STUDY OF PROCUREMENT, INVENTORY POLICY AND PRACTICES OF MEDICINES SHOP

PREPARED BY: Group 8, Section A

ACKNOWLEDGEMENT
It is our extreme pleasure to express our vote of thanks to all those who helped us in the compilation of this project to study the inventory management in Pharmaceutical store. First of all, we would like to thank our Operations Management faculty, Prof. S.K.Bishwal who gave us the opportunity to conduct this study. Next, we would like to express our gratitude to Mr. Nikhil Biswal and Mr. Kushal Biswal, Proprietors Kalinga Drug House, Mr. Satyapriya Sahoo, Proprietor Shyam Sunder Drug House who helped us give a lot of insight regarding the operations at Retail Pharmacies. Lastly we would like to thank all the people who helped us throughout this project.

Contents Brief Overview of pharma sector ........................................................................... 4 Pharma retail market in India: ............................................................................... 5 Procurement Management.................................................................................... 8 Inventory Management ....................................................................................... 12 Operationalization of Medical Stores ................................................................... 16 References ........................................................................................................... 21

Brief Overview of pharma sector

The pharmacy retail market was valued at INR 216 bn in 2009 and estimated to reach INR 432 bn in 2011. The market is fragmented and dominated by the unorganized sector. The Pharmaceutical Industry is very different from other industries. The uniqueness of its Business Model can be attributed to the arrangements and interdependence between the retailer stockist, stockist manufacturer, doctor marketers. One of the only markets where substitutes have also gained on account of the popular medicines sold. Sales revenue of the company totally depends on popularity of the product or prescription by doctors. Indian pharmaceutical Industry has improved its infrastructure, creating that are based on technologies, and various other spheres of developments which has resulted in a huge amount of production in the Indian pharmaceutical Industry. It has been observed that the gross production of drugs in India has crossed an amount of 26,280 million rupees. The growth rate that has been seen is more than a staggering 20 percent for formulated drugs and around 15 percent for bulk drugs. The primary function of a pharmaceutical industry is to develop, produce and market drugs licensed for use as medications Types of drugs: y Generic Drugs : Produced and distributed without patent protection. They are considered to be identical or bioequivalent to the brand-name originals. Brand Drugs : They are named under the innovator who develops it. The pharmaceutical company that develops the drugs usually obtains patent for it. The patent protection is usually for a period of 20 years.

Medicines are categorized into two types of drugs: y Prescription drugs : They require doctors prescription. Prescription drugs are meant to cure not so common and endemic diseases such as FLU, Malaria, Asthma, Diabetes, Migraine, etc. Some examples of these kinds of drugs are: Ibuphren, Fenofenidine, and Azithromycin. OTC Over-the counter ) drugs Do not require doctors prescription. A regulatory agency selects OTC drugs to ensure that the ingredients that are safe and effective when used without a physicians care. They are used as medicines for common diseases such as common cold, viral fever, acidity, pain killers, etc. Some examples of these kinds of drugs are: Disprin, Calpol, Crocin etc.

Pharma retail market in India:

The pharma retailing is estimated at about Rs. 300 billion, with 15 percent of retail stores in India being chemists. The pharmaceutical retail sector, which forms an integral part of the flourishing pharmaceutical industry, is undergoing a change. The pharma retailing business in India was traditionally dominated by small time dispensers of medicine operating in tiny shops. As in case of the provisions retailing sector, unorganized players dominate the pharmaceutical retail. The retail boom is due to the large number of new players. However, fierce competition will force retailers to respond quickly changes in the market, bringing the forth importance of SCM in handling the availability of stock, suppliers relationships, value-added services, and cost cutting. There are over 8,00,000 pharma retailers in the unorganized sector across the country and the organized sector accounts for merely 2% of the business. But it is growing by 30-40%. Though they are a disintegrated , pharma retailers constitute a powerful edge, and on account of their close-knit trade association, are able to enter into collective bargaining with drugs manufactures. Drivers of Pharma retail market in India : y y y y y y Increase in healthcare spending Growth in pharmaceutical sector (like organized retailing) Changing disease profile Consumer attitudes Attractive Margins Growth in OTC segment

Challenges for Pharma retail market in India : y y y y Fragmented Industry dominated by unorganized sector Long distribution and supply chain Counterfeit drugs FDI regulations

