PART V: FINANCIAL MANAGEMENT CHAPTER 12 Purchasing and Inventory Control Jerrod Milton

n n n inventory. High inventory turnover is a sign of efficiency because inventory LEARNING OBJECTIVES is constantly at work and generating revenue. Low turnover is a sign of inef- After completing this chapter, readers ficiency. should be able to: ■■ Just-in-time inventory management: A 1. Describe the steps in purchasing medi- philosophy of inventory management cations and inventory control. where products are ordered and deliv- 2. Define key terminology in purchasing ered at just the right time—when they and inventory control. are needed for patient care—with a goal of minimizing wasted steps, labor, 3. Discuss the processes for managing and cost. The goal is to neither over- medication inventory. stock nor understock products. 4. Identify products that require special ■■ Order book: A list of products that handling. need to be ordered from a supplier. n n n ■■ Pareto/ABC analysis: Based on the principle stating that a relatively small number of drugs account for a dispro- KEY TERMS AND DEFINITIONS portionate amount of drug usage in ■■ Economic order quantity (EOQ): A a health system. Thus, a Pareto ABC model of inventory control (also analysis groups inventory products by known as the minimum cost quantity aggregate value and volume of use into approach) that uses past history of three groupings (A, B, and C). Products inventory use, costs, and demand to in group A are the small percentage develop an accounting model that of items that make up the greatest predicts optimal inventory order amount of inventory cost. Groups B quantities to minimize order costs and and C make up decreasingly less cost. inventory holding costs. ■■ Par-level systems: Based on the prin- ■■ Group purchasing organizations ciple that individual inventory drug (GPOs): Purchasing groups consisting use falls within a predictable range of health systems and hospitals that or “par-level.” In these systems, a join together to obtain greater collec- range is identified and minimum and tive buying power. maximum order quantities are set. ■■ Inventory carrying costs: All costs Inventory is ordered in a way that associated with inventory investment maintains amounts within the par- and storage; sometimes called holding level. costs. It might include interest, insur- ■■ Perpetual inventory: A record of inven- ance, taxes, and storage expenses. tory that is constantly updated when ■■ Inventory turns: The fraction of a items are added or subtracted from year that an average item remains in inventory.

239 240 INTRODUCTION TO ACUTE AND AMBULATORY CARE PHARMACY PRACTICE

■■ Pharmacist in charge: Typically an individual who has accepted the responsibility for the complete supervision, management, and compliance with all federal and state pharmacy laws, rules, and regulations governing the practice of pharmacy within the prescription department.1 ■■ Prime vendor agreement (PVA): A contract between a health-system pharmacy and a licensed wholesale distributor wherein the pharmacy agrees to purchase most of its pharmaceuticals from a single distributor in return for advantageous pricing, terms of drug delivery, and support services (e.g., providing the pharmacy with electronic order entry/receiving devices and bar-coded shelf stickers). ■■ Resource Conservation & Recovery Act (RCRA): The public law enforced by the EPA that creates the framework for the proper management of hazardous and non- hazardous solid waste.2,3 ■■ Stock rotation: The process of placing products nearest to the time of expiration at the front of the shelf or storage unit so that they will be used first.

n n n INTRODUCTION In 2001, the Institute of Medicine (IOM) in Washington, DC, released Crossing the Quality Chasm: A New Health System for the 21st Century, which provides a detailed examination of the tremendous divide between what we know to be good healthcare and the care that Americans actually receive. Although a systematic transformation has begun, the chal- lenge to close the chasm remains largely on healthcare leaders and clinicians. The quality of healthcare must be improved, and the profession of pharmacy is not exempt from this ideal. The IOM defines quality across six important dimensions that include safety, effec- tiveness, patient-centeredness, timeliness, efficiency, and equity.4 Effective pharmacy purchasing and inventory control measures are essential to fulfilling this ideal. As fundamental elements of the medication-use system, they support these aims of quality in healthcare. The dimensions of quality included in this context are the following: ■■ Safety (to cause no harm) ■■ Efficiency (reduce waste/excessive cost) ■■ Effectiveness (every patient who would benefit from a particular drug should receive it) ■■ Timeliness (appropriate time to heal) Purchasing and inventory control processes impact the ability of the system to provide the right drug, to the right patient, in the right amount, in the right dosage form, by the right route of administration, and at the right time and frequency. Therefore, an effective purchasing and inventory control system requires the understanding and active participa- tion of all pharmacy staff. This chapter describes the basic principles of pharmaceutical purchasing and inventory control. It applies to all types of pharmacy settings including decentralized, centralized, home infusion, and ambulatory care pharmacy operations.

FORMULARY SYSTEM The formulary is the cornerstone of the purchasing and inventory control system.5-7 The phar- macy and therapeutics (P&T) committee develops and maintains the formulary. This group generally comprises medical and allied health staff such as physicians, pharmacists, nurses,