pharmacy management lo4

inventory

all items intended for sale and supply, medication, front store items and supply

assets

property and posession

liability

what you owe

replenishment

how much to order and when to order

lead time

the length of time between the order date and the arrival of the product

what is the goal of pharmacy

for the owner to increase profit by increasing sales and decreasing expenses

goals of purchasing and inventor management

increase sales, increase profits, decrease cost, decrease expenses, while ensuring patient safety/optimal pateint care

expenses associated with inventory

carrying cost, shortage cost, replenishment cost, risk cost

pareto’s principal

known as the 80/20 rule, 80% of outputs come from 20% of the causes, for example 20 percent of your inventory accounts for 80 percent of the sales

class a of inventory

80% of dollars is 20% product

class b inventory

15% of dollars is 15% product

class c inventory

5% of dollars is 65% product

gudilines for class a

dont run out, strict control, maintain accurate forecast, develop a min/max ordering system

guidlines for class b

lower safety stock, moderate control, min/max ordering point

guidelines for class c

special orders, loose control

visual system

individual checks shelves and orders low stock products, number of units is based on history and what is needed, want book

advantages of visual system

simple, inexpensive

disadvantages of visual

no record of purchase sale, dependant on one individual, requires steady sale service and supple, tracked useing physical inventory account

periodic system

stock card is created for each item with supplier info, product info, total is increased or decreased and cards are put into a bin when items need to be reordered, keeps historical sale record, good for higher sale volumes, takes more time to prepare,

perpetual system

system that records sales as they occur, usually electronic and cash and registar equiptment, inventory purchased as sales are big, requires acruate input, manual is used to maintain hospital stock

effective inventory control

imporves efficiencies in drug ordering, saves time and money and increases sales, reduces ordering errors, reduces wastage, maintians good supplier relationship, improves pharmacy image, enhances pt care

inventory location

hoe the products are organized, increases inevntory amount, difficult to visulaize on hand quantity, central storage neccasary like a warehouse, requires more monitoring

what is the purpose of financial statements

determines how a buisness is doing financially, provides a financial picture, provides a common point of reference, used to perfomr calculations

who uses financial statements?

managers for sales compared to budget, shareholders to show internal effeciency and management effectiveness, lenders for loan security, CRA

revenue

entire income a company generates before expenses are subtracted

expenses

all cost of running a business

COGS

cost of goods sold, the cost of what is takes to make a business sell,m

gross profit

selling price of profit minus the buying cost, compares profit of sales, profit without taking expenses into account

gross margin

gross profit/revenue times 100, compares products with sales cost

net earnings

before tax-after tax

net annual sale

total cost of money made in the year

fiscal year

the one year accounting period set by the company for the purpose of the financial reporting and budgeting

asset

what is owned by a business, value can objectively measured, can be tangible or intangible

current asset

asset of what is expected to be converted to cash, sold, or consumed within operating a business cycle

fixed asset

long-lived assets, will not be consumed or converted into cash within operating business cycle

overhead

the costs related to a business, includes wages, equiptment, rent, taxes, utilites, meds, supplies

current liability

liability expected to be paid within an operating business cycle

owner’s equity

owners claims against the assets of the business, value of company if all debts were paid off

depreciation

Decrease in value of a fixed asset due to wear and tear or obsolescence (going out of date)

goodwill

The favourable reputation a business has with its patients and customers

equity

The amount of money that would be returned to a company’s shareholders if it were liquidated and all assets sold off

income statement

Summarizes all transactions which are involved in either income (revenue) or expenses during an accounting period  Results in a net profit or (net loss)  aka Profit & Loss Statement  Revenue – Expenses = Profi

balance sheet

aka Statement of Financial Position  Shows financial status of business at a point in time  Represents the basic accounting equation Assets=What you own VS. Liabilities=What you owe  Accounting equation: Assets – Liabilities = Net Worth (Owner’s Equity)  Everything owned by the business can be claimed by someone  Assets are owned by the business owner (owner’s equity) or by outside debt holders (liability)

