Chapter 1

THE PROBLEM AND ITS BACKGROUND

Introduction

The small scale business grows fast and their impacts on the economy are

becoming bigger. How to manage the inventory effectively and efficiently often is a

challenge for these small businesses. Planning and controlling as well as

replenishments of inventories are crucial decisions. There are unpredicted situations

which lead firms to make decisions so that overstock or stock-outs could not occur.

Keeping inventories will cost the firm’s money.

Inventory management focuses on getting inventory to the right places while

inventory control focuses on using the inventory most effectively to keep costs down.

According to the article “Inventory Management Techniques”’ inventory management

focuses on three of things: correct placement of resources, quick, inexpensive product

reordering and efficient product receiving and storage. Inventory control focuses on

these three things: cutting purchases of slow-moving products, keeping up with changes

in demand to avoid overstock and avoiding product spoilage by efficiently using

inventory.

Both inventory management and inventory control are important parts of a

business’ sucess. They feed off each other and help each other succeed. If a company

has a set of strong inventory management and inventory control, it can quickly get the

products they need to the locations they need them at and then sell them in a timely

manner.
 An effective planning and control of inventories is fundamental if distributors are

to achieve their goals simultaneously. Selecting of inventory ordering policy is crucial to

guide planners and purchasers in determining what items to be ordered, when orders

should be released and the order quantity. An inventory created out of economical

reason could act as a buffer and gives company time to replenish. Inventories which are

stocked too long could age and this will cost the company financially and operationally

because it is very difficult to sell old stocks.

Inventory Control is designed to support the requisition processing, inventory

management, purchasing and physical inventory reconciliation functions of inventory

management through a set of highly interactive capabilities. Inventory control is often

seen as the practical side of inventory management because it focuses on the time

element.

Inventory Control is important in any commercial environment, but even more so

when it comes to maintaining inventory in a pharmaceutical setting because public

health is involved. Anyone with pharmacy technician training can appreciate the

importance of having enough medical stock in both retail and hospital pharmacies at all

times in order to be able to successfully fill the prescriptions that customers may need

immediately. Successfully dispensing prescriptions may seem like a simple task, but if

you’ve ever observed the operation of a hospital or community pharmacy, you’ll

understand the need for an efficient inventory control structure.

The main goal of an effective inventory control system is to successfully fulfill

customer demand at the lowest cost, while keeping a lot of factors in mind, including

seasonal variation, changing patterns in usage as well as theft prevention. There are
some goals to keep in mind in controlling inventory; minimize inventory investment,

maintain an optimal level of customer service, maintain a balance of supply and

demand, minimize costs and lastly manage and maintain a current inventory control

system. Because traffic in a pharmacy is never easy to predict or control, these

objectives may sometimes be challenging to accomplish.

Forecasting is usually made in order to replenish inventories while some can be

derived from a product replenishment schedule. Controlling of inventories could be done

in various methods; one of it is through Material Requirement Planning (MRP) used to

schedule production and controlling inventories.

Pharmaceutical procurement occurs in many contexts. Although the operational

principles presented here are in many respects applicable to all procurement settings

and for most types of procurement situations, their primary target is pharmaceutical

procurement for public sector health systems. It is recognized that public sector

procurement may be managed in a variety of ways, ranging from total in-house

systems, through various autonomous or semi-autonomous procurement agencies, to

total privatization. These principles are applicable to each of those variations.

Inventory control demands in a pharmacy can sometimes be a little tricky

because of conflicting priorities. Keeping a wide variety of stock while also maintaining a

large supply that moves quickly, increasing inventory turnover without affecting service,

maintaining minimal stock without affecting service, making larger purchases to get

lower prices without overstocking on inventory that doesn’t sell and lastly maintain a

large inventory without getting stuck with expired or dated products. While controlling

inventory may appear to be somewhat straightforward, pharmaceutical inventory

management requires many considerations to be met, demanding consistency and

dedication.

