4937442

IMPROVEMENT OF RE-ORDER POINT FOR DRUG
INVENTORY MANAGEMENT AT RAMATHIBODI HOSPITAL
CHULEEPORN LAEIDDEE
A THESIS SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENTS FOR
THE DEGREE OF MASTER OF SCIENCE IN PHARMACY
(PHARMACY ADMINISTRATION)
FACULTY OF GRADUATE STUDIES
MAHIDOL UNIVERSITY
2010
COPYRIGHT OF MAHIDOL UNIVERSITY
Copyright by Mahidol University

iii
ACKNOWLEDGEMENTS
I would like to express my gratitude and a deep appreciation to my

advisor, Associate Professor Dr. Cha-Oncin Sooksriwong, for her understanding,
kind supports, encouragement, helpful guidance, and continuous valuable advice
throughout this study. I would like to express my respectful gratitude and deep
appreciation for her supervision and continual encouragement.
My sincere and grateful appreciation is also expressed to my co-
advisor, Dr. Rawee Suwandechochai, for her valuable suggestions, helpful discussion
and continuous supervision of my study. I also would like to thank my external
examiner, Dr. Kusawadee Maluangnon for her kindness in providing suggestions
during thesis defense.
I am very grateful and wish to express my deepest thanks to pharmacy
staffs, especially to Mrs. Patcharin Suvanakoot from Ramathibodi Hospitals for
implementing this study.
I am grateful to all the lecturers and staffs at the Division of Pharmacy
Administration, Faculty of Pharmacy for their valuable advice and providing
suggestions for improvement and thanks also go to my friends in Pharmacy
Administration class for their cheerfulness and kind support.
Finally, my special thanks go to my beloved parents for their entirely care,
my sister, my brother and my dear for their encouragement, dedication, love and give
continuous support throughout my life.
Chuleeporn Laeiddee

Fac. of Grad. Studies, Mahidol Univ. Thesis / iv
IMPROVEMENT OF RE-ORDER POINT FOR DRUG INVENTORY

MANAGEMENT AT RAMATHIBODI HOSPITAL
CHULEEPORN LAEIDDEE 4937442 PYPA/M
M.Sc. in Pharm. (PHARMACY ADMINISTRATION)
THESIS ADVISORY COMMITTEE: CHA-ONCIN SOOKSRIWONG, Dr.PH.

(PUBLIC HEALTH ADMINISTRATION), RAWEE SUWANDECHOCHAI, Ph.D.
(INDUSTRIAL SYSTEM AND ENGINEERING)
ABSTRACT
The objective of this study is to find out if a re-order point model can
improve the efficiency of drug inventory management at Ramathibodi Hospital by
using inventory performance data from the fiscal year 2006. Three case study drugs
were used in this research: Eprex Prefilled Syringe 4000 U injection, Metformin 500
mg tablets, and Vitamin B Complex tablets. The criteria for drug selection were cost,
storage space, and delivery time. The research procedure was divided into three parts.
First, we analyzed activity and cost of drug purchasing and inventory management,
Second, we defined the appropriate re-order point and order up to level by the (s,S)
inventory control model. Lastly, we compared the inventory performance indicators
of the drug inventory management base with the (s,S) model and existing method.
The results revealed that drug purchasing and inventory management has
6 activities: purchasing, dispensing, receiving, stock level checking, expensive and
narcotic drug checking, and nearly expired drug checking. The average purchasing
cost was 59.89 Baht per purchasing order. The carrying charge of drugs stored in a
refrigerator and drugs stored at room temperature was 1.25% and 1.20% of the
average inventory value, respectively. The inventory performance indicators based on
the (s,S) model had a lower average inventory value, higher inventory turnover rate,
and lower cost than the existing system.
The study concludes that if the (s,S) model was implemented, the
efficiency of drug inventory management would increase. The study results provide
basic information for pharmacist administrators to develop processes for drug
purchasing and inventory management in hospitals. In addition, there was not
constant optimal purchasing nor an inventory management model for all hospitals,
but that may depend on the size of the hospital, work environment, whether or not it
is a private or public hospital, and the purchasing and inventory management policy
of each hospital. So, implementation of this model should be considered.
KEY WORDS: IVENTORY CONTROL/ RE-ORDER POINT/ ORDER UP TO

LEVEL/ HOSPITAL
82 pages

Fac. of Grad. Studies, Mahidol Univ. Thesis / v
การพัฒนาจุดสั่งซื้อใหม่ในการบริหารยาคงคลังโรงพยาบาลรามาธิบดี
IMPROVEMENT OF RE-ORDER POINT FOR DRUG INVENTORY MANAGEMENT AT
RAMATHIBODI HOSPITAL
ชุลีพร ละเอียดดี 4937442 PYPA/M
ภ.ม. (บริหารเภสัชกิจ)
คณะกรรมการที่ปรึกษาวิทยานิพนธ์: ชะอรสิน สุขศรีวงศ์ , Dr.PH. (Public Health Administration), ระวี สุวรรณ

เดโชไชย, Ph.D. (Industrial and System Engineering),
บทคัดย่อ
งานวิจัยนี้มีวัตถุประสงค์เพื่อศึกษาวิเคราะห์รูปแบบการควบคุมสินค้าคงคลังด้านการกาหนดจุด
สั่งซื้อใหม่ที่เหมาะสมเพื่อเพิ่มประสิทธิภาพการบริหารจัดการคลังยาของโรงพยาบาลามาธิบดี ในปีงบประมาณ
2549 โดยคัดเลือกยา 3 รายการเป็นกรณีศึกษา ได้แก่ Eprex Prefilled Syring 4000 U injection, Metformin 500
mg tablet และ Vitamin B Complex tablet การเลือกยาที่ใช้ในการศึกษาจะแบ่งตามปัญหาการจัดการสินค้าคงคลัง
รูปแบบการควบคุมสินค้าคงคลังแบบ (s,S) ได้ถูกนามาใช้ในกาพัฒนาการจัดการสินค้าคงคลัง ขั้นตอนการศึกษา
แบ่งเป็น 3 ส่วนคือ ขั้นตอนแรกทาการวิเคราะห์กิจกรรมและต้นทุนในการจัดซื้อยาและการบริหารจัดการคลังยา
ขั้นตอนที่สอง กาหนดจุดสั่งซื้อใหม่ และระดับที่สั่งซื้อภายใต้รูปแบบ (s,S) ขั้นตอนสุดท้าย เปรียบเทียบตัวชี้วัด
ระสิทธิภาพการจัดการสินค้าคงคลังของรูปแบบ (s,S) และรูปแบบเดิม
ผลการศึกษาพบว่า งานจัดซื้อยาและจัดการสินค้าคงคลังประกอบด้วย 6 กิจกรรม ต้นทุนในการ
จัดซื้อยาต่อใบสั่งซื้อคือ 59.89 บาท และต้นทุนการเก็บรักษายาที่ต้องเก็บในตู้เย็นและยาที่เก็บในอุณหภูมิปกติต่อ
มูลค่ายาคงคลังเฉลี่ยเท่ากับร้อยละ 1.25 และ 1.20 ตามลาดับ จากการเปรียบเทียบตัวชี้วัดประสิทธิภาพการจัดการ
สินค้าคงคลังตามรูปแบบ (s,S) พบว่ามูลค่ายาคงคลังเฉลี่ยลดลง อัตราการหมุนเวียนยาเพิ่มขึ้น และต้นทุนต่ากว่า
รูปแบบเดิมที่ใช้อยู่ในปัจจุบัน
จากการศึกษานี้สรุปได้ว่า ถ้านารูปแบบ (s,S) มาใช้ในการบริหารยาคงคลังในโรงพยาบาล จะ
ทาให้ประสิทธิภาพในการบริหารจัดการคลังยาดีขึ้น และผลที่ได้จากการศึกษานี้สามารถนาไปใช้เป็นข้อมูล
พื้นฐานสาหรับเภสัชกรในการพัฒนาระบบการจัดซื้อและจัดการสินค้าคงคลังในโรงพยาบาลให้ดียิ่งขึ้น อย่างไร
ก็ตาม ยังไม่มีรูปแบบการสั่งซื้อที่เหมาะสมสาหรับทุกโรงพยาบาลเนื่องจากขึ้นอยู่กับ ขนาดโรงพยาบาล ปัจจัย
สิ่งแวดล้อมขั้นพื้นฐาน , โรงพยาบาลรัฐบาลหรือเอกชน และนโยบายในการสั่งซื้อและการบริหารจัดการคลัง
ดังนั้นการนารูปแบบมาใช้ในการบริหารยาคงคลังในโรงพยาบาลจาเป็นต้องคานึงถึงปัจจัยเหล่านี้เป็นสาคัญ
82 หน้า

vi
CONTENTS
Page
ACKNOWLEDGEMENTS iii
ABSTRACT (ENGLISH) iv
ABSTRACT (THAI) v
LIST OF TABLES viii
LIST OF FIGURES ix
CHAPTER I INTRODUCTION 1
Research question 2
General objective 2
Specific objectives 2
Expected outcomes and benefits 3
Definition of terms 3
Conceptual framework 4
CHAPTER II LITERATURE REVIEW 6
Inventory management 6
Inventory control model 13
Activity-Based Costing (ABC) 21
Rationale on selecting the study site 24
CHAPTER III METHODOLOGY 25
Study design 25
Study site 25
Study period 25
Drug selection criteria 25
Study procedure 27
CHAPTER IV RESULTS 32
Activity analysis 32
Cost analysis 34

vii
CONTENTS (cont.)
Page
Inventory model 42
Inventory performance 51
Summary of major finding 56
CHAPTER V DISCUSSION 58
Activity analysis 58
Cost analysis 59
Inventory model 61
Inventory performance 61
Limitation of this study 64
CHAPTER VI CONCLUSION AND RECOMMENDATIONS 65
Conclusion 65
Recommendations 66
REFERENCES 67
APPENDIX 71
BIOGRAPHY 82

viii
LIST OF TABLES
Table Page
1. Number and value of monthly drugs dispensing from inventory during 26
fiscal year 2006
2. Activity dictionary of drug purchasing and inventory management 33
process
3. Total cost and activity cost of drug purchasing 35
4. Total cost of drug inventory management 37
5. Activity cost of drug inventory management 40
6. Activity cost per unit of drug purchasing and inventory management 41
7. Comparing MSE of Eprex between forecasting methods 43
8. Comparing MSE of Metformin between forecasting methods 46
9. Comparing MSE of Vitamin B Complex between forecasting methods 49
10. Comparing purchasing cost and carrying cost between the existing 52
system and (s,S) model of Eprex
system and (s,S) model of Eprex
system and (s,S) model of Metformin
13. Comparing inventory performance between the existing system and 54
(s,S) model of Metformin
system and (s,S) model of Vitamin B Complex
15. Comparing inventory performance between the existing system and 56
(s,S) model of Vitamin B Complex

ix
LIST OF FIGURES
Figure Page
1 Conceptual framework of this study 5
2. Carrying cost is linearly related to order size 14
3. Ordering cost is inversely and nonlinearly related to order size 14
4. The total-cost curve is U-shaped 14
5. Order point, Order quantity (s,Q) system 16
6. Order point, Order up to level (s,S) system 17
7. Periodic review, Order up to level (R,S) system 18
8. The existing system inventory situation of Eprex 42
9. Forecasting demand of Eprex and actual demand in fiscal year 2006 44
10. The (s,S) model inventory simulation of Eprex 45
11. The existing system inventory situation of Metformin 45
12. Forecasting demand of Metformin and actual demand in fiscal year 47
2006
13. The (s,S) model inventory simulation of Metformin 48
14. The existing system inventory situation of Vitamin B Complex 48
15. Forecasting demand of Vitamin B Complex and actual demand in fiscal year 50
2006
16. The (s,S) model inventory simulation of Vitamin B Complex 51

