Inventory Tips
Sara K Clinton, CPht Lead Pharmacy Technician Hayat Pharmacy, Milwaukee WI Disclosure and Conflict of Interest
Sara K Clinton has no personal or financial conflicts of interest to disclose. Pharmacist Objectives
At the conclusion of this program, the pharmacist will be able to:
1.Discuss best practices for inventory management. 2.Describe how in-stock items and cash flow can be balanced. 3.Review different inventory management strategies. Technician Objectives
At the conclusion of this program, the technician will be able to:
1.Define common inventory terms. 2.Identify various methods to manage inventory. 3.Describe how the pharmacy technician can take an active role in inventory management. Why is inventory management important ?
Inventory control is the process of managing inventory to meet customer demand at the lowest cost with the minimum investment.
For most pharmacies, inventory represents the largest investment.
With medications’ cost going up annually, it can be a challenge! Common Inventory terms
Stock of pharmaceutical products on hand retained to meet future Inventory demand
Net Inventory Total merchandise inventory less accounts payable
Amount of stock that is carried to meet average demand levels Basic Stock
the amount of time that elapses between the placement and receipt of Order Cycle/ Lead Time an order
The amount of stock carried to account for fluctuations in demand or Safety Stock order cycles Common Inventory terms
Level of product (in units) on which buyers base purchasing decisions Order Point
The pharmacy’s acquisition cost - what is paid to buy the product Cost of Goods Sold (COGS)
The specific amount of a product needed to cover demand without Economic Order Quantity (EOQ) tying up cash in unnecessary inventory
A method of inventory management where orders are placed just Just-in-Time Method before a product runs out What Can Efficient Inventory Management Do?
Successfully implemented inventory management strategies can help:
● Enhance profitability ○ Reducing cost of products ○ Reducing expired products
● Improving cash flow
● Ensure meeting patients’ demands Inventory Control Goals
● Reduce costs
● Maintain effective inventory to satisfy demands
Belinski, D. J. (n.d.). Intelligent Inventory Optimization. Speech presented at Computer RX Idea Exchange 2018. Inventory Associated Costs
While trying to reach effective inventory management, it is important to consider the following costs:
● Acquisition costs ● Procurement costs ● Carrying costs ● Shortage costs Acquisition Costs
Acquisition cost is the total net cost the pharmacy pays for the products.
● After deducting discounts and adding normal incidental costs Procurement Costs
The total estimated cost of the goods or services being purchased
Used with permission from… Belinski, D. J. (n.d.). Intelligent Inventory Optimization. Speech presented at Computer RX Idea Exchange 2018. Carrying Costs
Carrying costs are the costs of holding inventory:
● Storage costs, ● Inventory risks, ● Loss-of-opportunity costs associated with tying up capital.
Used with permission from… Belinski, D. J. (n.d.). Intelligent Inventory Optimization. Speech presented at Computer RX Idea Exchange 2018. Shortage Costs
Shortage costs—also known as stock-out costs are the costs of not having the product on the shelves when needed.
I’m sorry but we do not have your medication in This is a pharmacy… stock… How do you not have it in stock??!!! To Stock or Not to Stock?
The cost of one bad decision can wipe out the profit of multiple scripts, reduce your cash flow & liquidity Methods to manage inventory
Visual, Periodic & Perpetual Method Methods to manage inventory Periodic Method
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. • Review Timing may affect inventory levels, depending on how much usage fluctuates on a seasonal basis causing significant variations in inventory levels Methods to manage inventory
Visual Method
Known as “walking the shelf” - is a method where one simply looks at the number of units in inventory and compares them with a listing of how many should be carried in stock
• The primary advantages of the visual system of inventory control are that it is relatively inexpensive and takes little time
• Margin of error is higher as It is much easier to spot empty places on the shelves, than it is to identify slow-moving merchandise or excess inventory. Methods to manage inventory
Perpetual Method
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.
• Perpetual systems is that they are the most expensive to maintain. Methods to manage inventory
Open-to-Buy (Budget) Method A method based on limiting purchases to a specific amount of funds available for purchasing pharmaceuticals during a specified period.
● Financial control of the pharmacy inventory
● Although effective, it needs to be combined with other methods for a more comprehensive approach Methods to manage inventory
Short-List Method
A method aiming to provide accurate and timely inventory information to the person responsible for order placement by creating a short list that identifies the items that are in short supply.
● Encourages continuous feedback and control from the pharmacy technicians ● Risks of duplicates, missed opportunities and excess stock Methods to manage inventory
Various methods exist to manage inventory, each with advantages and disadvantages:
Open-to-Buy Budget Short- List Method Method
Minimum and Maximum Stock Record Method Method Methods to manage inventory
Open-to-Buy (Budget) Method A method based on limiting purchases to a specific amount of funds available for purchasing pharmaceuticals during a specified period.
● Financial control of the pharmacy inventory ● Although effective, it needs to be combined with other methods for a more comprehensive approach Methods to manage inventory
Short-List Method
A method aiming to provide accurate and timely inventory information to the person responsible for order placement by creating a short list that identifies the items that are in short supply.
● Encourages continuous feedback and control from the pharmacy technicians ● Risks of duplicates, missed opportunities and excess stock Methods to manage inventory
Minimum and Maximum Method
A strategy aiming to determine order points and levels: when and how much to order of each item
● It also provides limited dollar control ● Time consuming to establish the minimum and maximum levels and update them regularly to reflect changes in demand Methods to manage inventory
Stock Record Method
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. Effectiveness of an inventory control system
➔Inventory Turnover Rate (ITOR)
The ratio of cost of medications sold (over a period of time) to the average inventory value (during that period)
Inventory Turnover Ratio = Total Cost of Medications Sold Average Inventory Value Effectiveness of an inventory control system
➔Days Inventory on Hand / Days to sell
The number of selling days covered by inventory before an out-of-stock occurs.
