Inventory control methods in Hospital Pharmacy

INVENTORY CONTROL IN HOSPITAL PHARMACY

1. INTRODUCTION

Inventory control is one of the most important functions of hospital pharmacy management. It involves the systematic planning, purchasing, receiving, storage, distribution and monitoring of medicines and pharmaceutical supplies required for the smooth functioning of a hospital.

Hospital pharmacies must maintain an adequate supply of medicines, surgical items, intravenous fluids, vaccines, emergency drugs and other medical supplies to meet the requirements of different hospital departments.

Effective inventory control ensures the availability of the right medicine, in the right quantity, at the right time, in the right condition and at an economical cost.

Poor inventory management may result in stock-outs, overstocking, expiry of medicines, financial losses, wastage and interruption of patient care.

Therefore, an effective inventory control system is essential for ensuring uninterrupted patient care and efficient utilization of hospital resources.

2. DEFINITION

Inventory control is defined as the systematic supervision and regulation of the procurement, storage, distribution and utilization of medicines and pharmaceutical supplies to ensure adequate availability at minimum possible cost.

It is also defined as the process of maintaining optimum stock levels by controlling the purchase, storage and issue of medicines according to hospital requirements.

3. OBJECTIVES OF INVENTORY CONTROL

1. To ensure continuous availability of essential medicines.
2. To prevent overstocking and stock-out situations.
3. To minimize expiry, deterioration and wastage of medicines.
4. To maintain optimum stock levels.
5. To ensure proper utilization of the hospital pharmacy budget.
6. To reduce unnecessary investment in inventory.
7. To maintain proper records of stock receipts and issues.
8. To prevent pilferage, theft and unauthorized utilization.
9. To ensure proper storage and preservation of medicines.
10. To improve the efficiency of hospital pharmacy services.
11. To ensure the availability of emergency and life-saving medicines.
12. To promote rational procurement and distribution of medicines.

4. IMPORTANCE OF INVENTORY CONTROL IN HOSPITAL PHARMACY

• Ensures uninterrupted availability of medicines for inpatients and outpatients.
• Prevents emergency shortages of life-saving drugs.
• Reduces financial losses due to expired and damaged medicines.
• Improves the utilization of hospital funds.
• Helps in identifying fast-moving and slow-moving medicines.
• Maintains proper stock records.
• Facilitates effective procurement planning.
• Improves coordination between pharmacy, purchase and hospital departments.
• Ensures proper storage conditions and maintenance of medicine quality.

5. METHODS OF INVENTORY CONTROL

The following methods are commonly used for inventory management in hospital pharmacies:

1. ABC Analysis
2. VED Analysis
3. ABC-VED Matrix Analysis
4. Economic Order Quantity (EOQ)
5. Perpetual Inventory Method
6. Physical Inventory Method
7. Lead Time
8. Open-to-Buy Budget System
9. Bin Card System
10. Safety Stock Method
11. FSN Analysis
12. HML Analysis

5.1 ABC ANALYSIS (ALWAYS BETTER CONTROL)

Definition

ABC analysis is an inventory control technique based on the annual consumption value of medicines and pharmaceutical products.

It classifies inventory items into three categories according to their financial importance.

Categories of ABC Analysis

A CATEGORY:

• Includes high-value medicines.
• Usually represents approximately 10–15% of total inventory items.
• Accounts for approximately 70–75% of total inventory expenditure.
• Requires strict supervision and frequent monitoring.

Examples: High-cost anticancer medicines, biological products and expensive specialty medicines.

B CATEGORY:

• Includes moderate-value medicines.
• Usually represents approximately 20–25% of total inventory items.
• Accounts for approximately 15–20% of total expenditure.
• Requires moderate supervision.

Examples: Moderately priced antibiotics and cardiovascular medicines.

C CATEGORY:

• Includes low-value medicines.
• Usually represents approximately 60–70% of total inventory items.
• Accounts for approximately 5–10% of total expenditure.
• Requires comparatively simple control procedures.

Examples: Low-cost consumables and commonly used inexpensive medicines.

Advantages

1. Helps in controlling hospital pharmacy expenditure.
2. Identifies high-value inventory items.
3. Reduces unnecessary investment.
4. Helps in prioritizing procurement.
5. Facilitates effective financial management.

