-in-progress

MRO:- Maintenance, Repair and Operations

SEC:- Securities and Exchange Commission

EOQ: - Economic Order Quantity

FIFO:- First in, first out

LIFO:- Last in, first out

JIT:- Just-In-Time Inventory

ITOR: Inventory turnover rate

FEFO:- First- Expiry, First Out

Introduction
14. What Is Inventory management?

Inventory management refers to the process of ordering, storing, using, and selling a company's

inventory. This includes the management of raw materials, components, and finished products,

as well as warehousing and processing of such items.

Key concepts about inventory management are given below:-

 It is the entire process of managing inventories from raw materials to finished products.

 It tries to efficiently streamline inventories to avoid both gluts and shortages.

 Inventory management has two major methods for inventory management which are

called just-in-time (JIT) and materials requirement planning (MRP).

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset

on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.

One measurement of good inventory management is inventory turnover. An accounting

measurement, inventory turnover reflects how often stock is sold in a period. A business does not

want more stock than sales. Poor inventory turnover can lead to dead stock, or unsold stock.

15. What Is JIT?

JIT is an inventory management method and used as manufacturing model originated in Japan in

the 1960s and 1970s. Toyota Motor Company is contributed the most to the development of JIT.

The method allows companies to save significant amounts of money and reduce waste by

keeping only the inventory they need to produce and sell products. This approach reduces

storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.
Inventory is the raw materials, work in process and finished goods a company sells or uses in

production. Accounting considers inventory an asset. Accountants use the information about

stock levels to record the correct valuations on the balance sheet.

15.1. Different Types of Inventory

There are twelve different types of inventory such as: raw materials, work-in-progress (WIP),

finished goods, decoupling inventory, safety stock, packing materials, cycle inventory, service

inventory, transit, theoretical, excess and maintenance, repair and operations (MRO). Some

people do not recognize MRO as a type of inventory.

15.2. Why is the importance of Inventory Management?

Inventory management is vital to a company’s health because it helps make sure there is rarely

too much or too little stock on hand, limiting the risk of stock outs and inaccurate records.

Public companies must track inventory as a requirement for compliance with Securities and

Exchange Commission (SEC) rules and the Sarbanes-Oxley (SOX) Act. Companies must

document their management processes to prove compliance.

16. The Objectives of Inventory Management

One objective of inventory management is to keep enough stock to satisfy customers. Another is

to invest as little as possible in stock while still earning the most profit. The followings are the

objectives of inventory management:

 To ensure continuous supply of materials spares and finished goods so that production should

not suffer at any time and the customer’s demand should also be met.

 To avoid both overstocking and under-stocking of inventory.

 To maintain investment in inventories at the optimum level as required by the operational

and sales activities.

 To keep materials cost under control so that they contribute in reducing cost of production

and overall cost.

 To eliminate duplication in ordering or replenishing stocks. This is possible with the help of

centralizing purchases.

 To minimize losses through deterioration, pilferage, wastages and damages.

 To design proper organization for inventory management. Clear cut accountability should be

fixed at various levels of the organization.

 To ensure perpetual inventory control so that materials shown in stock ledgers should be

actually lying in the stores.

 To ensure right quality goods at reasonable prices. Suitable quality standards will ensure

proper quality stocks. The price analysis, the cost analysis and value analysis will ensure

payment of proper prices.

 To facilitate furnishing of data for short term and long term planning and control of

inventory.

17. Benefits of Inventory Management

The two main benefits of inventory management are that it ensures you’re able to fulfill

incoming or open orders and raises profits. Inventory management also:

 Saves Money:

Understanding stock trends means you see how much of and where you have something

in stock so you’re better able to use the stock you have. This also allows you to keep less

stock at each location (store, warehouse), as you’re able to pull from anywhere to fulfill
 orders — all of this decreases costs tied up in inventory and decreases the amount of

stock that goes unsold before it’s obsolete.

 Improves Cash Flow:

With proper inventory management, you spend money on inventory that sells, so cash is

always moving through the business.

