Defining Basic Inventory Terminology

To understand approaches to managing pharmacy inventory, you must first be familiar with basic inventory terminology. Table 13-1 shows key inventory-related terms and definitions.

Understanding the Pharmaceutical Supply Chain

Next, you must understand how pharmacies obtain the products they sell and where they send products they no longer need. The major entities in the pharmaceutical supply chain include the following:

• Manufacturers—companies or entities that manufacture, distribute, market, and sell drug products directly to pharmacies. Pharmacies can often get lower prices when they purchase products directly from manufacturers, but they also have to order certain minimum quantities.
  
• Wholesalers (also referred to as suppliers or distributors)—these are the “middle men” in the pharmaceutical supply chain. Wholesalers stock many thousands of items that are generally found in pharmacies, from health and beauty aids to nonprescription agents to the most expensive prescription drugs. As wholesalers have become heavily computerized, they have helped pharmacies to improve their business, financial, and sales analyses based on purchasing patterns.
  
• Purchasing groups—both hospital and community pharmacies have banded together to increase their purchasing power. By committing to the use of certain common items—such as intravenous fluids and administration sets or specific drugs in commonly used therapeutic categories—members of these purchasing groups can negotiate very favorable prices with manufacturers, wholesalers, or both.
  
• Prime vendors—many pharmacies also enter into contracts with wholesalers that promise the wholesalers a large percentage of the pharmacy’s business. In return, these wholesalers—or prime vendors—give special pricing and assist pharmacies in managing inventory levels and costs.
  
• Other pharmacies—when one pharmacy runs out of an item or needs a product they do not usually stock, the staff often borrows from another pharmacy. Ask your pharmacist what other pharmacies in your area to contact for this purpose.
  
• Reverse distributors—think of these as opposite of wholesalers. When drug products expire and can no longer be dispensed, pharmacies need to dispose of them in a way that complies with federal and state regulations. In many cases, expired drugs can be returned to the manufacturer or wholesaler for partial credit. Many pharmacies use reverse distributors to facilitate this process. They assist in returning expired or unusable products, help maintain compliance with manufacturers’ return policies, and receive and process return credits for the pharmacy.

Calculating Order Quantities

Many pharmacies calculate an economic order quantity (EOQ) to help them determine how much of a product to order, as follows:

L = annual purchases of the item in dollars

M = dollar cost of reordering or issuing a purchase order

W = cost of capital or carrying inventory (interest rate on borrowed funds)

As illustrated in Figure 13-1, the EOQ system creates three critical numbers. First, the EOQ is the ideal amount of inventory that should be ordered so that the costs of carrying the inventory and the costs of reordering and stocking the inventory are minimized. Next, a reorder level must be determined, based on how fast the product is selling and how long it takes to get a new order in. Finally, an emergency level is designated so that special actions—such as telephone calls, ordering from a different source, or borrowing—can be taken if the inventory gets too low before the order comes in.

Many pharmacy managers use a “just-in-time” inventory system. As the name suggests, this system is designed to have inventory arrive just as the previous supply is exhausted. For items whose usage and delivery are predictable, this system helps pharmacies minimize inventory costs and stocking levels.

Stay updated, free articles. Join our Telegram channel

Join