INVENTORY MANAGEMENT

Presented by:-Chiranjibi Adhikari,M. Pharm. 1st year,P.G. Pharmaceutics,Mallige College of Pharmacy.

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CONTENTS

INTRODUCTION REORDER QUANTITY METHODS ECONOMIC ORDER QUANTITY INVENTORY MODELS REFERENCES

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INVENTORY MANAGEMENT Inventory management is defined as the

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 the material at right time in right quantities at competitive prices.

Inventory is actually money which is available in the shape of materials ,equipments , storage space , work time etc.

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KEY INVENTORY TERMS

Safety Stock: Safety stock or the buffer stock is an ideal quantity

of material that has to be always maintained and it is drawn only in the emergency situation.

Lead Time: It is the time lapse between placement of an order

and receipt of items including their approval by quality control department.

This is counted on past experiences. Procurement of material has a long lead time . 4

Reorder Level: It indicates that level of material stock at which it

is necessary to take the steps for the procurement of further lots of material.

The reorder level is slightly more than minimum stock level to guard against abnormal use of item and abnormal delay in supply.

Reorder level= Maximum lead time × Maximum uses

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REORDER QUANTITY METHOD The quantity of items is to be ordered so as to continue

production without any interruption in future. Fixed order quantity method:- o When the stock level drops to a pre-determined point,

i.e. re-order level, then the order of fixed quantity of material is placed.

o Fixed order quantity is calculated using Economic Order Quantity (EOQ) formula.

Reorder level quantity=Safety stock +(usage rate x lead

time)

Fixed order quantity method has following advantages:1. Each material can be procured in the most

economical quantity.2. Purchasing and inventory control personnel

automatically devote attention to the items that are needed only when required.

3. Positive control can easily be exerted to maintain total inventory investment at the desired level simply by manipulating the planned maximum and minimum value.

Disadvantages: The orders are raised at irregular intervals which may not be convenient to the suppliers. 7

Reorder quantity systems1. Open access bin system:- The bin is filled with items to the maximum level as

and when required. Open bins with items are kept at places nearer to the

production line. The operators use items without making a record. The system is usually restricted to C-items, i.e. 70%

of all items with small inventory value.

E.g. Postal department where a fixed quantity of stamps is kept. At the end of each week, the quantities are examined and brought back to the maximum level

2. Two –bin system:-

Two bins are filled with items at different levels, when the first one is exhausted, it indicates the time for reorder.

The 2nd one is a reserve stock during lead-time period.

This is normally applicable to hospital & community pharmacies.

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ECONOMIC ORDER QUANTITY (EOQ) It is defined as the quantity of the material to be

ordered at one time . This quantity is fixed in such a manner as to

minimize the cost of ordering and carrying the stock so that only correct quantity of the material is to be purchased .

There should be no over stock or under stock and balance should be made between the cost of carrying and the cost of carry out .

EOQ formula is widely used for computing the minimum annual cost for ordering and stocking each item.

EOQ depends upon the two type of costs:A. Procurement cost - Receiving quotations. Processing purchase requisition. Follow up and expending the purchase order . Receiving the items and inspecting the items . Processing vendors invoice .

B. Carrying cost - Interest on the capital investment . Cost of the storage facility. Cost involved in deterioration . Cost of insurance property tax .

The size of an economic buying quantity or economic purchase lot depends on many factors such as :-

Inventory carrying cost Cost of purchasing & receiving Average consumption Annual sales rate The unit cost and quantity discount Availability of storage accommodation

TABULAR DETERMINATION OF EOQ

Per ordering cost = 410 % is invested for the inventory carrying cost1000 is the Annual Usage Value

Annual Carrying Cost = 10100 X 1000 X 1

Or no.

GRAPHIC REPRESENTATION OF EOQ

Annual ordering Cost

Carrying CostTot

al Annual C

ost

Ordering no

Cos

t to

Ord

er &

Car

ryin

g

EOQ

EOQ MODEL PROVIDES A LEVEL OF INVENTORY AT WHICH THE COMBINED COST OF PROCURING & CARRYING INVENTORY ARE MINIMUM.

100 200 300 400 5001020304050

Total cost Carrying cost

Procuring costs

Mincost

Order quantity

Cost

per

per

iod

EOQ

ALGEBRAIC METHOD

EOQ = 2 a b c s

a = Annual consumptionb = Buying cost per orderc = Cost per units = Storage cost (It include inventory carrying cost)

WEAKNESS OF EOQ FORMULA If usage of material varies unpredictably, as often

does, no formula will work well. EOQ formulas are only as accurate as the order cost

and carrying cost information. It is not an easy job to estimate the cost of

acquisition and cost of possession accurately. Items purchased to order, and items subject to rapid

production improvement will be restricted from EOQ use.

Critical supply items will be ordered in greater than normal quantities. The time of supply of quantities selected will over-ride EOQ. 18

INVENTORY MODELS

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1. Fixed order quantity method A. Production quantity model B. Quantity discount model

2. Probabilistic models

3. Fixed order period models

1 A. PRODUCTION QUANTITY MODEL Allows how much to order and when to

order .

It is suited for the production environment .• Materials produced and used immediately.• Provides production lot size .

It has a lower holding cost

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1 B. QUANTITY DISCOUNT MODEL It answers how much to order and when to

order.

It allows quantity discounts.

Reduced price is there when items are purchased in larger quantities .

Trade off is lower between lower price and increased holding cost

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QUANTITY DISCOUNT SCHEDULE Discou

nt Numbe

r

Discount Quantity

Discount (%)

Discount Price (P)

1 0 to 999 No discoun

t

$5.00

2 1,000 to 1,999

4 $4.80

3 2,000 and over

5 $4.7522

2. PROBABILISTIC MODEL It answers how much and when to order . Allow the demands to vary. Follows normal distribution. Consider service level and safety stock. Service level = 1- probability of stock out Higher service level means more safety

stock.

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PROBABILISTIC MODEL WHEN TO ORDER .

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Reorder Point

(ROP)

Optimal Order

QuantityX

Safety Stock (SS)

Time

Inventory Level

Lead Time

SSROP

Service Level P(Stockout)

Place order

Receive order

Frequency

3. FIXED PERIOD MODEL Answers how much to order . Orders are placed at fixed intervals. Inventory brought up to the target amount . Amount of order varies No continuous inventory count. Possibility of stock out between the interval.

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REFERENCES Pharmaceutical production and management by

C.V.S. Subrahmanyam, Vallabh Prakashan, First edition: 2005, Page no. 292-321.

Industrial Pharmacy by Dr. Shyamala Bhaskaran, Birla Publications, First Edition : 2009-2010, Page no. 194-212.

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