INTRODUCTION:

Pharmaceutical is one of the most sensitive and major industry that deals with human and animal
life. Purity is highly deserved in this industry and there is no option of second chance. Quality,
security, identity are the most important to maintain. So inventory management of the industry is a
difficult job. A pharmaceutical company handled 500-600 types of products that includes huge
amount of raw materials movement, packaging and secondary packaging of the finished products.
Planning and scheduling in the pharmaceutical companies is a critical activity. Demand
management under constraints of life-limited inventory buffers and non-discrete nature of products
is challenging.
INVENTORY:
A physical resource that a firm holds in stock with the intent of selling it or transforming it into a
more valuable state.
An inventory system is the set of policies and controls that monitor levels of inventory and
determine what levels should be maintained, when stock should be replenished, and how large
orders should be. By convention, manufacturing inventory generally refers to items that contribute
to or become part of a firms product output. Manufacturing inventory is typically classified into raw
materials, finished products, component parts, supplies, and work-in-process. In distribution,
inventory is classified as in-transit, meaning that it is being moved in the system, and warehouse,
which is inventory in a warehouse or distribution center. Retail sites carry inventory for immediate
sale to customers. In services, inventory generally refers to the tangible goods to be sold and the
supplies necessary to administer the service.

INPUT
Material management
department

INVENTORY
Goods in stores
Work-in-progress
Finished products

OUTPUT
Production
Department

Figure A: Basic Inventory Model

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TYPES OF INVENTORY:

Materials

Components

Partially completed goods called work in process

Finished-goods inventories

Distribution inventory

Maintenance, Repair and Operating supplies

Materials: These are such chemicals as active ingredients, diluents, and excipients needed to
manufacture intermediates or components of the finished product. Included in this category
and best shown separately are finishing supplies such as container, labels, caps, and shippers
needed in the packaging operation.
Components: These are parts or sub-assemblies needed for the final assembly of the end
product (e.g., Bulk tablets awaiting packaging)
Work-in-process: This is inventory in the process of being assembled into final products. Raw
materials are released from inventory and moved to work center. These parts may be
restocked temporarily until withdrawn for use later in the production process.
Finished goods: These are shippable inventories ready to be delivered to distribution centre,
retailers, and wholesalers or directly to customers.
Distribution inventory: This is inventory held at point as close to the customer as possible.
Distribution points such as warehouse or stores may be owned and operated by the
manufacturer or may be independently owned and operated.
Maintenance, Repair and operating supplies: These items are held by most companies.
These inventories are often low cost, and include office and operating supplies and services.
So a pharmaceutical company generally possesses inventories like finished goods, work in
process, packing material, literature and promotional materials, physician sample, raw and
packing material in transit, stock of stationery, spare and accessories.

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PURPOSE OF INVENTORY
To maintain independence of operations: A supply of materials at a work center allows that
center flexibility in operations. For example, because there are costs for making each new
production setup, this inventory allows management to reduce the number of setups.
To meet variation in product demand: If the demand for the product is known precisely, it may
be possible (though not necessarily economical) to produce the product to exactly meet the
demand. Usually, however, demand is not completely known, and a safety or buffer stock must be
maintained to absorb variation.
To allow flexibility in production scheduling: A stock of inventory relieves the pressure on the
production system to get the goods out. This causes longer lead times, which permit production
planning for smoother flow and lower-cost operation through larger lot-size production. High setup
costs, for example, favor producing a larger number of units once the setup has been made.
To provide a safeguard for variation in raw material delivery time: When material is ordered
from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a
shortage of material at the vendors plant causing backlogs, an unexpected strike at the vendors
plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective
material.
To take advantage of economic purchase order size: There are costs to place an order: labor,
Phone calls, typing, postage, and so on. Therefore, the larger each order is, the fewer the orders
that need be written. Also, shipping costs favor larger ordersthe larger the shipment, the lower
the per-unit cost.
Minimizing inventory investment: Inventories tie up cash that the company could use elsewhere
in the business. Excess inventory can create a negative cash flow, something must be avoided.
This is why the financial people work to keep inventories as low as possible.
Maximizing profit: Profit can be maximized by increasing revenue or decreasing cost. One of the
best ways to do this is by proper management of inventory.

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KEY INVENTORY TERMS:

Lead time: time interval between ordering and receiving the order

Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year

Ordering costs: costs of ordering and receiving inventory

Shortage costs: costs when demand exceeds supply

Bin Card: This is a document showing daily incoming and outgoing of stocks in and out of the
store or warehouse. It must show the consignee's name and address, batch number, expiry
date, quantity, signature and the balance (on continuous basis). FIFO should be strictly applied
so as to avoid loss due to expiration of drugs.