 Satisfies Customers:

One element of developing loyal customers is ensuring they receive the items they want

without waiting.

18. Inventory Management Challenges

The primary challenges of inventory management are having too much inventory and not being

able to sell it, not having enough inventories to fulfill orders, and not understanding what items

you have in inventory and where they’re located. Other obstacles include:

19. Inventory Management Process

If you produce on demand, the inventory management process starts when a company receives a

customer order and continues until the order ships. Otherwise, the process begins when you

forecast your demand and then place POs for the required raw materials or components. Other

parts of the process include analyzing sales trends and organizing the storage of products in

warehouses.

20. How Inventory Management Works

The goal of inventory management is to understand stock levels and stock’s location in

warehouses. Inventory management software tracks the flow of products from supplier through
the production process to the customer. In the warehouse, inventory management tracks stock

receipt, picking, packing and shipping.

21. Inventory Management Techniques and Terms

Some inventory management techniques use formulas and analysis to plan stock. Others rely on

procedures. All methods aim to improve accuracy. The techniques a company uses depend on its

needs and stock.

Find out which technique works best for your business by reading the guide to inventory

management techniques. Here’s a summary of them:

21.1. ABC Analysis:

This method works by identifying the most and least popular types of stock. The majority of the

companies today, face the problem of managing their inventory right. After all, it is difficult to maintain

the optimum level of inventory, when you are dealing with a diversity of customer demands. However,

with a good inventory control system, you will be able to manage your stocks efficiently.
Inventory control assists businesses to maintain ideal stock levels. It tops the priority list of many

industries such as the E-commerce industry, manufacturing, logistics, retail, and other businesses that

deal with inventories. There are various methods of inventory control, and ABC analysis is one such

method.

21.1.1. What is ABC analysis?

ABC analysis also referred to as ABC Classification, is a vital part of Inventory Management. It allows

business owners to distinguish the products in their stock and focus on managing them based on their

worth. The main objective of ABC analysis is to make maximum out of minimum investment without

wasting any resources or inventory.

ABC analysis is an inventory classification strategy that categorizes the stocks into three categories, A,

B, and C, based on their revenue. Now let us find out what these three categories are.
8.1.2. Categories of ABC Analysis

The ABC analysis considers that all the goods cannot have equal value in the market. They are found in
three different categories:

Segment A: Products included in category A are the most essential goods with the highest value.

Segment A goods consist of approximately 20% of the total products with 80% of revenue generation

for your business. It is considered as a small category with minimal goods, but maximum revenue.

Segment B: Products included in category B have a slightly higher value than segment B. It

approximately regulates 30% of goods with 15% revenue generation. Not to mention, the goods

included in this category are more in number but less in utility.

Segment C: Products included in category C are more in numbers but least valuable when it comes to

generating revenue. As compared to category A & B, segment C has the maximum share of 50% of the

stock, generating just 5% revenue.

8.1.3. Benefits of ABC analysis

Most of the organizations have a huge amount of stock-keeping units (SKUs), yet they have not been

able to prosper or upscale their business significantly. There are many other challenges in inventory

management that businesses have to handle. Challenges may include lack of information on stocks, a

weak management process, difficulty in managing employees, space, and so on.

ABC analysis is a solution to this problem. It can assist companies to streamline and optimize their

inventory management. Let’s find out how.

8.2. Economic Order Quantity (EOQ):

This formula shows exactly how much inventory a company should order to reduce holding and

other costs.

8.3. FIFO and LIFO:

First in, first out (FIFO) means you move the oldest stock first. Last in, first out (LIFO) considers

that prices always rise, so the most recently-purchased inventory is the most expensive and thus

sold first.

8.4 . Just-In-Time Inventory (JIT):

Just-in-time (JIT) methodology, in which products arrive as they are ordered by customers and

is based on analyzing customer behavior. This approach involves researching buying patterns,

seasonal demand and location-based factors that present an accurate picture of which goods are

needed at certain times and places. The advantage of JIT is customer demand can be met without

needing to keep large quantities of products on hand and in close to real time. However, the risks

include misreading the market demand or having distribution problems with suppliers, which can

lead to out-of-stock issues.

