PURCHASE AND

INVENTORY CONTROL

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 INTRODUCTION
Purchase: ‘to obtain by paying money or its equivalent’
Inventory: ‘an itemized list of goods with their estimated worth:
specifically an annual account of stock taken in any business’
Control: ‘to exercise, direct, guide, or retain of power’

Purchase & Inventory control of pharmaceuticals is a special &

important phase of the operation of a successful pharmacy.

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 INTRODUCTION
 Purchase means to obtain something by paying money or its
equivalent.
 An inventory can be defined as the sum of the value of the
raw materials, spare parts, maintenance consumables, stocks
of a business firm at any given point of time.
 Inventories are maintained for smooth running of business.
 On an average, most of business has about 30% of its
working capital tied up as inventories.

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 OBJECTIVES
 To keep the inventories as low as possible consistent with the
market conditions.
 To minimize ‘out of stock’ danger.
 To maintain a sufficient stock of finished product for prompt
delivery of goods.
 To maintain the records so as to supply accurate and regular
material reports to the management.
 To forecast market and economic conditions of supply as
regards availability of materials.

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 INTRODUCTION
The main purpose of having an inventory control is
o Maximum customer service
o Minimum inventory investment
o Low cost for operation

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 PURCHASE
Items in pharmacy can be purchased:
o By direct purchase from the manufacturer
o By direct purchase from a wholesaler
o By bid from manufacturers
o By purchase from a local pharmacy
o By contract arrangement with manufacturer

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 SEVEN RIGHTS OF PURCHASING
o Right variety of materials
o Right quality of merchandise to meet the target market expectation and demand.
o Right quantity of goods at a particular point in time to ensure that the risk of stock
out is controlled.
o At the right time so that the supply of incoming merchandise roughly coincides with
customer purchases.
o From the right source to obtain the most favorable items possible and develop
dependable sources of supply
o At the right price so that the cost of goods will not be too high to allow for a
reasonable gross margin.
oAt the right cost to the pharmacy in terms of minimizing expenses associated with
purchasing.

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o
 SUPPLIER SELECTION
While selecting supplier following points should be
taken in consideration
o Reputation of the supplier in the market
o Financial condition of the supplier
o Manufacturing capabilities of the supplier
o Capability of the supplier to supply at a short notice
o After sales service facilities provided by the supplier
o Terms and conditions of payment

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 Operational principles for good
pharmaceutical procurement
 Efficient and Transparent Management
 Drug Selection and Quantification
 Financing and Competition
 Supplier Selection and Quality Assurance

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 Efficient and Transparent Management
o Different procurement functions and responsibilities (selection,
quantification, product specification, pre-selection of suppliers and
adjudication of tenders) should be divided among different offices,
committees and individuals, each with the appropriate expertise
and resources for the specific function.
o Procurement procedures should be transparent, following formal
written procedures throughout the process and using explicit
criteria to award contracts.
o Procurement should be planned properly and procurement
performance should be monitored regularly; monitoring should
include an annual external audit.

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 Drug Selection and Quantification
o Public sector procurement should be limited to an essential
drugs list or national/local formulary list.

o Procurement and tender documents should list drugs by their

International Nonproprietary Name (INN), or generic name.

o Order quantities should be based on a reliable estimate of

actual need.

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 Financing and Competition
o Mechanisms should be put in place to ensure reliable financing for
procurement.
o Good financial management procedures should be followed to
maximize the use of financial resources.
o Procurement should be effected in the largest possible quantities
in order to achieve economies of scale; this applies to both
centralized and decentralized systems.
o Procurement in the public health sector should be based on
competitive procurement methods, except for very small or
emergency orders.
o Members of the purchasing groups should purchase all contracted
items from the supplier(s) which hold(s) the contract.
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Supplier Selection and Quality Assurance
o Prospective suppliers should be pre-qualified, and selected
suppliers should be monitored through a process which considers
product quality, service reliability, delivery time and financial
viability.

o Procurement procedures/systems should include all assurances

that the drugs purchased are of high quality, according to
international standards.