cash flow statement

Inflows and outflows of cash  Cash In – Cash Out = Net Cash  Gives a picture of what is happening to goods NOT sold, whereas Income Statement generally gives picture on goods sold  Possible to show a net profit on an income statement AND have a negative cash flow

pharmacy cash flow

Cash flow is NOT consistent  Rx sales increase in the winter, decrease summer  Sales can be dependent on cheque timing, weather, holidays etc.  Purchases must precede sales!  Many purchases are made on credit accounts  Additional funding from outside sources decreases profitability

budgeting

Begin with monthly sales forecasting and estimates of monthly receipts, income, expenses, time, period

cash management

An itemized allotment of funds/time, etc. for a given period. A financial plan setting limits for spending for a time period.  Is an estimate of what is needed  Must take into account both income and expenses  Can be short- or long–term, broad or specific  Helps in evaluating viability of the business, gauge financial health of the business and measure progress.  What you have planned to do financially vs. what you have done

pharmacy budgeting considerations

Labor (also includes WCB and payroll fees)  Rent/Utilities  Insurance/Taxes/Professional fees/Licensing  Stock  Inventory shrink/obsolescence/theft  Advertising/Signage  Equipment, Supplies  Vendor fees

inventory budgeting

A projection of what to spend yearly, quarterly, monthly based on previous timelines  Good cash flow may lead to excess spending on inventory while poor cash flow leads to limiting purchases  Determines whether you are spending what you need/can afford to spend

dollar inventory control system

Controls money invested in the inventory vs controlling items (their balance and assortment)  Limits purchases to a specific amount of funds available for a specified period of time  Useful for monitoring and adjusting dollar value of inventory only  Does not account for unit tracking

cost of goods sold

Calculating the goods sold (the sales) in terms of the at cost value

mark up

the amount by which the cost of a product is increased to determine the selling price  Difference between cost you paid & what you sell product for  How much over cost you sold the product for

margin

Margin shows profit as it relates to how much of the product revenue you keep

gross profit

Gross profit is profit with regard to the selling price. It is the percentage of sales resulting from markup.  Measure of profitability BEFORE expenses are considered.  Provides dollars (or % if GP%) of sales available to cover expenses  To earn high GP, can charge high, or buy low!  Low GP, means your sell price is low, or your cost of goods are too high OR there’s theft (internal/external)  Industry standard is 25-35

gross margin

Gross margin is net sales less the COGS  GM = net sales – COGS  Shows the amount of profit made before deducting selling, general and administrative costs  Measures how production (cost of goods and labor) relate to the revenues  Measures a company’s efficiency

inevntory turnover

The measure of the number of times inventory is sold or used (and replaced) in a time period, such as a year  Determines how efficiently a company uses its inventory  Determines whether business has excessive inventory in comparison to its sales

average inventory

Inventory = Refers to the amount of inventory present at any one time (amount on your shelf)  Usually is at cost price unless otherwise specified  Common method of calculating is to average the opening & closing inventories

turnover

How efficiently can a company control its merchandise?  Refers to # of times a given amount of inventory ($ or units) is sold and replaced in a period of time  Usually the time is a business cycle or accounting period  Industry standards are 4-7 (turns)  Based on AI and annual sales (unit #)

what does a higher turnover mean

High turnover indicates the pharmacy is being run with a minimum investment in inventory (a good thing)  However, if turnover is too high, it means that the pharmacy may find that it is frequently out of stock

turnover days

A measure of the average number of days a company holds its inventory before selling it.  Inventory standard is 45-50 to 90 days with target of approx. 60 days

key inventory management metric

Inventory turnover is a key metric for determining if inventory levels are appropriate and to improve efficiency  Hospitals and community pharmacies have goal of maximizing inventory turnover

why should inventory levels be set?

