Running Head: Inventory Management system of Martin Dow Pharmaceuticals

Abstract
A brief report explaining
each step of inventory
management system of
Martin Dow
Pharmaceuticals

Submitted By
Muhammad Ramzan
(8952)
Sidra Mehmood
(62496)
Rabia Hussain
(63167)
Syed Sami Hussain
(60670)
Hasan Bin Tariq
(64052)
Ali Abdullah Ahmed
(61112)
Shahreyar Siddiqui
(6628)
Umair Ahmed
Inventory Management System: A Case Study (61938)
Martin Dow Pharmaceuticals
Submitted To
Mr. Hassan Bin Hassan
Faculty for Inventory
Management Course

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Running Head: Inventory Management system of Martin Dow Pharmaceuticals

Contents
1. Introduction.......................................................................................................................................4
1.1. Mission........................................................................................................................................4
1.2. Vision..........................................................................................................................................4
1.3. Values.........................................................................................................................................4
1.4. Business Partners.......................................................................................................................5
2. Inventory Management System........................................................................................................5
2.1. Types of Inventories..................................................................................................................5
2.1.1. Raw Material Inventory....................................................................................................6
2.1.2. Work In Process Inventory...............................................................................................6
2.1.3. Finished Goods inventory..................................................................................................6
2.1.4. Components Inventory......................................................................................................6
2.1.5. Maintenance, Repair and operating supplies...................................................................7
2.1.6. Warehouses........................................................................................................................7
2.2. Standard Operating Procedures...............................................................................................7
2.2.1. Objective.............................................................................................................................7
2.2.2. Scope of the SOP................................................................................................................8
2.2.3. Responsibilities of the Inventory Focal Point...................................................................8
2.2.4. Processes for Receiving and Releasing Inventory............................................................9
2.2.5. Safety and Security of Stock............................................................................................10
2.2.6. Hazardous Goods.............................................................................................................11
2.2.7. Fire....................................................................................................................................11
2.2.8. Flood and water damage.................................................................................................11
2.2.9. Access control...................................................................................................................12
2.2.10. Pest control.......................................................................................................................12
2.2.11. Perishable goods control..................................................................................................12
2.2.12. Return of Goods...............................................................................................................12
2.2.13. Release of Goods..............................................................................................................13
2.3. Forecasting and Demand Planning Methodology..................................................................16
2.4. Safety Stock Inventory............................................................................................................17
2.5. Bullwhip Effect........................................................................................................................17
2.6. Just In Time (JIT)....................................................................................................................18

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2.7. Vendor Managed Inventory (VMI)........................................................................................18

2.8. Inventory Counting & Costing Methodologies......................................................................18
2.8.1. Input Measurement Basis -Standard costing.................................................................20
2.8.2. Inventory Valuation Methods -Absorption method......................................................21
2.8.3. Cost Flow Assumptions -FEFO.......................................................................................21
2.8.4. Inventory Counting and Recording – Periodic and Perpetual.....................................22
2.9. Inventory Control Technique.................................................................................................23
2.9.1. API (Active Pharmaceutical Ingredient)........................................................................23
2.9.2. Excipient...........................................................................................................................23
2.10. Production Planning Process..............................................................................................24
2.11. Lead Times...........................................................................................................................25
2.12. Reorder Points.....................................................................................................................25
2.13. Minimum Order Quantities................................................................................................25

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Acknowledgement

We would like to express our deepest appreciation to all those who provided us the possibility to
complete this report. A special gratitude we give to our course faculty Mr. Hassan Bin Hassan,
whose contribution in stimulating suggestions and encouragement helped us to coordinate in
writing this report.

Furthermore we would also like to acknowledge with much appreciation the crucial role of Mr.
Talha Sultan (Supply chain Officer) and Mr. Raheel (Manager Reporting and Taxation) of
Martin Dow Pharmaceuticals, who gave us insight to the inventory system of Martin Dow to
complete this task

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Running Head: Inventory Management system of Martin Dow Pharmaceuticals

Martin Dow Pharmaceuticals

1. Introduction
Founded in 1995, Martin Dow is one of the largest healthcare groups in Pakistan and one of the
top pharmaceutical companies in Karachi, a status achieved through rigorous efforts of its
management and employees. Martin Dow Pharmaceuticals markets over 60 brands with more
than 1000 employees countrywide. It markets research-based products and world-class branded
generics which are developed, formulated and manufactured at its cGMP compliant
manufacturing facility located in Karachi.
1.1. Mission
Martin Dow is one of the most ethical pharmaceutical group of companies in Pakistan and
our mission is:
 To be one of the most admired companies
 To be amongst the fastest growing healthcare companies
1.2. Vision
Martin Dow Pakistan is a Corporate Force that is positioned to create long term values for the
society and its stakeholders
 Stakeholders
 Employees
 Patients
 Doctors
 Other Healthcare Professionals
 Regulators/Government
 Partners
1.3. Values
 To treat every employee with dignity & respect and create a culture of continuous
learning & growth
 To develop a long term & transparent relationship with our business associates by
entering into value added ventures which are mutually beneficial
 To share the benefits of our success with the communities and be socially responsible
 To nurture talent & enhance teamwork