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 GOOD PROCUREMENT PRACTICES
o Generic name
o Limited to essential medicines list or formulary list
o Bulk purchases
o Formal supplier qualification and monitoring
o Competitive bidding process
o Commitment to a sole source
o Order quantities based on reliable estimate of actual need

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 GOOD PROCUREMENT PRACTICES
o Reliable payment and good financial management
o Transparency and written procedures
o Separation of key functions
o Product quality assurance program
o Annual audit with published results
o Regular reporting on performance

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PHARMACEUTICAL PROCUREMENT CYCLE

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 INVENTORY CONTROL
 Inventory: what comes in & what goes out
 Refers to the stock of products held to meet future demand.
 Pharmacies hold inventory to guard against fluctuations in
demand, to take advantage of bulk discounts, and to withstand
fluctuations in supply (e.g., late deliveries)
 The size of the inventory tells you the investment made by the
organization for the materials in the stores

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 INVENTORY CONTROL
Acquisition cost: Price the pharmacy pays for the product.

Procurement costs: Costs associated with purchasing the

product: checking inventory, placing orders, receiving orders,
stocking the product, and paying the invoices.

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 INVENTORY CONTROL
Carrying cost
◦ Refer to the storage, handling, insurance, cost of capital to
finance the inventory, and opportunity costs.
◦ Another carrying cost is the cost of loss through theft,
deterioration, and damage.

Stock-out cost
◦ Cost of not having a product on the shelf when a patient needs
or wants it.
◦ This is frustrating to the pharmacist as this cause an
inconvenience to the patient and prescriber

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 OBJECTIVES OF INVENTORY CONTROL
 Minimization of inventory investment
 Determination of the right level of customer services
 Balance of supply & demand
 Minimization of procurement costs & carrying costs
 Maintenance of an up to date control system

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 THE INVENTORY CYCLE

Profile of Inventory Level Over Time

Q Usage
Quantity rate
on hand

Reorder
point Safety
Stock
Time
Receive Place Receive Place Receive
order order order order order
Lead time
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Minimum stock - Amount of stock required to support testing
operations until additional supplies are received

Lead time – Time between placing an order and receiving it

Maximum usage – number of test devices used in a given time

period

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 Re- order level/ point
 This is that level of materials at which a new order for
supply of materials is to be placed.

 This level is fixed somewhere between maximum and

minimum levels.

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TECHNIQUES OF INVENTORY CONTROL
o ABC analysis
o Economic order quantity
o Perpetual inventory system
o Review of slow and non moving products
o Setting of various levels
o Use of material budgeting

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 ABC ANALYSIS

Classifying inventory according to annual value of

consumption of the items.

A - very important
B - mod. important High
A
C - least important Annual
value B
of items

Low
C
Few Many
Number of Items

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 ABC ANALYSIS
A- items B- items C- items
1 It covers 10% of the total It covers 20% of the total It covers 70% of the total
inventories inventories inventories
2 It consumes about 70% of It consumes 20% of total budget It consumes 10% of the
total budget total expenditure of
inventories

3 It requires very strict It required moderate control It may require loose

control control
4 It requires either no safety It requires low safety stocks It may require high safety
stock or low safety stocks
stock
5 It must be handled by It can be handled by middle It can be handled by any
senior officers management official of the
management

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 ABC ANALYSIS

Advantages:
 Investment in inventory can be regulated and utilized in the
best possible manner.
 Closer and strict control on those items which represent a
major portion of total stock value.
 Helps in maintaining enough safety stock of category ‘C’ items.
 The scientific and selective control helps in the maintenance of
high stock turnover rate

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 ECONOMIC ORDER QUANTITY

 Used to find out how much of the inventory is to be ordered.

