Inventory Management

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Inventory Management

Uninterrupted supply of drugs is the most important factor for success of many programmes. And to achieve uninterrupted supply there is need of proper inventory control system. The science of Inventory management deals with following:

a. How to maintain an appropriate stock level of all products to avoid shortages and oversupply

b. When to order c. How much to order

1. Assessing Stock Status

The purpose of assessing stock status is to determine how long the supplies in the store will last. Specific data—that is, stock on hand (SOH) and rate of consumption—are needed to assess stock status. The general formula for assessing stock status is as below:

Amount we have (now) ÷ Amount we use (each month) = How long it will last (in number of

months)

(SOH)

(AMC)

(MOS)

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To assess the Stock Status we need data sources as given in below box

How do we get “stock on hand (SOH)”?

One can find stock on hand (SOH) data from stock keeping records like stock register or computerized system. The most accurate source is a Physical inventory. A physical inventory is the process of counting, by hand, the total number of units of each commodity in store or health facility, at any given time.

How do we get “Average Monthly Consumption (AMC)”?

The average of the quantities of product dispensed to users or patients in the most recent three months used as AMC. Consumption data can be used to determine the AMC; one can find actual consumption data in only one place i.e. consumption records like daily expense registers or daily usage data. Because consumption fluctuates sometimes by a great deal over the time periods, one should not use data from one month only. To calculate the AMC, first calculate a simple average by finding the sum of a set of monthly consumption numbers and divide the total by the number of months used. When determine the AMC, in general, one should analyze data for the most recent three months.

** For the facilities where consumption data is not available, issue data can be used in place of consumption data to calculate AMC.

** Points to be considered before calculation AMC for the defined period: - Stock out of drug or Short supply from warehouse

- Damaged/transferred/expired drugs, if shown as consumption

How to calculate months of stock on hand (SOH)?

1. Organize monthly consumption data for the product in chronological sequence. 2. Calculate your AMC

3. Collect your current stock-on-hand data. 4. Calculate your months of stock on hand:

– divide stock on hand by the AMC

– round up this figure to the nearest tenth decimal

How to calculate AMC:

- Add the most recent 3 months of consumption data - Divide the sum by 3 months

- Round up this figure up to the nearest whole number

SOH MOS =

3 Example 1:-

If one clinic had 2400 tablets of Paracetamol in stock and AVERAGE consumption in last three months is 1254, calculate how long it will last?

What happens if you fill this number into the formula and determine the months of stock on hand?

Amount we have ÷ Amount we use = How long it will last (NOW) (EACH MONTH) (IN NUMBER OF MONTHS)

2400 1254 1.91 or 1.9 months

2. Inventory Control System (Maximum Minimum Inventory Control System) An inventory control system is used to inform the following:

 when to order,

 how much to order, and

 how to maintain an appropriate stock level of all products to avoid shortages and oversupply.

Key terms in Maximum-Minimum inventory control includes the following:

Max Stock Level

This is the stock level is the HIGHEST level of stock we should keep in our inventory. It is set as ―number of months of stock‖ and it indicates how long supplies will last.

Min Stock Level

This is the level of stock at which actions to replenish inventory should take place. It should be set to be the level that you want the facility to have on hand at the end of a "normal" order period.

Emergency Order Point

(EOP)

This is the level of stock that triggers and immediate emergency order. An EOP can be reached at any point and must be lower than the min.

Lead Time Stock Level

Safety Stock Level

Buffer, cushion, or reserve stock kept on hand to protect against stockouts caused by delayed deliveries, markedly increased demand, or other unexpected events.

Review Period Stock

Level

Review period - this is the time scheduled to examine stock levels and determine if additional stock is needed.

Review period stock – this is the amount of stock that is dispensed during the review period.

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Standard max-min inventory control system:

Following are the trigger for Indenting/Ordering:

1. Review all stock levels at the end of each Review Period.

2. For products which are at or below Minimum level, order enough stock to bring stock levels up to Maximum.

3. If the stock level for any item falls below the Emergency Order Point before the end of the Review Period, place an emergency order.

Setting the Minimum Stock Level (Standard max-min inventory control system)

Setting the Minimum Stock Level

SAFETY STOCK LEVEL

+

=

+

+

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system

Max stock quantity stock on hand pending order quantity = Indent or Order Quantity

…where…

Max stock quantity = Average monthly consumption (AMC) × max stock level (in months) Stock on Hand  Amount we have now

Pending order quantity  Quantity which was ordered but not received till date and expected to be received very soon

At Health Facilities of Haryana usually indent is filled every month and stock is received within 1 week of indent. Thus following are the levels:

Safety Stock level

1 month

Max Stock Level

7 days or 0.25 month

Emergency Order Point

(EOP)

0.5 months

Lead Time Stock

= Minimum stock level + review period stock

= 2 months

+ 1 month

= 3 months

Min Stock Level

= Lead time stock + safety stock + Review period stock

= 0.25 month + 0.5 month +

1 month

= 1.75 ≈ 2 months

Review Period

6 Example 2:-

Let’s use the stock on hand and AMC figure of example 1( If one clinic had 2400 tablets of Paracetamol in stock and AVERAGE consumption in last three months is 1254) to calculate indent quantity if review period is 1 month, min stock is 2 months, max stock is 3 months, and EOP is 0.5 month. You are using Standard Inventory Control System.

At the end of review period, after assessing stock status you found that the current stock on hand will last for 1.9 months which is below the minimum stock level of 2 month.

Therefore considering the trigger points, you need to calculate the indent quantity and calculation will be as below:

1. Calculating maximum stock quantity:

Average monthly consumption (AMC) × max stock level (in months) = Max stock quantity

1254 X 3 = 3762

2. Calculating Indent quantity

Max stock quantity − stock on hand – pending order quantity = Indent or Order Quantity 3762 - 3000-0 = 762