Fac. of Grad. Studies, Mahidol Univ. M.Sc. in Pharm. (Pharmacy Administration) / 1
CHAPTER I
INTRODUCTION
The health care service grew over the past few years and the total world
spent 4.7 trillion U.S. dollars on health in 2005. At the same time, Thailand’s total
expenditure on health as percentage of Gross Domestic Product (GDP) was 3.5(1).
Many health care organizations are expected to grow in the next few years. Hospitals
are complex organizations providing a multitude of services to patients, physicians,
and staff. These services include dietary, linen, housekeeping, pharmacy, laboratory,
surgery, administration, and others. Each area has specific and often unique material
and supply need, creating a requirement in these facilities for supply management
system that can provide the necessary supplies when need. In the current climate of
increasing health care costs, systems inventory must be optimized without sacrificing
the level of service provided.
As a percentage of GDP, Thailand’s health expenditure rose from 5.43%
in 1995 to 6.14% in 2005, the growth rising at the rate faster than that for GDP. Most
of health spending was on curative care as evidenced by the fact that the proportion of
pharmaceutical spending rose to 42.8% of overall health spending in 2005(2). Since
drug is the important factor in curative care, study on cost containment of general
hospitals revealed that hospital pharmacy department had the highest proportion
between 25% to 27% of the total cost in hospital(3). In 1995 the value of hospital drug
inventory of nationwide under the Ministry of Public Health was 1,779.5 million Baht
and it was forecasted to exceed 2,121 million by 2004(4).
In an attempt to decrease the amount of hospital drug inventory, the
Ministry of Public Health has continually striven to develop the efficiency of drug
inventory management system. Reduction of drug inventory level will eventually
lower the carrying cost, but causes the purchasing frequency to arise, which in turn,
purchasing cost will increase by the number of purchasing time. And when drug
inventory decreases, there will be more chances of drug to be out-of-stock. In this

Chuleeporn Laeiddee Introduction / 2
case, the responsible person will urgently procure those shortage drug items, thus, it
may cause some problem in the service system. In order to manage the various types
of inventory, attributes of items first must be analyzed in term of cost, lead time, past
usage, and the nature of demand (5). In many purchasing situations, there are number
of different considerations conflicting with one another that influence the final
purchasing decision. Improvement of drug inventory management can significantly
decrease the expenditure in great amount.
This research is begins to study with focus on order quantity and re-order
point of drug purchasing in hospital. The purpose of this study is to find out the re-
order point model can improve the efficiency of drug inventory management at
Ramathibodi Hospital by employing inventory performance indicators. The
information of drug purchasing would be beneficial for pharmacist administrators to
develop drug inventory management system.
Research question
Will the re-order point model improve the efficiency of drug inventory
management?
Objectives
General objective
The purpose of this study is to find out if re-order point model can
employing inventory performance data during the fiscal year 2006.
Specific objectives
1. Assess the activities of drug purchasing and inventory management at
Pharmacy department, Ramathibodi Hospital during the fiscal year 2006.
2. Apply the re-order point model to calculate new re-order point, order
quantities and simulate the new drug inventory processes.
3. Compare the inventory performance indicators of drug inventory
management base on the re-order point model and existing method.

Expected benefits and applications

1. This research provides information about re-order point method to
calculate drug order quantities and reorder point that can improve performance of drug
inventory management.
2. It could be used as basic information for pharmacist administrators to
develop processes of drug purchasing and storage.
Definition of terms
Inventory
The total stock kept on hand at any storage point to protect against
uncertainty, permit bulk purchasing, minimize waiting time, increase transportation
efficiency and buffer against seasonal fluctuations.
Inventory management
The branch of business management concerned with planning and
controlling inventories.
Drug expenditure
Money spends for purchasing drug to dispense that occur in the hospital.
Safety stock
The buffer, cushion, or reserve stock keep on hand to protect against stock
outs caused by delayed deliveries or markedly increased demand.
Service level
The percentage of items requested that are supplied, in the quantity
requested, by pharmacy inventory.
Stock out
Complete absence of an item that is normally expected to be on hand.

Chuleeporn Laeiddee Introduction / 4
Replenishment lead time

The time interval needed to complete the procurement cycle. It begins at
the time the need for new stock is recognized and end when that stock is received and
available for issue.
Re-order Point
The inventory level set to trigger an order of a specific item.
Activity-Based Costing (ABC)

A method is measuring the cost and performance of activities and cost
objects. Assigns cost to activities based on their use of resources and assigns cost to
cost objects based on their use of activities.
Conceptual framework
In this study, the researcher is to find out if new inventory model can
employing inventory performance data during the fiscal year 2006. We conducted in 2
systems of the inventory management, which are the existing system and re-order
point model (s,S) model. The inventory performance is indicated by three parameters.
When the inventory performances of those 2 systems were done, the comparison
between 2 systems will be present. The conceptual framework of this study is shown
in Figure 1.

Problem
Problem
·· Regulation
Regulation
·· Cost
Cost
·· Storage
Storagespace
space
Inventory
Inventory
on
onhand
hand
Order
Orderup
uptotolevel
level Carrying
Carrying
Minimum
Minimum Inventory (S)
(S)
Monthly
Monthly Order
Order InventoryPerformance
Performance cost
cost
inventory
Fac. of Grad. Studies, Mahidol Univ.
inventory Sales quantity indicators

indicators
level Sales quantity
level
· Safety
Safety Re-order
Re-orderpoint
point ABC
· Inventory
Inventoryvalue
value stock model Ordering ABC
· Inventory
· Inventoryturnover
turnover stock(SS)
(SS) model Ordering
· cost
cost
· Inventory
Inventorycost
cost
Existing
Existingsystem
system Demand
Demand
forecasting
forecasting
Lead
Leadtime
time
Reorder
Reorderpoint
point(s)
(s)
(s,S)
(s,S)model
model
Figure 1 Conceptual framework

M.Sc. in Pharm. (Pharmacy Administration) / 5

Chuleeporn Laeiddee Literature review / 6
CHAPTER II
LITERATURE REVIEW
The literature review is divided into four parts as the followings:

1. Inventory management
2. Inventory control model
3. Activity-Based Costing (ABC)
4. Rationale on selecting the study site
1. Inventory management
The American Production and Inventory Control Society (APICS) define
inventory management as the branch of business management concerned with
planning and controlling inventories(6). The role of inventory management is to
maintain a desired stock level of specific products or items. The systems that plan and
control inventory must be based on the product, the customer, and the process that
makes the product available (7).
1.1 Type of inventory supply

Inventory supply can be classified in terms of manufacturing process into
4 categories (8)
1.1.1. Raw material refer to the primary supply that needs to
be used in the process of manufacturing parts or goods
1.1.2. Components refer to the supply that does not reach the
final step of the manufacturing process.
1.1.3. Work-In Process (WIP) refers to the supply kept for use
in the next manufacturing step or the supply that is under the manufacturing process.
In fact, the WIP Inventory level is usually used as an indicator of the efficiency of the
manufacturing system

1.1.4. Finished goods inventory refers to the supply, which is

ready to use for client service or for storage in the warehouse.
1.2 Inventory management process (9)

Inventory control process is composed of 5 steps as follows: 1)
Purchasing, 2) Receiving, 3) Storage, 4) Issue (Distribution stock from storeroom) and
5) Report
1.2.1 Purchasing
Purchasing is the process of inventory control to acquire
medications. The objective of purchasing is to obtain the right product in the right
quantity at the right price at the right time from the right vendor.
1.2.2 Receiving
When the products arrive at the warehouse, staff should
physically count each item in the shipment and compare it with the invoice before
stock on the shelves.
1.2.3 Storage
Proper storage of inventory is vital. Improper storage can cause
a product to ruin, resulting in a loss of inventory and money.
1.2.4 Issue (Distribution stock from storeroom)
Products need to be moved from the facility store to the places
where they are used. The procedures are similar, whatever the size of the facility. The
movement and control of stocks are more complex in large facilities. Separate stocks
or storerooms may be needed.
1.2.5 Report
The computerized inventory management systems are common
today in all practice setting. The computer systems can integrate the management of
inventory, information, and costs. The ability to integrate inventory and cost data
allows for the generation of wide array of reports and analyses. Example of inventory
management reports include
- Purchase trend report
- Sales analysis report
- Item-movement report

1.3 Inventory performance indicators

Indicator is an important tool used to measure the performance. It can be
used to assess and evaluate the present situation of organization (10). The objective of
indicators is to reflect health care service, which relates to the cause of needed
outcome (11). Indicators are composed of three important categories (12).
1. Structural indicators
They are used to evaluate the structure of system service arrangement such
as number of pharmacists in the hospital pharmacy department.
2. Process indicators
They are used to assess process, activity, or step of medical care service
such as indicators of drug administration and patient treatment.
3. Outcome indicators
They are used to evaluate any outcome that may occur to the patients from
medical care service process, which can be divided in two outcomes as the followings:
- Proximate outcome
It is the imported factor to next step of health care service such
as receiving correct medicine.
- Ultimate outcome
It is an outcome that may happen to the patients including
paralysis, death, and satisfaction of the patients.
From the hospital survey experience in hospital accreditation project,
experts of the institute of Hospital Quality Improvement and Accreditation (HA)
suggested that good quality indicators should have five characteristics (10).
1. They focus on hospital missions and core processes of common area.
They involve the evaluation of high risk and problematic processes. They display
attempting of quality development and continuous quality improvement.
2. They reflect the need and the expectation of customers, providers, and
administrators especially service process, customer outcome, and public health
policies.
3. They are valid, reliable and sensitive to check responsive. They can cite
in academic and quality standard that everyone accepts.

4. They come from the information of potential hospital that can record
the correct and reliable data. They can analyze and conduct information to use. They
are not the burden to collect and analyze.
5. They consist of the sets that cover structural, process, and outcome
indicators of health service and medical therapy. They are used for considering overall
hospital quality improvement.
1.4 Inventory costs

One goal of inventory management is to achieve a reasonable balance
between carrying cost, ordering cost and shortage cost(13).There are four types of
inventory cost involved in drug management (13, 14).
1.4.1 Acquisition cost is the amount the pharmacy pays for the
product.
1.4.2 Inventory carrying cost includes all associated with
carrying and maintaining inventory. The cost is calculated from average inventory
values. The average inventory values are obtained by adding the beginning and ending
inventory values for fiscal year, and dividing by two. The inventory carrying cost
includes several components, many of which have both stable and incremental aspects
 Financial opportunity cost such as interest. It is obtained by
multiplying the average inventory values by average interest rate.
 Losses from inventory: This is often an incremental cost, in
that losses rise as inventory values increase.
 Operating cost for storage and stock management: It is a
mixture of stable and incremental cost.
1.4.3 Ordering cost is cost of ordering and receiving goods.
Ordering cost is usually expressed as amount per order.
1.4.4 Shortage cost is the cost associated with being out of an
item a patient needs or wants. The size of shortage costs is difficult to estimate. At
minimum, it is the embarrassment and frustration of explaining to a patient or
prescription that that the pharmacy is out of the item needed. At maximum, it is the
cost of losing all a patient’s future purchases or, in the case of life-saving emergency
drugs, of causing physical harm to the patient.

1.5 Problems of inventory control

Many problems of inventory control are found in hospital under MOPH.
The problems are as follow (4):
1. Human resource management problem, such as a problem of assistant
knowledge and capability, number of assistant problem inadequate.
2. Expired drug.
3. Drug shortage problem.
4. Main warehouse problem, such as the space is not enough to store drug.
5. Distributor problem, such as the shortage problems from distributors
due to the long distance or inconvenience of transportation.
6. Problem from the number of medicines, such as the medicine not listed
in hospital formulary not being used.
1.6 Drug management in hospital

There are four main activities involved in hospital drug management
including drug selection, drug purchasing, drug storage and inventory control and drug
use (15).
1.6.1 Drug selection
The selection of pharmaceuticals is basic and extremely
important professional function of the hospital pharmacist who is charged with making
decisions regarding products, quantities, product specifications, and sources of supply.
Although the pharmacist has the authority to select a brand or source of supply, he
must make economic considerations subordinate to those of quality. In selecting a
vendor, the pharmacist must consider price, terms, shipping times, dependability,
quality of service, returned goods policy, and packaging (16).
1.6.2 Drug purchasing
According to the Prime Minister’s office regulation on
procurement, 2535 B.E. purchasing process comprises five categories.
1. Price Agreement.
This is the method by which the hospital purchases from private
drug manufacturer or from a distributor with the amount not to exceed 100,000 Baht
per purchase. This method is quite convenient with no purchasing committee need

except the inspecting/checking supply committee, which is formed to inspect and

accept the drug supply.
2. Price Enquiry.
This is the method by which the hospital purchases drug
supply from private manufacturer or distributor within a budget of more than 100,000
Baht but not exceeding 2 million Baht.
3. Price Bidding
This is the method by the hospital purchases drug supply from
private manufacturer or distributor with the amount more than 2 million Baht.
4. Special Case Method.
In this method the hospital purchases the drug from the
government, privatized other organization according to the laws of the governmental
district, which no limit on purchasing budget.
5. Special Method
This method used only when other purchasing methods are not
practical. For instance, this method may be used if the purchase needs to be done with
urgency or the supply is used for secret agent matter.
1.6.3 Drug storage and inventory control
Storage is an important aspect of the total drug control system.
Proper environmental control (i.e., proper temperature, light, humidity, conditions of
sanitation, ventilation and segregation) must be maintained wherever drugs and
supplies are stored in the institution. Storage areas must be secure; fixtures and
equipment used to store drugs should be constructed so that drugs are accessible only
to designated and authorized personnel. Such personnel must be carefully selected and
supervised. Safety also is an important factor, and proper consideration should be
given to the safe storage of poisons and flammable compounds. Externals should be
stored separately from internal medications. Medications stored in a refrigerator
containing items other than drugs should be kept in a secured, separate compartment.
1.7 The related studies in the inventory management