 The purpose of this model is:
o when an item should be reordered (resulting in procurement
cost) and
o what quantity should an item be ordered (resulting in carrying
or holding cost).
 The correct quantity to buy is the quantity at which the
ordering cost and the inventory carrying cost will be minimum.
 Used to determine how much inventory needs to be carried to
meet demand

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 EOQ..
Procurement cost/ ordering cost
 While placing the order certain costs are involved
 Such costs are repeated with each repeat order
 Includes:
◦ Paper work cost – typing/ dispatching
◦ Follow up costs – travel/ telephone/ postal bills etc
◦ Costs involving in receiving materials – inspection / checking &
handling charges
◦ Salaries & wages of purchase department

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 EOQ..
Inventory carrying cost/ holding cost
 Measured as of unit cost of the item for estimating what actually
costs a hospital to carry the stocks
 Includes:
oInterest & borrowings
oInsurances & taxes
oStorage costs – any labor excluding handling of receipt, costs of
provision of storage area, facilities like bins, racks etc
oAllowances for deterioration
oObsolescence
oSalaries & wages of stores department

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 EOQ..
The formula for calculating EOQ is:
EOQ (or Q) = 2 CD
H
where,
C  fixed cost per order
D  annual demand (or annual consumption)
H  annual holding cost per unit
H = c*s (c- cost per unit of material &
s- storage & inventory cost)

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 Assumptions in EOQ model
The EOQ model is based on following assumptions:
 The annual usage of particular item of inventory is
known

 The rate of usage of inventory does not vary over time

 Orders placed to replenish the inventory are received at

exactly the point in time when the inventory is zero

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 PERPETUAL INVENTORY SYSTEM

 Method of receiving the store balance after every receipt and

issue to facilitate regular checking and to prevent closing down
for stock-counting.
 After every receipt or issue, the entry is made in the bin card
and balance is adjusted.
 Thus, bin card becomes perpetual inventory record and store
balance is recorded continuously after every receipt and issue.
 All errors detected are adjusted both in bin card as well as in
store ledger under proper authority.

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 PERPETUAL INVENTORY SYSTEM
1. Bin card
 Is a document maintained by the store keeper in his store to
keep record of all items of material and goods in his store
 Serves the purpose of providing ready references
 Shows quantities of each material received, issued, and in
stock
 A bin card is used for each material
 Each receipt, issue or return is recorded on bin card in a
chronological order & the latest balance is shown after each
receipt and issue

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 PERPETUAL INVENTORY SYSTEM

2. Store ledger
 It is kept in the cost accounting department

 The stores ledger is maintained in the form of loose leaf cards

because they can be easily removed and inserted

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 PERPETUAL INVENTORY SYSTEM
3. Continuous stock taking
 A limited number of items are verified on a day
 The selection of the items of materials should be such that
each item of materials gets checked up at least a certain number
of times in a year & checking of a particular item is evenly
distributed during the period
 The selected number of items are counted daily or at a
frequent intervals and compared with the bin card & stores
ledger by the store keeper
 The bin card & stores ledger record the balances and their
correctness can be can be verified

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 Advantages of perpetual
inventory control
 It helps in detection and immediate correction of errors

 Ensures a reliable checking of the store items in a

methodological manner without disturbing the routine work of
the enterprise

 Timely action can be taken on serious shortages

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 REVIEW OF SLOW AND NON MOVING
PRODUCTS

System is adopted to detect and control slow moving items,

obsolete items and dormant stock. In order to detect the
problem following steps may be taken
oPeriodic report
oObsolete items
oMoving ratios

Periodic report- A monthly or quarterly report on the stocks of

non-moving items is prepared which indicates its purchase,
consumption and balance in hand.

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 REVIEW OF SLOW AND NON MOVING
PRODUCTS

Obsolete items
o Many of the slow and non-moving items may become useless with
the passage of time.
o A well designed information system has to be devised to locate such
obsolete items, so that these can be utilized and their further
purchase can be stopped.

Moving ratios
o In order to isolate slow moving items, dormant and dead stocks,
moving ratios may be calculated periodically.
o These ratios show the turnover of these items for presentation for
management.