Number of days in the Period Days Inventory Turnover = (Period in Days) Inventory Turnover ( for the specific Period) Effectiveness of an inventory control system
The inventory turnover rate represents the average number of time the inventory is sold and placed during a given period (usually a year).
• The higher the turnover, the better
• Low ITOR indicates poor management of inventory ➢ A low turnover rate indicates that products are not being used at a proper rate relative to average inventory. Effectiveness of an inventory control system How Much to order ?
COGS Average Inventory Value Inventory turnover Ratio
$ 59,000 $10,000 5.9 times
Days on Hand (Days Inventory Turnover) = 61 days [365/5.9]
If we are aiming at about six turns per year for the specific item, we need to have no more than two months’ supply of inventory on hand at any time. Effectiveness of an inventory control system
https://retailowner.com/Benchmarks/Health-and- Personal-Care-Stores/Pharmacies-Drug- Stores#2908117-turnover Effective Inventory management How Much to order ?
Inventory management is based on a four-part equation:
Sales + Ending Inventory – Beginning Inventory = Purchases
One key element in this equation is first determine how many you want to have remaining
• The ending inventory projection is based on the number of inventory turns you want to achieve for that the specific item . • The higher the turnover rate, the smaller the ending inventory. Effective Inventory management
An efficient inventory control system has to resolve contradictory demands
• Maintain a wide variety of • Obsolete items stock
• Keeping stock low VS. • Level of service
• Volume ordering to lower cost • Slow Moving inventory Effective Inventory management
● Forecasting
● Balancing: ○ Returns ○ Transfers (if multiple locations exists)
● Cycle counting Effective Inventory management
Relationship with Wholesalers
● Establish a good relationship with representatives
● Consider “don’t sub” scenarios
● Do you have the best pay-terms?
● Does wholesaler have trade specials? Effective Inventory management
Best Practices
Streamline pharmacy inventory with an automatic inventory management system. An automated system will help the pharmacy maintain accurate inventory levels. • Reduce costs and improve efficiency
With an automated inventory management system, some factors can be easily identified: • The inventory on hand • Items available to fill the next prescription • The inventory on order Effective Inventory management
Best Practices
The purchasing and inventory control system includes a daily routine of tasks in an organized, systematic, and cooperative
Pharmacy technicians’ role is crucial to the success of any inventory and purchasing control system.
○ Primary handlers of medications in the workflow ○ Familiarity with medication stocks allows the identification of quality and care issues ○ Proper training allows the optimal use of inventory Effective Inventory management
Best Practices
Establishing incentive programs to engage pharmacy technicians to:
● Conduct regular reviews of inventory in order to account for trends and better maintain inventory levels.
● Help identify about-to-expire or dead inventory ○ Slow or non-moving items tie up your cash flow. Effective Inventory management
Best Practices
Use these regular reviews to identify trends so you can order more effectively.
● No activity report: 120 days
● Cycle counts
● Expensive uncommon products: ○ Label at pick-up
● Return to stock: ○ Will-call bin prescriptions within 14 days Effective Inventory management
Best Practices
Implement medication synchronization programs for appropriate patients as:
● It helps spot trends and engage patients
● Demand becomes more predictable What happens if a patient has a steep co-pay and refuses to pick up the prescription? What if that prescription was for an expensive, special order therapy?
● If you have patients who need rarely-used or expensive drugs: order exactly what you need.
● Avoid keeping unnecessary expensive drugs on the shelves Effective Inventory management : Conclusion
• The world of pharmacy is unpredictable but inventory management can be.
• Making major improvements to inventory management can seem a little overwhelming, incremental steps involving all team members.
• Successful independent pharmacies should create a good inventory management system. Assessment Question #1
The amount of stock carried to account for fluctuations in demand or order cycles is known as:
A. Safety stock B. Extra Supply C. Just-in-Case stock D. None of the above
Answer: A Assessment Question #2
Methods to manage your inventory include:
A. Visual Method B. Perpetual Method C. Guess-and-Go Method D. Automatic Method E. A&B F. All of the Above
Answer. E Assessment Question #3
An important best practice tip to remember the Open-to-Buy (budget) Method for management inventory is…
A. It should be combined with other methods. B. It should only be used as a last resort. C. It includes limiting purchases on weekdays. D. All of the Above.
Answer: A Assessment Question #4
True or False:
Inventory should be managed solely by the pharmacist.
FALSE Assessment Question #5
True or False:
Effective inventory management can improve cash flow.
TRUE Resources “Inventory Management: How to Improve Your Pharmacy's Bottom Line.” Elements, PBA Health, 14 May 2013, https://www.pbahealth.com/inventory-management-how-to-improve- your-pharmacys-bottom-line/. Accessed 26 August 2019.
“Inventory Control in Pharmaceutical Supply Chain.” LinkedIn, 22 April 2016. https://www.linkedin.com/pulse/inventory-control- pharmaceutical-supply-chain-pinto. Accessed 26 August 2019. Speaker Contact Information
Sara K Clinton, CPhT Lead Pharmacy Technician/Operations Manager Hayat Pharmacy #4 Work: 414-817-1111 | Fax: 414-817-1110 Mobile: 414-242-1996 [email protected] http://www.hayatrx.com CE Evaluation Code: 19023