Upcoming trends in pharma retail market : y y y y y y y Loyalty schemes Value added services Tie-ups with retail firms Rural expansion Entry of government in pharmacy retailing Entry of private labels Organized retailers starting pharmacy chains

Usage of various store formats to expand operations by pharmacy chains: Store Formats Description

Hospital Pharmacies Standalone Stores

They are housed in hospitals & dispense a limited number of medicies They mainly cater to the requirements of patients admitted in hospitals

Stores located near the residential areas Some of the stores offer home delivery Target customers are middle and upper class households

alls/Shop-inShops

Located in supermarkets,malls or departmental stores

Organized retail outlets-

Organized pharmaceutical retail chains operate in 3 different modelsFully owned stores Franchise model Combination of owned and Franchise stores

Pharmaceutical Distribution in India The long channel of distribution and high incidence of brand substitution makes it mandatory for a company to make all its stock keeping units (SKU) available at all levels at all times. In India, most brands have generic versions of drugs and retailers can usually obtain higher margins with generics than for branded products. Drug distribution system in India has witnessed a paradigm shift. Earlier companies had their own depots which are now replaced by clearing and forwarding agents (CFAs).These organizations are primarily responsible for maintaining storage (stock) of the companys products and forwarding SKUs to the stockist on request.

Current distribution chain in India : A manufactured product passes through the company owned central depot, which supplies it to the CFA or super stockist. From the CFA the stocks are supplied either to stockist, substockist or hospitals. The retail pharmacy obtains products from the stockist or substockist through whom it finally reaches the consumers (patients). Few small manufacturers directly supply to the stockist.

Manufacturer Central Depot Super stockist

Stockist

Sub stockist Retail shop Consumers

Hospitals

Pricing and Margins : The prices and the margins of drugs and retailers are largely decided by the National Pharmaceutical Pricing Authority (NPPA), which varies depending on whether the active constituent of the product is a scheduled drug or a nonscheduled drug. Scheduled drugs are price controlled whereas nonscheduled drugs are not. Margins at various levels of distribution system Levels Clearing & forwarding agents Stockist or distributors Margins 1-10% on total turnover +other expenses 8% on scheduled drugs 10% on nonscheduled drugs Retailers 16% on scheduled drugs 20% on nonscheduled drugs

Procurement Management
Definition Procurement management is the process involving sourcing and purchasing of economic resources and business input from suppliers or vendors for business use. This process helps companies negotiate prices and get the best quality resources for production processes. The procurement management process involves managing the ordering, receipt, review and approval of items from suppliers. It also manages the supplier relationship so that a high level of service is received. A Procurement Management is a process that all products and services obtained for the project from the supplier are in accordance with the requirements and standards as mentioned in Procurement Plan. This requires that the products are: y y y Obtained within the specified time Measure up to the quality standards set Within the budgeted cost.

The process also defines measures and procedures for ensuring a properly managed supplier relationship. This is achieved through: y y Reviewing and monitoring supplier performance regularly. Identifying supplier issues and then taking remedial measures.

In addition to the above mentioned points, procurement process also helps to: y y y y y y Identify the goods and services to procure Complete Purchase Orders and issue to suppliers Agree on delivery timeframes and methods Receive goods and services from suppliers Review and accept the items procured Approve supplier payments

When to use a procurement management process As soon as the Procurement Plan has been approved and the Supplier Contract signed, the Procurement Management Process is initiated. The Procurement Process is usually managed by a Procurement Officer or Manager and supervised by the Project Manager. In the absence of a formal Procurement Management Process, it is difficult to determine whether the products and services delivered by the supplier conforming to the standards and requirements outlined within the Procurement Plan. Also, it will be difficult to identify and resolve supplier issues, thereby resulting in a poor supplier relationship and will therefore increase the overall risk to the project. The Procurement Management Process is terminated just prior to Project Closure.