The 1997/98 annual Lilly Hospital Pharmacy Survey of pharmacy
operation in Canada (16). The average of reported total purchases for 1997/98 was

$4,023,409. This was a 15% increase from the average of $3,485,492 reported in
1996/97. Reported total purchases ranged from $312,056 to $30,349,416, total beds
from 102 to 1999 and total patient days from 11,507 to 675,965. The data therefore
represents responses from hospitals with a broad range of services, programs and
specialties. The information and data presented here attempts to bring order to the
numbers that are representative of the diversity of respondents’ hospitals. They
provide valuable insight into trends and averages and allow readers to track changes in
their own facilities and make rough comparisons to national averages. They allow
readers to determine if their facility is keeping pace and offers some insight as to why
the changes are occurring.
Suchonwanich N. studied the inventory management at Mahasarakam
hospital in the fiscal year 1996 (17). Inventory values in the fiscal year 1996 were
10,093,483 Baht. The safety stocks of essential drug (3-6 months) were higher than the
safety stocks of non-essential drug (2-4 months). The essential drug values were
6,470,343.60 Baht, the non-essential drug values were 3,623,139.66 Baht. She
explained why safety stocks of non-essential drug were less than essential drug.
Because of the out- of-date hospital drug list, then the doctor turn to order more non-
essential drug. If this trend has continued, the hospital would face the over drug stock.
Kattiviriyaoinyo K. studied about assessment of drug procurement system
of private hospitals in 1998 (18). The study was conducted in two parts. In first part,
procurement procedures, all 422 private hospitals and clinics with beds for admission
in Thailand were surveyed by mailed questionnaire. In the second part, procurement
costs were collected using cost collecting from at two Bangkok and vicinity private
hospitals. The results of first part revealed that the larger hospitals and hospitals in the
Hospital Accreditation (HA) project had high percentages of good procurement
practices. The hospital with good procurement practices would have good
procurement outcomes. For the second part, labor cost was the largest proportion of
both purchasing and inventory carrying cost. In the larger hospital, the unit cost of
purchasing and inventory carrying cost were less. There were not constant optimal
procurement costs for all hospitals, but that they depended on the hospital’s
management.

Chungsiwapornpong W. studied the process of drug inventory control

systems and performance among hospital pharmacy departments in Thailand (9). It
was conduct in two parts. The first part was the development of major drug inventory
indicators. A list of drug inventory indicators from literature review was assessed by
20 hospital pharmacists and 9 experts according to 3 criteria of good indicators. The
second part was a survey of drug inventory process and performance by mail
questionnaire to 720 samples of both public and private hospitals in Thailand. The first
part, nine indicators were selected as major drug inventory control. For the second
part, the drug inventory performance and outcomes were also different. A combination
of good drug inventory system was ABC, VEN system, group purchasing, verification
of quantity in drug issuing according to the real usage, drug accepted with the
expiration dates more than one year, and vender performance. Another importance
finding was that the level of drug inventory value (Baht/OPD visit in each size of
hospital could be used as a benchmark to improve their drug inventory process and
performance.
2. Inventory control model

2.1 Economic Order Quantity (EOQ)
In 1915, F.W. Harris of General Electric developed the Economic Order
Quantity formula (EOQ) to help stock keepers in determining how much product to
buy (19). The objective of an inventory system is the minimization of total operating
costs. The unavoidable costs of operating pure inventory systems are ordering cost,
stock out cost, and carrying cost. The EOQ derives the optimal lot size for purchasing
by minimizing the cost components involved (ordering cost and carrying cost). The
ordering cost or purchasing cost; all costs associated with preparing a purchase order.
These include the cost of preparing a purchase invoice, telephone, salaries of
purchasing clerks, and stationery. The relationship between the carrying cost and
ordering cost is shown in Figure2-4.

Figure 2 Carrying cost is linearly related to order size

Source: W.C. Benton, Jr. Purchasing and supply management, 2007
Figure 3 Ordering cost is inversely and nonlinearly related to order size

Figure 4 The total-cost curve is U-shaped


The total cost can be described as follows:
Total cost = Ordering Cost + Inventory Carrying Cost
TC =  A / Q  CP   Q / 2 C H  [1]
Where
A = Annual requirement
Q = Order size
CP = Cost of an order
CH = Unit inventory cost per year
To derive the minimum-cost lot size (EOQ), take the first derivative with
respect to Q and set it equal to zero. The calculus is used to determine the point of
inflection on the total cost curve where it is no longer decreasing and beginning to
increase.
 TC  A C
= CP + H = 0 [2]
Q Q 2
2
The solution to Equation (2) is
EOQ = 2 AC P / C H [3]
The classical EOQ model assumes the following (7):

1. Constant demand.
2. Constant lead time.
3. Constant unit price.
4. Fixed order cost per order.
5. Fixed holding cost per unit.
6. Instantaneous replenishment.

7. No stock outs allowed.

8. No demand uncertainty.
9. Quantity discounts are not available.
Since the above assumptions do not reflect all real situations, EOQ model
must be modified in a real inventory system analysis.
2.2 Re-order point model

The logic of the reorder point is that product is to be reordered when the
stock level of material will be used up during the time required to bring in additional
stock. The calculate reorder point is that predetermined inventory level at which
replenishment action is called for when the on-hand and on-order drops to or below
that level.
The re-order point policies are following (20):
1. Order point, Order quantity (s,Q) system
This system involves continuous review. A fixed quantity Q is ordered
whenever the inventory position drops to the reorder point s or lower. This system is
shown in Figure 5.
Figure 5 Order point, Order quantity (s,Q) system

Source: http://www.inventory-management.de

2. Order point, Order up to level (s,S) system

This system involves continuous review and replenishment is made
whenever the inventory position drops to order point s or lower. However, in contrast
to the (s,Q) system, here a variable replenishment quantity is uses, enough being
ordered to raise the inventory position to the order up to level S. The order up to level
S is given by S = s +Q. This system is shown in Figure 6.
Figure 6 Order point, Order up to level (s,S) system

3. Periodic review, Order up to level (R,S) system

This control procedure is that every review interval R units of time (that is,
at each review instant) enough is ordered to raise the inventory position to the order up
to level S. This system is shown in Figure 7.

Figure 7 Periodic review, Order up to level (R,S) system

4. (R,s,S) system
This is combination of (s,S) and (R,S) systems. The idea is that every
review interval units of time to check the inventory position. If it is at or below the
reorder point s and order enough to raise it to the order up to level S. If the position is
above the reorder point, nothing is done until at least the next review instant.
2.3 Safety stock

When there is the uncertainty in demand, safety stock must be considered.
Safety stock is extra inventory held to protect against randomness in demand or lead
time. Safety stock is needed to cover the demand during the replenishment lead time in
case actual demand is greater than expected demand (5).
The safety stock may be based on sophisticated statistical formulas such as
measuring the standard deviation and relating that deviation to the lot size, lead time,
and desired service level. On the other hand, the safety stock may be a fix number that
represents an expected demand over a predetermined period of time (7).

2.4 Application of inventory control model in the inventory

management
Kwak. N. K. et al studied inventory model for optimizing purchasing of
intravenous fluids for hospital (21). This study determined the optimal order interval
for placing IV fluid orders interval. They calculated the appropriate safety stock, the
economic order quantity, and reorder point for each fluid. The optimal order
calculations can be influenced by both internal and external factors to the hospital.
Some of factors that influence the reorder interval are very predictable and thus can be
easily compensated. The other factors are very difficult to predict. For example, the
complexity of the surgery schedule or how many premature babies would be admitted
on a given day.
Thawani. V. R et al studied the economic analysis of drug expenditure in
the Government Medical College Hospital, Nagpur and identified the categories of
drugs needing stringent management control (22). The result of annual drug
expenditure was found to be only 11.59% of the total hospital budget. The division of
drug inventory into two priority categories resulted in identifying the priority drugs for
stringent control. The percentage cost of each drug helped in determining the
economic order quantity and the schedule of placing the purchase orders for drugs of
high value but low criticality. Using the cost inflation index, it was observed that the
overtly seen increase in annual drug expenditure was just 2.84% when the inflation
factor-based expenditure was derived.
Vincent V. and Ranton M. studied Economic order quantity model with
space limitation (23). They have used a limited storage area in a hospital to study the
drug items Ampicillin injection 250 mg which belongs in A group classification. This
study reveals that the application of EOQ model can lower in the inventory cost
control for about $ 30.12 per annum from just one item-Ampicillin injection 250 mg
from more than 800 of total drug items in the hospital. Researchers conclude that EOQ
model together with computer technology application can tremendously lower the
inventory management cost.
A study in Arizona Health Science Center, U.S.A. has combined the ABC
classification and the Economic Order Quantity purchasing model to investigate
whether such application can lower the inventory cost in comparison with the

traditional Maximum-Minimum system. The result shows that within a year time-
frame, the cost of inventory control can decrease by more than 10,000 US Dollars.
Chanchai C. studied costs of drug inventory management and drug
inventory performance at Khon Kaen Hospital in the fiscal year 2000, and then
compared the existing system with a simulated model using ABC classification and
Economic Order Quantity model (ABC/EOQ system) (24). The findings showed a
total inventory management cost of 3.34 million Baht, which was divided into
purchasing cost of 1.54 million Baht and carrying cost of 1.80 million Baht. The
inventory carrying fraction was 15.18 % and the purchasing cost was 421.38 Baht per
item. The inventory performance was indicated as inventory turnover of 7.9, a service
level of 81.3%, and expense ratio of 3.6%. When the service level was increased from
81.3 % of the existing system to 95 % of ABC/EOQ system, the inventory
management cost did not change. The costs of inventory management and inventory
performance derived from a simulated model (ABC/EOQ) were compared with those
of the existing system. For category A drugs, when the service level was adjusted from
82.75% to 95%, the cost of drug inventory management did not change. For category
B drugs, when the service level was adjusted from 83.73% to 95%, the cost of drug
inventory management increased by 15.19 %. For category C drugs, when the service
level was adjusted from 75.5% to 95%, the cost of drug inventory management
decreased by 13.84 %. The feasibility of implementing the ABC/EOQ system in real
practice was determined by the Delphi technique. It is possible to implement the
ABC/EOQ system in hospitals.
Jie Yang et al. considered an inventory control problem with multiple-
period replenishment lead time and nonstationary stochastic demand, and provided an
optimal policy for this kind of problem (25). This paper compared the expected total
costs performance of a nonstationary (s, S) policy with Sox’s method and Tarim and
Kingsman’s method. The expected total cost for this policy was lower than Sox’s
policy. And the expected total cost Tarim and Kingsman’s method was 2418.1, while
for this policy it was only 2179.2, which saves 9.88% total costs. This policy can
adjust both replenishment period and order quantity based on demand realization and
thus save cost.

3. Activity-Based Costing (ABC)

Activity-Based Costing (ABC) was proposed by Kapland and Cooper in
1998, the first printed in journal of cost management and Harvard business review.
After that, this system was accepted and rapid popularity in England and Europe. At
the first in Thailand, the private businesses interested and adopted ABC for their
organization (26). At the present, ABC was widely used in other organizations.
For the health care system, there is a need for ABC because competition in health care
is a driving force while efficiency remains serious concerns. ABC can deliver the
information to maximize resources and to relate cost to performance and outcome
measure. Management decision makers can utilize ABC information to accomplish
cost efficiency without negatively impacting the quality of service delivery while also
assisting in continuous quality improvement (27).
3.1 Differences between Traditional and Activity-Based Costing

There are three major differences between Activity-Based Costing and
traditional cost accounting method (28).
1. In traditional cost accounting it is assumed that cost objects consume
resources whereas in ABC it is assumed that cost objects consume activities.
2. Traditional cost accounting mostly utilizes volume related allocation
bases while ABC uses drivers at various levels.
3. Traditional cost accounting is structure-oriented whereas ABC is
process-oriented.
3.2 The importance of Activity-based cost analysis

Activity cost is the value of resources which used to perform activities of
enterprise. It composed of labor, material, machine, vehicle, computer system, and
others. Activity-based is the administrated system to use cost information for activity
management by integrated activities. The administrators can overall processes of their
services and associate of each activity for further continuous process improvement
(26).
Charaemmeprasert, C described that ABC is the cost management, which
can help the administrators to understand the cost behavior in their organization (29).

