Drug Supply Management

Part-II
Inventory Manegment
By Hailu
 Inventory Management

[Type here] HA [Type here]

 Introduction
• Inventory Management
• is the process and maintaining of stock
properly at all levels and at all times.
– It is the management of the routine ordering
process.
– It includes ordering, receiving, storing, issuing and
then reordering of a limited list of items
– Is the heart of drug supply system
– Poor inventory management system in public drug

[Type here] HA [Type here]

 Application of inventory management

– Maintain appropriate stock

– Check the movement of stocks
– Avoid wastage, theft and shortage of stock
Prevent expiration of drug before being used
– To provide an uninterrupted supply of material
– Avoid over – stocking, low – stocking or out of
stock materials in the store

[Type here] HA [Type here]

 Inventory Management
• Purpose of an Inventory Control System
– To determine when stock should be ordered/issued

– To determine how much stock should be ordered/issued

– To maintain an appropriate stock level of all products

• A well designed and well operated inventory

control system
– prevents shortages, oversupply, and expiry of
pharmaceuticals

[Type here] HA [Type here]

 Seven basic issues must be considered when an
inventory management system is being designed.
1. Definition of the context in which the inventory management system
must function
2. Determination of the types of stock records & inventory reports
needed
3. Selection of items to be stocked as standard items
4. Maintenance of appropriate service levels for d/nt classes of items
5. Adoption of decision rule or model for determining when to order
6. Adoption of decision rule or model for determining how much to order
7. Identification and control at variable inventory management costs by
using product classification system such as ABC analysis, VEN analysis
. 6
 Issues to be considered during designing
or upgrading IM
1. Defining the context of IM system must function
– Independent demand system vs Dependent demand system

– Pull or push distribution system

• Independent demand system is applicable to the management of
procurement and distribution of finished goods.
• Dependent demand system manages inventory requirements for
raw materials and supplies based on what is needed for
production in manufacturing operation.
– Pull system:-operating units order medicine from the ware house or
supplier according local determination of need.
– Push system:- a central a quantity that will be shipped to the operating
unit, based on the annual distribution plan and on information
transmitted to the ware house about need at the operating units

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 Issues to be considered during designing
or upgrading IM
2. Determination of the type of stock records &
inventory reports needed
– Stock records

• Primary source of information

• Can be manual or computerized

• Commonly used manual records

– Vertical file records, Kardex system, Ledger system

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 Performance monitoring and Activity reporting
• The information from the stock records should
be compiled in reports for use for management
decisions, for purchasing activity etc.
• Two types of reports are useful
1. Periodic reports
2. Routine record

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• 1. Periodic reports
• a. To assess the inventory management
system using standard performance indicators
• b. Net sales to inventory (inventory turnover)
• c. Inventory shrinkage
• d. Expense ratio
• e. Service level
• f. Average inventory holding cost
• g. Incremental orderingcost
lalisa. 10
 Record format
Ledger

Vertical file
records

Kardex system

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 stock keeping records

• Purpose of stock keeping records?

– to record information about items in storage.
• What essential data items do stock keeping records
contain?
– the quantity of stock on hand
– the quantity of losses and adjustments.
– Products stored in a storeroom and generally are not
distributed (dispensed) directly from the storeroom to
the customer.

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 stock keeping records

• When are entries to stock keeping records

made?
– whenever products are received or issued.

– when stock is counted during a physical inventory.

– When the stock keeping record is full, a new record is

started using the ending balance from the previous
record.

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 stock keeping records
• How are the data on a stock keeping record organized?
– Stock keeping records are organized by date.
– They record receipts, issues, losses and adjustments, and the
balance on hand.
– They also record the results of physical inventories (when items are
counted to verify the quantity in storage).
• In what formats are stocks keeping records printed?
– Two stock keeping records are used in the inventory management
– the Bin Card and the Stock Record Card.

