Chapter 1: Pharmacy Inventory Basics
Part 1: Operational DefinitionsWelcome! Datarithm® is proud to present you with “They Don’t Teach This in Pharmacy School” — an ongoing series of educational articles to help pharmacists, pharmacy techs, and others involved in independent and chain pharmacy understand the ins and outs of pharmacy inventory management. Before we begin, it is important to ensure we are all on the same page when it comes to the operational definitions of some of the arcane terms we will be using. Feel free to bookmark this page as you will likely want to return to it and use it as your own glossary. And let us know if you think we should add. Next month, in Chapter 1: Part 2 we will cover “What is Pharmacy Inventory Management?”
Operational Definitions:Pharmacy Audit An audit includes detailed information regarding each step and is divided into four sections; prescribing practices, controlled substances management, invoice management, and billing practices. These sections can be used separately or together as appropriate to meet the needs of the pharmacy practice.
Central Fill Centralized prescription processing (central fill) refers to a service one pharmacy provides to another where the central fill pharmacy processes a request from an originating pharmacy to prepare a drug order. Medications packaged by a central fill pharmacy are dispensed by the originating pharmacy pursuant to a prescription.
Controlled Substance Act (CSA) This Act of the US Government places all substances that were regulated under existing federal law into one of five schedules. The placement is based on the substance’s medical use, potential for abuse, and safety or dependence liability.
Cost of Goods The carrying value of goods sold during a particular period. Costs are associated with particular goods using one of several formulas; including specific identification, first-in-first-out (FIFO), or average cost. Costs include all costs of purchase, costs of conversion, and other costs that are incurred in bringing the inventories to their present location and condition. Costs of goods made by the businesses include material, labor, and allocated overhead. The costs of those goods which are not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
Cycle Counting The process of completing physical counts of inventory and adjusting through any discrepancies discovered. Cycle counts are typically completed at specific, regularly scheduled intervals (cycles).
Days On-Hand Inventory Expected time period (days) to dispense inventory that you currently have on-hand. The value of Days On-Hand represents the inventory liquidity.
Day’s Supply at the Replenishment Point (Min/OP) Represents the inventory level (days), at or below, which triggers replenishment.
Dead Inventory Items whereby dispensing activity has stopped due to defective product, no/low demand, or product that is short dated or no longer returnable to the wholesaler.
Demand Market demand for a specific inventory item.
Demand Forecasting The process of forecasting expected inventory utilization over an upcoming period of time. Important factors included in forecasting calculations can be historical usage patterns, recent usage trending, smoothing peaks and valleys, seasonality, order cycle time, and supplier lead time.
Dispensing Volume The dispensing quantity over a selected time period.
Drug Diversion A medical and legal concept involving the transfer of any legally prescribed controlled substance from the individual for whom it was prescribed to another person for any illicit use. Diversion includes employee theft for personal use or profit.
Drug Shortages A lack of drug supply. Shortages may be a result of natural disasters, manufacturing problems, regulatory issues, raw material shortages, and voluntary recalls.
Drug Supply Chain Security Act (DSCA) Outlines the steps to build an electronic system to identify and trace certain prescription drugs distributed in the United States. This in turn helps protect consumers from exposure to drugs that may be counterfeit, stolen, contaminated, or otherwise harmful.
EDI – Electronic Data Interchange (Ordering/Receiving) An automatic ordering convention whereby a pharmacy management system sends replenishment orders to drug wholesalers when the on-hand quantity of a drug is equal to or below the replenishment point (MIN/OP). In pharmacy, electronic orders are known as 850 files while wholesaler confirmations back the pharmacy are 855’s and the wholesaler invoice is an 810 file. The 810 files can optionally trigger an automatic on-hand update within the pharmacy management system.
Fast Movers Popular, high-demand drugs that are dispensed often and in high volumes.
Formulary A formulary is basically a listing of drugs (prescription and other) that are dispensed in a pharmacy.
Drug Equivalents Prescription drugs that are chemically equivalent (branded and generics). Equivalency is identified by generic indicator codes like GPI or GNC.
Generic Groups Generally referred to as drug equivalents exclusive of branded versions.