The inventory control practices aims to describe and evaluate the nature of

inventory control as it exists at the study and to compare their method to the standard

inventory control system. It will analyze and interpret the data gathered also identify

some factors that may affect the inventory control practices of a Selected Pharmacies

performance.

Background of the Study

The term inventory refers to the goods or materials used by a firm for the purpose

of the production and sale. The focus of the study is the inventory control practices of

small business pharmacies in the First District of Rizal.

All essential drugs needed for health care should be available at all times, at all

the health facilities, so that the Pharmacies should be aware of what type of Inventory

Control that they will need to be used to provide and maintain a quality product for their

customer.

Inventory costs generally fall into ordering costs and holding costs. Ordering, or

acquisition, costs come about regardless of the actual value of the goods. These costs

include the salaries of those purchasing the product, costs of expediting the inventory,

and so on. This study was conducted to seek information about the most common

methods of inventory control techniques being used by the pharmacies in first district of

Rizal and to evaluate the effectiveness of it in their operation.

 The inventory management approach of accurate response is an excellent

mechanism that helps business manages their inventory, which may get overloaded

due to improper forecasts. Businesses greatly manage their inventory on the basis of

future demand predictions.

Drugs & Medicines, that are being expensive and resource limited, it becomes

very important to improve their supply, increase the use, and minimize the cost through

a pharmaceutical management system to be effectively put in place.

Based on the reading material prepared by the State Institute of Health & Family

Welfare, (Rajasthan, 2010), there are four areas related to drug management: Rational

use; Affordable price; Sustainable financing and Reliable health and supply systems.

Also it includes the Delhi Model, Drug Procurement System in Tamil Nadu, Andhra

Pradesh, and Orissa, India.

"Delhi Model: The Delhi Society for Promotion of Rational Use of Drugs

(DSPRUD) introduced the centralized drug procurement system with the government

hospitals of Delhi in 1996 with the technical support of the WHO. The objective was to

ensure availability of good quality medicines with these hospitals and to promote

rational drug use. Despite 30-35% of the health budget of the government was spent on

medicines, each hospital in Delhi used to procure the drugs independently.

The system was ruined by mismanagement and corruption. Many of the drugs

procured by the hospitals were rarely needed while the required medicines were almost

perennially in short supply. The new system procures drugs centrally for half a dozen

main and many smaller hospitals run by the Delhi government. Under the initiative, it

was found that only a limited number of basic drugs were actually needed for treatment
in almost 90% of the hospital cases. These were identified and procured centrally for

supply to the hospitals."

This study is related because some of the main problems encountered by other

pharmacies are not recording the medical transaction by their employee to make a fraud

by doing mismanagement of assets (inventories), corruption/theft and other illegal

similar activities.

Some other aspects of inventory loss aside from theft and mismanagement of

assets are product obsolescence and natural disaster. Thus, these events can affect the

performance of the operation of the business that would result business’ loss or

business’ bankruptcy. Some of the risk is inherent and cannot be eliminated from the

factors affecting firms productivity such as natural disaster like earthquake, flooding and

other water damage such as from a broken pipe or water heater used improperly or

accidently. It can also create inventory loss; however it can be reduced through effective

control and management techniques.

Losses can also be occurring as a result of poor inventory management system,

lack of monitoring, and inaccurate estimation, and inappropriate strategies, method and

techniques poor inventory storage such as when inventory is improperly stored. This

risk is not inherent so that they need to change the poor inventory system to a good

inventory management system including the strategies; method and techniques to

reduce such risk and the business will operate efficient and effective to raise their

performance in terms of profitability.

According to the study entitled Analysis of Inventory Control Techniques; A

comparative Study (2013), safety stocks are the minimum additional inventories which
serves as a safety margin to meet a unanticipated increase in usage resulting from an

unusually high demand and an uncontrollable late receipt of incoming inventory.

This comparative study is relevant to this research because it indicates the

importance of safety stock level of inventory in which is included in the study of

inventory control practices.