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 Stock record card
Example;
Stock Record card
Name of health institution. .
Name of the item Metronidazole 250mg capsule. Maximum stock level. .
Unit of issue: tins of 1000capsul Minimum stock level .
Reorder stock level .
Average monthly consumption=2tins

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 received from ce
1 January Inventory Opening stock 04

1 January 03567 Dispensary 02 02

2 February 06587 Reg. H bureau 06 08

25 February 06786 Dispensary 02 06

20 March 03204 Dispensary 02 04

25 March Ref.058/97 Expired/dispose 02 02

20 April 03758 Dispensary 02 0

30 April 07654 Reg. H bureau 06 06

20 May 058343 Dispensary 02 02 2 tins stolen

25 June 06548 Dispensary 02 0

20 October 03865 Reg. H bureau 10 10

hailu. 16
stock keeping records

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 Inventory Control/Management system…

• A bin card
– Is an individual stock keeping card that keeps information about
a single lot of a product.

– One bin card should be maintained for each:

• Pack size, form or presentation or dosage form of each

commodity.

– Bin cards are usually displayed at the bins (or shelf) where the
product is found.

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Issues to be considered…….cont’d
• Good to maintain stock records for each item
– To improve accuracy and accountability
• Typically, bin card is combined with ledger, kardex or
computer system
• Computerized
– Efficient to manage inventory with perpetual or periodic
purchasing
– Easy to retrieve information
– Easy for reporting
– NB! Stock records (manual or computerized)
• Must be current and accurate
– Stock count
• Reordering purpose
• Determining inventory value

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Issues to be considered…….cont’d
• Stock count can be done
– Annually
– Cyclic counting → best
• No shut down of warehousing and distribution
• Relatively easy to trace discrepancy if it arise
– Methods of cyclic counting
• Assign counting frequency and timing
– ABC category
• A system of rotating d/t staff members
• Activity report and performance monitoring
– Accurate stock records only
• little value for decision making
– Have to be compiled in report to be used be managers (purchasing and
stock management etc)in decision making
– Periodic vs routine

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Issues to be considered…….cont’d
• Report from storage facilities
– Stock position (on hand, on order
– Beginning and ending inventory value, average
inventory holding cost
– Value of
• Supplies issue and received
– Change in inventory value and any discrepancy noted
during stock count
– Consumption pattern
– Service level (from supplier to medical store to health
facility)
– Medicines at risk of expiry

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Issues to be considered…….cont’d
• Purchasing and financial departments
– Budget status
• year to date expenditure vs target
• amount remaining
– Purchase and expenditure by supplier and operating
unit
– Summaries of account payable to supplier
– Status of outstanding order
– Comparison
• Actual vs expected lead time
• Actual price vs projected cost
• Item purchased and need of projection

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Issues to be considered…….cont’d
3. Selection of items to be stocked as standard
items
• Reason to hold a stock
– To ensure availability
– To maintain confidence in the system
– To reduce the unit cost of medicine
– To avoid shortage cost
– To minimize ordering cost
– To minimize transport cost
– To allow fluctuation in demand
• Disadvantage of holding high stock
– Capital can be tied up in inventory → unavailable for other
purpose
– Cost (personnel, utilities, insurance, storage facilities and other
– Loss (spoilage, expiry, obsolescence, theft)

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 Issues to be considered…….cont’d
 Which item to be stocked?
1. Stock movement (high vs low)
• ABC analysis

• VEN system

2. Level of use
• Aspirin, Anticancer ( all level vs tertiary care
hospital)

3. Local availability 24
Issues to be considered…….cont’d
 Which item to be stocked?
 ABC analysis
– A- 10-20% items of drugs costing 75-80% of total budget
– B-10-20% items of drug costing 15-20% of total budget
– C-60-80% items of drug costing 5-10% of total budget
 VEN Analysis
– (V)Vital- are potentially lifesaving drug (very essential).
• E.g. anti malarial, vaccines, ORS, etc.
– (E)Essential drug- which are effective against life
threatening drug.
• E.g. certain antibiotics, anti inflammatory
– (N)Normal usage (less essential) - drugs used for minor or
self limiting health problems .
• E.g. cough syrup, antacid tabllea lti sao. r suspension. 25
Issues to be considered…….cont’d
4. Maintenance of appropriate level for different
class of items
 Service level: percentage of individual items ordered
from a supplier or warehouse that is issued from stock on
hand.
– Service level= (# items issued/# items requested) x 100
 Safety stock:- is how much stock will be kept in reserve
to prevent stock outs
 The minimum safety stock needed to avoid a stock out is the quantity of
stock used on average during the average lead time from the current
supplier.
• SS = LT × CA