Principle: A small proportion of inventory items accounts for a major proportion of total expenditure.

5.2 VED ANALYSIS (VITAL, ESSENTIAL AND DESIRABLE)

Definition

VED analysis is an inventory control method based on the clinical importance and criticality of medicines, irrespective of their cost.

It is particularly useful in hospital pharmacies because the availability of certain medicines is essential for saving patients' lives.

Categories

V – VITAL

• Medicines that are essential for saving life.
• Their absence may result in serious complications or death.
• They should always be available in adequate quantities.

Examples:

• Adrenaline injection
• Atropine injection
• Anti-snake venom
• Emergency resuscitation medicines

E – ESSENTIAL

• Medicines required for the treatment of important diseases.
• Their temporary non-availability may affect treatment and patient recovery.
• Adequate stock should be maintained.

Examples:

• Antibiotics
• Antihypertensive medicines
• Antidiabetic medicines
• Proton pump inhibitors

D – DESIRABLE

• Medicines that are useful but not immediately critical for life.
• Their absence generally does not cause serious interruption of essential treatment.

Examples:

• Multivitamin preparations
• Certain nutritional supplements
• Non-essential supportive preparations

Advantages

1. Ensures availability of life-saving medicines.
2. Helps prioritize procurement.
3. Prevents shortages of critical medicines.
4. Improves patient safety.
5. Supports emergency pharmacy management.

5.3 ABC-VED MATRIX ANALYSIS

Definition

ABC-VED matrix analysis is a combined inventory control technique that classifies medicines according to both their annual consumption value and their clinical importance.

ABC analysis considers the cost of medicines, whereas VED analysis considers their criticality.

Classification

The combination produces nine categories:

ABC / VED	Vital (V)	Essential (E)	Desirable (D)
A	AV	AE	AD
B	BV	BE	BD
C	CV	CE	CD

Classification into three groups

Category I: AV, AE, AD, BV and CV.

Category II: BE, CE and BD.

Category III: CD.

This grouping is a commonly used matrix arrangement; the exact grouping can vary according to hospital policy.

Advantages

1. Combines financial and clinical importance.
2. Helps prioritize purchasing decisions.
3. Ensures adequate availability of vital medicines.
4. Improves budget utilization.
5. Helps in identifying items requiring strict control.

5.4 ECONOMIC ORDER QUANTITY (EOQ)

Definition

Economic Order Quantity is the optimum quantity of medicines or pharmaceutical products that should be ordered at one time to minimize the total ordering and carrying costs.

Formula

EOQ = √(2DS/H)

Where:

D = Annual demand or consumption in units.

S = Ordering or procurement cost per order.

H = Annual holding or carrying cost per unit.

Procuring Cost

It includes:

• Communication expenses.
• Preparation of purchase orders.
• Administrative expenses.
• Receiving and inspection costs.
• Documentation and processing expenses.

Carrying Cost

It includes:

• Storage and warehousing expenses.
• Insurance charges.
• Interest on invested capital.
• Refrigeration and maintenance expenses.
• Deterioration and damage.
• Expiry and obsolescence losses.

Advantages

1. Minimizes total inventory costs.
2. Prevents excessive purchasing.
3. Reduces unnecessary capital investment.
4. Helps in planning procurement.
5. Improves inventory management.

Note: The basic EOQ model assumes relatively constant demand and lead time. In hospitals, expiry dates, criticality, storage limitations and supplier constraints must also be considered.

5.5 PERPETUAL INVENTORY METHOD

Definition

Perpetual inventory is a continuous system of inventory control in which every receipt and issue of medicines is recorded immediately to maintain an updated stock balance.

Features

1. Every purchase and issue is recorded.
2. Stock records are continuously updated.
3. Current stock levels can be identified at any time.
4. Physical verification is performed periodically.
5. Discrepancies between actual stock and recorded stock are investigated.

Advantages

• Provides updated stock information.
• Helps identify stock shortages.
• Detects pilferage and recording errors.
• Facilitates timely reordering.
• Improves accountability.

5.6 PHYSICAL INVENTORY METHOD

Definition

Physical inventory refers to the actual counting and verification of medicines and pharmaceutical supplies available in the hospital pharmacy.

