Inventory Management ,Jaytirmoy Barmon,Manik

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Edited By: Jaytirmoy Barmon Inventory Management
Lecturer, Pharmacy, Varendra University
Inventory Management
Prepared by:
Kushal Biswas
Md. Sanowar Hossain &
Jaytirmoy Barmon
Q. What do you mean by inventory & inventory management? What are the reasons for
keeping stock?
Inventory
Inventory (American English) or stock (British English) is the goods and materials that
a business holds for the ultimate goal of resale (or repair). It is an itemized catalog or list of
tangible goods or property, or the intangible attributes or qualities.
The value of materials and goods held by an organization (1) to support production (raw
materials, subassemblies, work in process), (2) for support activities (repair, maintenance,
consumables), or (3) for sale or customer service (merchandise, finished goods, spare parts).
The basic three criteria of a pharmaceutical inventories-
 Need for production
 Replenishment
 Must have cost
Reasons for keeping stock
There are five basic reasons for keeping an inventory
1. Time: The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amounts of inventory to use in this lead time.
However, in practice, inventory is to be maintained for consumption during 'variations
in lead time'. Lead time itself can be addressed by ordering that many days in advance.
2. Seasonal Demand: demands varies periodically, but producers capacity is fixed. This
can lead to stock accumulation, consider for example how goods consumed only in
holidays can lead to accumulation of large stocks on the anticipation of future
consumption.
3. Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand,
supply and movements of goods.
4. Economies of scale: Ideal condition of "one unit at a time at a place where a user needs
it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk
buying, movement and storing brings in economies of scale, thus inventory.
5. Appreciation in Value: In some situations, some stock gains the required value when
it is kept for some time to allow it reach the desired standard for consumption, or for
production. For example; beer in the brewing industry

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Inventory Management
Inventory management is the practice overseeing and controlling of the ordering, storage and
use of components that a company uses in the production of the items it sells. Inventory
management is also the practice of overseeing and controlling of quantities of finished products
for sale.
Inventory control is concerned with minimizing the total cost of inventory. The three main
factors in inventory control decision making process are:
 The cost of holding the stock.
 The cost of placing an order.
 The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
The third element is the most difficult to measure and is often handled by establishing a "service
level" policy, e. g, certain percentage of demand will be met from stock without delay.
Some important terms
Rolling Forecast Process for predicting future over a set period
Pipeline Raw materials ordered but has not come to the station yet i.e. on the way.
Lead time Time required to be delivered to the orderer’s hand from order
Campaign A campaign means number of batches manufactured without any interruption or
product change
Handling The term handling means checking according to invoice/challan and other
documents during receiving of the materials.
Preservation The term preservation means the materials are stored in different conditions
according to its nature of stability i.e. to maintain a specific temperature and
relative humidity.
Dispensing Dispensing means the materials are supplied to the production areas by weighing
according to the proper document and release it from the RM Store.
Quarantine The term quarantine means the material is not ready for use and it is under test
after received. So a quarantine label is attached to the container.
Reconciliation The supervision of how much quantity of raw materials was, how much quantity
has used and how much quantity will remain within the warehouse.
Buffer zone It is the place where finished product department received the finished products.
Sampling As the process of taking a small portion from a lot for test and analysis to show
the quality of the whole lot. The purpose of sampling and subsequent testing is
to provide an effective check on the quality of the product or substances being
processed.
Sampling quantity Sampling quantity should be the double of one complete test.
FEFO First Expiry First Out
FIFO First In First Out
LIFO Last In First Out
MOQ Minimum Order Quantity
BOM Bill Of Material