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Issues to be considered…….cont’d
5. Adoption of a decision rule or a model for
determining when to order and determining
how much to reorder
• Any inventory control model must address the following
issues-
1. Safety stock:- how much stock will be kept in the reserve
to prevent stock out.
2. Reorder frequency:- the periodic of time between each
order for an item(also known as the procurement period)
3. Reorder quantity :- the number of units specified when an
order is placed

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Issues to be considered…….cont’d
• Two ways to classify these models are:
1. Periodic review model: order can be placed only at
specified intervals, and the item is ordered at every
interval.
2. Perpetual model: orders can be placed at any time, the
user determines when to order and how much to order
• The most common inventory control models are:-
 Annual purchase for importing drugs into the controls, low- priced drugs.
 Schedule purchasing for slow – moving but regularly used items.
 Perpetual purchasing for high – volume drugs and very expensive drug

• Factors to consider in calculating reorder quantity

– average consumption (demand), Lead time, safety stock, reorder level,
maximum stock level, stock position, procurement period, projecting
demand 28
Issues to be considered…….cont’d
• Standard reordering formula
– 1. Minimum and maximum stock levels
– 2. Consumption – based reordering formulas
– CA = Average monthly consumption, adjusted for stock out
– LT = Suppliers lead time
– PP = Procurement period – time until the next order will be placed
– SS = additional stock to cope with variability in consumption and lead time
– S1 = Stock on hand in inventory
– S0 = stock now no order from a supplier but not yet received
– SB = quantity of stock back- ordered to lower levels

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Issues to be considered…….cont’d
• Two Standard reordering formula
1. Minimum and maximum stock levels

2. Consumption – based reordering formulas

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1. Consumption – Based Reordering Formula
• This formula by passes the step of calculating min and
max levels and instead calculates the proposed reorder
quantity directly.
• when emergency orders are needed in a schedules
purchasing system, the same formula is used to
compute emergency order quantity as would be used
for a regular order.

Qo = CA x (LT + PP) + SS – (S1 + S0)

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2. Minimum – maximum stock level formula
• This formula often used in scheduled purchasing, with
set order intervals.
• Minimum stock (Smin) = (LT x CA) + SS
• Maximum stock level (Smax) = Smax = Smin + (PP x
CA)

Order quantity (Qo) = (Smax+ SB) – (S1+ S0)

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Issues to be considered…….cont’d
• To help maintain adequate stock levels for each health facility in the
system
– the maximum months of stock
– minimum months of stock
– emergency order point
• The maximum months of stock
– is the largest amount of each pharmaceutical a facility should hold at
any one time.
• overstocked and expired
• The minimum months of stock
– is the approximate level of stock on hand at the end of the reporting
period when an order is placed.
• The emergency order point
– is the level where the risk of stocking out is likely, and an
emergency order should be placed immediately.

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Example: Health logistics system of Ethiopia

Maximum Minimum
Review Emergency Order
Level Months of Months of
Period Point
Stock Stock
Every other
HC and month 4 months 2 months 0.5 months (= 2 wks)
Hospitals

0.25 months
Health Posts Monthly 2 months 1 months
(= 1 wk)

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Types of Max-Min inventory Control Systems
• Determining How Much to Order or Issue
• Stock Status
– Purpose of assessing stock status is to determine
how long supplies will last.

How much we have of a certain product = How long that product will last(in # of periods
How much we use during a given period

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 Types of Max-Min… ......... cont’d
• Calculating Order or Issue Quantities
– Order/issue quantity = Max stock quantity − stock
on hand
• If a facility, for some reason, has not received the
previous order or issue, but is positive that stock will
arrive, they should subtract the quantities expected
from the next resupply quantity.
– Order/issue quantity = Max stock quantity − stock on hand − quantity on order

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 Types of Max-Min… .........cont’d
Example on Forced ordering ICS.
– calculate the quantity of Chloroquine to order if the
maximum stock level for Chloroquine is 4 months
and an emergency order point of 1 month.

– One case of 300 Chloroquine was ordered and has

not yet been received. Use an average of the last 6
months data for your calculations.

