PRINCIPLES
AND METHODS
OF PHARMACY
MANAGEMENT
HARRY A. SMITH, Ph.D.
Professor of Pharmacy Administration, College of Pharmacy,
University of Kentucky, Lexington, Kentucky
T H I R D E D I T I O N
Contents
SECTION I PERSPECTIVES
1. Historic Perspective
Origin of Pharmacy 3 Separation of Pharmacy from Medicine 4 English Conflicts and Organizations 4 Pharmacy in the Colonies 6 Early American History and Competition 7 The Revolutionary War 7 Interwar Period 8 The Civil War 9 Deterrents to Professionalization 10 Demise of the General Store and Transfer of Stock . . . 10 Competition and Diversification . 11 The Soda Fountain and Pharmacy 13 Inadequate Regulations and Education ; i . . . 16 Prohibition and Pharmacy 17 "Fair Trade" Laws 17 Influence of Laissez Faire 19 Summary 19 2. Social Perspective:. Pharmacy Roles
Social Roles 22 Role Strain 23 Studies of Pharmacy Roles 23 Recent Research of Pharmacy Roles 24 Summary of Recent Studies 25 Implications of Dual Roles 26 The "Clinical Role" 29 The Entrepreneurial Role 30 Summary 32 ix
Contents
3. Practice Perspective: Profiles and Opportunities
Pharmacists' Work Settings 34 Pharmacists' Work Activities 35 Managerial Activity 36 Professional Activity 36 Comparison of Two Studies 38 Institutional Characteristics of Practice Settings 39 Traditional Independent Pharmacies 39 Prescription Pharmacies 42 Office Practice/Pharmaceutical Center 43 Franchise Systems 44 Chain Pharmacies .: 45 Profile of Community Pharmacy 48 Institutional Practice 50 Hospital Pharmacy 51 Nursing Home Pharmacy 52 Economic Characteristics of Practice Settings 53 Community Pharmacy 53 Hospital Pharmacy 56 Nursing Home Pharmacy 58 Summary 59 4. Managerial Perspective: Nature of the Management Process
What is Management? 61 Styles of Management 62 Captain-of-Industry Style 63 Hard-Nose Style 64 Human-Relations Style 64 Management-by-Pressure Style . 64 Management-by-Objectives Style \.. 65 Management-by-Objectives 65 Major Premises 66 Philosophy and Conceptual Framework 66 Solution for Chronic Problems 67 Installing the MBO System 69 Basic Changes 70 Implementation 70 Misconceptions of Management-by-Objectives 72 Results of Management-by-Objectives 73 Traditional versus Humanistic Approach to Management 73 TheoryX 74 Theory Y 75 Improving Decision-Making 77 Principles of Decision-Making 77 Preparation for Decisions 79
Contents XI
Steps in Making a Decision 80 "Follow-Through" 81 Summary 82
SECTION II PLANNING
5. The Planning Process
Developing the Plan 89 Setting Goals 89 Assessing Resources • 90 Developing Alternative Approaches 91 Assessing the Risk 92 Deciding on the Best Approach 95 Implementing the Plan 95 Developing a Time Table 95 Control Systems and Risk 96 Business Failure: A Major Risk 97 Policies and Procedures 99
6. Planning and Evaluating a Location
Classification and Definitions 103 Geographic and Demographic Classes 103 Shopping Centers 106 Functional Classes of Locations 108 Variables Affecting Choice of Location 108 Demographic ... 108 Economic : . . 109 Institutional 109 Pharmacy Type 109 Variables Significantly Related to Sales 110 Analysis of the Market Potential 112 Delineating the Trade Area 112 Estimating the Market Potential 118 Estimating Relative Strength 119 Evaluating Suscipient Locations 122 Evaluating Interceptive Locations 123 Calculating an Example 123 When to Relocate Your Pharmacy 124 Analysis of Prescription Files 125 Analysis of Charge Accounts 127 Special Event to Determine Potential Trade Area 127 Summary 128
Xll Contents
1. Planning the Layout Design of a Pharmacy
Objectives of Layout Design 130 Types of Community Pharmacies 131 Pharmaceutical Center 131 Prescription-Oriented Pharmacies 131 Traditional Pharmacies 131 The Super Drugstore 131 Consumer Goods and Purchases 132 Classification of Consumer Goods 132 Classification of Purchases 132 Classes of Layout Designs 133 Historic Types of Service-Oriented Layout Design . . . . 133 Styles of Layout Designs 134 Principles and Characteristics of Layout Design 138