Universal Bar Code: Bar code printed on a label that has information about the item to which
it is attached.

Inventory Software: Inventory management and control software could be installed on the
office system for daily posting and accurate report as generated by the tested and tried
program.

Delivery Note (DN): This records all drugs and materials leaving the store to the customers,
REPs, office workers and donations to institutions. It must have Date, Particular (for drug
name, expiry date, batch number and strength), packaging details (e.g. bottles, vial, PC, etc),
Name and Address of the consignee, serial number, signature space for the store manager
and the receiver. It could be duplicated in pink or be in triplicate.

Goods Return Form (GRF): It records all goods return and in good condition.

Good Receive Note (GRN): It records all imported stocks as they enter the store i.e. stocks
imported from manufacturer and being received into the store or stocks received from the
production department into the store and ready to be issued out.

Product Requisition Note (PRN): It records all requests for order placement forwarded to the
purchasing manager or procurement department when stocks reach reorder level. It should
specify which stock needs to be replenished and the quantity to be ordered (though the
procurement manager may know the right quantity to procure within the financial constraint of
the organization).

Inventory Turnover: It indicates the efficiency of the pharmaceuticals about inventory. It also
called inventory utilization ratio.

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INVENTORY MANAGEMENT:
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.
It is customary in any production operation to consider return on investment in buying capital
equipment, and many appropriation requests are turned down if the rate of return is too low.
Commitments for inventories must be considered in the same way, and obviously, the purchase
and holding of a one month supply of an item gives a better return on investment and inventory
turnover than a two month supply. This is an oversimplification since there are many cost
associated with inventory decisions, for example ordering cost, out of stock cost, clerical cost,
computer costs, and quality control costs, others are too numerous to list here. Examination of the
annual report of several top pharmaceutical companies that have the greater return on equity
shows that inventories can represent anywhere form 35% to 80% of working capital, and some of
these have worldwide inventories approaching 700 million dollar! A well managed inventory can
exert considerable financial leverage, and inventory reduction can release much needed cash
which the corporation can invest in more profitable ventures and reduce borrowing. PPIC
(Procurement planning and inventory control) Division of a company plan and monitor for inventory.
Processing purchase order: The procedure begins with need recognition. The respective
department identifies its need, gets approval of the departmental head and with the approval an
authorized person sends purchase requisition to purchase department to initiate purchase. In case
of property, plant and equipment acquisition, before sending purchase requisition, a budget has to
be prepared by the user department. If the departmental head or higher authorities, whichever is
required, approve the proposed budget a purchase requisition is sent to purchase department. And
in case of raw or packing materials, the planning department determines the quantity and timing of
raw materials. This department informs the purchase department when to buy materials.
When the purchase department got the requisition, it calls for quotation or tender. After receiving
the quotation or tender, supplier has been selected. The supplier may be local or international. If
the terms and conditions are in favor of both company and the selected supplier, an order for the
purchase is than issued by the purchase department. In case of raw or packing material, the
purchase order is issued by the factory. A purchase register is maintained by the purchase
department in which they maintain all the required information relating to a consignment.

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Receiving Material, Goods and Services: Generally the goods and services are received by the
user department who issue the purchase requisition or in some cases by the authorized
department. Materials are received by Quality Assurance Department (QAD) in the factory. After
receiving materials, goods and services an MRR is issued for material and other than material a
GRR is issued by receiving department to purchase department. In the mean time the invoice or
bill is received by the purchase department. Before using the product by user department that is at
the time of delivery, it has been inspected by the inspection or QAD, by user department or by
authorized department. QAD examined the materials on a sample testing basis and provide a
certificate.
Factory sends MRR (Material Receiving Report): After receiving material factory send MRR to
accounts department for reconciliation. In this MRR amount of quantity, receiving date, amount to
use quality testing are mention. Respective department entry this MRR in excel sheet for
reconciliation.
Supplier bill submit: In this mean time of sending MRR supplier submit their bill in to purchase
department. They approve the figure and send this bill to accounts department. Then accounts
department check the approve amount, rate from purchase order, amount from MRR. If any
discrepancy identify at this stage then its reported to purchase department.
Voucher Entry: After checking purchase order and MRR, respective person entry this information
in to journal vouchers. Where supplier name, description of product, approve amount are
mentioned. Every journal voucher stapling with photocopy of bill and original bill. Then these
journal vouchers approve with proper authority and main bill send for payment.
Import of Raw & Packing materials: Another source of raw and packing material is importing. For
import any raw and packing material respective department must open a letter of credit at bank. It
is ensure the liquidity of foreign supplier. Purchase department maintain a PC (Pharmaceutical
Consignment) file against a Letter of Credit. It contains all necessary documents among the
raw/packing material and shipment. Purchase department opens Letter of Credit as a starting
phase of raw and packing material import. As a part of this process, Purchase department also
makes insurance in any insurance company. The insurance company sends insurance bill to
purchase department and after approval purchase department sends it to Accounts section. From
the bill an excel sheet is prepared by taking the relevant figures.