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Types of Max-Min… ............ cont’d
Chloroquine Dispensed to Users

October 11 178

November 11 552

December 11 540

January 12 846

February 12 630

March 12 578

April 12 812

May 12 508
Balance of Chloroquine on hand May 30, 2013 is 756 tablets

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 Types of Max-Min… ............ cont’d
• Minimum stock (Smin) = (LT x CA) + SS
• Maximum stock level (Smax) = Smax = Smin + (PP x CA)
• Order quantity (Qo) = (Smax + SB) – (S1+ S0)
• Step 1: Calculate average monthly quantity of Chloroquine consumed

• AMC = Total Chloroquine tabs/6 months = 3914/6=652 tabs per month

• Step 2: Calculate reorder quantity

– Max cons Qty = AMC(652) X MAX months (4) = (2608 )

– Order Quantity = max Qty(2608)SOH (756) SOO(300)=1552

– Order Quantity =1552

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 Types of Max-Min Inventory Control Systems
• Three Types of Max-Min Inventory Control Systems
– The same formula is used to determine how much to
order or issue for each of the systems
– The basic difference b/n the systems
• is the trigger for ordering or issuing
1. In a forced-ordering system
 end of the review period
2. In a continuous review system
 when the facility reaches the minimum level.
3. In a standard system
 E nd of the review period for the commodities that
are at the minimum level.
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 Types of Max-Min Inventory Control Systems
1. Forced-ordering max-min system
– The inventory control system of Ethiopia.
– all facilities are required to report on a fixed schedule for
all products
• Health Posts – monthly
• Health Centres and Hospitals – every other month
• Storekeeper decision rule to resupply
– At the end of each review period, review all stock levels
and order or issue enough stock to bring the levels up to
the max.
– Place an emergency order if the stock level for any
item falls below the emergency order point before the
end of the review period.
– all products are re-supplied each time a report is
completed

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 Types of Max-Min Inventory Control Systems
• Advantages of forced-ordering max-min system
– rule for resupply is simple
• order/issue every item at the end of the period.
– easier to ensure the availability of transport resources
• b/c orders are placed at regular intervals
– Every facility orders or is resupplied at the end of
every review period
– No need of storekeepers constantly assess stock
status, unless they think a potential stockout is possible
• Disadvantage of a forced-ordering system
– orders for some items may be for small quantities
• B/c all items are ordered regardless of the stock on hand.

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 Types of Max-Min Inventory Control Systems
• Forced –ordering variation: delivery truck system
– also called a topping up or bread truck system or
Vendor Managed Inventory (VMI) system.
– difference b/n regular vs delivery truck forced-ordering
system
• the way the deliveries are made
• a truck is loaded with supplies at the end of the review period.
• The truck and a delivery team travel to each facility
• assess the stock & leave (top up) an amount of each product
• Advantages of the forced-ordering delivery truck system
– The order is filled on the spot
• the lead time is zero → lead time stock to zero
• lowers the min and the max stock levels.
– Damaged or expired products can be put back on the
truck for disposal

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Types of Max-Min Inventory Control Systems
– The truck can be sent out with a full load of supplies,
eliminating multiple small orders.
– The LMIS report can be completed and collected at the
time of delivery.
• Avoid delayed reporting
– The training requirements are significantly less for the
facility staff.
– If a supervisor goes on the truck for deliveries, on-the-job
training and supervision at the various stops.

Hailu 44
 Types of Max-Min Inventory Control Systems
• Disadvantages of the forced-ordering delivery truck
system
– All types of max-min systems rely on their delivery trucks.
• system is vulnerable to breakdowns
• the whole system breaks down
– A sufficient number of staff must be available in the office
• team leaders are away making deliveries.
– Require larger trucks
• always carry more stock then they will actually deliver.

Hailu 45
 Types of Max-Min Inventory Control
Systems
2. Continuous review max-min system
– Store keeper decision rule
• Review the stock level of each item every time you make
an issue.
• If the stock level is at the min, or has fallen below the
min, order enough stock to bring the level up to the max.
– The least appropriate for most health programs….why????