The Assessment Paper Issue by the Academy for Excellence in Health Care,

Pharmacy Inventory Project: Improving Inventory Management at Genesis Health Care

System Pharmacies 2014, the focus are on the hospitals and pharmacies which is

related to the researchers study that the pharmacy has a big contribution to the

hospitals, patients, and other health facilities even if it is operate by a different person.

Also, Chuck Adams, a Director of Lean Six Sigma for Genesis, said "When we

started looking at inventories associated with both [hospital] pharmacies as well as

some other satellite pharmacy operations we have, it became pretty apparent that we

were carrying too much inventory and we needed a good methodology to reduce it". It is

important to the business whether big or small to have an appropriate inventory

management system to control and balance the inventories needed between excess

and out of stock inventory.

To determine the service to be provided is to prioritize the service that will have

tangible positive impact and to identify the area where to implement clinical pharmacy

(Dacuyanan June 26, 2015)

It is related because it promote a high quality service in pharmaceutical industry

such as right strategies to be implemented and even small business pharmacies can

adopt some strategies but not all because it is applicable only to the big companies.
 According to the study entitled Analysis of Inventory of Drug and Pharmacy

Department of a Tertiary Care Hospital 2012, the increase in costs of hospital care,

modern technology, inflation, increasing demands and expectations of public are

necessitating the development of financial policies and mechanism. The main health

care concern nowadays is development of resources on rationale basis.

This study is relative because it endures the right business policy and strategy

and methods of inventory costing to reflect the right net profit of the business in the

financial statement concerning the factors affecting the operations of the business.

According to Rachmania, (Basri, 2013), replenishment process is also one of

common practices in inventory control. Replenishment is divided two types, which are

continuous review and periodic review. Continuous review means placing the order

when the inventory declines to the reorder point (ROP). While periodic review means

placing the order to regular intervals. ROP also used n inventory control to seek suitable

level for replenishment.

This study is connected because it discussed the replenishment method that

must be used to monitor the level of inventory. It is important to the management when

to order to maintain an average stock level.

Based on the presentation prepared by Leonila M. Ocampo, RPh, MS, President,

The Philippine Pharmacists Association 2012, there is a big difference in actual an

expected practices in Pharmacy.

"Actual; poor implementation of 'no prescription, no dispensing policy', poor

storage practices, medication counseling not practiced in most dispensing sites, sales of

medicines unsupervised by pharmacists in non-traditional medicine outlets. Expected;

strict implementation of Pharmacy Law and related regulations, adoption of Good

Pharmacy Practice Standards, medication counselling as part of dispensing, inclusion of

the Pharmacists in all level of health. If the current situation continues, pharmacists

appear over-educated and underutilized".

The study is very important and is also related because it indicated the

importance every business organization that must comply with the standards, rules,

regulations and laws such as Pharmacy Law in Business Pharmacy in the Philippines.

Theoretical Framework

Inventory control contains all activities that consider all consequences, which are

connected with the storage of items. On the first hand, there is the mere technical and

logistical aspect of inventory control, for example the storage layout. On the other hand,

there are general questions, which are related to the total stock of a company. One of

the most important decisions is about the quantity of inventories. Therefore a lot of

mathematical models have been developed, which are summarized under the concept

of Inventory Control.

Figure 1

The Elementary Storage Transaction

 The Elementary Storage Transaction Model of Markus Zisler represents the

basic flow and culture of inventories in inventory control that the business organization

should need to create effective techniques especially in practice.

The areas of application are all inventories of the retail market. But also the

inventories of industrial purchasing and selling are pliable to the models of inventory

control. Subsequent to the inventory of finished items from industrial selling there is a

system of distribution. The disposal of such hierarchical systems is in the domain of

multi-echelon inventory control; that is an extension of real inventory control theory. The

problems of inventory control are characterized through the following:

1. Several items are managed in one stock; this means that order handling and

storage occur collaborative. Every item is singular disposed.

2. Demand and delivery time (of the order to the stock) are often stochastic or not

known.