This system emphasized on activity management by divided organization processes

into activities. This system help the administrators to know what does the activities
process, how much the time spent on each activity, and how many the output of
activity performed.
3.3 Steps of activity cost analysis

Brimson, J.A. revealed the seven steps to computing activity cost are (30):
1. Activity analysis
Activity analysis decomposes a large, complex organization into elemental
activities that are understandable and easy to manage.
2. Life-cycle analysis
Life-cycle analysis provides a framework for managing the cost and
performance of a product/process over the duration of its activities.
3. Determine of activity cost
3.1 Tracing of organizational resources to activities with an
established causal relationship
3.2 Determination of measure of activity by which the cost
of a given an activity varies most directly (as in number of purchase order, number of
hours of grinding, and so forth.
3.3 Calculation of cost per activity
4. Identification of performance measures
Performance measures are the financial and operational statistics used to
gauge the performance of a company. Under activity-based performance measurement,
each activity is analyzed to determine how effectively the work is being performed as
gauged by key performance measure such as quality, cost, and time.
5. Determination of the cost of business processes
A business process analysis determines the interdependencies among
activities. Insight into these interrelationships provides visibility of event; a company
can reduce or eliminate the cost of all subsequent activities.
6. Tracing of cost to reporting objective
1. Technology
- Order

- Customers
7. Calculation of product cost
Products cost is determined through a bill of activities that itemizes the
activities and quantity of each activity.
3.4 Application of Activity-based costing in Health care service.

Hugh W. et al. described the application of activity-based costing (ABC)
to calculate unit costs for a healthcare organization in a developing country (31). It
also describes the ways in which these calculations can provide information for
improving the efficiency and quality of healthcare services. Traditional costing
frequently allocates overhead and other support costs on the basis of units of
production, while ABC assigns these costs to direct services by tracing actual time and
other costs through the organization. This provides more accurate estimates of the full
unit costs of services than traditional accounting methods. ABC also highlights areas
in the healthcare process where efficiency improvements are possible.
Sopanna, W. studied prevention and promotion (P&P) activities-based
costing of primary care unit at salalumduan, Sakaeo Province, Thailand in 2004(32).
This study was a cross-sectional study and three principles use in ABC were activity
analysis, activity costing and performance measurement. The result showed that the
P&P cost in 2003 was 1,186,497.59 Baht, the government funding of P&P capital cost
was 927,740.93 Baht and labor cost was 636,681.59 Baht. The operation cost was
101,055.86 Baht and capital cost was 167,586.81 Baht. The non-UC budget was
22,416.67 Baht. The lowest unit cost was in the sanitation and environmental health
services sub-activity.
Lazaro M. et al. studied to calculate the cost of heart transplant by applied
Activity-Based Costing in 2004(33). To develop a method to calculate accurately heart
transplant cost to analyze comparatively the calculated cost a variations in clinical
practice and organization-economic strategy among 4 Spanish hospitals. They found
that mean of cost in 4 studied hospital was 39,975 Euros. The global cost and cost of
each phases varies significant among hospitals. The difference were depends on
variations in clinical practice and organization strategic planning. They conclude that

ABC method is applicable to accurately the cost, detected inefficient activities and
allowed to optimized costs in heart transplant process.
Methacanon, T. analyzed the activity cost of the pharmacy dispensing
service in the outpatient unit in Ladyao Hospital, Nakhonsawan Province, Thailand
(34). Research used an activity-based approach in the fiscal year 2005. The results
revealed that there were 18 activities of the outpatient pharmacy dispensing service in
Ladyao Hospital. The total cost was 12,223,331.27 Baht which was composed of
recurrent costs (96.46%) and capital costs (3.54%). The largest proportion of recurrent
cost was cost of drugs and medical supplies. Unit cost of dispensing service was 85.85
Baht/prescription or 19.10 Baht/drug item. If the cost of drugs and medical supplies
was excluded, unit cost was 11.76 Baht/prescription or 2.62 Baht/drug item.
4. Rationale on selecting the study site

Ramathibodi Hospital is a University Hospital of Mahidol University with
903 beds. The number of outpatients was about 5,109 patients per day with in fiscal
year 2006 (35). The pharmaceutical department of Ramathibodi Hospital has drug
inventory 2,111 items. Those effects to the stock values are up to 130 million Baht.
The criterion of drug purchasing was based on average monthly distribution from drug
inventory. In addition, a new drug order point was 70 percent of the monthly sales and
quantities of drug order are up to 100-150% of the monthly sales. This system has not
base on actual drug usage and cost of drug inventory. The value of drug stock can
affect all systems in hospital. At the same time, the adequate amount of drug supply
will affect the quality of health care service. Consequently, the study of inventory
management and application of theoretical re-order point model in real situation of
hospital and use a result as a practice guideline in managing the drug inventory.

CHAPTER III
METHODOLOGY
The methodology of this study was consisted of 5 parts:

1. Study design
2. Study site
3. Study period
4. Drug selection criteria
5. Study procedure
1. Study design
This study was an analytical cross-sectional study.
2. Study site
This study was conducted at the drug purchasing and drug inventory
control unit of the pharmacy department, Ramathibodi Hospital.
3. Study period
The process activities of drug purchasing and inventory management were
collected from December 2007 to February 2008. Data during fiscal year 2006 were
collected for calculation new re-order point and order quantity.
4. Drug selection criteria

Drugs included in this study were suggested by the principal pharmacist
and the head of drug inventory unit at a teaching hospital. These drugs are
representatives of each drug inventory problems mentioned at the sample hospital. The
criteria for drugs selection divided by type of problems of drug inventory management

Chuleeporn Laeiddee Methodology / 26
1. High value drugs and required storage in the refrigerator. Eprex

Prefilled Syringe 4000 U injection was selected under this criterion. Eprex is used for
the treatment of anemia in certain patients with kidney failure, HIV, or cancer. Total
number of Eprex dispensed from the inventory unit was 18,008 syringes and total
value was 32,630,496 Baht in the fiscal year 2006. (Table 1)
2. High utilization rate, high volume and bulkiness. Metformin 500 mg
tablet was selected under this criterion. Metformin is a drug for the treatment of
diabetes mellitus. Total number of Metformin dispensed from the inventory was
6,495,500 tablets and total value was 6,495,500 Baht in fiscal year 2006. (Table 1)
3. Drugs purchased from the Government Pharmaceutical Organization
(GPO), with long lead time. Vitamin B Complex tablet was selected under this
criterion. Total number of Vitamin B Complex dispensed from the inventory was
2,550,000 tablets and total value was 1,275,000 Baht in fiscal year 2006. (Table 1)
Table 1 Number and value of monthly drugs dispensing from inventory during fiscal
year 2006.
Eprex Metformin Vit. B Cpx.
Date
(syringe) (tablet) (tablet)
Oct-05 894 347,500 130,000
Nov-05 1,380 438,000 180,000
Dec-05 846 437,500 221,000
Jan-06 1,254 377,500 192,000
Feb-06 780 438,500 111,000
Mar-06 1,640 438,500 162,000
Apr-06 960 334,000 170,000
May-06 1,560 437,000 121,000
Jun-06 1,140 585,000 304,000
Jul-06 1,500 347,000 86,000
Aug-06 1,380 437,000 224,000
Sep-06 1,026 481,500 90,000
Oct-06 1,314 384,500 200,000
Nov-06 1,158 559,000 119,000
Dec-06 1,176 453,000 240,000
Total (unit) 18,008 6,495,500 2,550,000
Total value (Baht) 32,630,496 6,495,500 1,275,000

5. Study procedure
This study procedure was divided into 4 phases; 1) Activity analysis,
2) Cost analysis, 3) Inventory model and 4) Inventory performance.
Phase1. Activity analysis

First, the activities of drug purchasing and inventory management
processes were collected from interviewing staffs and observation. Then the functional
flow diagram to show the relationship between processes and the departments
responsible for that processes was constructed. The data from functional flow diagram
were summarized to document an activity dictionary.
Phase2. Cost analysis

This study determined the direct costs of drug purchasing and inventory
management activities base on activity-based costing (ABC). Total direct costs were
acquired from the total of labor costs, material costs and capital costs.
1. Labor cost
- The labor cost; total salaries of personnel in the pharmacy department
related to drug purchasing and inventory management. Data were collected from
financial and accounting department.
- The proportion of time spent in each activity collected by interviews and
observation of actual operations.
- The labor cost per activity was calculated as follow.
Labor cost per activity = Total labor cost × Proportion of time spent in each activity
2. Material costs
- Costs of material office supply used in drug purchasing unit and drug
inventory unit were recorded and allocated to activities by estimation of material used
in each activity.
- Public utilities included electricity and telephone charges were collected
from the financial and accounting department. The water supply has not been charged
as a direct relationship with drug purchasing and drug inventory management.
Ramathibodi Hospital did not have separate electricity meter in each department. In
this study, electricity cost of drug purchasing unit and drug inventory unit was

calculated by multiplying the electric power with working time used and was
computed by using government non-profit rate. The telephone cost allocated to
purchasing unit and drug inventory control unit by the number of personnel. The
electricity and telephone costs were allocated to activities by proportion of working
time and proportion of telephone used in each activity, respectively.
3. Capital cost
- Capital cost included depreciation value of buildings and long-lasting
equipments. The data collected from central supply unit. Useful life of buildings and
equipments criteria based on central supply unit. Cost accounting system was used to
calculate the depreciation cost based on straight-line method under the following
formula:
- Capital cost was allocated to activities by proportion of working time.

4. Unit cost calculation.
This present study estimated three unit cost, activity cost, purchasing cost and carrying
charge.
Activity cost per unit calculation.
Purchasing cost per purchasing.

Carrying charge, the cost in one Baht of carrying one Baht of inventory for
one year.
Phase3. Inventory model

1. Number of drugs dispensing per week during fiscal year 2005-2007 was
collected. Kolmogorov-Smirnov goodness of fit test were using normal and other
distribution test.
2. The demand forecasting of drugs dispensing per week in fiscal year
2006 forecasting used four exponential smoothing methods for analyses the data
following (36):
- Simple Exponential Smoothing method
- Holt’s linear trend method
- Brown’s linear trend method
- Damp trend method.
Data divided into 2 parts; initialization set (44 weeks) and test set (8
weeks). Selection the best forecasting method for data used to find at least Mean
Square Error: MSE following formula (36):
Where
= Actual value - forecast value
= number of data
Drugs dispensing per week in fiscal year 2006 was forecasted from
number of drug dispensing per week in fiscal year 2005.
3. Data forecasting was used to calculate Economic Order Quantity (EOQ)
following formula (20):

Where
Q = Economic Order Quantity (units)
= Purchasing cost (Baht/purchasing)

= Annual demand (units)
= Carrying charge (Baht/Baht/year)
= Unit price (Baht)
4. Calculation reorder point and safety stock as following (20):
Where
5. Inventory model uses a (s, S)

Whenever inventory position (on hand plus order) drops to reorder point (s) or lower,
an order is placed to raise the position to the order up to level (S). Calculation the
value S following formula (20):
6. Purchasing is determined as follows.

- When inventory position equal to reorder point, order quantity equal to
Economic Order Quantity.

- When inventory position lower than reorder point, order quantity are
equal to Economic Order Quantity plus the difference between inventory position and
reorder point.
The actual order quantity is round number to packing size.
Phase4. Inventory performance

Comparison of inventory performances between the existing system and
(s,S) model. Drug inventory performance was indicated by three parameters. (37)
1. Average inventory values (Baht) = Total inventory value/365 (day)
2. Inventory turnover = value of drug use/Average inventory value
3. Inventory cost (Baht) = Purchasing Cost + Inventory Carrying Cost
Purchasing cost = Number of times purchasing x Purchasing cost per purchasing
Carrying cost = Average inventory values x Unit price x Carrying charge
The data in this study were analyzed by using the Microsoft Excel 2003,
XLSTAT 2008 and SPSS software version 16.