Hailu 46
 Types of Max-Min Inventory Control
Systems
• In a continuous review system—
– The review period is not fixed
– The storekeeper must know both the max and min
stock levels.
– The storekeeper does not need an emergency order
point
• an order can be placed any time stock is needed.
– The storekeeper must assess stock status each time an
issue is made.
• storekeeper’s workload increases if there is many item
– The storekeeper must be able to order – pull system
• b/c only the storekeeper determine stock level (min or not)
– A continuous review system must be a pull system.

Hailu 47
 Types of Max-Min Inventory Control
Systems
• Advantages of continuous review max-
min system
– rule for resupply is simple: reaching minimum
– The system is more responsive and flexible
• orders can be placed at any time.
– Small orders are eliminated
• stock levels are at the min when an order is placed.
• Disadvantages of a continuous review
system
– Transportation resources are harder to schedule.
– Overload storekeepers in large facilities with a large
number of products

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 Types of Max-Min Inventory Control
Systems
• Continuous review
system variation: two
bin
– Resupply rule is the same
– The difference
• the way of determining
when the min has been
reached.
– two equal-sized bins of
each individual product
– When the first bin is
empty, the min has been
reached.

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 Types of Max-Min Inventory Control
Systems
• Advantages continuous review system variation: two
bin.
– Require less training than a normal pull systems
• empty bin
– No calculations are required and paperwork is minimal.
• Disadvantages:
– bin size must be continually reviewed
• If consumption for products is not stable

• Standard max-min system

– Resupply (when to and how much to order) is based on
• Reviewing all stock levels at the end of each review period.
• Falling below the min

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 Types of Max-Min Inventory Control
Systems
• In a standard system—
– Ordering/issuing new stock is based on the min stock level and
the review period.
– the storekeeper must know the min, max, and review period.
– an emergency order point is needed
• to ensure that a stockout does not occur between review
periods.
– the stock status must be assessed at the end of each review
period
• Advantages of standard max-min system
– Eliminate small orders
– Avoid the need to assess stock status continually
– Reduce the number of calculations
– Transportation can be scheduled for specific times
Hailu 51
 Types of Max-Min Inventory Control
Systems
• Disadvantages:
– Higher min stock level
• Increase the likelihood of expiry
• Require more storage capacity,
• Increased costs.

– More training for the storekeepers may be

required
• b/c of their decision rules are more complex.

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• Question
– Identify the different types of purchasing
model, their limitations and the recommended
situation for applying the model

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 Quality Assurance for Drug Procurement
• Drug quality
• Quality of the final drug product is determined
– Raw material (ingredient)
– Equipment
– Technical knowhow
– Packaging
– storage
• Defining assessing drug quality
– Establish quality standards:
• e.g. BP, USP, EP,IP
– Identity, Purity:, Uniformity of dosage form,
Bioavailability: Bioequivalent, Stability etc
– Analytical methods
• for newly marketed drug when the standards are not established
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 Pharmacopeia’s specifications for Drug quality
Assurance.
• These include:-
• Identity: - confirm the existence of the correct active
ingredient on the label

• Purity: - Presence or absence of contaminants. E.g.

Microbes

• Potency: - availability of sufficient active ingredient

specify a content range, such as 95 to 110 percent of the
amount written on the label
Hailu 55
 Pharmacopeia’s specifications for Drug
quality Assurance.
• Uniformity: - consistency in colour, Shape, size etc. of
the dosage form.
– Any lack on uniformity may suggest problems with identity,
purity, potency.
– Also influence the acceptability of the drug to pharmacist,
medical practitioners, and patients.
• 5. Bioavailability: - The rate & extent of absorption of a
drug from a specific dosage form & route of
administration.
• 6. Stability:- is the extent to w/c a product retains, within
specified limits & throughout its period of storage, used
its short life, the same properties that is possesses at the
time of manufacture 56
 Quality Assurance for Drug Procurement
• Consequence of poor drug quality
– Lack of therapeutic effect may lead to prolonged illness
– may induce toxic or adverse reactions
– wastes money
– may affect program credibility
• Practical approaches to quality assurance
– Careful product selection
• Powders for reconstitution instead of injectable liquids
• Powders for reconstitution instead of oral suspensions
• Tablets instead of capsules
– Careful supplier selection
• Certification, supplier reliability, product quality
• inspecting product sample