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An important point to be remembered is that total amount payable to the insurance company is not
included in the cost of raw material. To determine the cost of raw material imported, only 20% of
VAT is included as per VAT Act and the company gets rebate of VAT equal to 80 % of VAT.
After releasing the goods from custom, C&F agent delivers the goods to factory and sends a bill to
accounts section. When goods are received by factory and MRR is received by account section.
The amount debited to LC in transit is transferred to cost of inventory.
The warehouse after receiving the material entry into the computer software used for inventory.
The QC sampled the material for test. The production department raises requisition for a product to
be manufactured to WH. The WH sends the material to production with intact container and after
using this material return the unused material to WH.
When production completes a products manufacturing send the finished products to WH. The WH
sends the finished products to distribution centers.
PPIC Division
Import Dept.

Local supply Dept.

Technical service section

General purchase section

RM import section

RM local section

PM import section

PM local section

WH Dept.
RM section
PM section
FP section
Figure B: Departments of inventory management
N.B-RM-Raw material, PM-Packaging material, WH-Warehouse, FP-Finished product
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The first part of setting up an inventory control and management system involves determining
ideal inventory level. Inventory must be maintained at a proper level and provided in a timely
fashion, otherwise production efficiencies will erode, as in the case of service a manufacturing
business, or sales will plummet, as in the case of a wholesaling or retailing business. To do this
one must consider factors like;

How much capital is available to purchase inventory?

How much and what kind of demand exits in the market and how will this effect sales
projections?

How much inventory sold in the past?

What and how much inventory carrying costs and how do they increase as inventory levels
increase?

Can quantity discounts actually in the long run?

How much storage space is available for inventory?

How much inventory do suppliers actually have available to sell?

Buying more inventories that cant an owner affords cause future cash flow problems. Large
inventories consume cash, increase the investment in the business and can bankrupt a business if
not properly controlled.
The second part of setting up an inventory control and management system involves developing
an inventory purchasing plan. A purchasing plan should provide detailed answers to the
following types of question:

What kinds of inventory items should we purchase and keep in stock?

Who will supply?

How should shipments of goods or raw materials be received and order quantities verified.

When should reorder be placed?

A purchasing plan should detail what kinds of inventory should be purchased and kept in stock. It is
possible for mail order sellers, offering unique items not regularly found in retain stores, to buy
inventory only after adverting has created sufficient demand.
The third part of setting up an inventory control and management system involves developing an
inventory record keeping system. An inventory record keeping system is primarily used to
determine companys cost of goods sold as well and provide information for financial statements.
To meet these basic objectives a record keeping system explain:

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Approximately or exactly how much of an item you have in stock at a particular moment in
time.

Exactly how much inventory has in stock and has sold at end of the month, quarter or year.

How much stock is on order?

A computer based system is usually centers around a sophisticated point of sale terminal that
relays information on each item used or sold to a computer. This system is usually expensive,
difficult to set up but once functioning is highly superior to all other systems. It allows avoiding
overstocking items that do not sell in large quantities, handling accounting and billing procedures
with a single entry, using on line point of sale terminals to relay information directly to the
computers of supplies who them use the information to ship additional items automatically.
In managing stock or inventory in a pharmaceutical company, the following must be put into
consideration:
1) The stocks expiry date must be checked and documented. It must be written on the bin card.
MANAGEMENT ACTION: Ensure that there is proper surveillance on the expiry date of each drug
to avoid loss due to expiration.
2) The Batch number must be noted and document as their may be many batches of the same
class of drug. MANAGEMENT ACTION: FEFO (First Expiry, First Out) should be used here. The
first expiring batch should go out first.
3) The temperature must be well noted and likewise the storage conditions. Some of such
instructions are: store between 2oC and 5oC, store between 15oC and 25oC, protect from sunlight,
keep in deep freezer, etc. Adhere to these instructions. MANAGEMENT ACTION: The temperature
should be properly monitored to avoid damaged due to over/under temperature.
4) Stocks should not be jam-packed in the stock. There should be enough space and the store
should be well organized to allow for easily location and free movement.
5) Computer data should exist for all stocks in the store which will be updated daily or almost
immediately as the stocks are going out or coming in to enable the manager to know quantity left
for each stock at a glance on the system in case of urgent demand.
6) Cleanliness is part of proper management of the warehouse.
7) Proper documentation and record updating is also necessary here from source document to Bin
Card.

