Inventory Tips

Sara K Clinton, CPhtLead 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

InventoryStock of pharmaceutical products on hand retained to meet future demand

Net Inventory Total merchandise inventory less accounts payable

Basic StockAmount of stock that is carried to meet average demand levels

Order Cycle/ Lead Timethe amount of time that elapses between the placement and receipt of an order

Safety StockThe amount of stock carried to account for fluctuations in demand or order cycles

Common Inventory terms

Order PointLevel of product (in units) on which buyers base purchasing decisions

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

Economic Order Quantity (EOQ)The specific amount of a product needed to cover demand without tying up cash in unnecessary inventory

Just-in-Time Method A method of inventory management where orders are placed just 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

Belinski, D. J. (n.d.). Intelligent Inventory Optimization. Speech presented at Computer RX Idea Exchange 2018.

● Reduce costs

● Maintain effective inventory to satisfy demands

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 CostsShortage costs—also known as stock-out costs are the costs of not having the product on the shelves when needed.

This is a pharmacy… How do you not

have it in stock??!!!

I’m sorry but we do not have your medication in

stock…

To Stock or Not to Stock?

The cost of one bad decision can wipe out theprofit of multiple scripts, reduce your cash flow &liquidity

Methods to manage inventory

Visual, Periodic & Perpetual Method

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

Methods to manage inventory

Perpetual Method

The most elaborate and accurate basic inventory control system is theperpetual system. With this system, inventory is monitored at all times. In thisway, it is possible to determine at a moment’s notice how many units of eachitem 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) MethodA 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

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

Short-List Method

Methods to manage inventory

Methods to manage inventory

Various methods exist to manage inventory, each with advantages and disadvantages:

Minimum and Maximum Method

Short- List MethodOpen-to-Buy Budget Method

Stock Record Method

Open-to-Buy (Budget) MethodA 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

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

Short-List Method

Methods to manage inventory

Methods to manage inventory

Minimum and Maximum MethodA 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

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.

Stock Record Method

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

➔Days Inventory on Hand / Days to sell

The number of selling days covered by inventory before an out-of-stock occurs.

Days Inventory Turnover (Period in Days)

=Number of days in the Period

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

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 systemHow Much to order ?

Effectiveness of an inventory control system

https://retailowner.com/Benchmarks/Health-and-Personal-Care-Stores/Pharmacies-Drug-Stores#2908117-turnover

Inventory management is based on a four-part equation:

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.

Sales + Ending Inventory – Beginning Inventory = Purchases

Effective Inventory management How Much to order ?

An efficient inventory control system has to resolve contradictory demands

• Maintain a wide variety of stock

VS.

• Obsolete items

• Keeping stock low • 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

● 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 Relationship with Wholesalers

Effective Inventory management

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

Best Practices

The purchasing and inventory control system includes a daily routine of tasksin 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

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.

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 predictableWhat 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 Best Practices

• The world of pharmacy is unpredictable but inventory management can be.

• Making major improvements to inventory management can seem a littleoverwhelming, incremental steps involving all team members.

• Successful independent pharmacies should create a good inventorymanagement system.

Effective Inventory management : Conclusion

Assessment Question #1

The amount of stock carried to account for fluctuations in demand or order cycles is known as:

A. Safety stockB. Extra SupplyC. Just-in-Case stockD. None of the above

Answer: A

Assessment Question #2

Methods to manage your inventory include:

A. Visual MethodB. Perpetual MethodC. Guess-and-Go MethodD. Automatic MethodE. A&BF. 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, CPhTLead Pharmacy Technician/Operations Manager

Hayat Pharmacy #4Work: 414-817-1111 | Fax: 414-817-1110

Mobile: 414-242-1996 Cleoandsara@gmail.comhttp://www.hayatrx.com

CE Evaluation Code: 19023