Hailu. 57
 Quality Assurance for Drug Procurement
– Certification of good manufacturing practice
• cGMP certificate
– Batch certification
– Inclusion of detailed specification in the contract
• Name of the pharmacopeia reference standard to assess
drug quality
• Language for the product label
• Minimum information required on the label
• Additional information such as product registration
• Standard for packaging
– Withstand storage and transport conditions
• Procedures to verify that the shipped good meet the
specification.
– Pre and post shipment inspection
– Analytical drug testing

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 Quality Assurance for Drug Procurement
• Procedures to monitor and maintain the quality of drug

– Proper storage and distribution procedures

– Appropriate dispensing

– Instructions to the patient on proper use of

medications

– Product defect reporting programs

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 Drug Donation
• Disaster and suffering
– Donation of medicines

• Problems with drug donations

– Donate drugs are often not relevant for the emergency
situation or for the level of care that is available

– Health workers are not always familiar with donated drugs

– The drugs are often not registered for use in the recipient
country

– may not comply with local treatment guidelines

Hailu. 60
 Drug Donation
– The drugs that arrive are frequently unsorted, difficult to
identify, unknown in the recipient country, labeled with brand
names or a labeled in a language that is not locally understood

– The quality of the drugs does not always comply with

standard in the donor country. Donated drugs may have
expired or may expire before they reach the patient, or they may
be returned drugs (half finished packages that have been
returned to the pharmacy

– The distribution plan often ignores normal administrative

procedures.

– Donation of returned drugs. 61

 Drug Donation
• Core principles of donation
– Donation should be intended only to assist the recipient and all
efforts should be made to maximize its positive effect.

– Donation should be given with full respect of the authority of the

recipient and be supportive of existing government policies and
administrative arrangements.

– No double standard should be applied: if the quality of an items is an

acceptable in the donor country, it is also unacceptable in the donor
country

– Effective communication must be maintained between the donor

and the recipient: donation should be based on expressed need and
should be sent unannounced.
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• Project instruction: fill and complete the Bin card using the
information given below:-
• Note: the bin card is being used at Zewditu Memorial Hospital
• On Hamle 1, 2006 E.C. the balance from the previous bin card
show 600 bottle of 70% alcohol of 1000ml with batch number
R344 and expiry date of 10/2016.
• On Hamle 1, 2006 E.C. 200 bottles of 70% alcohol of 1000ml
issued to emergency department.
• On meskerem 3, 2007 E.C. 120 bottles of 70% alcohol of 1000ml
issued to medical ward.
• On Tikmet 14, 2007 E.C. 150 bottles of 70% alcohol of 1000ml
issued to surgical ward.

Hailu. 63
• On Hidar 3, 2007 E.C. 1,200 bottles of 70% alcohol
were supplied from Sheba pharmaceuticals with batch
number G566 and expiry date of 08/2017.
• On Hidar 14, 2007 E.C. 130 bottles of 70% alcohol
issued to Gynecological ward.
• On Hidar 14, 2007 E.C. 120 bottles of 70% alcohol
issued to Gynecological ward.
• On Tahsas 5, 2007 E.C. 300 bottles of 70% alcohol
issued to Laboratory department.
• On Tikmet 25, 2007 E.C. 100 bottles of 70% alcohol
issued to Pediatric ward.

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• On Yekatit 10, 2007 E.C. 150 bottles of 70% alcohol issued to
VCT department.
• On Megabit 18, 2007 E.C. 800 bottles of 70% alcohol were
supplied from Fine chemicals, with batch number of K867 and
Expiry date of 02/2017.
• On Meazia 13, 2007 E.C. 600 bottles of 70% alcohol issued to
Gandi Hospital.
• On Ginbot 30, 2007 E.C. 200 bottles of 70% alcohol issued to
Emergency department.
• On Sene 12, 2007 E.C. 50 bottles of 70% alcohol were damaged.
• On Sene 14, 2007 E.C. 120 bottles of 70% alcohol issued to
Medical wards.
• On Sene 30, 2007 E.C. 150 bottles of 70% alcohol issued to
Gynecological ward.

Hailu. 65
Thank You!

The End