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Q. What is PPIC? Describe some features of it?
[Courtesy: Niaj Morshed. Sr. Executive, PPIC, SQUARE & 11th
Batch, RU]
Production Planning and Inventory Control (PPIC)
Production Planning and Inventory Control is an important department for any pharmaceutical
industry which deal with smooth production and distribution. PPIC is the department where
the raw materials and packaging materials are stored which comes from the supplier, dispensed
in the production area and finished product is delivered through this area.
PPIC
Planning Warehousing
*Production * Raw materials warehouse
*Inventory * Packaging materials warehouse
*Finished goods warehouse
Production planning
Production planning is that function of management which decides about the resources that
will require for its future manufacturing operation and allocating these resources to produce
the desired products in required amount at lowest cost.
Levels of production planning:
Production planning can be done at three levels which are as:
1. Factory planning- building, machine and equipment which is required for
manufacturing the desired goods and services.
2. Process planning- involved in factory planning for manufacturing the raw materials
into finished products
3. Operation planning- involves selection of work centers, designing of tools required for
various operation
Factor regulating production planning
1. Sales forecast: Marketing and Sales department maintain sales forecast which is
known as rolling forecast. They prepare sales forecast of upcoming 7 months. The
assumption is more accurate when little time near forecasting. But the PPIC department
work on the forecast for the ultimate next month.
2. National opening stock (NOS): For effective production planning PPIC department
take national opening stock (products remaining unsold at any time) into consideration
and they minus the amount of total national opening stock form the total sales forecast.
3. Buffer: It is the extra quantity of product required to meet the demand of market before
the scheduled production will be started on next month. The amount is added to the
sales forecast.
4. Production facility: The last but not least important factor for production planning. On
a validated machine the products having same machine validated system are produced
to minimize time consuming.

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Inventory control:
Inventory Control is the supervision of supply, storage and accessibility of items in
order to ensure an adequate supply without excessive over supply. It can also be referred
as internal control - an accounting procedure or system designed to promote efficiency
or assure the implementation of a policy or safeguard assets or avoid fraud and error etc. It
answers the 3 basic questions of any supply chain: 1. When? 2. Where? 3. How much?
Inventory control is an effective way to control over losses from misappropriation, damage and
carelessness. This is necessary because investment in materials constitutes a major portion of
the production and therefore a strict control has to be kept. It can be defined as the systematic
control over maintenance of a stock in the store department. It is done in SQUARE by SAP
software (Systems, applications & products in data processing).
Raw Materials Warehouse (RM W/H)
This is the place where the raw materials are received and stored until they are used for
production. The materials first quarantined and kept for the sampling performed by QC
department. After QC passed materials are ready for production. The raw materials stock in
different position with specific code number for easily tracking the location.
Routine Work of Raw Material Warehouse
Receives raw material according to the invoice/challan.
Prepare QIR (Quality Incident Report) if any problem of materials.
Updates the present status of raw materials.
Stores all raw materials according to the storage guideline.
Supplies raw materials according to the FIFO to the production floor.
Adjust present stock after dispensing the raw material.
Storage Condition:
Storage Condition Temperature Relatives Humidity Examples
Cold Store 2-8ºC N/A Benzoylperoxide, Calcitriol,
Nitroglycerine etc
Cool store 8-15ºC N/A Azithromycin
Controlled store 20±5ºC 35-65% Capsule shell
Air Condition store 20±5ºC N/A Sucrose, Aerosil
Weighing area:
It is the area where raw materials are weighing according to batch requirement. With the help
bubble point, the right position of the balance is checked. Error applicable in the balance is
±2%.weighing is done by two way- Single wise & Campaign wise (involve two or more batch).
Three basic principles should drive the design of any pharmaceutical weighing room:
i. Unidirectional flow of materials and personnel
ii. Segregation between hazardous and non-hazardous materials
iii. Separation of storage and manufacturing items and spaces.

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Packaging Materials Warehouse (PM W/H)
The place where the domestic and export packaging materials are received and stored until they
are used for production. This warehouse supply the materials on the basis of production need
per day.
Routine Work of Packaging Material Warehouse
Receives packaging materials according to the invoice/challan.
Inputs the batch number.
Store all the packaging materials according to the storage guide.
Updates the present status of packaging materials.
Dispense packaging materials according to the requisition from production area.
Adjust present stock after dispensing the packaging materials.
Find out under safety stock.
Finished Goods Warehouse (FG W/H)
When all production process completed the materials kept on a buffer zone for few times. Then
the materials comes to the FG store and received as like other warehouse. The materials
arranged in accordance to their batch number and the position of the warehouse. When all the
taxes of the material paid and gate pass allowed the materials send to the DPG (Duty Paid
Godown) or Depot. From the DPG/Depot the medicines send to the customer level.
Routine Work of Finished Material Warehouse
Receives finished product according to the delivery token of production area.
Preserves the packaged product report of QA department.
Prepares transfer note.
Prepares VAT challan.
Dispense FP according to FIFO basis.
Updates the current stock of finished goods.
Maintain the proper storage condition of finished product.
Materials sampling plan
The materials sampling plan done on the basis of FIFO system i.e. first in first out. For active
ingredients, preservatives every container and for excipients except color, flavor, essence in
case of 3 or less every container and for container above 3 number √n+1 containers are sampled
(where n = total number of containers).
Machinery and equipment
Forklift, reach truck and trolley are used for carrying the container to keep it on the desired
rack. The PPIC department is a segregated place from the production area which facilitates
easy receive and delivery of the materials.