Objectives

1. To verify actual stock against recorded stock.
2. To identify expired and near-expiry medicines.
3. To detect damaged and deteriorated products.
4. To identify slow-moving and non-moving items.
5. To detect shortages and pilferage.
6. To maintain accurate inventory records.

Physical verification may be performed weekly, monthly, quarterly or annually depending on hospital policy and the nature of the inventory.

5.7 LEAD TIME

Definition

Lead time is the total time interval between placing an order with the supplier and receiving the ordered medicines into hospital pharmacy stock.

Formula

Lead Time = Ordering Time + Delivery Time + Receiving Time

1. Ordering Time

Time required to identify the need for medicines, select the supplier and place the purchase order.

2. Delivery Time

Time taken by the supplier to process the order, collect the medicines, prepare the invoice, pack and dispatch the products.

3. Receiving Time

Time required for transportation, unloading, inspection, verification and entry of medicines into hospital stock records.

Importance

• Helps in planning procurement.
• Prevents stock-out situations.
• Helps determine reorder levels.
• Supports safety stock calculations.

5.8 OPEN-TO-BUY BUDGET SYSTEM

Definition

Open-to-buy is a financial inventory control method used to monitor the amount of money available for future purchases within an approved inventory budget.

In hospital pharmacy, a purchase budget is generally prepared based on previous consumption, anticipated patient requirements and available financial resources.

As medicines are purchased, the committed expenditure is deducted from the available purchasing budget.

Advantages

1. Prevents unnecessary purchases.
2. Controls excess investment in inventory.
3. Helps maintain financial discipline.
4. Supports planned procurement.
5. Reduces overstocking and wastage.

The calculation should account for both purchases already made and outstanding purchase commitments.

5.9 BIN CARD SYSTEM

Definition

A bin card is a stock recording document maintained for an individual medicine or inventory item to record the quantity received, quantity issued and balance available.

It is generally kept near the storage location of the corresponding medicine.

Information Recorded

1. Name of medicine.
2. Strength and dosage form.
3. Date of receipt.
4. Quantity received.
5. Date of issue.
6. Quantity issued.
7. Balance quantity.
8. Batch number, where applicable.

Advantages

• Helps maintain accurate stock records.
• Facilitates easy identification of stock balance.
• Helps in detecting discrepancies.
• Supports FIFO and FEFO stock rotation.

FIFO: First In, First Out.

FEFO: First Expiry, First Out.

FEFO is particularly important in hospital pharmacies because medicines with earlier expiry dates should generally be issued first.

5.10 SAFETY STOCK METHOD

Definition

Safety stock is the additional quantity of medicines maintained as a reserve to prevent stock-outs caused by unexpected increases in demand or delays in supply.

Uses

1. Prevents shortages during emergencies.
2. Covers unexpected increases in medicine consumption.
3. Protects against supplier and transportation delays.
4. Ensures uninterrupted availability of essential medicines.
5. Supports emergency preparedness.

Formula

Safety Stock = Z × σd × √L

Where:

Z = Service level factor.

σd = Standard deviation of demand per day.

L = Lead time in days.

This formula assumes constant lead time and variable daily demand.

Advantages

• Prevents stock-out situations.
• Improves patient care.
• Ensures emergency medicine availability.
• Reduces emergency purchasing.

Limitations

• Increases storage and holding costs.
• Blocks financial resources.
• Increases the risk of expiry and wastage.

5.11 FSN ANALYSIS (FAST, SLOW AND NON-MOVING)

Definition

FSN analysis is an inventory control technique based on the movement or consumption rate of medicines and pharmaceutical supplies.

Categories

F – FAST-MOVING

Items that are frequently issued or consumed.

Examples: Commonly used antibiotics, IV fluids and frequently prescribed medicines.

S – SLOW-MOVING

Items that are issued less frequently.

Examples: Certain specialized medicines and less frequently used preparations.

N – NON-MOVING

Items that have not been issued or consumed for a specified period.

Examples: Unused medicines and discontinued preparations.

Advantages

1. Identifies fast-moving and slow-moving medicines.
2. Helps prevent dead stock.
3. Reduces expiry losses.
4. Improves purchasing decisions.
5. Helps optimize storage space.

5.12 HML ANALYSIS (HIGH, MEDIUM AND LOW)

Definition

HML analysis is an inventory control method based on the unit purchase price of medicines and pharmaceutical products.