Chuleeporn Laeiddee Results / 32
CHAPTER IV
RESULTS
The results of this study were divided into three parts as follows:
Part1. Activity analysis
Part2. Cost analysis
Part3. Inventory model
Part3. Inventory performance

This part described drug purchasing and drug inventory management
processes and activity dictionary.
The Activity pools of drug purchasing and inventory management process
are divided following:
1. Drug purchasing
2. Drug inventory dispensing
3. Drug receiving
4. Stock level checking
5. Expensive and narcotic drug checking
6. Nearly expired drug checking
The functional flow diagram in appendix A to show the relationship
between processes and the departments responsible for drug purchasing and inventory
management processes.
The activity processes of drug purchasing and inventory management were
summarized to document an activity dictionary (Table 2). Drug purchasing process
has 1 activity and 4 sub activities. Total time spent on drug purchasing activity in
fiscal year 2006 was 6,174 hours or accounted to 36.18% of total working time. Drug
inventory management process has 5 activities as follows:
1. Drug inventory dispensing was composed of 6 sub activities.

2. Drug receiving was composed of 8 sub activities.

3. Stock level checking was composed of 2 sub activities.
4. Expensive and narcotic drug checking was composed of 2 sub
activities.
5. Nearly expired drug checking had 1 sub activity.
The total time spent on drug inventory management in fiscal year 2006
was 32,151.12 hours. The drug inventory dispensing activity had spent the highest
proportion time of working time (65.20%) followed by drug receiving (26.81%),
nearly expired drug checking (6.38%), stock level checking (1.5%) and expensive and
narcotic drug checking (0.11%), respectively.
Table 2 Activity dictionary of drug purchasing and inventory management process

Activity Sub activities
1. Update stock and arrange drug list for purchasing
2. Record and print out purchasing order and sign to authorize
by pharmacist and head of pharmacy department
Drug purchasing 3. Arrange document and record data after purchasing order
permit by director of hospital
4. Arrange document sign to authorize by pharmacist after drug
receiving
1. Receive drug requisition and arrange drug requisition
2. Check and deliver drug
3. Record data in stock card
Drug inventory
4. Record data in computer and print reports
dispensing
5. Check correction of record and drug cannot dispensing list
by pharmacist
6. Sign record report by pharmacist

Table 2 Activity dictionary of drug purchasing and inventory management process

(continue).
Activity Sub activities
1. Check and arrange document and record with print
document for committee
2. Check drug and record data in receiving book by committee
3. Check drug by inventory staff
4. Place drugs on shelf
Drug receiving
5. Record data in stock card
6. Record data in computer, print
7. Check and arrange drug receiving document
8. Sign drug receiving document by chief of inventory control
unit
1. Print out inventory level report
Stock level checking 2. Check drug quantity on shelf and stock card compare with
report
1. Print out inventory level report
Expensive and narcotic
drug checking 2.Check drug quantity in stock card compare with report
Nearly expired drug Check drug expiration date and record in report
checking

This study determined the total direct costs of drug purchasing and
inventory management activities base on existing method during fiscal year 2006.
Total direct costs were acquired from the total of labor costs, material costs and capital
costs. In this part was divided 2 parts: 1) Total cost and activity cost 2) Unit Cost of
drug purchasing and inventory management.
1. Total cost and activity cost
Total cost of drug purchasing was 821,692.90 Baht. Labor cost, material
cost and capital cost were 668,452.93 Baht, 152,940.02 Bath and 299.95 Bath,
respectively. The record and print out purchasing order and sign to authorize by
pharmacist and head of pharmacy department sub activity cost was highest
(489,004.32 Baht), which accounted for 59.51% of total cost (Table 3).

Table 3 Total cost and activity cost of drug purchasing.

Labor cost Material cost Capital cost Total cost
Activity Sub activities Baht % Baht % Baht % Baht %
1.Update stock and arrange drug list
for purchasing 49,515.03 7.41 14,776.74 9.66 22.22 7.41 64,313.99 7.83
2. Record and print out purchasing
order and sign to be authorized by
pharmacist and head of pharmacy

Drug department 371,362.74 55.56 117,474.94 76.81 166.64 55.56 489,004.32 59.51
purchasing 3. Arrange document and record data
after purchasing order permit by
director of hospital 123,787.58 18.52 10,344.17 6.76 55.55 18.52 134,187.30 16.33
4.Arrange document sign to
authorize by pharmacist after drug
receiving 123,787.58 18.52 10,344.17 6.76 55.55 18.52 134,187.30 16.33
Total (Baht) 668,452.93 100.00 152,940.02 100.00 299.95 100.00 821,692.90 100.00

Total cost of drug inventory management was 2,566,851.52 Baht. Labor

cost, material cost and capital cost were 2,029,186.00 Baht, 378,301.76 Baht and
159, 363.76 Baht, respectively (Table 5). The drug inventory dispensing activity cost
was the highest (1,651,461.84 Baht), which accounted for 64.34% of total cost. Record
data in stock card sub activity cost was the highest (728,061.18 Baht), which
accounted for 28.36% of total cost. The drug receiving activity cost was 706,277.12
Baht, which accounted for 27.52% of total cost. Check drug and record data in
receiving book by committee sub activity cost was highest (230,662.71 Baht), which
accounted for 8.99% of total cost. The nearly expired drug checking was 166,799.75
Baht, which accounted for 6.50% of total cost. The stock level checking activity cost
was 38,473.01 Baht, which accounted for 1.50% of total cost. Check drug quantity on
shelf and stock card compare with report sub activity cost was highest (37,561.47
Baht), which accounted for 1.46% of total cost. The expensive and narcotic drug
checking was the lowest (3,839.80 Baht), which accounted for 0.15% of total cost.
Check drug quantity in stock card compare with report sub activity cost was highest
(2,016.72 Baht), which accounted for 0.08% of total cost. Total cost, activity cost and
sub activity cost was presented in Table 4-5.

Table4 Total cost of drug inventory management.

Activity Sub-activities
Baht % Baht % Baht % Baht %
1. Receive drug requisition
and Arrange drug
requisition 432,622.46 21.32 70,857.92 18.73 33,976.35 21.32 537,456.73 20.94
2. Check and deliver drug 257,097.87 12.67 42,109.28 11.13 20,191.39 12.67 319,398.53 12.44
3. Record data in stock card 584,608.49 28.81 97,540.00 25.78 45,912.70 28.81 728,061.18 28.36
Drug 5. Record data in computer

inventory and print reports 19,480.19 0.96 4,839.22 1.28 1,529.89 0.96 25,849.29 1.01
dispensing 6. Check correction of
record and drug cannot
dispensing list by
pharmacist 19,480.19 0.96 7,585.69 2.01 1,529.89 0.96 28,595.77 1.11
7. Sign record report by
pharmacist 9,740.09 0.48 1,595.30 0.42 764.95 0.48 12,100.34 0.47

Table4 Total cost of drug inventory management (continue).

1. Check and arrange document and
Chuleeporn Laeiddee
record with print document for committee 43,221.66 2.13 33,456.55 8.84 3,394.45 2.13 80,072.66 3.12
2. Check drug and record data in receiving
book by committee 185,670.52 9.15 30,410.41 8.04 14,581.78 9.15 230,662.71 8.99
3. Check drug by inventory staff 172,683.73 8.51 28,283.34 7.48 13,561.86 8.51 214,528.93 8.36
4. Place drugs on shelf 72,036.10 3.55 11,798.57 3.12 5,657.41 3.55 89,492.09 3.49
Drug
5. Record data in stock card 28,814.44 1.42 4,918.18 1.30 2,262.97 1.42 35,995.59 1.40
receiving
6. Record data in computer, print report
and transfer data to purchasing unit 14,407.22 0.71 4,008.33 1.06 1,131.48 0.71 19,547.03 0.76
7. Check and arrange drug receiving
document 21,509.37 1.06 5,720.96 1.51 1,689.26 1.06 28,919.58 1.13
8. Sign drug receiving document by chief
of inventory control unit 5,681.72 0.28 930.59 0.25 446.22 0.28 7,058.53 0.27
Results / 38

Table4 Total cost of drug inventory management (continue).

Fac.

Chuleeporn

1. Print out inventory level
of Grad.Laeiddee
report 202.92 0.01 692.68 0.18 15.94 0.01 911.54 0.04

Stock level
2. Check drug quantity on
checking
shelf and stock card
Studies, Mahidol Univ.
compare with report 30,234.87 1.49 4,952.08 1.31 2,374.52 1.49 37,561.47 1.46
1. Print out inventory level
Expensive and report 405.84 0.02 1,385.36 0.37 31.87 0.02 1,823.07 0.07
narcotic drug 2. Check drug quantity in
checking stock card compare with
report 1,623.35 0.08 265.88 0.07 127.49 0.08 2,016.72 0.08
Nearly expired Check drug expiration date
drug checking and record in report 129,664.99 6.39 26,951.42 7.12 10,183.34 6.39 166,799.75 6.50
Total 2,029,186.00 100.00 378,301.76 100.00 159,363.76 100.00 2,566,851.52 100.00
M.Sc. in Pharm. (Pharmacy Administration)
Results // 39
42

Table5 Activity cost of drug inventory management.

Activity
Drug inventory dispensing 1,323,029.27 65.20 224,527.40 59.35 103,905.17 65.20 1,651,461.84 64.34
Chuleeporn Laeiddee
Drug receiving 544,024.77 26.81 119,526.93 31.60 42,725.42 26.81 706,277.12 27.52
Stock level checking 30,437.79 1.50 5,644.76 1.49 2,390.46 1.50 38,473.01 1.50
Expensive and narcotic drug checking 2,029.19 0.10 1,651.25 0.44 159.36 0.10 3,839.80 0.15
Nearly expired drug checking 129,664.99 6.39 26,951.42 7.12 10,183.34 6.39 166,799.75 6.50
Total 2,029,186.00 100.00 378,301.76 100.00 159,363.76 100.00 2,566,851.52 100.00

Results / 40

2. Unit Cost of drug purchasing and inventory management.

This present study estimated three unit costs; 2.1 Activity cost,
2.2 Purchasing cost, 2.3 Carrying charge.
2.1 Activity cost
The unit cost of each activity in drug purchasing and inventory
management was presented in Table6. The inventory management activities included
drug inventory dispensing, drug receiving, stock level checking, expensive and
narcotic drug checking and nearly expired drug checking.
2.2 Purchasing cost
The purchasing cost was equivalent to 59.89 Baht per
purchasing. This value was used to compute purchasing cost for each drug.
2.3 Carrying charge
Carrying charge, the cost in one Baht of carrying one Baht of
inventory for one year. The carrying charge of drugs stored in refrigerator and drugs
stored at room temperature were 0.0125 and 0.0120 (Baht/Baht/Year) on average. The
carrying cost for each drug could be obtained by multiplying the average inventory
value for each drug with carry charge constant.
Table6 Activity cost per unit of drug purchasing and inventory management.
Total cost Unit cost
Activities Amount Output
(Baht) (Baht)
1. Drug purchasing 821,692.90 13,720 Purchasing order 59.89
2. Drug inventory
1,651,461.84 18,569 Requisition order 88.94
dispensing
3. Drug receiving 706,277.12 13,720 Invoice 51.48
4. Stock level checking 38,473.01 4 Time 9,618.25
5. Expensive and
3,839.80 1,440 Drug item 2.67
narcotic drug checking
6. Nearly expired drug
166,799.75 132 report 1,263.63
checking


The Existing system; the criterion of drug purchasing was based on
average monthly distribution from central drug inventory. In addition, a new drug
order point was 70 percent of the monthly sales and quantities of drug order are up to
100-150% of the monthly sales. This system has not base on actual drug usage.
This part presented to apply the (s,S) inventory model for drug purchasing
and inventory management. It comprises 3 parts for each drug; 1) Distribution test, 2)
Forecasting, 3) Set inventory model
Eprex Prefilled Syringe 4000 U injection

During fiscal year 2006, Eprex was classified in group A of ABC
inventory analysis and purchased by special case method. The characteristic of this
drug is high value drug. The total value of Eprex dispensing from inventory during
fiscal year 2006 was 32,630,496 Baht and the average inventory value was
2,012,024.94 Baht. Eprex required storage in the refrigerator that increase carrying
cost. Thus, this drug should require tight inventory controls. The inventory situation of
Eprex base on existing system was presented in figure8.
Figure8 The existing system inventory situation of Eprex.

1. Distribution test
Kolmogorov-Smirnov goodness of fit test for number of Eprex dispensing
per week during fiscal year 2005-2007 were used. The null hypothesis was that the
number of Eprex dispensing was similar to the normal distribution. A statistical
significance level set at 0.05. The statistical significance was 0.2000 that greater than
0.05. So the number of Eprex dispensing was normal distribution.
2. Forecasting
The forecast method that yielded the least Mean Square Error (MSE) was
selected. The comparing MSE between forecasting methods was presented in Table7.
Table7 Comparing MSE of Eprex between forecasting methods.