Optimum Design Characteristics for the Traditional
Pharmacy 138 Arrangement of Departments and Merchandise 139 Traffic Flow Analysis 140 Qualitative Traffic Flow Analysis 141 Quantitative Traffic Flow Analysis 141 Case Studies 145 Traffic Flow Analysis of a Prescription Pharmacy . . . . 145 Traffic Flow Analysis of a Traditional Pharmacy 148
8. Capital Planning for a Pharmacy Practice
Why Should a Pharmacist Want His Own Practice? 155 Methods of Entering Private Practice 155 Purchasing an Established Pharmacy ';,. . 156 Establishing a New Pharmacy 157 Junior Partnerships 158 Evaluating an Established Pharmacy 159 Capitalization Method 159 Sales Projection Methods 160 Summation Method 160 Financing a New Pharmacy 162 Factors Influencing the Investment 162 Calculating Capital Requirements 163 Capital Planning and Assessment 166 Basic Accounting Concepts 166 Definitions 168 Capital Leverage 169
Contents Xlll
Source of Capital 170 An Innovative Capital Structure Plan 171
SECTION III ORGANIZATION
9. Macro-Organizational Theory and Practice
Organizational Schools of Thought 178 Classical School 178 Behavioral School 179 Management Science School 179 Design of an Organization 180 Environmental Factors 180 Technology 181 Structure 183 Linkages 183 Organizational Performance 184 Model and Hypotheses 184 Summary 184 Social Control 186 Organizational Structure and Charts 187 Line or Scalar Organizations 188 Departmental Modified Line Organization 189 Line and Staff Organizations 189 Functional Organizations 190 Informal Organizations 192 WorkGroups 192 Classification and Characteristics of Work Groups . . . . 193 Group Interactions 193 Special Groups 195 Organizational Change and Development .^.. 197 Forces of Change 197 Recognition of the Need for Change 199 Development of Strategy 199 Limiting Factors 200 Implementation 201
Evaluation :; 201
Toward an Integrated Organizational Theory 202 Chronological Development 202 Current Status of Theories 204 Summary of Practical Principles 206 10. Micro-Organizational Theory and Practice
Motivation 210 Energizing Human Behavior: Need Theory 211
XIV Contents
Directing Human Behavior 215 Sustaining Human Behavior 219 Motivational Programs 223 Summary of Motivation 225 Leadership Development 225 Bases of Influence 226 Theories of Leadership 226 How Significant is the Leadership Role? 233 Summary of the Leadership Role 234
11. Legal Organizations ,
Sole Proprietorship 241 Advantages 241 Disadvantages 241 General Partnership 241 Definition and Formation of Partnerships 241 Advantages 242 Limitations 242 Rights of Partners 243 Dissolution of Partnership 243 Specialized Types of Partnership 243 Inactive Partner 244 Limited Partnership 244 Partnership by Estoppel 244 The Corporation 244 Definition and Formation 244 Powers 245 Board of Directors 245 Stockholders \ 246 Stocks and Dividends 246 Dissolution of a Corporation 246 Advantages of a Corporation 247 Limitations of a Corporation 247 The "Subchapter S" Corporation 247 Summary -' '.-... 248 12. Personnel Administration
Importance of Personnel Administration 250 Principles of Personnel Administration 251 Methods of Personnel Administration 252 Staffing Requirements 252 Job Analysis and Specification 256 Recruitment and Selection 257 Orientation and Training 258
Contents XV
Supervision 260 Evaluation and Compensation 261 Summary 265
SECTION IV DIRECTING
13. Purchasing