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1.4. Business Partners

Martin Dow has striven to develop quality products. Their CGMP compliant manufacturing
facility manifest the promise that company has made towards development of quality
medicines. In order to maintain their edge and efficacy in offering customers the best health
care solutions, they have partnered with some of the most renowned names of international
pharmaceutical groups of industry. Following is a list of Martin Dow’s licensee partners with
the respective year in which they joined hands to work on the introduction and establishment
of some of their renowned brands in Pakistan

Partners Year

TEIJIN Pharma Limited – Japan 1996

RIEMSER Pharma GmbH- Germany 2010
MEDA Pharma GmbH – Sweden 2010
F.Hoffmann-La Roche Ltd. – Switzerland 2010
Biocodex – France 2014
2. Inventory Management System
Inventory management system in pharmaceuticals is considered as one of the most complex
systems that involves various interconnected subsystems. Every decision regards to inventory
can have unexpected results and consequences on complete chain of systems. A number of
advanced practices have been adopted by Pharmaceutical industry but despite of it still small
mistakes can make larger changes that impact the inventory management process extensively.
For instance increased turnaround times, can lead to unnecessary expenses and prescription
errors that endanger patient health etc. This advancement has been done not only for inventory
management practices but has also affected the global supply chain specifically when it comes to
meet demand. An inventory system is basically the set of policies and procedures that helps to
monitor and maintain the inventory level and when and how much replenishment of inventory is
required
2.1. Types of Inventories
Pharmaceuticals industry is responsible for human and animal life therefore considered as the
most sensitive industry ever. Pharmaceutical industry works on hygienic and purity basis. As
purity is adopted as standard practice which cannot be denied and ignored. Some of the

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recognized values of Pharmaceutical industry are quality, security and Identity, also
considered as crucial to maintain. Therefore the management of inventory of a
Pharmaceutical company is not an easy task. Martin Dow is involved in handling several
types of inventory that includes raw material, Packaging and Secondary packaging material
of finished products and finished products etc. Basically Inventory is the resource that
companies hold in order to sell or convert it into finished products or help to produce finished
products. Martin Dow use SAP system to record and manage its each type of inventory
separately. Martin Dow inventory is classified as follows,
1. Raw Material Inventory
2. Work in process Inventory
3. Finished goods inventory
4. Components Inventory
5. Maintenance, Repair and Operating supplies
2.1.1. Raw Material Inventory
Raw Material inventory is consists of Chemicals such as active ingredients, diluents and
excipients required for manufacturing component for finished products. Moreover
container, labels, caps, and shippers required for packaging is also the part of raw
material inventory.
2.1.2. Work In Process Inventory
Work in process inventory is consists of finished products in assembling process. When
raw material is released from inventory and moved to production or work center. Work in
process inventory can be restocked for the future production process.
2.1.3. Finished Goods inventory
It is the type of inventory which has been converted in final products and ready at
company’s warehouse to dispatch to the next intermediary of supply chain system such as
distribution center, Wholesalers and then retailers.
2.1.4. Components Inventory
Components inventory is the subassemblies needed to convert work in process inventory
to final product. For instance packaging for tablets.

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2.1.5. Maintenance, Repair and operating supplies

Martin Dow, like all pharmaceutical companies maintains the stock of maintenance,
repair and operating supplies. These in narrow aspects included spare parts of
machineries and office supplies required in daily operations.
2.1.6. Warehouses
Martin Dow manages an efficient system for storing inventory. Martin Dow have
temperature controlled sites with highly skilled management and operating teams to
handle warehouse operations. A 24 hour temperature monitoring system is installed at
Martin Dow warehouses with a controlled temperature of 2 to 8 °C to ensure the
maintenance of finished goods. To handle uncertain situations, Martin Dow installed a
secure logging system and emergency care mechanism to ensure safety.
2.2. Standard Operating Procedures
Martin Dow inventories represent a significant investment and follow the implementation of
IPSAS their monetary value is disclosed in Martin Dow financial statements. It is, therefore,
the duty and responsibility of the Martin Dow Supply Management function and the
Warehouse Manager to closely ensure adequate and safe storing conditions, efficient
warehouse operations and complete and accurate recording of all inventory movements.
2.2.1. Objective
The SOP’s objectives of warehouse and inventory management are to:
1. Ensure satisfactory receipt of goods;
2. Provide the ability to rapidly deliver goods requested;
3. Keep accurate account of the inventory movements and balance;
4. Maintain complete and accurate records of the inventory situation (physical, reserved,
buffer, on hand, distribution, and contingency, temporary and in transit inventories);
5. Maintain adequate storage conditions, to ensure that the inventory is in usable or
serviceable condition when needed;
6. Implement appropriated measures to guarantee the safety and security of the goods;
7. Ensure the inventory is maintained according to the Layout & Storage plan; and items are
conveniently staked;
8. To standardize item description and nomenclature to avoid ambiguity

