Inventory Management Flashcards by Alanna Parker

What are some factors that impact purchasing in pharmacy?

cost of products
local MDs and what they tend to prescribe (ex// specialist)
demographics (old vs younger people)
hospital formularies/proximity to hospitals
pricing
availability
seasons

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What are some factors that influence front store purchasing?

Mainstay products: things that tend to sell
New and Now: small portion of new products to test demand
Competition: # of competitor brands of same product
Store Niche: ex// home care, braces, wheelchairs

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T or F: inventory is always equal to liquid assets

F: not all inventory is easily sold + may decrease in value (what you paid for it vs what you have to end up selling it for)

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What are the purchasing goals? (5)

Purchase right:
- product
- quantity
- time
- price
- vendor

want to try and balance needs of pts while minimizing inventory costs

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What does CCC stand for

Cash Conversion Cycle
— where cash goes/flows within your business (flow between inventory purchases –> to inventory storage –> to customer sale –> to revenue collection)

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What are the 3 variables that impact the CCC

Days inventory outstanding

Days sales outstanding

Days payable outstanding

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In the CCC (DIO + DSO - DPO), we want:
High/low DIO
High/low DSO
High/low DPO

Low
Low
High

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Days sales outstanding: what is it?

Part of CCC
- days it takes to collect on sales/accounts receivable
- aka how long does it take to get money back in your hand (pay with cash vs rx going through drug plan)

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Do we want days sales outstanding to be high or low?

Low number –> means it takes LESS days/time to get money back fully

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What is days payables outstanding?

Part of the CCC
- accounts payable (what you have to pay for)
- ex// charged rent for pharmacy building

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Do we want days payables outstanding to be high or low?

High –> means more days until you have to pay something

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What is days inventory outstanding

Part of the CCC
- days to sell entire inventory (turnover)
- aka getting rid of everything

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Do we want days inventory outstanding to be high or low?

Low –> takes less days to sell entire inventory (indicates high demand/stuff moving off shelves fast)

— we don’t want this to be high bc that means stuff is sitting around for longer (increased risk of expiry)

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What happens if DIO, DSO + DPO are all HIGH values (CCC)

Longer cash conversion cycle

takes longer to get money into your hand to save (its taking you longer to get money from sales, less days till you have to pay bills etc and slow turnover of inventory)

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T/F: the CCC impacts how and what you can do with your business at different times

T - it represents how cash is flowing in your business (more in vs out)
- how much extra money you have

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What is Gross Profit (GP)?

difference bw revenue and cost of getting a product BEFORE deducting overhead, payroll, taxes and interest payments

aka GP: Sales (revenue) - COGS

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T/F: GP is a % value and GM is a $ amount

F
Gross profit: $ amount
Gross markup : %

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What is Gross Margin (GM%)

Percentage of revenue that represents gross profit
(how much of sales you have made as a profit)

— profit as a % of selling price

GM = (revenue-COGS/revenue) x 100

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T/F: we want GM to be a HIGH %

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TRUE - its a % of how much sales/revenues are a profit — higher means you make more $

What are the 4 main factors that influence inventory costs?

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Purchasing costs: how much it cost to buy
Ordering costs: costs associated with placing order
Carrying costs: costs associated with holding inventory after it arrives
Stock-out costs : costs associated with running out of stock

What is Markup %

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profit as a percentage of cost (COGS) price (how much profit we are making in comparison to how much it cost to buy)

Markup %: (markup/COGS) x 100
OR gross profit/COGS x 100

What 2 factors impact purchasing costs?

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Price of item:
- Discounts arranged with manufacturer/supplier (quantity discounts/product bundling)

Sources of inventory:
- Deciding on a vendor (wholesaler vs direct from manufacturer)

Both of these factors impact the overall cost to buy the drugs

Factors to consider when picking a vendor to buy products from

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delivery schedule
frequency of out of stock meds
breadth of merchandise
planograms
ordering technology
return policy
financing options –> how often do they make you pay?

Wholesalers: set pricing + order/delivery window (need to set orders for next day by certain time like McKesson)

Buying groups: improve buying power for independents

What are the different costs associated with ORDERING products?

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ordering software used
processing payment
receiving
stocking shelves—- manufacturers/ wholesalers will upcharge because they need to pay employees to pack + stock shelves

What are the costs associated with CARRYING costs of products?

capital investment obsolescence damages shrink

How does capital investment impact carrying costs?