Categories

H – HIGH: Items with high unit purchase prices.

M – MEDIUM: Items with moderate unit purchase prices.

L – LOW: Items with low unit purchase prices.

Advantages

1. Helps identify expensive individual items.
2. Facilitates purchasing supervision.
3. Helps in financial planning.
4. Improves control over high-value medicines.

Difference between ABC and HML:

ABC analysis is based on annual consumption value, whereas HML analysis is based on the unit price of an individual item.

6. REORDER LEVEL

Definition

Reorder level is the stock level at which a fresh purchase order should be placed to ensure that medicines are replenished before the existing stock is exhausted.

Formula

Reorder Level = Average Daily Consumption × Lead Time + Safety Stock

Example

If the average daily consumption of a medicine is 20 units, lead time is 5 days and safety stock is 30 units:

Reorder Level = (20 × 5) + 30

Reorder Level = 130 units.

Therefore, when the available stock reaches 130 units, a new order should be placed.

7. STOCK ROTATION METHODS

Stock rotation is the systematic arrangement and distribution of medicines to minimize expiry and wastage.

1. FIFO – First In, First Out

Medicines received first are issued first.

2. FEFO – First Expiry, First Out

Medicines with the earliest expiry dates are issued first, irrespective of their date of receipt.

Importance of FEFO:

• Reduces expiry-related losses.
• Prevents dispensing of expired medicines.
• Maintains proper stock rotation.
• Improves patient safety.

In pharmaceutical stores, FEFO should generally be preferred when expiry dates differ.

8. RESPONSIBILITIES OF A HOSPITAL PHARMACIST IN INVENTORY CONTROL

1. Estimate the medicine requirements of the hospital.
2. Prepare and monitor the pharmacy inventory budget.
3. Select reliable and authorized suppliers.
4. Maintain appropriate stock levels.
5. Monitor the availability of essential and emergency medicines.
6. Verify medicines received against purchase orders and invoices.
7. Ensure proper storage conditions.
8. Maintain batch numbers and expiry records.
9. Conduct regular physical stock verification.
10. Identify expired, damaged and non-moving medicines.
11. Maintain stock registers and computerized records.
12. Implement FIFO and FEFO practices.
13. Prevent pilferage and unauthorized stock movement.
14. Coordinate with hospital departments for medicine requirements.

9. ADVANTAGES OF EFFECTIVE INVENTORY CONTROL

• Continuous availability of medicines.
• Improved patient safety.
• Reduction in medicine wastage.
• Better financial management.
• Reduced expiry losses.
• Efficient utilization of storage space.
• Improved procurement planning.
• Better coordination between departments.
• Increased accountability and transparency.

10. CONCLUSION

Inventory control is an essential component of hospital pharmacy management. It ensures the continuous availability of medicines and pharmaceutical supplies while minimizing financial losses, expiry and wastage.

The use of scientific inventory control techniques such as ABC, VED, ABC-VED matrix, EOQ, perpetual inventory, physical inventory, FSN, HML and safety stock helps hospital pharmacists manage pharmaceutical resources efficiently.

An effective inventory control system ultimately improves hospital pharmacy services, promotes rational utilization of medicines and ensures better patient care.

QUICK REVISION TABLE

Method	Basis / Purpose
ABC	Annual consumption value
VED	Clinical criticality
ABC-VED	Cost and clinical criticality
EOQ	Optimum order quantity
Perpetual	Continuous stock recording
Physical inventory	Actual stock verification
Lead time	Time required to receive an order
Open-to-buy	Purchase budget control
Bin card	Item-wise quantity record
Safety stock	Reserve stock
FSN	Rate of stock movement
HML	Unit purchase price
FIFO	First received, first issued
FEFO	Earliest expiry, first issued
Reorder level	Stock level triggering a new order

IMPORTANT EXAM POINTS

1. ABC analysis is based on cost/annual consumption value.
2. VED analysis is based on clinical importance.
3. EOQ determines the optimum quantity to order.
4. Perpetual inventory maintains continuous stock records.
5. Physical inventory involves actual counting of stock.
6. Lead time is the time between ordering and receiving.
7. Safety stock prevents stock-outs.
8. FEFO is particularly important for medicines with different expiry dates.
9. FSN identifies fast-, slow- and non-moving items.
10. HML classifies items based on individual unit price.