 Based upon the consumption purpose the procurement activities are classified into two types: y Direct procurement activities- It occurs in manufacturing areas only and include all the objects that are a part of the finished product i.e. raw materials and finished goods. Example: crude oil in petroleum industry. y Indirect procurement activities- it is usually concerned with operating resources and includes a variety of goods and services like maintenance, repair and operational supplies. Example: lubricants.

quantity is large

Direct or Production related Procurement Process

value is industry specific

DIRECT

frequency is high

quantity is low
nature is operational

Indirect or Nonproduction related Procurement

value is low

INDIRECT

frequency is moderate

nature is tactical

 Based on ordering y Fixed Quantity: It specifies the exact quantities that have to be purchased. Delivery can be in one shipment or several small shipments over the period of the contract. It is Riskier for the purchaser as there is a possibility of overstocking. If there is under stocking, price of additional order is high in this model. y Estimated Quantity: Tender quantity is based on an estimate. Orders are placed periodically over the period of contract. It is riskier for the supplier as the amount actually purchased may differ from the estimate.

Based on type of payment y Credit Payment: Procurement of medicines is done on credit in this model. Payment can be made at fixed period after delivery, or once goods are sold which is convenient for shop owners but at the same time margin may take a beating. In this model Supplier is under high risk as buyer can default. It Locks the working capital of supplier. y On Delivery Payment: In this model ayment is made at the time of delivery of goods. Risk of default for supplier is almost nil. Usually the customer gets a discount for paying the amount upfront.

Based on purchasing authority y Centralized: This model is applicable mainly for big retail chains eg. Apollo Pharmaceuticals. In this Organization has central procurement department with specialized buyers. CPD has individuals who ensure that corporate purchasing standards are met. y Decentralized: This model is applicable mainly for small retail shops. It allows for the quick purchasing decisions. If followed in big chains this causes a lot of duplication of effort.

Steps of procurement management There are basically six steps in procurement management: 1. Making purchase decision- planning: The project at hand is analyzed and any resources that are not available are procured. 2. Supplier contact: The suitable suppliers that satisfy our requirements are contacted through request of tender, request of quotation, etc. Direct contact can also be made as is done in small businesses. 3. Conduct Negotiation: Negotiations are undertaken with the selected supplier and price, shipping cost, delivery date and customization possibilities are established. 4. Fulfillment: Supplier preparation, expending, shipment, delivery, and payment are completed, based on contract terms. Installation and training may also be included. 5. Review performance: Throughout the course of consumption, maintenance and disposal the company monitors, reviews and compares the performance of the product or service with the standard mentioned in the contract. 6. Renewal: If the services of the supplier are satisfactory the company may decide to continue with the same supplier by renewing the contract or may look for some other supplier.

making purchase decisions

supplier contact

conduct negotiations

renewal of contract

review performance

order fulfillment

Benefits of procurement management Procurement process has the following benefits:

y y y y y y

There is no unavailability of materials for production Material and resources prices can be optimized Costs and procurement time are minimized Risks are minimized There is a balanced execution of production plan Leads to a better company-supplier relationship

Inventory Management
Inventory is the stock of any item or resource used in an organization. Inventory management is the management of the timing and quantities of goods to be ordered and stocked by an organization in order that demand can always be satisfied without excess expenditure Importance of Inventory Management Inventory management is one of the important portions of running a successful business. It can make or break the business as it lies just between the production and sales. One can have a very efficient production team and an equally adept sales team , but if you are not good at inventory management , it is really difficult to achieve that optimal performance. Inventory management as all would know means walking the tight rope of not having stock outs neither incurring losses due to excessive inventory. People have devised various methods and models to cope up with this problem. The main reasons one can say why inventory management is important are : 1. To strike a balance between supply and demand The most difficult thing in the business is to determine buyer behavior. In fact , even if you would take help of historical data , still each new day brings with itself new set is surprising results. Hence one has to always be on the toes to see if one is falling short of some product. Also you can always calculate the average demand per day and using the lead time as a measure, you could calculate the reorder point for a quantity. 2. To streamline operations The inventory management is very important to streamline the operations , the production schedule sometimes depends heavily on the inventory management. So one could say it is a vital cog in the functioning of the business and operations are greatly affected by this. 3. To deal with variations in lead times among various products Now every product in your business may not have the same lead time . Also each product will have a completely different demand cycles in the market. It is important to note this and hence each SKU would have a different inventory check for itself . So , the more complex your business is , the importance of inventory management increases by that complexity. 4. Lack of it can cause severe dent to goodwill One thing a company cant afford losing is goodwill of people because that cost of the loss is simply incalculable , word of mouth spread of bad words against you if a customer

