This chapter discusses inventory management - the management of the routine ordering process. Seven basic issues must be considered for effective, efficient inventory management -
- The supply system’s purpose and the type of distribution system
- The records and reports that will provide the foundation for inventory management
- The selection of items to be stocked
- The balance between service levels, including stockout costs, ordering costs, and stock-holding costs
- The policy on when to order
- The policy on how much to order and methods for determining reorder quantities or reorder intervals
- The control of costs associated with inventory management (ordering, stockout, and stock holding)
The type of inventory management system needed depends first on the context - different systems are used for dependent demand systems (manufacturing) and independent demand systems (distribution of finished goods). Similarly, a different system may be needed in a push system as opposed to a pull system (see Chapter 22), although ordering has to be done in both push and pull systems. Clearly, most inventory management for pharmaceutical supply concerns the distribution of finished goods.
Accurate and current stock records are essential to good inventory management. They are the source of information used to calculate needs, and inaccurate records produce inaccurate needs estimations (and problems with stockouts and expiry). Each inventory system should monitor performance with indicators and produce regular reports on inventory and order status, operating costs, and consumption patterns.
The primary reason for holding stock in a pharmaceutical supply system is to ensure availability of essential items almost all the time. The selection of items to stock should be based on their value to public health and on the regularity and volume of consumption. VEN (vital, essential, nonessential) and ABC analyses are useful tools for defining which items on the formulary list must be held in stock (see Chapter 40). Although ABC analyses are often based on the value of the medicines, for inventory management, ABC analyses based on order frequency and volume are also important.
Key issues in inventory management are service level and safety stocks. The service level is the measurement of service from a supplier or from a warehouse, with the goal of never having stockouts. The principal determinant of service level is safety stock - the higher the level of safety stock in the warehouse, the higher the service level. However, excessive safety stocks cause excessive inventory-holding costs. The basic method for setting safety stock is multiplying the lead time by the average monthly consumption, but adjustments may be needed to cope with variations in consumption and lead-time patterns. The other key determinant is the turnaround time with the supplier or the warehouse, that is, the time taken to fill and deliver an order once it is received by the supplier or the warehouse. This turnaround time is a component of the overall lead time that is used by the user-level stockholder to determine inventory levels.
The ideal inventory model is the optimal stock movement pattern, in which inventory levels are as low as possible (without risking stockouts) and optimized, consumption patterns are consistent, and suppliers always deliver on time - but this model is rarely achieved in practice. As described in Section 23.6, the three common inventory models used in pharmaceutical supply systems are defined by how often regular orders are placed with suppliers -
- Annual purchasing (one regular order per year)
- Scheduled purchasing (periodic orders at set times during the year)
- Perpetual purchasing (orders are placed whenever stock becomes low, or when stock levels reach predetermined reorder levels)
Average inventory levels (and holding costs) are expected to decrease with more frequent orders.
The basic formulas for calculating order quantity are relatively simple; two useful formulas are minimum, maximum and consumption based. Both incorporate several essential factors -
- Average monthly consumption
- Supplier/warehouse lead time
- Safety stock
- Stock on order
- Stock in inventory
- Stock back-ordered to lower levels
The more complicated mathematical formulas, such as economic order quantity and exponential smoothing of demand, do not necessarily lead to better services than the simpler approaches and are not recommended for most pharmaceutical supply systems.