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 SETTING OF VARIOUS LEVELS

 In orders to maintain inventory control, it is important to

decide upon various levels of materials.
 These are maximum level, minimum level and re-order level.
 These levels are not permanent, but need revision due to
changes in the factors which determine these levels.

Based on the unit value (in rupees) of items: HML

Based on distribution of items from store: FSN

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 USE OF MATERIAL BUDGETING

 Purchase budget of both the whole and the individual item

is prepared.

 During the preparation of material budget the following

factors should be considered
o Increase or decrease in the sales of the previous month in
comparison with the corresponding monthly sales in the previous
year.
o Adjustment of over-buying or under-buying during the previous
month.

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 VEN/VED Analysis
 Based on the utility of the materials

 In a drug store, VEN analysis is very useful in controlling &

maintaining the stock of various types of formulations of a
particular group of drugs

 VEN analysis is a time consuming process, but once

implemented it is easy to verify, revise & modify the system

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 VEN/VED Analysis
Vital (V) drugs: potentially life saving or crucial to providing basic
health services

Essential (E) drugs: effective against less severe but significant

forms of disease (but not absolutely vital to provide basic
health care)

Non- essential (N) drugs: used for minor or self- limited illnesses.
It includes those drugs which are required for routine,
preventive, hygienic purposes

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 Drug recalls
o Recall is the removal from the market of specified batches or all
batches of a product.
o Some countries refer to the recall of all batches as “withdrawal”.

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 Reasons for recall
o Customer complaint
o Detection of GMP failure after release
o Result from the ongoing stability testing
o Request by the national authorities
o Result of an inspection
o Known counterfeiting or tampering
o Adverse reaction reporting

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 Reasons for recall

Detection of GMP failure

The photo shows an active tablet in

the row of placebos in a bi-phasic
oral contraceptive blister pack

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 Recycling of drugs
o Many pharmaceuticals may come to hospital pharmacy store
from donor organisations or countries for the use within the
hospital. Such materials may not be used completely.
o There may be instances when such pharmaceuticals may not
used in hospital leading to expiry or near to expiry.
o Some other drugs purchased by the store may not be used
because as forecasted by the department.
oProvisions should be made by the store for the recycling of those
drugs which are not used.
o Recycling may be dose by returning back those pharmaceuticals
to the suppliers or manufacturers prior to the time of expiry.

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 Disposal of drugs
Disposal Method
Return to donor or manufacturer
High temperature incineration
(Temp: 12000C)
Medium temperature incineration
with two chamber incinerator with
min. temp of 8500C
Immobilization
Waste encapsulation
Inertization
Types of pharmaceutical
All bulk waste pharmaceuticals, particularly
antineoplastics
Solids, semisolids, powders, antineoplastics,
controlled substances
In the absence of high temp incinerators, solids,
semi-solids, powders. controlled substances
Solids, semi-solids, powders, liquids,
antineoplastics, controlled substances
Solids, semi-solids, powders, antineoplastics,
controlled substances
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 Disposal of drugs
Disposal Method Types of pharmaceutical
Landfill
Highly engineered sanitary Limited quantities of untreated solids, semi-
landfill solids and powders. Disposal of waste
pharmaceuticals after immobilization
preferable. PVC plastics
Engineered landfill Waste solids, semi-solids and powders,
preferably after immobilization. PVC plastics
Open uncontrolled non- At last resort untreated solids, semi solids,
engineered dump powders-must be covered immediately with
municipal waste. Immobilization of solids, semi-
solids, powders is preferable

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 Disposal of drugs
Disposal Method Types of pharmaceutical
Sewer
Fast flowing watercourse Diluted liquids, syrups, intravenous fluids;
small quantities of diluted disinfectants
(supervised)
Burning in open containers At last resort, packaging, paper, cardboard
Chemical decomposition Not recommended unless special chemical
expertise and materials available

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