doesnt get the product in the store can spell doom for your company. In fact , it is rather to incur little loss for excessive storage rather than bearing the brunt of goodwill loss. Major methods of managing inventory( probable models which could be used in pharmaceutical sector) 1. Fixed order quantity model 2. Fixed order quantity model with safety stock 3. Based on intuition Fixed order quantity model This model determines the specific point R , at which the order can be placed and also the size of that order. The order point R is determined in terms of a specified number of units. Three important assumptions are used while using this model : 1. 2. 3. 4. 5. 6. Demand for the product is constant and uniform throughout the period Lead time is constant Price per unit is constant Inventory holding cost is based on average inventory Ordering cost or setup costs are constant All demands for the products are satisfied ( no back orders are allowed)

Here the total annual cost is calculated as the sum of annual purchase cost , annual ordering cost and annual holding cost. Using the above formula , an optimum quantity is obtained at which minimum cost would be incurred That quantity Q is cost. where D= annual demand , S= setup cost ,and H= annual holding

This method is helpful in determining the required point at which the reorder should be done and that would help in dealing with when to place the order. Fixed order quantity model with safety stock To deal with the danger of stockout during the lead time in fixed order quantity model , this model is used. It basically depends on the service level one wishes to give to the customers. During the lead time , a range of demands is possible. The uncertainty part is taken care of in this model by keeping an extra safety stock in addition to the determined quantity. The reorder point R = avg( demand)L + z Here R= reorder point L= lead time in days Z= Number of standard deviations for a specified service probability
L

= standard deviation of usage during lead time

The amount z L is the safety stock . Hence the larger the safety stock , the greater is the reorder point. So , the advantage of this model lies in taking care of the uncertainties during the lead time which can be crucial in some situations. Based on judgment and intuition Now the small time shops in cities are not even aware of these models , let alone implementing them. While selling they can keep track of the levels in each medicine and accordingly order for more if they feel the stock is not going to last long. In fact , it may be a prudent step in some situations in which the stockists visit their shops frequently or if they dont want to incur the fixed cost of maintaining a database of all medicine . On the other hand , situations can go out of hand if suddenly there is demand of any medicine . Also 3 out of 4 shops visited managed their inventory this way . The basic advantages of this method are : 1. No costs incurred for information regarding inventory like computerization 2. It is difficult to predict buying behavior in this sector 3. Gets to easier to predict after running shop for some years But not all the times this method can be adopted , some inherent disadvantages are : 1. Human error 2. Difficult to deal with emergency if suddenly there is a spurt in sales 3. Difficult to implement in a big pharmaceutical shop Inventory management in computerized medical shop The inventory management now-a-days has become a computerized affair. In fact , the time you are selling the medicines , the database gets automatically updated of the SKU sold and a trigger could be inserted when it reaches the reorder point . But all the shops in the cities might not be encouraged to take up this cost , even to this day one can see the manual methods of inventory management . This decision of course solely rests with the owner of whether to use computerized database. The basics steps by which this system is implemented are : Entry of each procured/sold items in the computer system: The medicine is sold is entered into the system and automatically its count is decreased by one in the database. Separate reorder point for each product maintained in database:

Different triggers are included in the database for different products , so that the moment the reorder point is reached some sort of alarm is given to place the order again to the distributor. An automatic report is generated daily showing items that have reached their expiry date as well as those whose reorder point has been reached: One can check the reports daily as to which item reached their reorder point and also those that might have reached their expiry or are nearing to their expiry . That item can be given back to the distributor saying that the expiry is nearing and there are no customers for it as they see it. Expiry date medicines are replaced and medicines are procured whose reorder point has reached: As mentioned earlier , one can see from the report which medicines reached their reorder point and hence procurement can be done from the distributors. Inventory database is interlinked with billing system so that accurate inventory is maintained: This is of course is the most essential thing as this links with selling of a product with its updating in the database. Manual checks are also done in order to verify with the computerized system on monthly/quarterly basis:

Challenges in inventory management in pharmacy sector Demand may change during epidemic outbreak This challenge always confronts this industry since it is very erratic in nature. There might be a sudden outbreak of an epidemic and you could be facing a serious shortage in medicines due to that . It is completely dependent on the manager of the shop of how he would manage it , using any historical data or any other means. Minimize loss due to damage This problem plagues everyone and one has to take proper care of the inventory through cycle counting or any other means to prevent any unnecessary damage to the products. Doctor may prescribe new medicines from time to time Some of the medicine shops store those products suggested by the nearby doctor . So it may so happen that the prescription might change from time to time and hence the shopkeeper has to deal with this problem through some means. But this problem might plague it nevertheless.

