INVENTORY MANAGEMENT AND

METHODS OF INVENTORY IN
PHARMA INDUSTRY

Presented By
M.Panditaradhya Swamy
1st Year M.Pharm
Dept. Of Pharmaceutics
 INVENTORY MANAGEMENT
• It is a scientific method of finding out how much
stock should be maintained in order to meet the
production demands and be able to provide right
type of material at right time, in right quantities
and at competitive prices.
 INVENTORY
• It is actually money, which is available in the
shape of materials, equipment, storage space,
work time etc.

INPUT INVENTORY
Goods in store OUTPUT
Material
work in process Production
management
Finished product department
department
• The words “Inventory Management” and
“Inventory Control” are interchangeable.
• Inventory control is concerned with
achieving an optimum balance between
the two competing objectives
1. Minimizing the investment in inventory.
2. Maximizing the service levels to customers
and its operating departments.
 Objectives of inventory control
• Utilizing scare resources and investment judiciously.

• Avoiding the break in production.

• Need to meet fluctuations in demand & production rates.

• Reducing administrative workload.

• To create trust and faith in customers.

• Avoiding risk of loss of life.

 INVENTORY

Production M.R.O Finished goods Work In Process

inventory inventory inventory inventory
• Production Inventories:- Active
ingredients, excipients that are needed to
manufacture the finished products.

• MRO Inventories:- Parts or subassemblies

needed for final assembly of end product.
Eg:- Assembling arrangements made for
packing bulk tablets.
• Work- in- process Inventories:- Semi
finished goods on which work has to be
done further
Eg:- Granules waiting for compression

• Finished goods Inventories:- Finished

goods present in stock room waiting for
dispatch and sale.
 Factors influencing Inventory
• Manufacture

• Procurement

• Demand

• Material costs
PARETO LAW:- vital few and trivial many
CLASSIFICATION CRITERIA
A-B-C Annual values of items
V-E-D Critical nature of components
H-M-L Unit price of material
F-S-N Issue from store
S-D-E Availability
S-O-S Seasonality
G-O-L-F Procuring material
X-Y-Z Inventory values stored
A-B-C ANALYSIS
 A- items
• Constitutes 70% of total inventory cost.

• Constitutes 15% of total items.

• Need careful control.

• Maximum limits, minimum limits, reorder

points should set.
• Purchased in small quantities.

• Detailed record of their receipts and issue

should be maintained

• Safety stock 15 days

 B-Items
• Constitutes 20% of total inventory cost.
• Constitutes 20% of total inventory items.
• Need moderate control.
• Purchased on the basis of past
experience.
• Record of receipts and issues are
maintained.
• Safety stock 30 days
 C-items
• Constitutes 10%of total inventory cost.
• Constitutes 65%of total inventory items.
• Low valued, maximum in number.
• Do not need any control.
• Procured just before finishing.
• Safety stock 60 days
 V-E-D
• Very important in Hospital pharmacy
VITAL- without these items activities will
come to halt
Eg:- Adrenaline inj. ,
Steroid preparations
ESSENTIAL– Non availability of these items
lead to disruption of normal
activity
Eg:- Transfusion fluids
• DESIRABLE:- With the absence of these
items, work will not stop
Eg:- Vitamins, Enzymes, Aspirin etc.
 H-M-L
• HIGH
• MEDIUM
• LOW
– Based on unit value of items.
– Similar to A-B-C analysis.
– But does not consider annual consumption.
– Items should list in decreasing order of their
unit value.
– Management fix limits.
 F-S-N
• Based on distribution and handling
patterns of items from stores.
• F - Fast moving
• S - Slow moving
• N - Non moving
 S -D -E
• Based on lead-time analysis and
availability.
• S - Scarce - longer lead time
• D - Difficult - long lead time
• E - Easy - reasonable lead time
 S -O -S
• Some items are seasonal in nature.
• Hence require special purchasing and
stocking strategies.
• EOQ Formula cannot be applied.
• At the time of procurement of these items
inventories will be extremely high.
 G-O-L-F
• Government
• Ordinary
• Local
• Foreign
• Imported items are procured through govt.
organizations like IDPL &MMTC.
• Items available within the country are
treated as local and ordinary procedures
are enough for procurement.
 X -Y - Z
• Based on value of inventory stored.
• If values are high, efforts should be made
to reduce these.
• Done once in a year.
 QUANTITY STANDARDS
• Max. quantity: upper limit of inventory in
stores.
• Min. quantity: lower limit of inventory in
stores.
• Standard order: difference between
maximum & minimum quantities.
• .
• Stock holding: buffer stock that should be
available to avoid breakdown
of production schedule.
• Reorder point: time to initiate purchase
order
 LEAD-TIME
• Time lapse between placement of an order
and receipt of items including their
approval by quality control department.
• Calculated on basis of past experience.
•
 REASONS FOR LEAD-TIME
• Raising of purchase requisition Inquiries, tenders,
quotations, tenders receipt, scrutiny and approval
placement of orders to suppliers.
 STOCKOUTS
• Means running out of stock.
• Lead to back orders.

