According to (Dias,
2012, 451) inventory management is an extremely important in pharmaceutical
supply system so that without healthy inventory system, the pharmaceutical
supply system will not be viable. in fact, the task of inventory management is
rather hard, and poor management of inventory in pharmaceutical supply system
for example order frequency and quantity, inaccurate stock records and a lack
of systematic performance monitoring can cause waste of financial resources,
lack of important medicines or surplus of others leading to expiration and poor
quality of patient care. These problems
because of lack of knowledge and appreciation of what inventory management
means; and in many cases, there are no systematic procedures and roles to guide
staff. The problem will be exacerbated if the managers have a lack of
understanding of the basic issues of proper inventory management.
are several advantages and disadvantages of maintaining inventory as shown in
the table (1) below.
Table 1. advantages and
disadvantages of maintaining inventory
against seasonal fluctuations
Source: Dias, 2012, 451
Inventory management focuses primarily
on activities related to planning and control stocks to ensure achieving a set
of objectives to meet the needs of companies and customers as efficiently as
possible for improving revenues; reducing degradation and obsolescence;
improving warehouse utilization; and lower utility, labor and capital costs.
Therefore, it is both directly and indirectly tied to huge financial gains
(Amjed & Harrison, 2012). Thus, from materials management perspective, an
apt definition of inventory is “a usable but idle resource having some
economic value.” Physical inventory is essential for the continuity of
production and services provided. However, keeping stocks is not free because
there are opportunity costs of holding in companies. Accordingly, the paradox
is that inventory is needed, but it is not desired which makes inventory
management a complicated area in materials management. It also makes a high inventory turnover ratio
as a good performance indicator.
are several kinds of inventory including raw materials; bought-out-parts (BOP)
which go to the product assembly directly as it is; work-in-progress (WIP) or
pipeline inventory; finished goods inventory to support the distribution to the
customers and maintenance, repair, and operating (MRO) supplies (Vrat, 2014).
is one of the most important cost elements and must be managed well to minimize
costs. According to The U.S. Department of Commerce estimates, the inventory of
U.S. companies cost a huge amount of money. Therefore, because of the high cost
of keeping inventory, the companies try to reduce inventory levels which can be
achieved by focusing on raising supply chain efficiency, quality management and
reducing uncertainty at various points along the supply chain. In fact,
uncertainty is created by low-quality weather from the part of the company or
its suppliers or both. This can be represented by variations in delivery times,
large fluctuations in customer demand, or poor forecasts of customer demand.
Therefore, much of inventory management involves lot sizing to determine how
frequently and in what quantity the inventory should be ordered (Russell &
Taylor, 2011, 554).
There are several tools used to control
inventory. These tools are very important to maximize the inventory efficiency
as illustrated bellow:
2-1-1- Economic order quantity (EOQ)
It is one of the most important models to manage
inventory under certainty situations. It is used to determine the quantity
required to minimize total cost and balance between procurement and holding
costs. The economic order quantity is called economic lot size as well. There
are two methods by which economic order quantity can be calculated which are
(Tabulation and Algebraic methods) (McLaughlin & Hays 2008; Kumar and
Suresh, 2009; Brindha, 2014).
2-1-2- Continuous review (Q)
Continuous review or perpetual
inventory one of the most common in pharmaceutical supply chain designed to
track stock units continuously to determine the quantity, at which an order
must be placed, and time of reorder. Sometimes, it is called reorder point
system or fixed quantity system. Depending on continuous review models, it is
possible to place order at any time when the inventory reach at the minimum
level (Buffa & Sarin 1990; Dias,
2012). The Continuous review is more
sophisticated and efficient than periodic review when precise information is
available at real-time and use computer systems or detailed records are
maintain (Çakici et al. 2011; Account tools, 2013).
2-1-3- Periodic review (P)
In pharmaceutical supply chain, there are two models
as a periodic review model.
model is Annual purchasing model used to purchase items at once a year. Annual
purchasing can be suitable for countries which new programs, which have no
system for inventory management. Annual purchasing might be compulsory in
countries that have limited local sources and lead times of importing from
foreign suppliers needs months for arriving.
Although using scheduled or continue purchasing by some systems, some
items might be purchased annually. There are several disadvantages related to
this model like surpluses, shortages and expensive emergency orders, high stock
levels and cost of inventory-holding, providing a huge single delivery is hard,
large storage space, difficulties to pay funds and workload in the main
receiving points and procurement office
second model is schedule purchasing in which orders are placed at a selected
time such as (weekly, monthly, quarterly, biannually). Orders are placed at the
scheduled order date for suitable quantity to meet average needs until the next
order. Schedule purchasing have to take into account stock needed during the
lead time for that order (plus replenishment of safety stock, if needed). In
most supply systems, new orders are placed only after receiving the previous
one. However, there are some systems use tandem ordering, with overlapping
orders and various expected times of arrival, if the reliability of estimated
lead time is high.
In scheduled purchasing, supply contracts can be
renewed at each interval or can be negotiated at the beginning of the year,
with the condition that orders will be placed when needed at the identified
Although there are several benefits for the schedule purchasing
model like bullwhip effect is less than annual purchasing model, bullwhip
effect can still occur with scheduled review periods in three to six months, as
shown in figure (1) and the cost of inventory-holding is directly proportional
to the interval of material supply. (Dias, 2012).