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Techniques of Inventory Control System
Some of the most important techniques of inventory control system are:
1. Setting up of various stock levels.
2. Preparations of inventory budgets.
3. Maintaining perpetual inventory system.
4. Establishing proper purchase procedures.
5. Inventory turnover ratios.
6. ABC analysis.
7. Just in Time Inventory
1. Setting up of various stock levels
To avoid over-stocking and under stocking of materials, the management has to decide about
the maximum level, minimum level, re-order level, danger level and average level of materials
to be kept in the store.
(a) Re-ordering level
It is also known as ‘ordering level’ or ‘ordering point’ or ‘ordering limit’. It is a point at which
order for supply of material should be made.
This level is fixed somewhere between the maximum level and the minimum level in such a
way that the quantity of materials represented by the difference between the re-ordering level
and the minimum level will be sufficient to meet the demands of production till such time as
the materials are replenished. Reorder level depends mainly on the maximum rate of
consumption and order lead time. When this level is reached, the store keeper will initiate the
purchase requisition. Reordering level is calculated with the following formula:
Re-order level = Maximum Rate of consumption × Maximum lead time
(b) Maximum Level
Maximum level is the level above which stock should never reach. It is also known as
‘maximum limit’ or ‘maximum stock’. The function of maximum level is essential to avoid
unnecessary blocking up of capital in inventories, losses on account of deterioration and
obsolescence of materials, extra overheads and temptation to thefts etc. This level can be
determined with the following formula.
Maximum stock level = Reordering level + Reordering quantity  (Minimum consumption
× Minimum re-ordering period)
(c) Minimum Level
It represents the lowest quantity of a particular material below which stock should not be
allowed to fall. This level must be maintained at every time so that production is not held up
due to shortage of any material. It is that level of inventories of which a fresh order must be
placed to replenish the stock. This level is usually determined through the following formula:
Minimum Level = Re-ordering level  (Normal rate of consumption x Normal delivery period)
(d) Average Stock Level
Average stock level is determined by averaging the minimum and maximum level of stock.
The formula for determination of the level is as follows:
Average level =1/2 (Minimum stock level + Maximum stock level)

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(e) Danger Level
Danger level is that level below which the stock should under no circumstances be allowed to
fall. Danger level is slightly below the minimum level and therefore the purchases manager
should make special efforts to acquire required materials and stores. This level can be
calculated with the help of following formula:
Danger Level = Average rate of consumption × Emergency supply time.
(f) Economic Order Quantity (E.O.Q.)
One of the most important problems faced by the purchasing department is how much to order
at a time. Purchasing in large quantities involve lesser purchasing cost. But cost of carrying
them tends to be higher. Likewise if purchases are made in smaller quantities, holding costs
are lower while purchasing costs tend to be higher.
Hence, the most economic buying quantity or the optimum quantity should be determined by
the purchase department by considering the factors such as cost of ordering, holding or
carrying. This can be calculated by the following formula:
Q = √2AS/I
Where,
Q stands for quantity per order
A stands for annual requirements of an item
S stands for cost of placement of an order
I stand for inventory carrying cost per unit per year
2. Preparation of Inventory Budgets
Organizations having huge material requirement normally prepare purchase budgets. The
purchase budget should be prepared well in advance. The budget for production and
consumable material and for capital and maintenance material should be separately prepared.
Sales budget generally provide the basis for preparation of production plans. Therefore, the
first step in the preparation of a purchase budget is the establishment of sales budget.
As per the production plan, material schedule is prepared depending upon the amount and
return contained in the plan. To determine the net quantities to be procured, necessary
adjustments for the stock already held is to be made.
They are valued as standard rate or current market. In this way, material procurement budget
is prepared. The budget so prepared should be communicated to all departments concerned so
that the actual purchase commitments can be regulated as per budgets.
At periodical intervals actuals are compared with the budgeted figures and reported to
management which provide a suitable basis for controlling the purchase of materials,
3. Maintaining Perpetual Inventory System
This is another technique to exercise control over inventory. It is also known as automatic
inventory system. The basic objective of this system is to make available details about the
quantity and value of stock of each item at all times. Thus, this system provides a rigid control
over stock of materials as physical stock can be regularly verified with the stock records kept
in the stores and the cost office.

