PA RT V : F I N A N C I A L M A N AG E M E N T
CHAPTER
Purchasing and Inventory Control
n n n a sign of efficiency because inventory
LEARNING OBJECTIVES
After completing this chapter, readers
should be able to:
1. Describe the steps in purchasing medi-
cations and inventory control.
2. Define key terminology in purchasing
and inventory control.
3. Discuss the processes for managing
medication inventory.
4. Identify products that require special
handling.
n n n principle stating that a relatively small
KEY TERMS AND DEFINITIONS
■■ Economic order quantity (EOQ): A
model of inventory control (also
known as the minimum cost quantity
approach) that uses past history of
inventory use, costs, and demand to
develop an accounting model that
predicts optimal inventory order
quantities to minimize order costs and
inventory holding costs.
■■ Group purchasing organizations
(GPOs): Purchasing groups consisting
of health systems and hospitals that
join together to obtain greater collec-
tive buying power.
■■ Inventory carrying costs: All costs
associated with inventory investment
and storage; sometimes called holding
costs. It might include interest, insur-
ance, taxes, and storage expenses.
■■ Inventory turns: The fraction of a
year that an average item remains in
239
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Jerrod Milton
inventory. High inventory turnover is
is constantly at work and generating
revenue. Low turnover is a sign of inef-
ficiency.
■■ Just-in-time inventory management: A
philosophy of inventory management
where products are ordered and deliv-
ered at just the right time—when they
are needed for patient care—with a
goal of minimizing wasted steps, labor,
and cost. The goal is to neither over-
stock nor understock products.
■■ Order book: A list of products that
need to be ordered from a supplier.
■■ Pareto/ABC analysis: Based on the
number of drugs account for a dispro-
portionate amount of drug usage in
a health system. Thus, a Pareto ABC
analysis groups inventory products by
aggregate value and volume of use into
three groupings (A, B, and C). Products
in group A are the small percentage
of items that make up the greatest
amount of inventory cost. Groups B
and C make up decreasingly less cost.
■■ Par-level systems: Based on the prin-
ciple that individual inventory drug
use falls within a predictable range
or “par-level.” In these systems, a
range is identified and minimum and
maximum order quantities are set.
Inventory is ordered in a way that
maintains amounts within the par-
level.
■■ Perpetual inventory: A record of inven-
tory that is constantly updated when
items are added or subtracted from
inventory.
240 I N T R O D U C T I O N T O A C U T E A N D A M B U L AT O R Y C A R E P H A R M A C Y P R A C T I C E

■■ Pharmacist in charge: Typically an individual who has accepted the responsibility for
the complete supervision, management, and compliance with all federal and state
pharmacy laws, rules, and regulations governing the practice of pharmacy within the
prescription department.1
■■ Prime vendor agreement (PVA): A contract between a health-system pharmacy and a
licensed wholesale distributor wherein the pharmacy agrees to purchase most of its
pharmaceuticals from a single distributor in return for advantageous pricing, terms of
drug delivery, and support services (e.g., providing the pharmacy with electronic order
entry/receiving devices and bar-coded shelf stickers).
■■ Resource Conservation & Recovery Act (RCRA): The public law enforced by the EPA
that creates the framework for the proper management of hazardous and non-
hazardous solid waste.2,3
■■ Stock rotation: The process of placing products nearest to the time of expiration at
the front of the shelf or storage unit so that they will be used first.

n n n
INTRODUCTION
In 2001, the Institute of Medicine (IOM) in Washington, DC, released Crossing the Quality
Chasm: A New Health System for the 21st Century, which provides a detailed examination
of the tremendous divide between what we know to be good healthcare and the care that
Americans actually receive. Although a systematic transformation has begun, the chal-
lenge to close the chasm remains largely on healthcare leaders and clinicians. The quality
of healthcare must be improved, and the profession of pharmacy is not exempt from this
ideal. The IOM defines quality across six important dimensions that include safety, effec-
tiveness, patient-centeredness, timeliness, efficiency, and equity.4
Effective pharmacy purchasing and inventory control measures are essential to
fulfilling this ideal. As fundamental elements of the medication-use system, they support
these aims of quality in healthcare. The dimensions of quality included in this context are
the following:
■■ Safety (to cause no harm)
■■ Efficiency (reduce waste/excessive cost)
■■ Effectiveness (every patient who would benefit from a particular drug should
receive it)
■■ Timeliness (appropriate time to heal)
Purchasing and inventory control processes impact the ability of the system to provide
the right drug, to the right patient, in the right amount, in the right dosage form, by the
right route of administration, and at the right time and frequency. Therefore, an effective
purchasing and inventory control system requires the understanding and active participa-
tion of all pharmacy staff.
This chapter describes the basic principles of pharmaceutical purchasing and inventory
control. It applies to all types of pharmacy settings including decentralized, centralized,
home infusion, and ambulatory care pharmacy operations.

FORMULARY SYSTEM
The formulary is the cornerstone of the purchasing and inventory control system.5-7 The phar-
macy and therapeutics (P&T) committee develops and maintains the formulary. This group
generally comprises medical and allied health staff such as physicians, pharmacists, nurses,