3. Not only the disposal of costs has to be considered, but also non-monetary and
non-quantitative aspects.
 Input Process Output

I. Profile of the respondents in

terms of:
 Age
 Sex Assessing
 Civil Status Inventory Control
 Educational Attainment Practices
 Length of Service
Assessed
 Assessing
II. Profile of the business in Inventory
 Evaluating
terms of:  Analyzing Control
 Years of existence  Interpreting Practices of
 Initial Capital Selected
 Present Capital Data will be Pharmacies
 Number of Employees gathered through: in First
 Operating Hours
District of
 Questionnaire Rizal
III. Respondent’s Perception  Interview
on Inventory Control Practices
of Pharmacies in terms of
Inventory Control Techniques

Feedback

Figure 2

A Conceptual Framework of Assessment of Inventory Control Practices by Pharmacies

in the First District of Rizal
Conceptual Framework

This framework shows the flow of activities in conducting the study.

The first frame represents the input. It includes the primary data about the profile

of the respondents in terms of age, sex, civil status, educational attainment, and status

of employment and length of service and profile of the business in terms of years of

existence, initial capital, present capital, number of employees and operating hours.

Also included in the framework are perceptions of the respondents on inventory control

practices in pharmacies in terms of inventory control techniques.

The second frame is the process. It includes the assessing, evaluation, analysis

and interpretation of data on the questionnaire, interview and other research materials

through statistical treatment.

The third frame is the output. It includes the information about inventory control

practices of pharmacies in the First District of Rizal.

The feedback shows the direct flow of the diagram in which input, process and

output are related to each other.

Statement of the Problem

Generally, the purpose of the study is to analyze and interpret the data that will be

gathered from the pharmacies about their practices in inventory control. The following

are the questions needed to answer.

1. What is the profile of the respondents in terms of

1.1 Age;

1.2 Sex;
 1.3 Civil status;

1.4 Educational Attainment and

1.5 Length of service?

2. What is the profile of the business in terms of

2.1 Years of existence;

2.2 Initial capital;

2.3 Present capital;

2.4 Number of employees and

2.5 Operating hours?

3. How do the respondents perceive the inventory control practices of Pharmacies

in the First District of Rizal?

4. Is there a significant difference on the respondent’s perception on inventory

control practices of Pharmacies when grouped according to personal profile?

5. Is there a significant difference on the respondent’s perception on inventory

control practices of Pharmacies when grouped according to business profile?

Hypothesis

The researchers tested the hypothesis that there was no significant relationship

between the respondent’s perception on Assessment of Inventory Control Practices of

Pharmacies in the First District of Rizal when grouped according to personal profile and

business profile.
Significance of the Study

The findings of the study will be beneficial to the following individuals or

intuitions:

Business Owner (Sole Proprietorship). With this study, the owners will be guided

to manage their inventory properly and it will give them some information to become

updated in handling inventory base on the problems encountered.

Customer. The customer will be benefited from the information in this study about

the status of Pharmacies nearby in their location in which they know about the proper

inventory management system that lead to quality product and services and gain

satisfaction to that business.

Future Researchers. With this study, the future researcher can use this as a

basis if they can do same studies about pharmaceutical inventory control and other

similar industry such as drugstore, health facilities, etc., and that it may will serve as a

guide or reference on that future research.

Students. They will be able to use the information presented for their future

career in terms of proper handling of inventory.

School. This will serve as a reference for Inventory Management System study,

topic for class discussion.

Scope and Limitation

This study was focused on Inventory Control Practices of Pharmacies in the First

District of Rizal. The variables included were the respondents’ profile in terms of age,

sex, civil status, educational attainment, length of service and the business profile of the

respondents in terms of years of existence, initial capital, present capital, number of

employees, operating hours and respondents’ perceptiveness in inventory control

practices of pharmacy in terms of inventory control techniques.

The research study aimed to describe and evaluate the nature of inventory

control as it exists at the study and to compare their method to the standard inventory

control system. It analyzed and interpreted the data gathered also identify some factors

that may affect the inventory control practices of a pharmacies. The researchers

decided to conduct this study in selected small scale pharmacies that have similarities

in profile and also find their differences. We decided to choose selected pharmacies

because only those pharmacies approved us, and others found it confidential to be part

of it. Those pharmacies were Farmacia Olga and General Merchandise in 157 Nat’l

Road Bilibiran, Ely Pharmacy in Bilibiran and etc. The respondents of the study were

the owners of Pharmacies in the First District of Rizal.

