Drug Inventory Management

HPAd 203

- Noel D. Lawas MD -
Inventory Classification Using
ABC Analysis
Classification of usage
Items (high usage value)
this class is commonly composed of a relatively few items
usually 10-20% of the items, but accounts for a large
percentage, about 70-80% of the total annual peso usage.
Items (medium usage value)
these mid-range items usually account for 20-40% of the total
items, whose total annual peso usage accounts for about 20%
of the total.
Items (low usage value)
this class comprise the bulk of the inventory items but accounts
for a negligible portion, usually 5-10% of the total peso usage
value.
ABC Classification Chart
No. of Items (%)
100%
A
High
Usage
Value
B
Medium
Usage
Value
C
Low Usage Value
Steps in Performing ABC
Analysis
Calculate the annual usage in units for each
stock item
Derive the annual usage in pesos for each
stock item by multiplying its annual usage
in units by its unit cost
Rank the items from highest to lowest
annual peso usage and categorize them
Example
Item Annual
Usage in
Units
Unit Cost Annual
Usage in
Peso
Rank
00001 30,000 0.10 3,000 6
00002 28,000 1.50 42,000 1
00003 3,000 0.10 300 9
00004 110,000 0.05 5,500 4
00005 4,000 0.05 200 10
00006 2,000 10.00 22,000 2
00007 15,000 0.05 750 8
00008 8,000 0.05 4,000 5
00009 60,000 0.15 9,000 3
00010 800 1.00 800 7 00010 800 1.00 800 7
Calculation of the Annual Usage in Peso
Example
Item Annual
Usage in
Peso
Cumulative
Usage in
Peso
Percent Classifi-
cation
00002 42,000 42,000 48.0 A
00006 22,000 64,000 73.1 A
00009 9,000 73,000 83.4 B
00004 5,500 78,500 89.6 B
00008 4,000 82,500 94.1 B
00001 3,000 85,500 97.6 C
00010 800 86,300 98.6 C
00007 750 87,050 99.4 C
00003 300 87,350 99.6 C
00005 200 87,550 100.0 C
Ranking and Using ABC Classification
Example
Class Items Percent of
Items
Value per
Group
% of Total
Value
A
00002,
00006
20 64,000 73.1
B
00009,
00004,
00008
30 18,500 21.1
C All others 50 5,050 5.8
Summary of ABC Analysis
Economic Order Quantity Analysis
Type I -
Stock Items - these are materials and supplies
whose usages are regular and can be forecasted
and which are ordered in anticipation of need.
Type II
As required Items - these are items for which
usages are not regular and can be forecasted
and are ordered when a specific demand rises.
Classification of Inventory Stocks
Economic Order Quantity Analysis
Type III
Erratic Supply Items - these are items subject to
extreme price and supply variations. Ordering
and inventory level decisions are governed by
external purchasing considerations rather than
internal cost factors.
Type IV -
Surplus Items - these are items found obsolete
or unusable and further ordering of the same
item is not expected.
Classification of Inventory Stocks
Conceptual Framework of Economic
Order Quantity Model
Q* Order Size (Qty)
A
m
o
u
n
t

(
P
h
p
)

Carrying Cost
Ordering Cost
Total Cost
Formula
2
Q
C Cost Carrying =
where:
C = fixed carrying cost per unit
Q = quantity per order
Q
S
O Cost Ordering =
where:
0 = fixed cost per order transaction
S = total inventory requirement per
period
Formula
Q
S O Q C
Cost Total

+

=
2
Let Q* = Quantity having the least cost
Then:
2
1
2
*
(

=
C
O S
Q
Sample Problem
Given:
Assume that the total requirement is 5,000 units per
year, ordering the cost is 200 per order and carrying cost is 50
per unit per year. Then economic order quantity is :
units
pesos
Q 200
50
200 000 , 5 2
*
2
1
=
(

=
Total expected cost = (P50*200)/2 + (P200*25)
= P5,000 + P5,000
= P 10,000
Exercise Problem
1. Guzman Clinic is attempting to determine the
optimal order quantity for a popular brand of cough
syrup. The clinic uses 2,500 bottles of cough syrup
a year, buying them at a retail price of 9.50 per
bottle. The administrator figures that it costs 1 a
year to carry a bottle in inventory and 50 to
prepare an order for new stocks.
1.1 Determine the total costs associated with
ordering one, four and ten times a year.
1.2 Determine the economic order quantity.
Exercise Problem
2. Allaga Clinic is considering an optimal inventory policy
for cotton. It consumes approximately 1,800 boxes per
year. Annual inventory cost per box is 3, while order cost
is 27.
Questions:
2.1 Determine the economic order quantity. What is
the clinic's average inventory of cotton?
2.2 Determine the total ordering and carrying costs.
2.3 Suppose a 0.05 discount per box is offered on
purchases of at least 200 boxes. Should the clinic
take advantage of the discount? Show calculations.