Method MSE
Simple 8,267.43
Holt’s 8,792.89
Brown’s 8,375.72
Damp 8,417.54
From Table7, the best forecasting method for forecast the number of Eprex
dispensing per week in fiscal year 2006 was simple exponential smoothing method.
The value Mean Square Error (MSE) was 8,267.43.
Number of Eprex dispensing per week in fiscal year 2006 was forecasted
from number of Eprex dispensing per week in fiscal year 2005 by using simple
exponential smoothing method. Figure9 presents forecasting demand of Eprex and
actual demand in fiscal year 2006. The MSE was 6,906.97.

Figure9 Forecasting demand of Eprex and actual demand in fiscal year 2006
3. Set inventory model

In fiscal year 2006 the average replenishment lead time of Eprex was 11
days. Average forecast demand over a replenishment lead time was 407.09 syringes.
Standard deviation and variance for forecast over a replenishment lead time were
104.18 and 10,853.82, respectively. The result of the demand forecasting that can
determine inventory policy as follows: Safety Stock (SS) was 322 syringes, Reorder
point (s) was 729 syringes, Economic Order Quantity (EOQ) was 267 syringes and
Order up to level (S) was 996 syringes. In this study a cycle service level was set at
99.9 percent.
From the (s,S) model purchasing determine as follows:
- When inventory position equal to 729 syringes, order quantity equal to
267 syringes.
- When inventory position lower than 729, order quantity are equal to 267
syringes plus the difference between inventory position and 729 syringes.
The actual order quantity is round number to packing size 6 syringes.
From the model above the inventory number of purchasing times increased from 12 to
43 times. The maximum order quantity was 372 syringes or 62 boxes. And minimum
order quantity was 270 syringes or 45 boxes. The (s,S) model inventory simulation of
Eprex was shown in Figure 10

Figure 10 The (s,S) model inventory simulation of Eprex
Metformin 500 mg tablet

During fiscal year 2006, Metformin was classified in group A of ABC
inventory analysis and purchased by price enquiry method. The characteristic of this
drug is high utilization rate; the total number of Metformin dispensing from inventory
during fiscal year 2006 was 6,495,500 tablets. Metformin is high volume and
bulkiness that cause not enough storage space and stock out problems. The inventory
situation of Metformin base on existing system was presented in figure11.
Figure 11 The existing system inventory situation of Metformin.

Kolmogorov-Smirnov goodness of fit test for number of Metformin
dispensing per week during fiscal year 2005-2007 were used. The null hypothesis was
that the number of Metformin dispensing was similar to the normal distribution.The
statistical significance of normality test was 0.0539 that greater than 0.05 so number of
Metformin dispensing was normal distribution.
2. Forecasting
Table8 Comparing MSE of Metformin between forecasting methods.

Method MSE
Simple 189,191,066.88
Holt’s 172,438,983.73
Brown’s 184,705,187.60
Damp 178,772,211.15
From Table8, the best forecasting method for forecast the number of
Metformin dispensing per week in fiscal year 2006 was Holt’s linear trend method.
The value Mean Square Error (MSE) was 172,438,983.73.
Number of Metformin dispensing per week in fiscal year 2006 was
forecasted from number of Metformin dispensing per week in fiscal year 2005 by
using Holt’s linear trend method. Figure12 presents forecasting demand of Metformin
and actual demand in fiscal year 2006. The MSE was 393,281,729.22.

Figure12 Forecasting demand of Metformin and actual demand in fiscal year 2006

In fiscal year 2006 the average replenishment lead time of Metformin was
11 days. Average forecast demand over a replenishment lead time was 150,102.76
tabs. Standard deviation and variance for forecasts over a replenishment lead time
were 24,859.89 and 618,014,145.91, respectively. The result of the demand
forecasting that can determine inventory policy as follows: Safety Stock (SS) was
76,823 tablets, Reorder point (s) was 226,926 tablets, Economic Order Quantity
(EOQ) was 224,649 tablets, and Order up to level (S) was 451,575 tablets. In this
study a cycle service level was set at 99.9 percent.
- When inventory position equal to 226,926 tablets, order quantity equal to
224,649 tablets.
- When inventory position lower than 226,926 tablets, order quantity are
equal to 224,649 tablets plus the difference between inventory position and 226,926
tablets.
The actual order quantity is round number to packing size 500 tablets.
From the model above the inventory number of purchasing times increased from 17 to
21 times. The maximum order quantity was 243,000 tablets or 486 boxes. And
minimum order quantity was 225,000 tablets or 450 boxes. The (s,S) model inventory
simulation of Metformin was shown in Figure 13

Figure13 The (s,S) model inventory simulation of Metformin.
Vitamin B Complex tablet

During fiscal year 2006, Vitamin B Complex tablet was classified in group
B and purchased by price enquiry method. Drugs purchased from the Government
Pharmaceutical Organization (GPO). The process of purchasing drug from GPO is
more complicate than supplier. The lead time delivery is set for 30 days that the
longest time for drug delivery. The inventory situation of Vitamin B Complex base on
existing system was presented in figure14.
Figure14 The existing system inventory situation of Vitamin B Complex.

Kolmogorov-Smirnov goodness of fit test for distribution was used. The
null hypothesis was that the number of Vitamin B complex dispensing was similar to
the normal distribution. The statistical significance of normality test was 0.0001 that
less than 0.05 so number of Vitamin B Complex dispensing was non-normal
distribution. Thus, other distributions consider to fitting the data. The weibull
distribution befitted data: the statistical significance was 0.26241 that greater than
0.05.
2. Forecasting
Table9 Comparing MSE of Vitamin B Complex between forecasting methods.

Method MSE
Simple 25,540,972.07
Holt’s 27,353,124.33
Brown’s 24,544,837.09
Damp 29,454,727.34
From Table9, the best forecasting method for forecast the number of
Vitamin B Complex dispensing per week in fiscal year 2006 was Brown’s linear trend
method. The value Mean Square Error (MSE) was 24,544,837.09.
Number of Vitamin B Complex dispensing per week in fiscal year 2006
was forecasted from number of Vitamin B Complex dispensing per week in fiscal year
2005 by using Brown’s linear trend method. Figure15 presents forecasting demand of
Vitamin B Complex and actual demand in fiscal year 2006. The MSE was
54,961,688.22.

Figure15 Forecasting demand of Vitamin B Complex and actual demand in fiscal year 2006

In fiscal year 2006 the average replenishment lead time of Vitamin B
Complex was 18 days. Average forecast demand over a replenishment lead time was
101,780.56 tablets. Standard deviation and variance for forecasts over a replenishment
lead time were 11,888.23 and 141,330,055.43, respectively. The result of the demand
forecasting that can determine inventory policy as follows: Safety Stock (SS) was
26,695 tablets, Reorder point (s) was 128,475 tablets, Economic Order Quantity
(EOQ) was 262,103 tablets, and Order up to level (S) was 390,578 tablets. In this
study a cycle service level was set at 99.9 percent.
- When inventory position equal to 128,475 tablets, order quantity equal to
262,103 tablets.
- When inventory position lower than 128,475 tablets, order quantity are
equal to 262,103 tablets plus the difference between inventory position and 128,475
tablets.
The actual order quantity is round number to packing size 1000 tablets.
From the model above the number of purchasing times increased from 6 to 8 times.
The maximum order quantity was 267,000 tablets or 267 boxes. And minimum order
quantity was 261,000 tablets or 261 boxes. The (s,S) model inventory simulation of
Vitamin B Complex was shown in Figure16.

Figure16 The (s,S) model inventory simulation of Vitamin B Complex

Drug inventory performance was indicated by three parameters as follows:
1. Average inventory values was calculated by total inventory value in
fiscal year 2006 divided by 365 (day).
2. Inventory turnover equals the ratio of the total number of items used
per year to the average daily inventory.
3. Inventory cost was composed of purchasing cost and carrying cost.
It is widely accepted that good inventory management could be shown by
the low inventory value, high turnover rate and low cost. Inventory performances of
the (s,S) model were compared with the existing system.
Eprex Prefilled Syringe 4000 U injection

1. Average inventory values
The average inventory level was 1,110.39 syringes. The unit value was
1,812.00 Baht. Thus, the average inventory value in fiscal year 2006 was 2,012,024.94
Baht (base on existing system). The (s,S) model; average inventory level was 581.65

syringes. Thus, the average inventory value was 1,053,953.52 Baht. For comparison of
the average inventory value between 2 system, the (s,S) model decreased average
inventory values was 958,071.42 Baht (47.62 %).
2. Inventory turnover
In the fiscal year 2006, Pharmacy department provided Eprex Prefilled
Syringe 4000 U injection at total annual value was 25,512,960.00 Baht. The average
inventory values base on existing system and (s,S) model from above. Thus, the
inventory turnover increased from 12.68 to 24.21 (90.90%).
3. Inventory costs
The existing system; the total drug inventory management costs of Eprex
Prefilled Syringe 4000 U injection in fiscal year 2006 were 25,796.30 Baht. These
included 718.68 Baht for purchasing cost and 25,077.62 Baht for carrying cost. The
(s,S) model; the total drug inventory management costs of Eprex Prefilled Syringe
4000 U injection tablet in fiscal year 2006 were 15,711.62 Baht. These included
2,575.28 Baht for purchasing cost and 13,136.34 Baht for carrying cost (Table 10).
Table10 Comparing purchasing cost and carrying cost between the existing system
and (s,S) model of Eprex
Existing system (s,S) model
Cost (Baht) (Baht)
Purchasing cost 718.68 2,575.28
Carrying cost 25,077.62 13,136.34
Total inventory cost 25,796.30 15,711.62
The existing system incurred the purchasing cost lower than the (s,S)
model. In the opposite, (s,S) model had the carrying cost and the total costs of drug
inventory management lower than the existing system. Thus, the total costs of drug
inventory management were decrease 39.09%.
The result of comparing inventory performance between the existing
system and (s,S) model of Eprex Prefilled Syringe 4000 U injection was presented in
Table11

and (s,S) model of Eprex
Difference
Performance indicator Existing system (s,S) model
(%)
Average inventory values
(Baht) 2,012,024.94 1,053,953.52 - 47.62
Inventory turnover 12.68 24.21 +90.90
Inventory cost (Baht) 25,796.30 15,711.62 -39.09
Metformin 500 mg tablet

The average inventory level of Metformin 500 mg tablet in fiscal year
2006 was 297,591.78 tablets. The unit value was 1 Baht. Thus, the average inventory
value was 297,591.78 Baht (base on existing system). The (s,S) model; average
inventory level was 216,027.10 tablets. Thus, the average inventory value was
216,027.10 Baht. For comparison of the average inventory value between 2 system,
the (s,S) model decreased average inventory values was 81,564.68 Baht (27.41%).
In the fiscal year 2006, Pharmacy department provided Metformin 500 mg
tablet at total annual value was 5,041,197.00 Baht. The average inventory values base
on existing system and (s,S) model from above. Thus the inventory turnover increased
from 16.94 to 23.34 (37.76%).
3. Inventory cost
The existing system; the total drug inventory management costs of
Metformin 500 mg tablet in fiscal year 2006 were 4,578.79 Baht. These included
1,018.13 Baht for purchasing cost and 3,560.65 Baht for carrying cost. The (s,S)
model; the total drug inventory management costs of Metformin 500 mg tablet in
fiscal year 2006 were 3,842.43 Baht. These included 1,257.69 Baht for purchasing
cost and 2,584.74 Baht for carrying cost (Table12).

and (s,S) model of Metformin
Cost (Baht) (Baht)
Purchasing cost 1,018.13 1,257.69
Carrying cost 3,560.65 2,584.74
inventory management lower than the existing system Thus, the total costs of drug
inventory management were decrease 16.08 %.
The result of comparing inventory performance between the existing
system and (s,S) model of provided Metformin 500 mg tablet was presented in
Table13
Table13 Comparing inventory performance between the existing system and (s,S)
model of Metformin
Difference
(%)
(Baht) 297,591.78 216,027.10 -27.41
Vitamin B Complex tablet

The average inventory level of Vitamin B Complex in fiscal year 2006 was
385,662.09 tablets. The unit value was 0.3 Baht. Thus, the average inventory value
was 115,698.63 Baht (base on existing system). The (s,S) model; average inventory
level was 49,690.15 tablets. Thus, the average inventory value was 49,690.15 Baht.