The coverage of the data is from gathering through analysis, interview,

questionnaire, and other research materials. The research method used by the

researchers was descriptive method.

Definition of Terms

The researchers defined operationally and/or conceptually the following

terminologies to give better understanding to the readers of the study.

Activity Based Costing. A costing methodology that identifies activities in an

organization and assigns the cost of each activity with resources to all products and
services according to the actual consumption by each. This model assigns more indirect

costs (overhead) into direct costs compared to conventional costing.

Accounting Information System. It is a frame of practical accounting activity, as it

tracks the event of the enterprise, supplies data for the manager’s decision, and

organically contributes to the report for the managers, to the financial statements, to

compiling the expense management systems and last but not the least to the controlling

reports.

Accounting Software. It describes a type of software that records and processes

accounting transactions within functional modules such as accounts payable, accounts

receivable, payroll and trial balance.

Carrying cost. Refers to the total cost of holding inventory, this includes

warehousing cost such as rent, utilities and salaries, financial cost such as opportunity

cost, and inventory costs related to perishability, pilferage, shrinkage and insurance.

Descriptive Method. Is used to describe characteristics of a population or

phenomenon being studied. It does not answer questions about how/when/why the

characteristics occurred.

Economic Order Quantity (EOQ). Is the order quantity that minimizes the total

inventory holding costs and ordering costs. It is one of the oldest classical production

scheduling models.

First-in, First-out method (FIFO).Is one of the methods commonly used to

calculate the value of inventory on hand at the end of an accounting period and the cost

of goods sold during the period.

 Forecasting. Is the process of making predictions of the future based on past and

present data and analysis of trends.

Inventory. It is complete list of items such as property, goods in stock, or the

contents of a building. It is a quantity of goods held in stock. In accounting, the entire

stock of a business, including materials, components, work in progress, and finished

products. It is make a complete list of.

Inventory Control. It is designed to support the requisition processing, inventory

management, purchasing and physical inventory reconciliation functions of inventory

management through a set of highly interactive capabilities.

Inventory Management. It is the supervision of non-capitalized assets (inventory)

and stock items.

Inventory Management Software. It is a computer-based system for

tracking inventory levels, orders, sales and deliveries. Companies use inventory

management software to avoid product overstock and outages. It is a tool for organizing

inventory data that before was generally stored in hard-copy form or in spreadsheets.

Lead time. Is the amount of time from the point at which you determine the need

to order to the point at which the inventory is on hand and available for use.

Material Requirement Planning (MRP. Is a production planning, scheduling, and

inventory control system used to manage manufacturing processes. Most MRP systems

are software-based, while it is possible to conduct MRP by hand as well.

Obsolete. No longer used because something newer exist.

Optimum stock level. The amount of inventory which should not be exceeded.

The limit is normally determined after considering storage space of the facilities, how
quickly inventory is sold or used, cost of insurance on inventory, and the risk of

inventory becoming outdated before it is used.

Pharmacy. Is the science and technique of preparing and dispensing drugs. It is

a health profession that links health sciences with chemical sciences and aims to

ensure the safe and effective use of pharmaceutical drugs.

Procurement. The act of obtaining or buying goods and services. The process

includes preparation and processing of a demand as well as the end receipt approval of

payment.

Reordering Point. Inventory level of an item which signals the need for placement

of a replenishment order, taking into account the consumption of the item during order

lead time and the quantity required for the safety stock. It is also called reorder, reorder

quantity, or replenishment order quantity.

Safety stock. Is an additional quantity of an item held in the inventory in order to

reduce the risk that the item will be out of stock, safety stock act as a buffer stock in

case the sales are greater than planned and or the supplier is unable to deliver the

additional units at the expected time.

System. Is a set of interacting or interdependent components forming an

integrated whole.