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9. To classify the items on functional basis so that one material is kept under one material
group;
10. To bring together the items according to their degree of similarity so as to reveal and
suggest the availability of suitable substitutes.
2.2.2. Scope of the SOP
The scope of this SOP covers the responsibilities for the related processes at the Martin Dow
Offices holding inventories and at the level of the warehouse manager who might be Martin
Dow staff or staff of a Partner or a commercial entity. Any tangible or intangible items under
the custody of Partners, defined as “Goods and Property” in the Project Partnership
Agreement, are out of the scope of this SOP even if these items are used to implement Martin
Dow projects. Such Goods and Property include:
 Martin Dow Goods and Property, i.e. items provided in-kind by Martin Dow to the
Partner;
 Project Goods and Property; i.e. items acquired by the Partner with Martin Dow funds
provided pursuant to the Partner Agreement.
The management of these items will be covered by specific Guidelines to be developed based
on this SOP. This SOP covers the processes for warehouse and inventory management up to
the point where Martin Dow inventory items are released from the Martin Dow warehouse
for distribution. There might be further obligations requested by Martin Dow.
2.2.2.1. Responsibility
The Procurement Services Department shall be the sole authority for generating
materials number for the materials through the system. Any new additional material
procured by the purchasing agencies shall be issued to a stockholding unit only after
generating the material number by Procurement Services Department.
2.2.2.2. Material Numbering
Every material number consists of seven (7) numeric characters which are generated
internally from the system according to the material group. This material number
uniquely identifies the materials in the material master record.
2.2.3. Responsibilities of the Inventory Focal Point
Information to be provided to the Warehouse. To enable the warehouse to operate effectively
and efficiently, Martin Dow office has minimum needs to inform the warehouse of:
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Sourcing plan: Will assist the Warehouse Manager in calculating the storage space needs for
future periods.
2.2.3.1. Incoming shipments
Pipeline information providing item specifications, quantities and PO/MSR numbers. It
allows the Warehouse Manager to verify the documentation/specifications of the items
prior to arrival and to arrange for proper receipt/inspection and storage space
2.2.3.2. Distribution plans
Informed by sourcing plans and incoming pipeline information. It allows the
Warehouse Manager to establish an estimated schedule for inventory movements,
enabling work force and space planning.
2.2.3.3. Approved MSRs
Approved MSRs are the only valid documents authorizing the Warehouse Manager to
release inventory to a named organization/entity or their representative (i.e. truck driver
showing appropriate documentation).
2.2.4. Processes for Receiving and Releasing Inventory
2.2.4.1. Initiating processes
 The Martin Dow office shall initiate and approve the receiving of consignments at
or releasing of inventory from a warehouse.
 Receipt of inventory at a Martin Dow warehouse requires valid shipping documents
verifying the following consignment details:
 Martin Dow Warehouses can only receive inventories that are procured for and
owned by Martin Dow and any consignment delivered should have a Martin Dow
PO number reference.
 In order to properly receive the items in the warehouse the responsible officer in the
Martin Dow office must ensure that all relevant information is provided to the
warehouse, preferably well in advance of the delivery.
 The warehouse is not allowed to dispatch any inventory without receiving a
completed and approved MSR from the Martin Dow office. For external MSRs, a
valid Chart Field combination must be entered before it can be approved.

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2.2.4.2. Layout & Storage Plan

