16 - Inventory Management Flashcards
What is inventory management?
- Practice of planning, organizing and controlling inventory in order to create profit for a business
- A major asset and investment in a business -> approx. 75% of expenses
- The balance between supply and demand of a product and controlling the costs involved
What are the various inventory costs?
- Ordering costs -> costs that occur every time you place an order
- Holding or “carrying” costs -> costs that involve storing the inventory prior to being sold
- Shortage costs -> out of stock costs
What is perpetual inventory control?
Updates inventory after each purchase/ sale (“point of sale”/ POS system)
What is periodic inventory control?
- Manually count stock at specific intervals
- Used for reordering of slow-moving stock
- Costs for managing inventory are very high b/c of the time that must be spent to maintain the inventory
Tips to manage inventory
- Place fewer orders (larger orders fewer times per week)
- Monitor computerized inventory systems -> adjust order levels when demand decreases for a product
- Decrease inventory levels -> remove outdated stock, stock that is rarely used, excess stock, backroom stock
- “Good” inventory that customers want/ will purchase
- Are stock levels managed? (In-stock when needed w/ minimal number of “empty spots”)
What is inventory turnover rate?
Annual cost of sales (COGS) / average inventory
**Use average inventory b/c products will vary over the year (seasonal inventory)
Formula for average inventory
Beginning inventory + ending inventory / 2
What is the average prescription turnover rate for community pharmacy?
- 11.7
- Dependent on size of pharmacy, demographics, how well inventory is managed, services offered
What is the average prescription turnover rate for hospital pharmacy?
- 14-16
- Pharmacy contracts help to control inventory costs
What does it mean when inventory turnover above benchmark?
- Inventory is at a level comparable to sales (bought, sold and replaced quickly)
- May not be purchasing enough inventory and may need to be increased (not meeting customer demands)
What does it mean when inventory turnover below benchmark?
- Not selling stock/ profit efficiently (buying too much inventory)
- Inventory may need to be decreased
- Stock is sitting on the shelf too long (excess inventory or “dead” stock)
Tips to improve inventory turnover
- Increase sales w/o changing ordering methods (no increase in inventory) –> re-merchandize products
- Decrease inventory w/o losing sales:
- Buy more frequently
- Buy in smaller quantities
- Remove outdated merchandise
- Increase sales and decrease inventory at the same time
5 R’s of purchasing
- Right product
- Right quantity
- Right price
- Right time
- Right vendor
Describe “right product” of purchasing
- Determining which products to stock is determined by -> past usage, target market, formularies, top 100 drugs
- Space should be given to those products w/ highest turnover or sales
- Determined by the target market, type of business, prescriber habits and 3rd party coverage (Rx products)
Describe “right quantity” of purchasing
- Amount of stock carried to match consumer demand and to prevent shortages but excess stock is not sitting on shelves or becoming outdated
- Consider average sales/ demand of a product
- High inventory levels could decrease cash flow
- Low inventory levels could result in lost sales
- Must consider seasonal fluctuations when possible