Generic Inventory Aggregators Typically web based Rx inventory aggregators offer pharmacies a multi-wholesaler marketplace used to replenish Rx inventories. These are typically generic drugs at highly competitive prices. i.e.: pharmsaver.net
Just-In-Time Inventory A style of inventory replenishment designed to receive stock close to the time it will be dispensed. The process allows pharmacies to keep inventory low and better manage cash flow.
Lead Time The average duration of time between order placement and receipt from wholesalers.
Med Sync Coordination of prescription refill dates so patients can obtain all or most of their medications at the same time every month.
Out-of-Stock (IOUs) Items that are no longer in inventory and need replenishment. The pharmacy may owe patients some portion of or all of the prescribed quantity.
Overstocked Carrying inventory levels in excess of what is expected to be dispensed in a reasonable period of time.
Over The Counter (OTC) Medications that can be purchased without a prescription.
Pharmacy Management System Pharmacy management software is a unified system that manages retail products and medications, and automates operations such as stock control and replenishment, drug dispensing, compliance, insurance claim management, billing, and reporting.
Physical Inventory Counting the entire pharmacy inventory to calculate what the pharmacy has on hand.
Replenishment Point The stock level at which inventory should be replenished. Typically known as the minimum or the re-order point. Replenishment is triggered when on-hand quantities reach or fall below the replenishment point.
Return Companies/Reverse Distributors Companies that provide various services focused on the dispensation of short-dated and expired Rx inventories. Such services can include onsite inventory removal and software technology to assist in the outbound processing of returnable RX inventories. Dependent upon manufacturer contractual rules pharmacies can receive partial or full return credits. Return credits can come in the form of wholesaler account credit or cash credit directly to the pharmacy.
Return Policies As described in a pharmacy’s contract (PVA) with their wholesaler, such policies outline the basis for returning full and unopened stock containers to the wholesaler for full credit or credit net of a restocking fee. Every wholesaler has different policies in place and there are many variables including time since delivery, package condition, salability, type of product (refrigerated/controls).
Robotics Hardware technology used to count, store and or repackage Rx inventory.
Safety Stock Insurance inventory maintained in case of unusual demand during the lead time or delays in receiving the replenishment shipment.
Service Level/Fill Rate A measurement of a pharmacy’s ability to fill prescriptions presented for fulfillment. Typically measured as a percentage. (i.e.: a 98% Service or Fill Rate implies 2% of presented prescriptions were not filled per the prescription).
Shrinkage The loss of inventory that can be attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error. It is the difference between recorded inventory on a company’s balance sheet and its actual inventory.
Supply The amount of any drug immediately on hand for dispensing.
Surplus The products that remain un-purchased and sit on store shelves.
Turnover Rates A measurement of inventory efficiency (the higher the better). To calculate the inventory turnover ratio, the cost of goods sold (COGS) is divided by the average inventory for the same period. The pharmacy industry average is typically noted to approximate 11 turns annually.
Various Costs of Inventory Acquisition Costs: The amount paid to drug wholesalers to replenish inventory. This cost can be considered before or after wholesaler rebates. Carry Costs: The cost of maintaining inventory in your pharmacy for an entire year. This is expressed as a percentage and calculated with the formula: Annual costs incurred in carrying inventory + average inventory value. It is the accumulation of all expenses you incur maintaining stocked inventory in your pharmacy. A study provided by NCPA indicated that carry costs could range from 20% to 30%. (On average 2% per month). Expiration Costs: The difference between the acquisition costs and any return credit provided by drug manufacturers, post-expiration, via reverse distributors/returns companies. Replenishment Costs: The cost of issuing, receiving, and paying for a line item on a vendor purchase order. This is generally the employee time cost associated with these tasks. Shortage Costs: The cost of not having inventory on hand when you need to fill a prescription. These costs include the following: time spent on secondary fills; cost of additional packaging and potential loss of patients.
Wholesalers Companies that supply and sell Rx inventories to pharmacies of any type; independent pharmacies, chain pharmacies, LTC, Specialty, Government institutions as well as inpatient and outpatient pharmacies associated with hospitals, and medical clinics.