Operationalization of Medical Stores

Shyam Sunder Drug House It is a small chemist shop located in BDA Bhubaneswar, having a space of 15X20 sq feet. It has a staff of 2 people including the owner Mr. Satyapriya Sahoo. Shops working hours are from 0800-1200 and 1700-2300. Operations: y y y y Cost of running the shop is Rs. 5000. Medicines are stored in shop itself as there is no godown. Medicines are clustered according to the companies. There is no fixed period for procurement of medicines, the stockiest sent their representative from time to time and medicines can be ordered as and when required. Procurement is done on credit and the credit period is of 21 days. If medicines are not sold in 21 days then chances of bearing loss are there. Any kind of forecasting is not followed; ad hoc ordering is done to tackle any kind of surge in demand. This kind of model has been adopted to avoid the risk of overestimation and lack of storage space. The common selling medicines inventory on an average lasts for a week. Whereas some of lesser selling drugs can last for months. He prefers to keep a minimal stock of costly medicines like life saving drugs. Nevertheless, he tries to maintain adequate stock of less frequently selling items also so that the customer does not return unsatisfied. However, the stock of such items is very low. The stockists are available locally and we replenish inventory almost daily. Inventory plays a vital role in pharmaceutical industry as a person coming for a medicine may be in a great need and if the chemist fails to provide him then it may spoil the relationship and one may lose a customer for lifetime. The stockists are often unwilling to return cash for the unsold drugs. Since the forecasting cant be that accurate there has to be a tradeoff between stockout and loss due to overestimation. The expiry of medicines is checked once in 3 months. Expired items are replaced with the medicines of the same worth.

Kalinga Drug House It is a small chemist shop located in BDA Bhubaneswar. Two brothers run the shop Nikhil Biswal & Kushal Biswal. Shops working hours are from 0700-1430 and 1600-2300. Operations: y Cost of running the shop is Rs. 7000. y Medicines are stored in shop itself as there is no godown. y Medicines are clustered according to the companies. y There is no fixed period for procurement of medicines, the stockiest sent their representative from time to time and medicines can be ordered as and when required. We were told that on average 10-15 representatives deliver. y Procurement is done on credit along with the payment on delivery in some cases. Medicines bought on credit have lesser margins as compared to those for whom payment is done on delivery. Any kind of forecasting is not followed; ad hoc ordering is done to tackle any kind of surge in demand. This kind of model has been adopted to avoid the risk of overestimation and lack of storage space. y The common selling medicines inventory on an average lasts for a week. Whereas some of lesser selling drugs can last for months. He prefers to keep a minimal stock of costly medicines like life saving drugs. Nevertheless, he tries to maintain adequate stock of less frequently selling items also so that the customer does not return unsatisfied. However, the stock of such items is very low. The stockists are available locally and we replenish inventory almost daily. y Inventory plays a vital role in pharmaceutical industry as a person coming for a medicine may be in a great need and if the chemist fails to provide him then it may spoil the relationship and one may lose a customer for lifetime. y The stockists are often unwilling to return cash for the unsold drugs. Since the forecasting cant be that accurate there has to be a tradeoff between stockout and loss due to overestimation. y The expiry of medicines is checked once in 3 months. Expired items are replaced with the medicines of the same worth. If fail to return within 3 months then have to bear the cost. y He has collaboration with a pediatric.

