[Revised Dec 04].
See also 'Ordering errors', link below.
The program makes up suggested orders based on probabilities. It takes the course of action that has the highest probability of producing the greatest profit to the business. It is designed to look after the interests of the pharmacy alone and wholesaler's interests are not taken into account except for some rounding of quantities for easier handling... E.g. if the ideal order would be 7 of an item, it will order 6, and instead of 11 it would order 12, as that is more convenient for everyone. Whole packs are ordered when economic for the pharmacy.
Allowance is made for;
- current sales levels
- trends of sales patterns
- changes in seasons
- fad or 'craze' products,
- cost of capital,
- cost of stock holding,
- risk of obsolescence,
- loss of goodwill that would be caused by being o/s,
- cash flow and liquidity requirements
and many other factors.
The formulae used are those refined in around 3000 sites over periods of up to sixteen years. Experience in those sites has shown that stock performance, following the computer's suggested quantities, will be around 25% better than that achieved by the best of human buyers, and 15% better than computer systems based on max/min stock levels.
Re-order point
This is not fixed, but is continuously recalculated. It is the point at which the cost of holding more of the item becomes less than the benefits gained. E.g. the profit on a sale that might otherwise be missed through being o/s is greater than the cost of holding more stock.
At the end of the month it will tolerate lower stocks for a few days in an attempt to squeeze over the end of the month.
It will never discontinue an item itself, (the user should untick the 'reorder' box if they want this) but will reduce it to the a minimum of one item if the item sells slowly enough.
Re-order quantity
Orders can be created for "General wholesaler" or "Direct supplier".
'General' orders buy enough to last almost until the 'End of the Billing Period', (which defaults to the last day of the month, though this can be user specified), but ONLY on those items which have reached the point where more is needed right now. This type of order should always be used for general wholesalers from whom orders will normally be placed every day or so.
'Direct' orders ask the period to order for. This should be the time until the next order, usually four weeks. This type of order is used for direct suppliers who are ordered from every few weeks, or every month or every few months. An efficient method is to tell the computer to bring the SoH up to 5 weeks stock at the start of each month regardless of the cycle of the representative's visits. If the stock is held lower than the user likes, increase the specified period to 5.5 or 6 weeks. Or reduce to 4.5 or 4.2 weeks etc. (but be careful with reducing it below 5 weeks as this risks many items being out of stock). 'Direct orders' should never be used for suppliers from which the pharmacy buys every few days, as this seriously disrupts the orders... use 'general orders' for those.
Once the order period is known, the computer will make up a suggested order to run out at the time shown. A small amount of buffer stock is added to appropriate items.
Price breaks for discounts
Often there are discounts if a 'round' amount such as 3, 6, 12 etc is ordered, and the system will order like this whenever it is economic to do so to get extra discounts and save handling and out-of-stock risk. However, it is frequently better to buy on a sell one - buy one' basis, and the machine is able to make this decision correctly;
Example
- Suppose an item costs $10.00, retails for $15.00 and sells only once every four months. Most pharmacies have several thousand items with this rate of sale. Suppose it attracts a 10% discount if ordered in lots of three.
- If managed on a 'sell one - buy one' cost of a year's supply is $30, a year's retail is $45, and a year's markup is $15, and the average stockholding is $10 so 150% return on Investment.
- If 3 x are purchased to get the 10% discount the cost of a year's supply is $27, the year's retail is still $45, so the year's markup is $18. The average stockholding is $18 (Average SoH = 2), giving a return on investment of 100%. This is not as good as the 150% from 'sell one - buy one'.
It is better to 'sell one - buy one' and use the cash elsewhere to generate higher returns on other items. The risk of shrinkage and obsolescence is also reduced. It is better not to round up the quantity to get a discount .
Capital availability
If a business is either unusually short of capital, or has plenty, the user can instruct the computer to order accordingly by altering the liquidity setting. The software takes this into account when deciding on the quantity to order, extracting the maximum economic benefit depending on the user's financial situation. See topic below for 'Liquidity' setting considerations.
Related topics