Investment is minimal  Profit (sales) is maximal

avoid inentory levels

Overstocking – merchandise sits on the shelf generating no return on investment  Understocking – sales that could have been made are lost, customer loyalty lost due to lack of stock

factors to consider for inventory levels

turnover, rate of sale, days of inventory, sales consistancy, lead time, price, package quantity, order frequency and quantity, procurment cost, carrying cost,

turnover

\# of times a given amt. of merchandise is sold or replaced  As T/O increases, sales or annual income will decrease  High turnover items are the profit makers & need to be well looked after \*inventory is managed to keep items in stock & avoid lost sales  Low turnover items will cost more to keep on shelves \*need to weed out if possible T/O = COGS/AI Standard range 4-7, target \~6 turns

rate of sale

Sales per DAY and at COST, usually  # of units sold per day is important in establishing inventory levels  ↑ ROS will ↑ AI, if all other factors remain the same  Must maintain adequate inventory for high rate of sale items!  Weed out the lower rate of sale items so that you are not needlessly increasing inventory  ROS = sales/days open

days of inventory

Standard range is 50-90 days. Target \~60 days (for a business)  Helps the pharmacy measure the performance of inventory (does it sell?)

consistency of sales

Pharmacy sales are inconsistent  If ROS is consistent (reliable), can easily predict how many DOI should be kept on hand  If ROS is inconsistent (unreliable), need to increase inventory to cover ‘upswings’, this leads to more $$ tied up, and decreases net profit Depending upon consistency, you may need to increase or decrease your Average Inventory

lead time

ime between ordering and receiving goods  Ex: if we order today, when does it arrive?  Longer LT, the higher the inventory level must be to cover sales (i.e. safety stock)  Shorter LT means decreased inventory, as you can replace inventory faster  ‘just in time’ inventory order cycle

price

Lower $ means less risk, low inventory cost  High cost items require tighter control

package quantity

Largest effect is in the dispensary (risk $)  Less obvious effect on inventory dollars in OTC & front store

order frequency

Frequency = how often Quantity = how much  If OQ small, then OF will increase, ↓AI  If OQ large, then OF will decrease, ↑AI  Ideally, order small quantities more frequently

procurment cost

A cost is incurred each time an order is placed  PC includes time, wages, delivery costs, etc.  Fewer orders = lower procurement costs, but may mean larger orders done less frequently

carrying cost

Costs of holding inventory – ie. Interest on loans, damage, obsolescence, tying up of liquid assets, etc.  If CC’s are high, then you want less inventory in the store, so you make smaller orders, and more orders = less inventory  Average carrying costs \~1-2%/week. Therefore, inventory not sold for one year (52 weeks) has lost 50%-100% of its value.  Larger orders = increase carrying costs

ideal quantity to order

To minimize costs, we want an optimal point of order size and frequency which minimizes both PC and CC  Ideal quantity is the quantity required to avoid running out of inventory  Detailed calculations can determine the optimum quantity of an item that should be ordered at a point in time  Best for high volume products with high PC & CC  Not useful or suited to seasonal merchandise or items with limited shelflife

factors to consider for ideal quantity

Shortage costs/holding costs  Supplier’s terms of payments  Order cycles  Volume discounts  Order quantities

target inventory level

The amount of inventory a company will maintain in terms of days’ supply  Low enough to avoid shortage & high enough to meet demands  Want to maximize profit (maximize sales and minimize cost of goods)

min and max inventory

Minimum Inventory – the lowest amount of product a pharmacy can have without running out of stock  Maximum Inventory – the largest amount of product a pharmacy can have without losing control of its inventory levels, thereby increasing costs  Also known as PAR (periodic automatic replacement) level

no stock zone

below minimum stock  Should be avoided  Take action immediately

red zone

min qty for safety

yellow zone

average stock level  Above minimum and below maximum

green zone

max stock level

overtsock zone

should be avoided

safety stock

– extra amount of stock held to avoid risk of unexpected increases in demand (or to prevent out-of-stocks/stock-outs)

what are some factors to consider for min and max levels

include T/O, ROS, sales consistency, PC, CC and target AI. Use general rule of thumb first then adjust based on these factors for individual products.