y One of the problems he faces is that in case of expiry stockiest many a times tell that they have stopped keeping the medicines for that particular company. y One of the unique practices followed is to write down initials of stockiest on the medicine. This allows ease in identification at the time of replacing, in case required. y Sometimes distributors offer greater margins to stock medicine from them only. This is avoided to ensure there is no stockout. Apollo Pharmacy ,Near Sainik School It is a 300 sqft pharmacy shop located in Near Sainik School Bhubaneswar. It is a 24x7 shop owned and operated by Apollo Pharmacy, a division of Apollo Hospitals Enterprises Ltd. It is India's first and largest branded pharmacy network, with over 740 plus outlets. It also deals with hygiene related FMCG products from various brands. It also has a special rack for Apollo branded products. Apart from selling Pharmacy Products the following services are Pharmacy . y also offered by Apollo

Free Reminder Service - It offers free remainder services to its customer by reminding them when to take medicine. Helpline services For any queries related to medicines customers can call up their toll free number. Free health camps Regular health camps are also organized free for regular consumers. Free Health Insurance Free health insurance upto Rs 20,000 is offered to consumers whose yearly spending crosses Rs 6000 at Apollo Pharmacy. Health newsletters

Operations: y Staffing Expenses of Rs 27,500 (5 staffs) is incurred per month with average monthly electricity bill of about Rs 4000. All the tablet/capsule type medicines are stored alphabetically in small boxes. All the eardrops as well as syrups are also stored alphabetically. There is a centralized warehouse for each city. These warehouses have state of art cold chains for storing the medicines at right temperature. For Bhubaneswar it is

located at Ashok Nagar. All the procurement at the city level is done through this warehouse. The inventory level as well as procurement practices are in turn regulated by the headquarters at Hyderabad. y All the 740 pharma stores of Apollo pharmacy are integrated with the IT servers located at Hyderabad .This is all managed by an effective MIS system. The entire supply chain system is computerized. The expiry date and batch numbers are also loaded in the system. So whenever a bill is generated upon purchase of a medicine the store level inventory of that medicine reduces by that number automatically. For example if 10 tablets of streptomycin are purchased ,the store level inventory of streptomycin reduces by 10. The ordering is done based on fixed order quantity method. Optimal Re Order point is designated for each medicine at individual stores. These individual store level reorder points can be controlled by the IT headquarters through the MIS system. Whenever Re-Order point of any medicine is reached then an auto order is generated by the system at the end of day. The order is then fulfilled by the central warehouse the very next morning through Apollos own transportation. The expiry dates of medicines are checked manually every 3 months as its cumbersome to enter the expiry date for each medicine in the store system. This also acts as a secondary check. This is done as the cost of loss due to expiry is too high.

Once medicines are identified whose expiry date is within next 2 months they are sent back to the warehouse through the delivery truck. y One inefficiency that we saw in the operations is that even if one medicine reached Re-Order point an order was generated and the delivery truck came the next day with a single medicine. Thus there was a inflation in transportation cost just to deliver one medicine. Another deficiency we observed is that it took equal time to take out a medicine from the rack regardless its regularly or sparsely purchased. This meant some extra time was used up while getting the medicines from the shelf for even the most common type of prescriptions.

Recommendations y y y y High volume medicines should be stored in front racks to reduce customer throughput time. A minimum safety stock should be maintained to reduce unsatisfied customers. Credit procurement should be avoided as far as possible to improve upon the margins. Improvement of the arrangement of drugs within a rack is required. Use of smaller plastic boxes with labels on them is a faster way of searching rather for hunting for the name on the medicine strip. Arrangement of drugs should be such that the first to receive, should be in front. This can be helpful to minimize the number of drugs reaching the expiry date. The medicines which will be expiring in near future ( 1-2 months ) should be considered as stock out. Should perform ABC analysis which can help in better inventory management. Records need to be maintained from time to time

y y y y

References
http://www.bharatbook.com/upload/Pharmacy-Retail-Market-India-Sample.pdf http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf http://www.livetips.biz/shar/sector/Pharma_Sector.pdf http://www.bioplanassociates.com/publications/articles/BPIBioPlanDISTRIBIndiaToday Oct08.pdf http://www.method123.com/procurement-management.php http://www.wisegeek.com/what-is-procurement-management.htm http://www.epiqtech.com/Purchase-Procurement-Management.htm http://globalknowledgeblog.com/professional-development/project-management-2/anintroduction-to-procurement-management%E2%80%A6continued/ http://www.sap.com/software/procurement-management.epx Operations management for competitive Advantage- Chase, Jacobs and Aquilano