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4. Establishing Proper Purchase Procedures
A proper purchase procedure has to be established and adopted to ensure necessary inventory
control. The following steps are involved.
(a) Purchase Requisition
It is the requisition made by the various departmental heads or storekeeper for their various
material requirements. The initiation of purchase begins with the receipts of a purchase
requisition by the purchase department.
(b) Inviting Quotations
The purchase department will invite quotations for supply of goods on the receipt of purchase
requisition.
(c) Schedule of Quotations
The schedule of quotations will be prepared by the purchase department on the basis of
quotations received.
(d) Approving the supplier
The schedule of quotations is put before the purchase committee who selects the supplier by
considering factors like price, quality of materials, terms of payment, delivery schedule etc.
(e) Purchase Order
It is the last step and the purchase order is prepared by the purchase department. It is a written
authorisation to the supplier to supply a specified quality and quantity of material at the
specified time and place mentioned at the stipulated terms.
5. Inventory Turnover Ratio
These are calculated to minimize the inventory by the use of the following formula:
Inventory Turnover Ratio = Cost of goods consumed/Sold during the period
The ratio indicates how quickly the inventory is used for production. Higher the ratio, shorter
will be the duration of inventory at the factory. It is the index of efficiency of material
management.
The comparison of various inventory turnover ratios at different items with those of previous
years may reveal the following four types of inventories:
(a) Slow moving Inventories
These inventories have a very low turnover ratio. Management should take all possible steps
to keep such inventories at the lowest levels.
(b) Dormant Inventories
These inventories have no demand. The finance manager has to take a decision whether such
inventories should be retained or scrapped based upon the current market price, conditions etc.
(c) Obsolete Inventories
These inventories are no longer in demand due to their becoming out of demand. Such
inventories should be immediately scrapped.

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(d) Fast moving inventories
These inventories are in hot demand. Proper and special care should be taken in respect of these
inventories so that the manufacturing process does not suffer due to shortage of such
inventories.
6. ABC analysis
Discussed in materials management chapter
7. Just in Time (JIT) Inventory
Just in time inventory is a strategy to increase efficiency and decrease waste by receiving goods
only as they are needed in the production process, thereby reducing inventory costs. In other
words, JIT inventory refers to an inventory management system with objectives of having
inventory readily available to meet demand, but not to a point of excess where you must
stockpile extra products. JIT originated in Japan in the 1960s and 1970s; Toyota Motor Corp.
(TM) contributed the most to its development.
The method allows companies to save significant amounts of money and reduce waste by
keeping only the inventory they need to produce and sell products. This approach reduces
storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.
JIT inventory management can be risky. If demand unexpectedly spikes, the manufacturer may
not be able to source the inventory it needs to meet that demand, damaging its reputation with
customers and driving business toward competitors. Even the smallest delays can be
problematic; if a key input does not arrive "just in time," a bottleneck can result.
KEY TAKEAWAYS
 Inventory management refers to the process of ordering, storing, and using a company's
inventory. These include the management of raw materials, components, and finished
products as well as warehousing and processing such items.
 For companies with complex supply chains and manufacturing processes, balancing
the risks of inventory gluts and shortages is especially difficult.
 To achieve these balances, firms have developed two major methods for inventory
management: just-in-time and materials requirement planning: just-in-time (JIT) and
materials requirement planning (MRP).

Inventory Management ,Jaytirmoy Barmon,Manik

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