For comparison of the average inventory value between 2 system, the (s,S) model
decreased average inventory values was 66,008.47 Baht (57.05%).
In the fiscal year, Pharmacy department provided Vitamin B Complex
tablet at total annual value was 599,461.20 Baht. The average inventory values base on
existing system and (s,S) model from above. Thus the inventory turnover increased
from 5.18 to 12.06 (132.84 %).
3. Inventory cost
The existing system; the total drug inventory management costs of
Vitamin B Complex in fiscal year 2006 were 1,743.66 Baht. These included 359.34
Baht for purchasing cost and 1,384.32 Baht for carrying cost. The (s,S) model; total
drug inventory management costs of Vitamin B Complex in fiscal year 2006 were
1,073.66 Baht. These included 479.12 Baht for purchasing cost and 594.54 Baht for
carrying cost (Table 14).
Table 14 Comparing purchasing cost and carrying cost between the existing system
and (s,S) model of Vitamin B Complex

Cost (Baht) (Baht)
Purchasing cost 359.34 479.12
Carrying cost 1,384.32 594.54
inventory management lower than the existing system. Thus, total drug inventory
management costs of Vitamin B Complex were decrease 38.43 %.
The result of comparing inventory performance between the existing system

and (s,S) model of provided Vitamin B Complex tablet was presented in Table15

Table15 Comparing inventory performance between the existing system and (s,S)
model of Vitamin B Complex
Difference
(%)
(Baht) 115,698.63 49,690.15 -57.05
Summary of major finding

1. Activity analysis
Drug purchasing activity has 4 sub activities. Total time spent on drug
purchasing activity in fiscal year 2006 was 6,174 hours or accounted to 36.18% of
total working time.
Drug inventory management has 5 activities and 19 sub activities. The
total time spent on drug inventory management in fiscal year 2006 was 32,151.12
hours. The drug inventory dispensing activity had spent the highest proportion time of
working time (65.20%).
2. Cost analysis
Total cost of drug dispensing was 821,692.90 Baht. Labor cost, material
cost and capital cost were 668,452.93 Baht, 152,940.02 Baht and 299.95 Baht,
respectively. The purchasing cost was equivalent to 59.89 Baht per purchasing.
Total cost of drug inventory management was 2,566,851.52 Bath. Labor
cost, material cost and capital cost were 2,029,186.00 Baht, 378,301.76 Baht and159,
363.76 Baht, respectively. The carrying charge of drugs stored in refrigerator and
drugs stored at room temperature were 0.0125 and 0.0120 (Baht/Baht/Year) on
average.
3. Inventory model
Eprex Prefilled Syringe 4000 U injection; when the inventory position
equal to 729 syringes or lower, order to raise the inventory position to 996 syringes.
The actual order quantity is round number to packing size is 6 syringes.

Metformin 500 mg tablet; when the inventory position equal to 226,926

tablets or lower, order to raise the inventory position to 451,575 tablets. The actual
order quantity is round number to packing size is 500 tablets.
Vitamin B Complex tablet; when the inventory position equal to 128,475
tablets or lower, order to raise the inventory position to 390,578 tablets. The actual
order quantity is round number to packing size is 1000 tablets.
4. Inventory performance
The (s,S) model decrease the average inventory value of Vitamin B
Complex was the highest (57.05%), Eprex was lower (47.62 %) and Metformin was
lowest (27.41%).
Inventory turnover
The (s,S) model increase the inventory turnover of Vitamin B Complex
was the highest (132.84 %), Eprex was lower (90.90%) and Metformin was lowest
(37.76%).
Inventory cost
The (s,S) model decrease total costs of drug inventory management of
Eprex was the highest (39.09%), Vitamin B Complex was lower (38.43 %) and
Metformin was lowest (16.08%).
From the result of this study, The application of (s,S) model can improve
the efficiency of drug purchasing and inventory management at Ramathibodi Hospital
in fiscal year 2006.

Chuleeporn Laeiddee Discussion / 58
CHAPTER V
DISCUSSION
improve the efficiency of drug inventory management at Ramathibodi Hospital. The
re-order point model used in this study is (s,S) model.
The discussion presented in five parts as follows:
Part 1 Activity analysis
Part 2 Cost analysis
Part 3 Inventory model
Part 4 Inventory performance
Part 5 Limitation of this study

One way to understand processes and activities more clearly is using
functional flow diagram, it is used for showing departmental or individual
responsibilities in a process flow. This tool can provide a quickly understood picture
of the activities involved, and who does them. The creation with documenting the
material flows provides useful knowledge for identifying activities and resources. In
this study, the functional flow diagrams of drug purchasing and inventory
management process were constructed.
The functional flow diagram of drug purchasing process was showed that
purchasing document was sent and approved in many divisions. The process has long
waiting period such as waiting for documents approval. The complexity of drug
purchasing issue is complexity may due to the regulation. The drug purchasing issue
follows by the Prime Minister Office Regulation on Procurement, 2535 B.E; the
purchasing issue must approved by purchasing committee. However every hospital

under supervised by the Ministry of Public Health used the same present regulation in
purchasing but methods and details of purchasing may be different. It happened
because of the different explanations. In some hospitals, executives created their own
systems to support regulation on procurement. This made the details of purchasing
was different.
The inventory management process comprises 5 activities following; drug
inventory dispensing, drug receiving, stock level checking, expensive and narcotic
drug checking, and nearly expired drug checking. Drug inventory dispensing activity
and drug receiving activity are main activities because of both activities are daily
routine. The average time spent of inventory dispensing activity and drug receiving
activity was 65.20% and 26.81% of total working time, respectively. The functional
flow diagrams of both activities were showed that the data of drug dispensing and
receiving was recorded in both stock card and computer. They were redundant work
that needed for considering. The activity time spent of drug purchasing and inventory
unit was the same way of the survey inventory activity time among public and private
hospitals (38). It found that they had spent the most time for receiving drug, ordering
drug, drug requisitioned order and checking inventory.

In this study determined the direct costs of drug purchasing and inventory
management activities base on activity-based costing (ABC). Total direct costs were
acquired from the total of labor costs, material costs and capital costs.
Total cost of drug dispensing was 821,692.90 Baht. The labor cost became
as the largest portion was 81.35% of total cost. The reason was many steps in the
process of purchasing and uses the executive staffs; head of pharmacy department,
head of drug purchasing unit and pharmacist. The record and print out purchasing
order and sign to authorize by pharmacist and head of pharmacy department sub
activity cost was highest (489,004.32 Baht), which accounted for 59.51% of total cost.
The purchasing cost was equivalent to 59.89 Baht per purchasing order.
The purchasing process done in Ramathibodi hospital had different methods. In this

study, the purchasing cost analysis in the process of purchasing would assume that
cost of each method was equal.
Total cost of drug inventory management was 2,566,851.52 Baht. The
labor cost became as the largest portion was 79.05% of total cost. The drug inventory
dispensing activity cost was the highest (1,651,461.84 Baht), which accounted for
64.34% of total cost. The record data in stock card sub activity cost was the highest
(728,061.18 Baht), which accounted for 28.36% of total cost. The drug inventory
dispensing was the highest activity cost from the most staff and time to perform this
activity. The record data in stock card activity; staffs that responsible on each drug
were count and record quantities of drug remain in inventory after drug dispensing and
receiving. This sub activity was the highest cost. Since, this sub activity is a manual
record that takes time to find stock card of each drug.
The carrying charge of drugs stored in refrigerator and drugs stored in
room temperature were 0.0125 and 0.0120 (Baht/Baht/year) on average, respectively.
This carrying charge implied that the carrying cost was 1.25% and 1.20% of the
average inventory value. In this study assumes that more expensive items are apt to
be riskier to carry and more expensive to handle or store.
In Thailand, The past studies of the cost of purchasing and inventory
management, they were studied both private hospitals and public hospital. Some
studies determined full cost of both direct and indirect cost but some concerned only
direct cost. The studies were conducted in Sena hospital (39) and Chachoengsao
hospital (40) revealed that the full cost drug stock was 751,422.22 Baht and
2,210,929.42 Baht respectively. Kattiviriyaoinyo K. studied about assessment of drug
purchasing system of private hospitals in 1998 (18). The study conducted in 2 private
hospitals showed that the direct cost of purchasing was 592,733 and 432,946 Baht.
And the direct cost of inventory control was 2,294,497 Bath and 530,160 Baht.
In this study, the capital cost was the smallest portion because the drug
purchasing unit and drug inventory management unit was located at building over 20
years, thus depreciation cost was determined as one Baht. The smallest portion of
capital cost was similar to the study in Sena and Chachoengsao hospital (39) (40). The
results of studies come out different. Thus, there were not constant optimal purchasing

and inventory management costs for all hospitals, but that they may depend on size of
hospital, basic environment, private or public hospital and purchasing and inventory
management.

A major concern in an inventory management is to decide about the time
when a replenishment order is to be placed and further what quantity of such
replenishment is to be ordered. The (s,S) model was applied in this study.
For the implementation the (s,S) was concerned in drug regulation which
might have problem. The result of this study, the (s,S) model order drugs more often
than the existing system. According to the Prime Minister Office Regulation on
Procurement, 2535 B.E. purchasing process comprises five categories; price
agreement, price enquiry, price bidding, special case method and special method. The
problem of using the (s,S) model under regulation, the price agreement would be the
frequency of purchasing. Metformin and Vitamin B complex purchase by this method.
The price agreement was the process of drug purchasing, which was so convenient. It
has also fewer steps than others. If purchasers often used the price agreement, they
would be judged that they intended to against the law by dividing the amount of
amount of money in purchasing to fit this process.
The (s,S) model assumes continuous review. The advantage of this model
may be able to effectively cope with situation where demands are large. The
disadvantage is variable order quantity. Suppliers could make errors more frequently;
and they certainly prefer the predictability of a fixed order quantity.

The past studies of problems in drug purchasing and inventory
management, they found the common problems such as lack of personnel, expired
drug, storage space and low inventory performance (4) (9). Ramathibodi hospital has
problems as similar as above.

employing inventory performance data during the fiscal year 2006. Inventory
management indicators were indicated the performance of inventory management.
Indicators indicated only how well drug inventory system performance. Drug
inventory indicators in this study were average inventory values, inventory turnover
and inventory cost. It is widely accepted that good inventory management could be
shown by the low inventory value, high turnover rate and low cost. The comparison of
inventory performance indicators between the existing system and (s,S) model
performed in this study.

The inventory reduction represents one of the major beneﬁts of the
implementation inventory control system. The comparison of the average inventory
value between two systems found that the (s,S) model decrease the average inventory
value of Vitamin B Complex was the highest (57.05%), Eprex was lower (47.62 %)
and Metformin was lowest (27.41%). In this study a service level was set at 99.9
percent. So, the (s,S) model are available for reducing inventory without reducing
service levels.
Inventory turnover
Inventory turnover equals the ratio of the total number of items used per
year to the average daily inventory. The Ministry of Public Health suggested an
indicator in the development of the inventory management of a hospital. That
indicator was inventory turnover. A good inventory system of hospital should have the
inventory turnover not less than 4.
In this study, Eprex, Metformin and Vitamin B Complex showed that the
inventory turnover of the existing was 12.68, 16.94 and 5.18 while the inventory
turnover of the (s,S) model was 24.21, 23.34 and 12.06, respectively. The comparison
of the inventory turnover between two systems found that in the (s,S) model increase

the inventory turnover of Vitamin B Complex was the highest (132.84 %), Eprex was
lower (90.90%) and Metformin was lowest (37.76%).
The survey inventory turnover value studied among hospital in Thailand
founds that the inventory turnover of public hospital was 6-9.3 and private hospital
was 8.8-10.2 (38). Khon Kaen hospital had the inventory value 7.89. For all 3 drugs
had the inventory turnover higher than the amount suggested by the Ministry of Public
Health. Eprex and Metformin had the inventory turnover higher than range of the
other hospitals except Vitamin B Complex.
Inventory cost
The objective of an inventory control system is to make that minimize the
total cost of inventory. Most pharmacy inventory decisions involve replenishment.
There are costs associated with pharmacy inventory such as ordering cost and carrying
cost (41).
The comparison of total costs of drug inventory management between two
systems among selected drugs showed that the (s,S) model decrease total costs of drug
inventory management of Eprex was the highest (39.09%), Vitamin B Complex was
lower (38.43 %) and Metformin was lowest (16.08%). The (s,S) model; the highest
decreasing total costs of drug inventory management was Eprex . Due to Eprex was
the high inventory value. If the inventory level reduction would lead to low cost of
inventory management too.
Analysis of purchasing cost and carrying cost found that in the existing
system incurred the purchasing cost lower than the (s,S) model. In the opposite, (s,S)
model had the carrying cost and the total costs of drug inventory management lower
than the existing system. Because the frequency of drug purchasing in the (s,S) model
was higher than the existing system.
From the result of this study found that the (s,S) model reduced the
average inventory value and inventory cost of Eprex equal 958,071.42 and 10,084.69
Baht in fiscal year 2006. So, this model appropriate saving budget for high value drug.
For bulkiness drug are Metformin, inventory turnover rate would be considered. The
increment of inventory turnover rate that would be reflects the problem of storage

space. Drug purchased from the Government Pharmaceutical Organization (GPO),

Vitamin B complex. The result of comparing inventory performance between the
existing system and (s,S) model of Vitamin B Complex tablet presented the best
improvement of both the average inventory value and turnover rate. Anyway, the
process of purchasing from GPO was more complicate than other suppliers.
Part5. Limitation of this study

This study had several limitations as follows:
1. This study was conducted in only one hospital that a government
teaching hospital. It is more complicate than the other hospitals.
2. The three drugs case study can not reflect all drug items in hospital.
3. The only direct costs of drug purchasing and inventory management
activities were analyze in this study.
4. Since data were collected retrospectively, some data were estimated
because actual data were not available.