Formulating Effective Buying Policies 271 Determining the Needs and Desires of Patrons 272 Selecting the Sources of Supply 273 Universality of Marketing Functions 273 Minimum Total Transactions 274 Sorting 274 Market Proximity 275 Services of Drug Wholesalers 275 Direct versus Indirect Purchasing 276 Cooperative Buying Groups 277 Specialty Wholesalers 280 Determining the Terms of Purchase 280 Discounts 281 Datings and Credit Terms 284 Return Goods Policy 285 Receiving, Marking, and Stocking Goods 285 Title to Goods 286 14. Inventory Control
Methods of Inventory Control 290 Intuitive Method 290 Systematic Wantbook Method 290 Open-to-Buy Budget System ':•;.. 290 Stock Record Card System 293 The Economic Order Quantity 295 Perpetual Inventory Method 300 Selection of the Optimum Method(s) 301 Effect of Inventory Control: A Mini-Case Study 303 15. Pricing and Professional Fees
General Pricing Considerations 305 Basic Factors 305 Competitive Range 306 Pricing Policies and Strategies 308 Pricing Methods 312 Nonmathematic Methods 312 Mathematic Methods 312 Pricing Objectives 314
XVI Contents
Prescription Pricing 316 History of Pricing 316 Analysis of Pricing Schedules 317 Professional Fees 319 Revival of Professional Fees 319 Philosophy 320 Pros and Cons of Professional Fees 320 Basis of Fee Computation 322 Older Methods 322 Revised Methodology 324 Steps in Computing Professional Fee 327 Case Study 329 Meeting Competition 331 Summary 331 16. Pharmacy Services and Patronage
Pharmacy's Public Image 334 Loss of Public Contact 335 Ranking of Pharmacists 337 Role Ambiguity 338 Perceived Attributes of Pharmacists 339 Consumer Patronage 340 Patronage Motives 340 Desired Professional Services 346 Professional Consultation 348 Purchasing Motives 350 Classification of Motives 350 Rational Motivations 351 Emotional Motivations 351 Interrelationship of Motives .\ 352 General Model of Consumer Motivation and Behavior 353 17. Promotion/Merchandising Objectives 359 Classification of Promotions 360 Institutional Approach . 360 Merchandising Approach 360 Modes of Promotions 360 Developing a Promotional Program 361 Promotional Strategy 361 Promotional Budget 363 Calendar of Events 366 Executing the Program 367 Steps in Implementation 367 Advertising 367
Contents XV11 Displays 371 Direct Mail 373 Miscellaneous Promotions 374 Personal Selling 375 Limiting Factors 376 Evaluation of Promotion 377 General Methods 377 Special Methods 378 Summary 379 SECTION V CONTROLLING
18. Financial Analysis and Management
Analysis Objectives 383 Definitions and Standards 384 Liquidity and Solvency Ratios 384 Financial Position Ratios 385 Profitability Ratios 386 Efficiency Ratios 388 Methods of Analysis 389 Ratios and Paradigm 390 Comparison with Standards 390 Trend Analysis 395 Illustration of Trend Analysis: A Case Study 396 Break-Even Financial Analysis 400 Summary 402 19. Control Mechanisms
Role of the Computer , . 405 Computer Components and Terminology 405 Functions of a Computer 407 Selecting a Computer System 408 Nonbudgetary Controls 409 Professional Functions 409 Credit Control 412 Store Security 417 Budgetary Controls 418 Revenue Component of the Budget 419 Expenditure Component of the Budget 420 Cash Flow Control 422 Budgeting Depreciation 425 Basis for Depreciation 425 Depreciation Criteria 425 Components of Depreciation 426 Depreciation Methods 426
XV111 Contents
Choosing the Best Method 428 Summary 428 Glossary 431 20. Risk Management and Insurance
Risk Management 437 Types of Risk 437 Approaches to Risk Management 438 Insurance Principles 439 Definitions of Insurance 439 Requisites of Insurable Risk 440 Formulating the Insurance Program 441 Types of Insurance Coverage 442 Fire Insurance 443 Consequential Coverage 443 Casualty Insurance 445 Special Types of Coverage 448 Insurance for Employees 449 Minimum Coverage 450 Co-Insurance 451 Business Life Insurance 452 Basic Information 452 Types of Business Life Insurance 453 Periodic Analysis and Evaluation of Program 454 Summary 455 Index 457