• Causes of stock outs:

INTERNAL: faculty planning, poor control,
improper records,
shortage of funds, strikes
etc.
• EXTERNAL: Labour problems at vendor’s
factory
• Faulty selection of transportation
• Demand
• Change in market rates
• Floods etc.
 SAFETY STOCKS
• Ideal quantity of materials that has to be
always maintained.
• It is defined as difference between the
reorder level quantity and average lead-
time demand.
• Mathematically expressed as
safety stock=(current leadtime-normal
leadtime) x avg. consumption rate
REORDER QUANTITY METHODS
• It is the quantity of items to be ordered so
as to continue production without any
interruptions in future
• 1.Fixed quantity system
• 2.Open axis bin system
• 3.Two bin system
• FIXED QUANTITY SYSTEM:
mathematical way
• Reorder quantity is a fixed one, only time
for ordering varies.
• Calculated using EOQ.
• Reorder level quantity=safety stock+
(usage rate x lead-time)
 OPEN ACCESS BIN SYSTEM

• System restricted to c-items only.

• Bins are filled and placed nearer to
production lines.
• No record is maintained.
• Eliminates the unnecessary paper work.
• Saves time.
• Replenish the items in fixed timings.
 TWO BIN SYSTEM
• Two bins are kept having items at different
levels.
• When first bin is exhausted,it indicates the
time for reorder.
• Second bin is reserve stock and used
during lead-time period.
• Applicable to hospital and community
pharmacies.
ECONOMIC ORDER QUANTITY
(EOQ)
How much of inventory is ordered at a time.

• METHODS OF DETERMINATION OF
EOQ
1)Tabular determination of EOQ
2)Graphical presentation of EOQ
3) Algebraic formula for determination of
EOQ
Tabular determination of EOQ

Number of orders need to be placed

S.No No. of orders Annual Annual Total

per year ordering inventory annual
cost carrying cost
cost

Total annual cost=ordering cost+ carrying cost

Algebraic formula for determination of
EOQ

2AS
Q
IU

Q = economic lot size

S = Ordering cost
A = Annual inventory carrying cost
U = cost of one unit.
APPLICATIONS:
Calculating economic lot size.

Increase inventory---If sales increase up to 20%.

LIMITATIONS:
Not suitable for large lot size.

Not suitable when demand is irregular.

Step up cost (LIMIT)

 Modern Inventory Management
Systems
• Materials Requirement Planning (MRP)

• Manufacturing Resource Planning (MRPII)

• Just-In-Time (JIT)
 Material Requirement Planning
• It is a computational technique that
converts master schedule of production
into detailed schedule for materials and
components used in production.

• It determines the quantity of materials and

date on which these are needed for each
phase of production.
Advantages:-
• Effective tool for minimizing unnecessary
inventory investment.
• Useful when there is sudden change in
demand in market.
• Machine and material utilization can be
planned in a better manner.
Disadvantages:-
• Procurement costs are high, because
each item is processed separately
Method:-
Three sources are required as an input data
1. Master production schedule
2. Bill of material file
3. Inventory record file
 Manufacturing Resource
Planning (MRP-II)

• Refers to strategic financial planning as

well as production planning and schedule.
• Sophisticated software package.
• Developed by CINCOM systems.
• Includes monitoring inventory levels, work
face levels, orders and jobs based upon
agreed priority system.
 Just – In – Time (JIT)
• Method of response to demand without
need for any overstocking.
• It is an approach of receiving materials,
transforming them into parts, converting
into subassemblies, assemblies and finally
finished products for sale.
• Also known as Zero Inventory method.
Advantages:-

• Inventory levels are reduced.

• Buying additional stock is not required.

• Fewer stock rooms are sufficient.

• Better service can be provided to

customers.
Costs In Inventory
– Ordering costs
– Holding or carrying costs
– Stock out costs
Savings In Inventory
– Material substitution
– Reduction in Inventory levels
– Standardization
– Variety reduction
 Inventory Turnover Ratio
• Used to show the relationship of
inventories reported in rupees to the
amount of goods that are produced.

Inventory Sales at sales value

• TO or
Cost of goods Total average
inventory
Various other turnover ratios are:-
• Manufacturing materials
Actual inventory of manufacturing materials

Total consumption for year

• Work-in-process
Actual work-in-progress inventory

Production at product cost for year
• Finished goods
Actual finished goods inventory

Total yearly sales at cost for the year
Operating Cycle:-
• Refers to the length of time necessary to
complete the following cycle of events
1. Converting cash into inventory
2. Converting inventory into receivables
3. Converting receivables into cash

Phase I:-
• cash is used to produce inventory
• This phase would start with purchase of raw
materials and conclude with manufacturing
process delivering goods to inventory
Phase II:-
• in this phase the inventory is converted to
receivables as sales are made to
customers

Phase III:-
• This is the last phase in which receivables
are being collected and operating cycle is
complete.
 References
1. C.V.S Subrahmanyam Pharmaceutical
Production and Management First edition
2005 P.292-318
2. O.P Khanna Industrial Engineering And
Management 1992 edition P.24-1 to 24-16
3. Max Muller Essentials Of Inventory
Management P.86-102
4. www.wikipedia.com