Companies use this method in an effort to maintain the lowest stock levels possible before a
refill.

Just In Time inventory module was introduced by the Toyota Motoring Company, Japan. This

was fashioned after the supermarket model that originated in the USA. The supermarkets

replenish their stock just as one is removed from the shelves. One of the firms that effectively

use JIT is Wal-Mart. Indeed, though it is certainly not a small business, Wal-Mart probably uses

JIT better than any company on Earth. Wal-Mart’s inventory management is one of the biggest
contributors to the company's success. It's called a "cross-docking system" which means that

supplier’ trucks and Wal-Mart’s trucks meet at the company’s warehouses.

22. Inventory Management Practical in Axum pharmacy

Managing materials (pharmaceutical products) in that process is an integral part of the business

model for Axum pharmacy settings, especially community and hospital practices. On the other

hand, inventory mismanagement causes unnecessary rise in procurement and carrying costs and

an imbalance in the supply and demand equation. In the case of Axum Pharmaceuticals proper

training of pharmacy students and pharmacists in management skills is an imperative course of

action and get serious attention by the general manager of the organization. Primarily Axum

pharmacy deployed three methods of inventory management to manage inventory: i.e. the visual

method, the periodic method, and the perpetual method.

A. Axum pharmacy applied the visual method to visually compare the stock on hand with a

listing of the amount of products that should be carried. And this method advances the

pharmacy to place a purchasing order when the stock number falls below the desired

listed amount.

B. The periodic method: - as the store manager of the pharmacy explained to us their

pharmacy used periodic inventory management method to count the stock and compare it

with a listing of minimum desired level of the inventory on regular basis at predetermined

periods of time and they count their inventory on quarterly basis. When the quantities fall

below the minimum amount, the products are ordered.

C. Inventory management method is the most efficient method to manage pharmacy

inventory used by Axum pharmacy. It involves a computerized system that monitors the

inventory at all times on a continuous systematic basis. In this system, the inventory on
 hand is entered into the computer software, and the appropriate amount of products is

automatically reduced from the inventory when a prescription or medication order is

filled.

In general Axum Pharmacy employed a hybrid of methods, e.g. conducting annual

physical count (visual and periodic methods), while maintaining a computerized system

(perpetual method). This strategy enables the pharmacy to compare the quantities of

products in computer with what is actually on shelves.

By virtue of this approach, potential variances owing to fluctuations in supply and

demand will be identified and corrected, and the accuracy of pharmacy’s financial

records will be evaluated and verified. Furthermore, this pharmacy should adhere to the

regulations of their pharmacy boards/associations with regard to inventory management

of specific entities, such as controlled substances, vaccines, and biological products.

However, the computerized system Axum deployed is outdated and not modernized and

sometimes resulted in giving false information about the actual inventory as the daily

sales manager explained.

23. What Axum pharmacy applies to improve its Inventory Management?

As Inventory is independent pharmacy’s biggest overhead, As Inventory is the biggest overhead

cost and an unmanaged inventory, it can severely hurt profits and the bottom line. Axum

pharmacy managed the inventory by adopting pharmacy software that can help to improve its

operation as given below:-

 Know what has on Shelves

The pharmacy owners assumed that they have handled their inventory well, but often find

outdated or slow-moving items buried at the back. Of course rotating inventory helps, but by

using their pharmacy software and point of sale system to track inventory electronically, it makes

it easier to manage exactly what’s on their shelves. A quick inventory report from their

pharmacy software or point of sale system is easy and provides additional detailed information.

 Adjusting of their Reorder Points, Manually or Automatically

Using a perpetual inventory helps to save time in Axum independent pharmacy by automatically

adding items to a purchase order when they fall below their minimums, however, these reorder

points need to be reviewed and adjusted from time to time as demand fluctuates either by

customer use or seasonally. As generic drugs become available, the demand for brand name

medications becomes less and less, making it important to adjust reorder levels on these items in

particular. Additionally, certain drugs have a higher demand during certain seasons, making it

important to lower reorder levels once that rush has passed.