1) A clear segregation between inventory items owned by Martin Dow and other
goods must be maintained in case the warehouse is shared with other organizations,
or when the warehouse operator stores goods for other clients in the same locality.
2) All warehouses should maintain a Layout and Storage Plan based on a grid layout,
showing where the different items are stored, and update it regularly.
3) The storage areas should be marked by chalk/paint on the floor and include area,
row and aisle identification codes.
As a minimum of five areas should be designated:
1. Office area;
2. Goods receiving area;
3. Goods storage area;
4. Damaged/expired goods area;
5. Staging/loading area for items picked and ready for release.
Further areas can be required for larger warehouses such as:
Sealed/locked area, for attractive and/or high value items; Spare parts storage area;
Temperature controlled/cold chain storage area; Dangerous goods area (pesticides, fuel,
etc.).
2.2.5. Safety and Security of Stock
Goods should be protected from the risks of fire, loss, breakage, damage and theft. A security
risk assessment and facilities assessment should be undertaken. The warehouse shall prepare
an infrastructure plan covering:
 Security lighting, evacuation plan (escape exits) and assembly points clearly identified
and marked;
 Appropriated fencing and other security measures as alarms; perimeter walls/fences
towards adjoining buildings/areas. This may include security guards/ response plan /
support from Host Government Security Forces;
 No smoking policy;
 Firefighting equipment and fire safety plan;
 Limited and controlled entry/exit to the warehouse/storage area; Storage requirements for
hazardous goods (especially fuel);
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 Special storage and security conditions for high value items: Incident response plan.
2.2.6. Hazardous Goods
Hazardous, flammable or explosive materials need to be stored away from inhabited areas
and surrounded by metal or masonry barriers. In addition, the following applies:
 Keep hazardous goods away from other products, especially foodstuffs;
 Be aware of the different hazard classes and which hazardous/dangerous goods that
cannot be stored together;
 All hazardous/dangerous goods must be appropriately marked with markings/stickers on
the goods/packing;
 All staff must be informed about handling, preventive and mitigating actions, place
accident cards on the stack and in the warehouse office;
 Provide protective clothing such as goggles and gloves when necessary: Proximity to
hazardous substance manufacturers should be avoided.
2.2.7. Fire
Fire is a major safety and security hazard in a warehouse. Some items (e.g. Petrol) may catch
fire spontaneously as a result of natural heating.
 Take special precautions with hazardous, inflammable or explosive materials; Ensure
regular inspection by firefighting authorities;
 Provide fire extinguishers, regularly maintained (available and tested); Post and circulate
fire prevention and extinction instructions;
 Organize regular fire drills;
 Place sand buckets and shovels near main exits; Prohibit smoking in the warehouse area;
 Nominate and train fire wardens;
 Regularly control the status of the electrical systems; Maintain list of relevant emergency
contact numbers.
2.2.8. Flood and water damage
Take precautions to prevent water damage, e.g. by elevating the bottom layer of stacks from
the floor. Repair and replace roofs during the dry season.
2.2.9. Access control
Restrict access to the storage area to authorized personnel only. Arrange for security services
and establish inspection routines. Establish strict controls of access to keys.
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Establish vehicle and personnel checking and control routines at gates.

2.2.10. Pest control
Insects and rodents attack foodstuffs and paper products, as well as pharmaceuticals. It is
estimated that insects and rodents damage as much as 10% of stored cereals on average
worldwide, with as much as 30% damaged in subtropical regions, especially when foodstuffs
are stored over long periods.
2.2.11. Perishable goods control
Special attention should be paid to perishable goods, and appropriate systems and monitoring
routines should be in place to manage perishable consumables.
The warehouse management should develop a system notifying about expiry dates, and
inform Martin Dow well in advance (at least 60 days prior to expiry).
2.2.12. Return of Goods
2.2.12.1. Returning items/inventory
Items that have been inspected may need to be returned either to the vendor or the
dispatching warehouse because they were discovered to be:
 Defective or damaged;
 Duplicate or shipped in excess of PO quantity;
 The wrong items;
 Not delivered on time and no longer required.
2.2.12.2. Rules for return to vendor
The process of returning goods to the vendor shall be managed by the responsible
officer in the Martin Dow office providing clear instructions to the Warehouse
Manager.
2.2.12.3. Returning dispatched inventory
1. Return of dispatched inventory from a Martin Dow controlled warehouse should be
an exception. If a dispatch, or part of it, is nevertheless returned to the issuing
warehouse the warehouse should immediately contact the Martin Dow office to
receive instructions on how to handle the returns in different situations, for
example:

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2. When receiving the approval from the Martin Dow office, the regular processes for
receiving consignments (including the first visual inspection, the offloading &
inspecting for damage or loss, etc.) must be followed.
3. These goods must be clearly marked and stored separately as the returned goods
cannot be dispatched again before the inventory adjustment process has been
confirmed by the Martin Dow office.
2.2.13. Release of Goods
2.2.13.1. Important remark
It is not allowed to issue inventory from a Martin Dow warehouse managed by a
Partner without a duly approved Material Stock Request (MSR) sent from the Martin
Dow office to the warehouse.
In order to execute the release the Martin Dow officer in charge of inventory must
ensure that all relevant information and documentation is received by the warehouse in
due time before the physical release.
2.2.13.2. Objectives for releasing goods
1. Goods are approved/authorized for release from the warehouse for the following
purposes:
2. Distribution externally to Martin Dow (External release);
3. Transfer to another Martin Dow warehouse (InterUnit transfer); Internal Martin
Dow consumption (Internal issue);
4. Disposal following the appropriate authorization (a process completely managed
and controlled by the Martin Dow office).
5. Following the release of inventory, the warehouse inventory records and stock as
well as stack/bin cards must be updated in a timely manner, all relevant
information/ documentation must be filed and documents need to be sent to the
Martin Dow office for update of MSRP.
2.2.13.3. Reserving stock
When receiving an approved MSR from the Martin Dow office the Warehouse
Manager should ‘reserve’ the inventory as specified in the MSR (PO number(s) of
items to be picked are stated in the MSR) to ensure that it will not be accidently
released with another MSR.
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Picking stock
1. The warehouse staffs needs to ‘pick’ the goods from the storage area based on the
MSR, and place them in the assigned staging area.
2. For larger shipments, the warehouse needs to prepare a loading plan and schedule,
taking into account the physical limitations of the warehouse and the warehouse
area, number of loading gates, country limitations on weight and volume of trucks,
etc.
3. As soon as the goods are moved from the storage area to the staging area, the
Bin/Stack and Stock Cards must be updated.
2.2.13.4. Staging area
1. Goods picked must be properly stacked in the staging area, ensuring a clear
separation between the different MSRs.
2. Items requiring packing must be packed and a packing list needs to be prepared.
3. Ensure that all relevant MSR information is displayed on each stack in the staging
area to avoid possible mistakes during the loading process.
2.2.13.5. Prepare Waybills
For any issue of inventory from a Martin Dow warehouse a Waybill must be issued,
countersigned by the receiver upon delivery of the goods and the original signed
Waybill must be returned to the warehouse.
2.2.13.6. Inspecting outgoing shipment
It is highly recommended that the controller/tally clerks or security guards count during
loading to ensure that the vehicle is loaded as planned and in accordance with the
Waybill.
2.2.13.7. Direct release
If goods are taken directly from the Martin Dow warehouse by the consignee s/he or
her/his representative must sign the Waybill when taking over the custody of the goods.
The Waybill will act as proof of delivery.
2.2.13.8. Updating stock records
The responsibility of Martin Dow Supply function and the warehouse ends when the
Waybill is duly signed by the consignee and the original returned to the warehouse.

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2.2.13.9. Receiving Goods and Supplies

Inventory control begins immediately when orders enter your receiving department.
Receiving personnel begin the documentation trail for each item that is received. The
responsible person must make a visual inspection of every item in each shipment. Any
item that is damaged or any order that does not match the bill-of-lading should be
refused. It is essential to properly document shipping orders when items are broken or
incomplete. Remember, receiving is the gateway into your facility, so it is important to
inspect and document every item that moves through shipping and passes into your
storage facility.
2.2.13.10. Storage and Control
Each product that comes into your storage facility has specific storage requirements.
Some products must be kept at certain temperatures, some must be rotated to ensure
timely shipment and some come with environmental requirements. Your tracking
system should reflect each of these requirements and should prompt workers to monitor
inventory for rotation requirements. Deficient storage methods expose your inventory
to waste through expiration or inappropriate storage. Your storage should be organized
so each item is clearly visible and storage requirements are clearly identified.
2.2.13.11. Scheduling and Rotation
Establish inspection dates for every item in your facility. Inspect for expiration dates,
and make sure the oldest items are picked to fill shipping orders each and every time.
Any item that is expired must be disposed of and documented to show the loss.
Schedule physical inspections that require workers to touch every item in the
warehouse. Any shortfalls must be justified and documented as a loss in your inventory
control system. Ultimately, employees who are found negligent must be held
responsible for inventory loss.
2.2.13.12. Storage Facility Security
Within your facility, two major reasons for loss are customer and employee theft.
Solutions include security cameras, security personnel and limiting access by
employees only to the areas related to their position. Make sure every employee signs a
theft policy that outlines exactly what will happen if they are caught stealing from the

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company. Along with these steps, make sure you provide a method for employees to
report theft without revealing their identity.
2.2.13.13. Product Shipping
Eventually, every item in your inventory will leave the facility through the shipping
department or through direct retail sale to customers. Shipped products must be
properly removed from inventory. This is an area of potential loss if an employee
allows more product to leave the facility than is specifically ordered by a customer.
Shipping personnel are key to your company's profitability. Products sold directly to
retail customers must be removed from your inventory in a similar manner. Items not
removed from inventory when shipped or sold show up later on inventory documents as
excess inventory.
2.3. Forecasting and Demand Planning Methodology
Pharmaceutical industry’s ability to forecast demand is crucial to recognize and streamline to
optimize business decisions. Demand Planners are the key players in any industry on whom
depends the forecast and optimization of order quantity, stock level or delivery schedule at
the store level. Forecasting is important in the perspective of the pharmaceutical industry,
which commonly employs Price War tactics and requires efficient Supply Chain
Management (SCM). Generally Industries uses two types of forecasting methods;
Quantitative and Qualitative. Quantitative forecasting based on Historical sales data whereas
Qualitative Forecasting based on management’s ability of judgment the future circumstances
that effects forecasting. Martin Dow uses quantitative approach specifically for demand
planning and it’s forecasting by using rolling forecast method. Rolling forecasts includes the
forecasting and planning for different constant period. Rolling forecasts basically includes a
set of periods to determine its planning. Martin Dow’s demand planning is made by
estimating rolling forecast versus budgeted sales. Demand planning of Martin Dow is usually
done by following equation