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ABC Analysis: One of the most important and simplest tools used for inventory management is
the ABC classification of inventories. This classification is based on a principle first outlined in the
late 1800s by V. Pareto, an Italian engineer and mathematician. In its simplest terms, it states that
in a large population in which many items involved, relatively few items account for the major part
of activity. In this system inventory is classified according to annual value of consumption of the
items. When a large number of items are involved, relatively few items account for a major part of
activity, based on annual value of consumption of items.

A-items: 15% of the items are of the highest value and their inventory accounts for 70% of
the total.

B-items: 20% of the items are of the intermediate value and their inventory accounts for
20% of the total.

C-items: 65 %( remaining) of the items are lowest value and their inventory accounts for
the relatively small balance, i.e., 10%.

In this classification system all items used in industry are identified. All items are listed as per

their value. The number of items are counted and categorized as high-, medium- and lowvalue. The percentage of high-, medium- and low- valued items are determined.

High

A - Very important
B - mod. Important
C - Least important

Annual
$ Value
of items

B
C

Low
Few

Many
Number of Items

Figure C: ABC Analysis

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Figure D: Pareto Curve

Economic Order Quantity: How much of inventory is ordered at a time.
Its a mathematical device for arriving at the purchase quantity of an item that will minimize the
cost. It helps to calculate the minimum annual cost for ordering and stocking each item in inventory
and identify the most economical way to replenish inventory by showing the best order quantity.
EOQ can be determined by the following way
Tabular determination of EOQ:
No. of order need to be placed.
Sl.No.

No. of order per year

Annual ordering
cost

Annual inventory
carrying cost

Total annual cost*

* Total annual cost=ordering cost+ carrying cost

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Graphical presentation of EOQ:

Figure E: Graphical presentation of EOQ

Algebraic formula in determination of EOQ
Optimal order quantity is found when annual setup cost equals annual holding cost.
Annual setup cost= (Q/2)H
Annual holding cost= (D/Q)S
So,
(Q/2)H = (D/Q) S
Q2 = 2DS/H
Q* = 2DS/H
Q= Number of pieces per order
Q*= Optimal number of pieces per order (EOQ)
D= Annual demand in units for the inventory item
S= Setup or ordering cost for each order
H= Holding or carrying cost per unit per year
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TC =

Q
D
H+ S
2
Q

The Total-Cost Curve is U-Shaped

Figure F: Cost involved in EOQ

As demand for the inventoried item occurs, the inventory level drops.

When the inventory level drops to a critical point, the order point, the ordering process is
triggered.

The amount ordered each time an order is placed is fixed or constant.

When the ordered quantity is received, the inventory level increases.

A perpetual inventory accounting system is usually associated with this type of system.

In this system,

Only one product is involved.

Annual demand requirements known.

Demand is even throughout the year.

Lead time does not vary.

Each order is received in a single delivery.

There are no quantity discounts.

Annual demand (D), carrying cost (C) and ordering cost (S) can be estimated.

demand occurs at a uniform rate

no inventory when an order arrives

stock-out, customer responsiveness, and other costs are inconsequential

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CONCLUSION:
Inventory management has become highly developed to meet the rising challenges in most
corporate organizations and this is in response to the fact that inventory is an asset of distinct
feature. Inventory management as one of the key activities of business logistics has always been a
major preoccupation for the companys survival and growth. It has been used to develop models to
meet items assembling and requirement under conditions of uncertain demand.
REFERENCE:

Basics of inventory management. J. David Viale

The theory and practice of industrial pharmacy. Leon. Lachman, H.A Liberman, J.L Kanig.

Working capital management practiced in Pharmaceutical companies listed in Dhaka stock

Exchange. Anup Chowdhury, BRAC Business School. Dhaka-1212, Bangladesh and Md.
Muntasir Amin, Department of Finance. University of Dhaka

Inventory Management of Pharmaceutical Industries in Bangladesh. M. E. Hoque and N.

Paul. Department of Mechanical Engineering, Rajshahi University of Engineering &
Technology, Bangladesh

Inventory Management and Control in a Pharmaceutical Company. OLUWANISOLA SEUN

EMMANUEL.http://ezinearticles.com/?expert=Oluwanisola_Seun

Wikipedia, the free encyclopedia

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