 Using special Order for High Priced Drugs

Many independent pharmacies have wholesale contracts that offer same day or next day

deliveries. High priced medications should never be sitting on your shelf unless you have

multiple patients routinely taking these items. Instead, coordinate with your patient’s for their

refills. Through our “ready to refill” queues, reports, and notifications in our pharmacy

management software, you can easily contact your patient prior to them running out of

meds. Give yourself enough time to order the item when it’s due instead of stocking it and

sitting on tens of thousands of dollars of unnecessary inventory.

 Stock Big Sellers and Fast Movers

It’s important in both your pharmacy department and frontend to stock “hot ticket”

items. Patients and customers can’t purchase what you don’t have, so making sure to stock

popular drugs and OTC items will keep your customers coming back.

 Products Should Never Expire on Shelves

By maintaining certain “days’ supply” of inventory the pharmacy is minimize the risk of items

expiring on the shelves. only stocking about a weeks’ worth items will make sure that nothing

sits stale and goes out of date. The pharmacy using point of sale to generate inventory reports

like usage reports, and current quantities on hand will make it easy to see which items should be

returned and also which items need to have their perpetual inventory quantities adjusted.

24. JIT (Just in Time) Model at Axum pharmacy

As with other business outfits Pharmacy has to deal with resources and to determine the best way

to deploy them. Pharmacist, unlike other business operators, has a lot of overheads that are of

course time critical in nature. As pharmacy operation become very savvy business concern,

operators are urged to “Go Lean or Go Home” Gone are those days where inventory is allowed

to sit and gather dust on the shelves before they are picked up by the beneficiaries. Gracefully

moving from PUSH philosophy to PULL methodology. More or less, Axum pharmacy is

applied the following JIT concepts as given next:-

 As it is known, Just in Time (JIT) Pharmacy is the way forwarding inventory. It envisions

a pharmacy that runs like a supermarket or fast food restaurant. The fast food restaurants

have the buns, patties and the other condiments ready BUT don’t “deploy” until an order

comes in except of course during the rush periods where historic data justifies preparing

in advance. The pharmacy is applied the thing in it service providing process.

 Axum as a retail Pharmacy has two major assets at its disposal which are known as, the

Pharmacists, Pharmacy Technicians and other support staffs. And the second element is

inventory. Un qualified business operators believes in reducing of manpower will lead to

improved money management and increased customer satisfaction. This is NOT exactly

true in retail pharmacy. The inventory remains the most expensive asset the pharmacy

carries and one that will keep you BIC {Best in Class} and when not properly managed

quickly becomes a liability. Hence, Axum pharmacy have to deploy improved inventory

management system to survive in the sector. This smart system will enable the pharmacy

to perform efficiently, gracefully with minimal negative impact on customer satisfaction

secondary to out of stock positions.

However, the system must also address the issue of inventory on hand vis-à-vis filled but

not sold inventory. Contrary to conventional believe, there is a cost associated with

carrying inventory because they have a finite shelf life. As such, the pharmacy be able to

ensure inventory on hand mirrors anticipated demand. Time is ripe to have a better

inventory system without incurring additional financial liability than necessary.

11.1 Benefits or advantages of JIT in Pharmacy service

I. The business will enjoy a streamlined inventory position that accurately mirrors

anticipated demand

II. This type of inventory management system will reduce the disappointment of not

getting the medication on hand when needed

III. This system allows pharmacists and staff to better understand the “power” of their

inventory and know it directly correlates to customer satisfaction, or lack thereof.

 IV. This system allows you to have an expanded view of what your inventory level is

at any point in time which reduces the risk of pilferage or shrink

V. It helps the pharmacy to reduce waste and be more efficient with allocating staff

& assets

VI. Requires & represents smaller financial investment

VII. This allows your pharmacy to deal with new generics when they hit the market as

patient’s transition from brand to generic. You don’t get lumbered with

unnecessary inventory to send back for credit.