Ties up money that could be used for other things such as paying bills, employees, and buying stock with better turns (more profit) FYI: Capital investment refers to the money a company spends on acquiring, maintaining, or upgrading long-term assets that will help the business grow and operate effectively (CUZ IDK WHAT IT WAS)

How can capital investment be REDUCED? (therefore reducing carrying costs)

1. Just in time purchasing: order when u need meds (why we prefer auto refills because we know the general trends of our pharmacy) 2. Refills due: refill when due only (not early) 3. Train pts: train them to know when to call for refill 4. Arrangements with other pharmacies: relationships setup to allow for transfer of stock

What is Obsolescence, and how does it impact carrying costs?

process where things become outdated/not used 1. expired meds (normally can return + get about 70% cost back; important to have process set up to ID expired drugs + set return process) 2. credit provided (determine return policy for ordering errors)

Examples of Damages and Shrink in Carrying Costs

damages: cold chain breaches, spills, failure to educate staff (ex// problems with management storage) shrink: theft, shelf counts not matching

Impact of stock out costs

Lost revenue (RX and front store): pts go to different pharmacy because you don’t have in stock Goodwill: less patient loyalty to ur pharmacy Reputation: not a good look if you never have anything in stock Patient Care/Health Consequence: delay tx

What is stock depth?

how much of an item you should keep on shelves at one point in time (helps balance funds tied up and out of stocks)

T/F: Stock depth varies based on the following - cost - average use - seasonality of product - return policy

TRUE

Explain each of the factors included in the stock depth formula (what they mean) Stock Depth = [(Review Time (days) + lead time (days)) x demand] + safety stock

Review Time : how often do you review the shelf Lead Time: how long it takes to come in (delivery) Average Demand: amount sold per day Safety Stock: buffer stock for varied demand (varies based on bottle size etc)

What are the different methods that can be used to manage inventory? (3)

Visual: visual inspection (just looking to see if missing anything) Periodic: inventory value determined at periodic basis (go and count at set time period - weekly, quarterly, annually) Perpetual: real time through pharm software (what have on shelf, what is dispensed, what is left) - this is the goal

What is the Inventory Turnover Rate (ITOR)?

- ratio that describes how often the whole inventory of the pharmacy is sold + replaced over set period of time - assessment of how well a pharmacy is managing their inventory

How is ITOR calculated?

Annual Sales - GP/ average inventory aka COGS/inventory

T/F: We want our inventory turnover rate to be as HIGH as possible because that means we are selling a lot / there is a lot of complete turnover of inventory

F - if too high, it means we aren’t stocking our inventory right > 12 = inventory turning very fast - may cause stock outs < 5 = inventory moving very slow - overstock, cash tied up generally want it to be > 5 but < 12 turns per year

What actions can be taken to improve ITOR/turns of inventory?

just in time purchasing look at revenue reports workflow systems SOPs for reordering

2. What is the formula for calculating Gross Profit (GP) dollars? A) Revenue – Gross Margin B) Revenue – Cost of Goods Sold (COGS) C) Revenue × COGS D) COGS – Revenue

The Cash Conversion Cycle (CCC) includes which of the following components? A) Days Payables Outstanding (DPO) B) Days Inventory Outstanding (DIO) C) Days Sales Outstanding (DSO) D) All of the above

Which of the following is a cost associated with CARRYING inventory? A) Ordering software fees B) Obsolescence C) Processing payments D) Vendor discounts

Which inventory management method involves real-time tracking through software or POS systems? A) Visual B) Periodic C) Perpetual D) Estimated

Which action would likely improve a pharmacy’s Inventory Turnover Rate (ITOR)? A) Increasing safety stock unnecessarily B) Stocking slow-moving niche products C) Adjusting stock levels based on seasonality D) Ignoring OTC item movement reports

When a pharmacy purchases stock with a “2% net 10” term, what does it mean? A) A 2% discount is given if paid within 10 days B) A 10% discount if paid within 2 days C) A 2% surcharge if paid within 10 days D) No discount is offered

What is a common way to reduce capital investment in inventory? A) Ignore inventory shrinkage B) Just-In-Time Purchasing C) Increase stock depth on all items D) Remove safety stock

T/F: The Cash Conversion Cycle is improved when Days Payables Outstanding (DPO) is high

True

T/F: The main purpose of the Stock Depth Formula is to calculate the profit margin on high-demand products

False (it’s to determine how much stock to keep on hand)

Inventory Management Flashcards

(47 cards)