(Rolling forecast) – (Distributors Stock) – (Warehouse stock) = Required Manufacturing

Every month, the global planner forecast the monthly demand for the upcoming 12 months.
The demand forecasts of individual product in different regional markets are assembled and
aggregated. The latest demand forecast is updated in MPS every month and the production

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schedule is adjusted according to the demand change. With a variety of products offered, MPS
has a few production planners under its production planning group, each in charge of different
product lines. The monthly demand forecast is first captured in a Master Production Schedule
(MPS) for each product in the coming year. MPS projects the inventory level based on the
forecasted demand and production projection.

2.4. Safety Stock Inventory

An excess part of inventory is hold in hand by industries to cater the unexpected market
demand and lead times is knows as safety stock inventory. Safety stock inventory helps to run
smooth operations without the barrier of stock shortage. Martin Dow keeps 45-60 days of
safety stock and the raw material which is being import from India are kept for 4-6 months as
a safety stock. Martin Dow has a clear vision to cater market demand whether it is anticipated
or uncertain to avoid loss of revenue, customers and market share. Safety Stock inventory
mitigates problems that can affect the industry health. Martin Dow calculates its safety stock
inventory by below equation.

Safety Stock Inventory = (Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales
x Average Lead Time in Days)

Max sales of the day is multiplied by the Max lead time of product and it’s subtracted by
Average of Daly sales multiplied by Average lead time. This method leads Martin Dow to
maintain the required safety stock level to fulfill market demand.

2.5. Bullwhip Effect

As stated earlier that the inventory management system of pharmaceutical industries is one of
the most complicated modules and hence Martin Dow also needs to be more efficient to
manage the complexity of this system. The shortage of Pharmaceutical products not only
leads to increased Health Care costs but also can expose patient’s health at risk. Bullwhip
effect is the variance detected by supply chain when orders are made to manufacturer or
supplier. This variance is larger than the forecasted demand and sometimes leads to irregular
orders which is distinctly higher. This variance can mislead the whole supply chain if product
demand is under or over estimated. Therefore demand planning of Martin Dow also covers
Bullwhip effect. Because it is basically the impact which is derived from demand forecasting.

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Martin Dow management keeps in view that forecasting can never be exact therefore they
must have to manage these errors and must have avoid creating negative results of bullwhip
effect. Martin Dow uses bullwhip strategy mostly when adopting forward buying strategy in
order to be cost effective and while promoting cost marketing promotions.

2.6. Just In Time (JIT)

Just in time is also known as lean manufacturing. Just in time is a concept used by many
companies in which the company receive goods only when those are needed in the production
process to increase efficiency and to decrease waste. Just in time manufacturing is now highly
adopted by various industries in order to eliminate waste and meet the current demand. Martin
Dow is not using JIT Manufacturing concept. They use product SKU wise forecast provided
by respective business product managers. JIT concept is somehow used in purchasing MRO
(Maintenance, Repair and operating supplies) only in Martin Dow.

2.7. Vendor Managed Inventory (VMI)

VMI stands for Vendor Managed Inventory. It is a theory based inspired by integration in
SCM regarding system dynamics various partners like vendor managed inventory approach
have been used in IM as a mean to cope with bullwhip effect. Martin Dow doesn’t use VMI
because of the critically of the nature of their products. Martin Dow use DRAP (Drug
Regulatory Authority of Pakistan) standards to follow quality protocol. DRAP is also
followed to access any vendor depending upon the type of service provided by the vendor.
Martin Dow also have a forecast QA assessment process before on boarding any vendor that
vendor must has to qualify.

2.8. Inventory Counting & Costing Methodologies

There is a divergence of opinion regarding classification of inventory i.e. expense or asset.
However, as per Generally Accepted Accounting Principles (GAAP) and International
Financial Reporting Standards (IFRS), they are classified as assets. Inventories are broadly
categorized into 4 classes i.e. raw materials, work in process, finished goods and Maintenance,
repair & operating (MRO). By inventory count, it is meant stocktaking or physical verification
or assessment of items in warehouse(s) of an organization. It is operationally and financially
important for organizations to conduct counting of inventory. Financially, in order to
determine the value of the organization by calculating the amount of stocks and assets which
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is reflected in the balance sheet of the organization. It can also be helpful for tax purposes and
in accurate forecasting of cash flows. Operationally, through inventory counting,
organizations get aware of how much stocks they possess. Without which organizations may
face lost sales as they may assume that they cannot fulfil customer demand due to non-
availability of stock. Conversely, it can also lead to deterioration and waste of items as
organizations may not be able to identify that stock and could not utilize it for making a sale.
In order to conduct the count of inventory items, two principal methods are used by
organizations around the world i.e. physical count and cycle count (also known as perpetual
counting). Physical count is the actual counting of entire stock that a company owns. It is a
comprehensive method of in-depth counting whereby each and every item is first counted
manually then entered into the system for reconciliation. On the other hand, instead of
counting each and every item, Cycle counting process is opted by the companies where a
small subset of inventory in a specific location is counted on a specific day. By this way, it is
inferred that this sample reflects the entire stock. Therefore, if an error found in this sampling
technique, errors could also be expected to occur for other items in the warehouse: count for
the entire warehouse. The count is made at regular intervals thus it is called perpetual system.