VIII. JIT helps better management of expiration dates and improves the chances of

getting top reimbursements when returned to the suppliers.

Note: -JIT in pharmaceutical service has its own disadvantages such like, Supply

shortage and Inability to respond to seasonal demands of medicines. However its

advantages are much more useful than it draw backs.

25. Conclusions
Inventory Management is the core of pharmaceutical supply management. Inadequate controls of

inventories can result in both under and overstocking of items. An effective inventory

management system plays an important role in reducing the associated costs across different

stages of the supply chain system which include selection, quantification, procurement, storage,

distribution and use. Effective pharmaceutical items management has a great impact on the

efficiency and effectiveness of the service delivery.

However the awareness, knowledge, practice and implementation of inventory control

techniques were exist on a much lower scale in the facilities. Our investigation shows that overall

inventory management practice at Axum pharmacy is not satisfactory and effective.

Finally, from this study it can be concluded that inventory management practices were poor.

Most of the time Axum do not use scientific method that can be used in controlling inventory

and those for quantifying needed pharmaceutical products at the market. For example during

covid-19 incidence the timely supply of max and other related protective inventories were poor

as the manager explained. On the other hand sufficient storage area to store all the needed

products, lack of technology in inventory control and lack of proper training of inventory

management and supply chain is the main challenge that Axum faced overtime. In general, over

stock of medicine which can lead to expiration and spoilage of medicine and out of stock of

medicine which might have leads to interruption of quality health care delivery and affect overall

profitability is a result of poor inventory control as a consequence.

26. Recommendations
From both financial and operational perspectives, efficient inventory management plays a great

role in pharmacy practice. Given the great deal of resources invested in inventory management,

Axum pharmacy should periodically calculate the ITOR to evaluate how well a pharmacy is

managing its inventory. Information technology makes methods of inventory management and

methods of evaluating inventory management more efficient, more precise, and more accurate.

Thus, relevant software should be employed in pharmacies and pharmacists should be trained

on utilizing such systems for managing inventory.

Pharmacists cannot take the impacts of inventory mismanagement lightly. Improper

management of pharmacy inventory has deleterious impacts on patient safety. Pharmacists

should consider details pertaining to pharmacy inventory management when assessing a

potential medication error or other drug therapy problems (e.g. patient needs a medication but

not receives it due to product unavailability; and loss of efficacy due to incorrect storage

conditions).

Finally, the following recommendations were suggested by the group to help improve

pharmaceutical inventory management practice at Axum pharmacy.

1. The study recommends that applying the scientific inventory management concepts along with

the practices such as having essential medicine list, use of established formula to determine

facility resupply need, established optimized stock level ( i.e. maximum, minimum, safety stock

and reorder level) and use of inventory management techniques such as ABC analysis, VEN

analysis and Economic order quantity in order to classify items and ensure their availability

ensures inventory control efficiency and effectiveness in best service delivery.

2. The study recommends that all pharmaceutical stores should adopt good storage practices and

use of expiry tracking chart to prevent wastage of medication due to expiration. The study further

recommends that Axum must use the first- expiry, first out (FEFO) method in the storage and

issuance of pharmaceutical products. The FEFO method is considered the best because, a

medicine can be received which may have the expiry date nearer than that same type of medicine

that is already stocked.

3. The study recommends that all facilities to computerize all inventory management system to

provide information regarding each stock movement and for better controlling inventory and

quantification of drugs instead of manual methods.

4. The study also recommends that top management or stake holders should provide support for

personnel that directly related to stock and inventory management practice by providing proper

training of inventory management and proper storage facilities.

5. Finally, the study recommends that facilities should be effective and efficient in practicing and

keeping records to improve pharmaceutical inventory management practice. Using stock cards

and updating bin cards should be regularly used for all products to track the level of stock and

prevent stock outs of essential medicines, overstocking and expiration of medicine.

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