order point and qty

The calculated minimum and maximum inventory levels are used in determining when to order (Order Point) and how much to order (Order Quantity)  With automated systems, an order is placed when the minimum inventory level is reached (order point = minimum)  The order quantity would be enough quantity to reach the minimum  Additionally, some automated systems may use maximum levels so stock does not exceed maximum amounts  Consider pack/case sizes as well when ordering

percent change over time

The extent to which something increases or decreases  Helps understand change in value

audit

An official inspection of an organization's accounts, typically by an independent body a systematic review or assessment of something

inventory audits

assist in controlling inventory levels for prescription drugs, OTCs and front store products ▪ are performed to determine stock on hand, order quantities, theft, shrinkage, etc. ▪ can be based on financial statements – sales versus cost of goods sold over an accounting period ▪ can be based on unit and dollar inventory control systems (e.g. stock cards, etc.) for specific products and/or departments over specific periods of time ▪ can be for specific products or types of products

perpetual inventory

Narcotics and controlled drugs  Type of inventory audit – an ongoing accurate count - Scheduled/regular counts of stock on hand  Drug count is reconciled with purchases and sales (via prescription for the most part) to determine shortages  “lost” inventory must then be “found”

reconsiliation process

Verify actual on hand amount 2. Compare to amount listed in perpetual inventory system 3. Based on when last verified inventory count was performed, determine usage for specific time period.– report can usually list both total as well as individual Rx events 4. Check receiving quantities and dates 5. Can perform calculation from last known count to current date to determine when discrepancy occurred and how many tablets/bottles involved. 6. Report discrepancies for narcotics/controlled substances to appropriate authorities

regular inventory counts

a) Conduct, at least semi-annually, a complete physical count of all Narcotic and Controlled Drugs; b) Check for outdated inventory and follow the correct protocol for return or destruction of outdated NARCOTIC AND CONTROLLED DRUGS

perpetual balance

For all high risk NARCOTIC AND CONTROLLED DRUGS; or b) For all NARCOTIC AND CONTROLLED DRUGS; or c) For all reportable NARCOTIC AND CONTROLLED DRUGS.

suppliers

Manufacturer Direct 2. Wholesale 3. Consignment (Rack Jobbers) 4. Central Purchasing Groups 5. Co-operatives

purchasing

Act of replenishing stock and introducing new product into a store  Closely related to inventory control and management  Numerous considerations/criteria:  Customer market/demand  T/O, CC, PC, ROS….  Market trends  Supplier times

documents related to purchasing

Purchase order 2. Bill of lading 3. Packing slip 4. Invoice 5. Terms of sale

purchase order

Itemized list of products ordered at a specified price, prepared by the buyer  A legally binding purchase contract once accepted by the seller  Purchase order is often referred to simply as a P.O.  Each P.O. will have a number on it specific to that order to enable ease of filing and retrieving the information if needed

bill of lading

Receipt listing the number of cartons/boxes shipped by the seller  Discrepancies between number of boxes shipped and number of boxes are noted on the bill of lading  Both delivery person and receiver sign this document, and each keeps a copy

packing slip

 Itemized list of items shipped  Usually attached in a clear plastic envelope to outside of one of the cartons or inside one of the cartons  Vendors usually mark the carton containing the packing slip so that it is opened first  Used to ‘check off’ the order  May have SRP (suggested retail price) and cost per item may be on this  Back-ordered, unavailable items are identified

invoice

A request for payment from the vendor  Terms of sale, which are conditions or stipulations for payment are included on the invoice  Invoice looks very similar to packing slip  Taxes and upcharges will be included as well as delivery charges, unless the delivery company bills independently