However, the timing and classification of sample for inventory counting is based on three
principle factors. i.e. relevance to the business, value proportion and location.

Moreover, the setting of standards for input of inventory cost, its valuation, costing and
counting and control are conducted in organizations in a whole process step by step based on
several widely acknowledged methods which are specifically discussed as under.

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2.8.1. Input Measurement Basis -Standard costing

As evident from exhibit 2, Inventory costing phase at Martin Dow’s begins with the selection
and measurement of inputs. Though there are several ways i.e pure historical, normal
historical and standard. Martin Dow however, adopts standard measurement basis. In this
approach, the manufacturing costs are applied, i.e. they are allocated to the inventory by
using standard or predetermined prices and quantities.
Martin Dow uses application integration software (SAP) through which managers assisted by
engineers and accountants set/overhead rates for items category wise then for each product
by setting quantity and cost standards for major inputs such as raw materials and labors,
which are then compared with actual costs and quantities when consumed. If the actual
quantity or cost departs from the standards, called variance, then managers investigate the
discrepancies and adopt control measures. The following types of variances usually are
identified
 Direct materials variance
 Direct labor variance
 Variable overhead variance (Fixed overhead remains fix)

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 Spending variance (Difference in costs)

 Efficiency variance (Difference in quantities)
Thereby, a carefully developed cost per unit is attained.
2.8.2. Inventory Valuation Methods -Absorption method
As the name implies, this method absorbs all the direct and indirect manufacturing costs,
either variable or fixed, in the product cost. However, a portion of fixed manufacturing
overhead cost along with the variable manufacturing overhead cost is allocated to each unit
of product on the basis of indirect materials and labor allocation base, usually portion of
materials and labor hours.
Under absorption costing at Martin Dow, all the manufacturing costs are charged to the
inventory and become assets (capitalized). These costs are not expensed out immediately
after their occurrence, rather they remain in inventory as an asset until such time as the
inventory is sold; at that point, they are charged to cost of goods sold.

2.8.3. Cost Flow Assumptions -FEFO

First Expired, First Out (FEFO)- This method is similar to the FIFO method, with the
difference that in this approach, the items who expiries are most near are used in production
(raw materials) and sold out (finished goods) irrespective of the price of the materials or their
purchase dates. This means the COGS and balance inventory will vary from time to time.
Exhibit 2 mentions several ways of how inventory cost flow is assumed in organizations,
however, Martin Dow uses FEFO as pharmaceutical products are critical with respect to
health, they are consumed on the basis of their expiration, as it is the date during which the
manufacturer guarantees the full potency and safety of a drug. The products are purchased in
batches, with each batch having a particular expiry date. Products from these batches are then
utilized with respect to the proximity to their expiry dates. i.e. one with recent expiry is used
first and vice versa.

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2.8.4. Inventory Counting and Recording – Periodic and Perpetual

Martin Dow, being one of the largest pharmaceutical company of Pakistan, have enormous
amount of inventory. The company maintains full fledge record system of its inventory
manually well as digitally. Inventory and warehousing staff at Martin Dow, maintains a list
of their counts and report it to management. Simultaneously, Martin Dow uses application
integration systems SAP to record each and every transaction including sell and purchase of
stock. On the basis of these, double check system of inventory is maintained at Martin Dow
through following
 List to floor (Physical checking at warehouse)
Counting made on the basis of system generated inventory list, to check whether the
physical stock lying at warehouse complies with this list or not.
 Floor to list (Digital checking at system)
Counting conducted manually by staff and on the basis of which, a list is generated and
reported to management, to check whether the provided list confirms digital stock being
reported at the system.
As depicted in above diagram, two principal counting methodologies are perpetual and
periodic. Within which there are two ways to conduct inventory count i.e. physically (for
entire stock) and cyclically (for a portion of total inventory).
Martin Dow, being a large pharmaceutical company with huge amount of inventory, utilizes
both techniques to conduct inventory count i.e. physically and cyclically.
2.8.4.1. Periodic
However, as it not convenient to conduct a count of entire stock at regular intervals
in a large company like Martin Dow, therefore, physically counting for entire stock
is done once in a year which is further backed by inspection from external auditors.
2.8.4.2. Perpetual
Perpetual or cyclical counting is used as per control purposes, i.e. for regular
check, quarterly counting is conducted of partial stocks based on random sampling
as mentioned in exhibit 1 with relevance at VED basis, proposition on ABC and
location at random. Similarly, a call for surprise counting is made at any time
during a month, so that inventory and warehousing staff remains vigilant and
chances of error and anomalies are minimized.