Fac. of Grad. Studies, Mahidol Univ. M.Sc. in Pharm. (Pharm. Admin.) / 65
CHAPTER VI
CONCLUSION AND RECOMMENDATIONS
This chapter provides the conclusion and recommendations. The purpose

of this study is to find out if re-order point model can improve the efficiency of drug
inventory management at Ramathibodi Hospital by employing inventory performance
data during the fiscal year 2006. Three drugs were selected as following: Eprex
Prefilled Syringe 4000 U injection, Metformin 500 mg tablet and Vitamin B Complex
tablet. The criteria for drugs selection divided by type of problems of drug inventory
management.
Conclusion of the study

The analysis process of drug purchasing and inventory management was
summarized as follows: the functional flow diagram and activity dictionary. In this
study, it found that drug purchasing activity has 4 sub activities and drug inventory
management has 5 activities and 19 sub activities. The total direct costs of drug
purchasing and inventory management activities base on activity-based costing
(ABC). The present study was conducted at the drug purchasing and drug inventory
control unit of the pharmacy department, Ramathibodi Hospital. It found that the
purchasing cost was equivalent to 59.89 Baht per purchasing order. The carrying
charge of drug store in refrigerator and drug store in room temperature was 1.25% and
1.20% of the average inventory value.
The (s,S) model was applied in this study. The forecasting methods for the
data use to find the Mean Square Error (MSE) and choose the method of the least
error. The best forecasting method used to forecast the demand. Then the forecasting
demands applied to find the appropriate re-order point and order up to level of each
case study drugs.

Chuleeporn Laeiddee Conclusion / 66
Inventory performance indicators indicating the efficiency of drug

inventory management composed of average inventory values, inventory turnover, and
inventory costs. The comparison of inventory performance indicators between the
existing system and (s,S) model performed in this study. The result of this study
showed that based on the (s,S) model had lower average inventory value, higher
turnover rate and lower cost than the existing system.
The study concludes that if the (s,S) model was implemented, the
efficiency of drug inventory management would be improve.
Recommendations
There are some recommendations occur from the study.
1. For higher performance of inventory management hospitals should be
more concerned with the quantity of drug purchasing.
2. The regulations for drug purchasing some obstacles for drug
purchasing and inventory management in both the existing and (s,S) model. So to
become successful in implement, the government should modify the regulations
related to drug purchasing. They could set the frequency of purchasing in each item as
many times as required such as of the price agreement purchasing method.
3. Electronic database and computer technology of the hospital is an
important source of information and knowledge for hospital management. It can help
in management and administration creates a system. For that reason, it should be
continuously developed for improvement system of hospital.
Recommendations for future studies could be summarized as following.

1. Because only 3 case-study drugs were analyzed in this study, it would
be beneficial to study in more characteristics.
2. The possibility study of (s,S) model the hospital inventory
management should be conducted.

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APPENDICES

Chuleeporn Laeiddee Appendix /72
APPENDIX A
FUNCTIONAL FLOW DIAGRAM OF DRUG PURCHASING AND
INVENTORY MANAGEMENT
Functional flow diagram of drug purchasing
drug purchasing
Drug
Central
Finance inventory
Drug purchasing unit GPO Supplier Director inventory
unit control
unit
unit
Start
Update stock
Drug under
limit list
Receive request
Determine drug list Write in GPO
form by drug
by pharmacist request form
representative
Inform drug
Record list that can
purchasing data deliver
Check data record No Revise

by pharmacist
Yes
Purchasing Fax Purchasing Fax
order order reply
Head of purchasing
unit sign in
purchasing order
Head of pharmacy
department sign in
purchasing order

Functional flow diagram of drug purchasing (cont.)
drug purchasing (cont.)
Finance Central Inventory

Purchasing unit GPO Supplier Director
unit inventory unit control unit
Send Proceed in
document purchasing
Proceed in
Determine purchasing
and Sign in
purchasing
order
Proceed in
purchasing
Receive document
representative
receive representative
Record permit purchasing receive
purchasing order order purchasing
order
Record date of
supplier
representative
receive purchasing Deliver
order drug
Receive
Deliver drug
drug
Check
No Revise
document
Yes
Head of pharmacy
department sign in
Send document to
central inventory unit
Finish

Functional flow diagram of drug inventory dispensing

Functional flow diagram of drug inventory dispensing process
Purchasing
Drug rooms Drug inventory control unit
unit
Start
Request Stamp original and

1 copy on request order
order
Request
2
order 2 Original
Consider narcotic Arrange drug and
Yes record quantity in
drug request order
Copy request order and
stock card
No
Copy Original
Pharmacist
Arrange check drug , record
drug and and check correction of
record No original and copy
request order
Check drug
No Revise
and record
Yes Yes
check correction Use data from original

No of original and copy request order record
request order in stock card
Revise
Record data in
Yes computer
Receive Deliver drug with
drug copy request order
Summary Summary drug can not
dispensing report Dispensing report
Check
correction of record and drug
Revise No
cannot dispensing list
by pharmacist
Pharmacist
Pharmacistsign
signinin
original
originalrequest
requestorder
order Yes
and
andrecord
recordreport
report
Send
Sendoriginal
originalrequest
requestorder
order
and
andrecord
recordreport
reporttoto
purchasing
purchasingunit
unit
Update
Update
stock
stock
Finish
Finish

Functional flow diagram of drug receiving
Functional flow diagram of drug receiving process
Drug
Druginventory
inventorycontrol
controlunit
unit Central
Central
Purchasing
Purchasing
Supplier
Supplier inventory
inventory
unit
unit department
department
Start
Tax invoice : original

and 3 copies
Check
correction of Arrange
Yes
PO : original and Document
documents
2copies
Invoice : original
and 8 copies
Document for
Quality report commitee
No
(reject) Invoice copy22
Revise Record data for drug
receiving Invoice copy 1
1
Checking report and

Receiving Report with
name of committee
Drug
deliver
Check drug by
committee from
No Yes
pharmacy
department
Check drug by
committee from other Yes
Reject drug ,return Yes department
document and delete data
Record in Check drug
receiving by inventory
book No staff
Yes
Yes
Committee sign Reject drug

Deliver staff sign in ,return
in Checking Check drug
Receiving Report document No
report and by inventory staff
and delete
Receiving Report data
Record in Arrange drug Yes

1
stock card on shelf

Functional flow diagram of drug receiving (cont.)
Functional flow diagram of drug receiving process(cont.)
Central
Central
Supplier
Supplier Drug
Druginventory
inventorycontrol
controlunit
unit Purchasing
Purchasingunit
unit inventory
inventory
department
department
Drug receiving
1 list Report 1
Drug receiving
list Report 2
Record
Recorddrug
drug
receiving
receivinglist
list
Drug receiving
list Report 3
Transfer data to
purchasing unit
Summary report
Check and
arrange No Revise
document
Yes
Sign in by head
of inventory
Proceed for
control unit
normal
purchasing
method Proceed for
Send special
document purchasing
method
Update
stock
Finish

Functional flow diagram of stock level checking

stock level checking
Inventory control unit
Start
Print out stock level
Report stock
level
Check actual stock level

No Revise
compare with stock card
Yes
Pharmacist sign in
stock card
Check stock card compare

No Revise
with report
Yes
Stamp date
Note: Check stock level every 3 month

Functional flow diagram of expensive and narcotic drug checking

expensive and narcotic drug checking
Inventory control unit
Start
Check drug quantity

in stock card compare with No Check and revise
report
Yes
Pharmacist sign in
stock card
Finish Note: Check every week
Functional flow diagram of nearly expired drug checking

Nearly expired drug checking
Inventory
Inventorycontrol
controlunit
unit
Start
Checking nearly
No Record in report
expired drugs
Yes
Record in report
Proceed in exchange
nearly expire drug
Finish Note: Check every month

APPENDIX B
DEMAND DISTRIBUTION
Normality test of Eprex demand per week during fiscal year 2005-2007 by
Kolmogorov-Smirnov test.
Kolmogorov-Smirnov
Statistic df Sig.
0.0477 156 0.2000
Histogram of Eprex demand per week during fiscal year 2005-2007

Normality test of Metformin demand per week during fiscal year 2005-2007 by
Kolmogorov-Smirnov test.
Kolmogorov-Smirnov
Statistic df Sig.
0.0708 156 0.0539
Histogram of Metformin demand per week during fiscal year 2005-2007

Normality test of Vitamin B complex demand per week during fiscal year
2005-2007 by Kolmogorov-Smirnov test.
Kolmogorov-Smirnov
Statistic df Sig.
0.1126 156 0.0001
Histogram of Vitamin B complex demand per week during fiscal year 2005-2007
Weibull distribution test of Vitamin B complex demand per week during fiscal year
2005-2007 by Kolmogorov-Smirnov test.
Kolmogorov-Smirnov
Statistic df Sig.
0.07981 156 0.2624

Chuleeporn Laeiddee Biography / 82
BIOGRAPHY
NAME Miss. Chuleeporn Laeiddee

DATE OF BIRTH August 4th, 1981
PLACE OF BIRTH Bangkok, Thailand
INSTITUTIONS ATTENDED Huachiew Chalermprakiet University, 1999-
2004: Bachelor of Science in Pharmacy
Mahidol University, 2009:
Master of Science in Pharmacy
(Pharmacy Administration)
EMPLOYMENT ADDRESS Huachiew Hospital, Bangkok,Thailand
Position: Pharmacist
Tel. 02-2231351
E-mail :[email protected]

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IMPROVEMENT OF RE-ORDER POINT FOR DRUG

INVENTORY MANAGEMENT AT RAMATHIBODI HOSPITAL

A THESIS SUBMITTED IN PARTIAL FULFILLMENT

COPYRIGHT OF MAHIDOL UNIVERSITY

Copyright by Mahidol University

I would like to express my gratitude and a deep appreciation to my

Copyright by Mahidol University

IMPROVEMENT OF RE-ORDER POINT FOR DRUG INVENTORY

CHULEEPORN LAEIDDEE 4937442 PYPA/M

M.Sc. in Pharm. (PHARMACY ADMINISTRATION)

THESIS ADVISORY COMMITTEE: CHA-ONCIN SOOKSRIWONG, Dr.PH.

KEY WORDS: IVENTORY CONTROL/ RE-ORDER POINT/ ORDER UP TO

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ชุลีพร ละเอียดดี 4937442 PYPA/M

คณะกรรมการที่ปรึกษาวิทยานิพนธ์: ชะอรสิน สุขศรีวงศ์ , Dr.PH. (Public Health Administration), ระวี สุวรรณ

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Expected benefits and applications

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Replenishment lead time

Activity-Based Costing (ABC)

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inventory Sales quantity indicators

Figure 1 Conceptual framework

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The literature review is divided into four parts as the followings:

1.1 Type of inventory supply

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1.1.4. Finished goods inventory refers to the supply, which is

1.2 Inventory management process (9)

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1.3 Inventory performance indicators

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1.4 Inventory costs

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1.5 Problems of inventory control

1.6 Drug management in hospital

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except the inspecting/checking supply committee, which is formed to inspect and

1.7 The related studies in the inventory management

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Chungsiwapornpong W. studied the process of drug inventory control

2. Inventory control model

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Figure 2 Carrying cost is linearly related to order size

Figure 3 Ordering cost is inversely and nonlinearly related to order size

Figure 4 The total-cost curve is U-shaped

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The total cost can be described as follows:

Total cost = Ordering Cost + Inventory Carrying Cost

The solution to Equation (2) is

The classical EOQ model assumes the following (7):

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7. No stock outs allowed.