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The structure of inventory count and Martin Dow can thus be depicted as below
S. Period Type Control Technique Total during
No
the year
1 Quarterly Regular Partial stocks on random sample 4
check
Perpetual
2 Monthly Surprise Identification of stock on 12
Judgment random sample
3 Annually Periodic Audit Physical counting of entire stock 1
2.9. Inventory Control Technique
To control the inventory, Martin Dow uses an ABC analysis technique as mentioned in exhibit
1 and exhibit 2. It is relevant for Martin Dow as generally in Pharmaceutical companies of
Pakistan, most of the raw materials or main ingredients for a drug are imported which are
costly as compared to their local counterparts.
S. No Period Portion Quantity Category
imported
1 API (Active Pharmaceutical Ingredient) 98% Medium A
2 Excipient 50% Medium B
3 Packaging materials 0% High C
Basically, there are two elements used in pharmaceutical companies based on their chemical
composition.
 API (Active Pharmaceutical Ingredient)
 Excipient
2.9.1. API (Active Pharmaceutical Ingredient)
An ingredient in a pharmaceutical drug or pesticide that is biologically active. It is the main
ingredient use in the formulation of a drug. They are called active because of their ability to
combine with other substances.
2.9.2. Excipient
Contrary to active ingredients, inactive ingredients are also used in medicines which are
called excipient. An excipient is a substance formulated alongside the active ingredient of a
medication, included for the purpose of long-term stabilization. Besides this, excipients are

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also helpful in manufacturing process by improving powder flow ability and prevention of
denaturation of proteins or nucleic acids.
The dosage form for a pharmaceutical contains the active pharmaceutical ingredient, which is
the drug substance itself, and excipients, which are the ingredients of the tablet, or the liquid
in which the active agent is suspended, or other material that is pharmaceutically inert.
Though APIs and excipients are generally used in the composition with the ratio of 1:1,
which means almost equal number of excipients are used as APIs in pharmaceutical
companies. However, as APIs are costlier than excipients, that’s why they are classified as A
and B category items respectively. While packaging materials are excessive in quantity and
are inexpensive as able to be procured locally, that’s why they are classified as C category
items.
2.10. Production Planning Process
Usually all pharmaceutical companies have their annual sales target and therefore, the
productions of medicines are aligned accordingly to complete the sales target and supply in the
market.
At Martin Dow, the production team gets the MPS (master production schedule) at 5th day of
each month start for individual commodities, parent brand or child SKUS to be produced in
each time period such as production, staffing, inventory, etc. The MPS translates the customer
demand (sales orders, PIR's), into a build plan using planned orders in a true
component scheduling environment. Once the MPS is received the production team knows
what to produce, when to produce and how much to produce. In second step the production
team at Martin Dow prepares MRP (Material requirement planning), MRP works backward
from a production plan for finished goods to develop requirements for components and raw
materials, also MRP breaks down inventory requirements into planning periods so that
production can be completed in a timely manner while inventory levels and related carrying
costs are kept to a minimum.
Then the material (raw and packaging) is arranged at warehouse through procurement
Department.
Production planning is done with each machine, it’s based upon availability of machine to
make specific formula OR demand wise/procedure wise, during production they call their 1st
week as Frozen (when the decision has been taken which formula/medicine to made), 2nd
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week as Freeze (where no changes are acceptable ideally) and 3rd & 4th week is called as fluid
(where production is started as per the formula of medicines step by step).

Packaging and packing is being done at the last step. This is a normal production planning
process followed at Martin Dow, however if the sales numbers are changed or any unexpected
sales is generated then the production plan may change at step Freeze (2nd week of production)
based on the availability of machine and formula.
2.11. Lead Times
Martin Dow procured raw material from different suppliers of both local and international
repute. International suppliers of Martin Dow are from China, India and some are from
European countries. Delivery from international suppliers takes delivery time up to
approximately 45 days by air and 70 days by sea. Company made purchases direct from
foreign suppliers as well as through the local indenters some of them are Causeway Arfeen,
Gudia and Morgan chemicals.
2.12. Reorder Points
When the inventory is depleted to lead time consumption, the order should be placed. Since the
lead time of the Martin Dow is 7 to 30 days for local material whereas it is around 45 to 70
days for international suppliers depending on the nature of the material.
2.13. Minimum Order Quantities
Minimum order quantities for Martin Dow is 1,000,000 tablets per order whereas for liquid
range syrups it is around 100,000 to 200,000. This figure is true only for multinational or large
scale manufacturing companies.

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