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CASE STUDY PRESENTATION FORMAT

1. Immediate Issue(s) or Problem(s):

Define the immediate problem(s) or identify the decision(s) that must be made. State a time
frame; how long do you have to make the decision?

There is one main problem identified in this study which is vital for correcting the management’s
operational flaws, that is, there are unaccounted outflows of inventories within the organization
and there is no clear reason behind that. The owner and capitalist of Golden Care Pharma and
General Merchandise Incorporated, Mr. Raul Calvento,had no idea with regards to the system and
management of the inventories. He only relies on the people he had appointed to be honest enough
for the performance of their duties. However, things are not the way they are supposed to be
because the firmlacked with the proper utilization of POS (Point of Order System)
database,increased the risks of the business from employees’ manipulation of the transactions and
the potential performance of other fraudulent activities in the organization. There are set of
internal control procedures prescribed by the firm for the performance of the employees’ duties but
it lacks a specific procedure for inventory management, so we therefore recommend the proper
storage of the inventories, maximize the use of Point of Sale (POS) system, proper segregation of
duties among available employees, supervision of operational and other related activities, and
periodic stocks reconciliation.

2. Basic Issue(s) or Associated Issue(s):

List any other issue that might influence your decision. These can be higher level, strategic
issues.
In the implementation of the suggested actions stated above, the researchers consider the following
issues as it can influence our decisions.

One primary issue concerning the implementation of the decision is the source of funds to be used
as it will require the corporation to incur additional cash outflow if the recommendations are to be
considered. A firm can’t grow unless it as money to invest in growth. Rapid growth means hiring
more people, furnishing more offices, and perhaps renting new quarters for additional storage.
Financing expansion can take many forms.You can use your own money, use internally generated
funds, approach equity investors or borrow from banks and other lenders. The source of funds used
by Golden Care Pharma and General Merchandise Incorporated is internally generated funds,
according to its capitalist.

Another issue that concerns the implementation of the decision is the number of employees in the
organization. Golden Care Pharma Incorporated is a small corporation that has a limited number of
employees which makes it difficult for them to segregate different duties resulting to overlapping
performance of tasks among personnel. In the ideal world, every task would be assigned to the
employee most suited to deal with it. In reality, most small businesses do not employ enough
people for this to happen and people often are asked to do jobs they wouldn’t qualified for or
interested in.

Lastly, the issue that concerns the implementation of the decision is the additional time to be
incurred as it will require the corporation to incur extra time to perform the suggested decision,
specifically for the supervision of operational and other related activities and periodic stock
reconciliation. Time management is essentially the ability to organize and plan the time spent on
activities. The result of good time management is increased effectiveness and productivity.

3. Issue(s) Analysis or Information Summary:

Summarize the important or major pieces of information from the case. Identify which are the
facts, opinions and assumptions. State your assumptions clearly. Analyze any financial
information made available in the case; financial analysis is an essential part of
your analysis. Identify any long term issues.

The following statements are based on facts gathered through interview and observation of
the researchers within he organization. The Golden Care Pharma and General Merchandise
inventory control is mostly done at their own house which operates as the warehouse where a
room is allocated for the storage of the pharmacy products including various medicines divided in
branded and generic medicines, as well as the wholesale and retail products. The medicines that are
about to be obsolete are listed in a white board displayed inside the storage room. And for closely
monitoring the storage room it has built in CCTV cameras to secure the stocks.The premises have
suitable and effective means of lighting and ventilation. When there is delivery the number of
medicines boxes are checked one by one according to the right amount written on the sales invoice,
and then received by the secretary, and transferred them to the storage room where there are
maintained.
In the pharmacy, they managed their own stocks at the storage room located at back of the
pharmacy. Likewise, in their own house the storage room also has CCTV cameras in every corner to
secure the stocks. According to the pharmacist, they are the ones who monitor the stocks at the
pharmacy and when the amount of stocks is at the critical level the pharmacy staff communicate
with the secretary and then the secretary update the stocks, and Mr. Raul Calvento orders from the
suppliers of the medicines.
The pharmacy uses a First Expired, First Out (FEFO) method, an optimized warehouse
management technique where the products are dispatched from the warehouse in order of their
expiration date. That means the product that would have expiration date due would be moved out
first of the warehouse first and rest would follow in the same order. The pharmacy monitors the
inventory by physical inventory count and then matches with the quantity of medicines bought that
are encoded in the system. This is done semi-annually approximately twice a year. In doing physical
counting it lacks control because no reconciliation with records due to non-entry of deliveries in the
POS system. The Point of Sale (POS) is not maximized as to its functionality because delivery
receipts are not entered/encoded in the system, re-ordering point also is not used due to lack in
information in the POS.

The following statements are the assumptions based on the interviews and observation made by
the researchers.

These are the following procedures in the SIPOC analysis:

Suppliers Inputs Process Outputs Customers

Wyeth Identification
Purchasing Patients
of needs Medicines

Pfizer
Purchasing
Receiving Doctors
order
RiteMed Injectibles
Issuing Delivery Family
Alps Pharm

Boxed Goods
Co-Pharm Reporting Payment Staff

Figure 5. SIPOC Analysis

The Strength and Weaknesses in the Existing Practices and Procedures of Inventories
Strengths
 The security cameras established around the pharmacy, storage areas and main stock room
located at the residence of the owner.
 The storage room in the warehouse has a vault to secure material possessions
 The system automatically records the sales of the pharmacy transactions including those
with discounts and refunds.
 The employees give good customer care.
 The storage room has proper ventilation for the medicines

Weaknesses
 The storage area is not that organized and can be easily accessed by anyone.
 The Point of Sale (POS) system is not maximized as to its functionality because delivery
receipts are not entered/encoded in the system.
 The system also does not apply the re-ordering point of stocks yet, that is why the
pharmacy employees are monitoring it manually by physical count.
 Physical Count requires a lot of trust and lacks control due to no reconciliation with records
that are not entered in the system.
 The pharmacy staff do not have proper segregation of duties; anybody available to serve in
the counter can also access the cash register of the pharmacy and act as the cashier; and the
pharmacist is also the one controlling the stocks in the branch and works all around.

4. Alternative Solutions or Options: The most important part!

List the various options available to resolve the problem. Discuss each option and state the
advantages (pro) and disadvantages (cons) of each option. Refer to quantitative and/or
qualitative information as needed in order to demonstrate the points raised. This is the major
part of the case and demonstrates that you clearly understand the issue(s) and the
various possible outcomes. There are usually at least three good options in a case and often
many more. Identify each option clearly and always show the pros and cons of each.

a. Hiring additional employees to suffice the problems with improper segregation of duties
Pros: Hiring regular full-time employees provides the benefit of dependability and control.
Employees have to follow instructions on how to go about the work, what to say and how to
act. Personnel make it possible to delegate responsibilities and cut the usual small business
situation of doing large number of task every day.
Cons: The downside is that employees’ compensation, health insurances, retirement plans
and so on cost money and take time to administrate. Each worker requires a substantial
amount of administration and reporting to different government agencies. There are also
labor law and guidelines that apply, potentially exposing the company to lawsuits.
b. Warehouse outsourcing for safekeeping of the inventories to suffice the problems with
improper inventory storage
Pros: Storage area will be flexible depending on the size of the inventory. Paying for a
warehouse that doesn’t fit your requirements doesn’t makes sense, so outsourcing to a
warehousing facility that will expand and shrink to suit your requirements is a good idea.
Moreover, some of them come with security and surveillance cameras included, offering you
additional peace of mind about your kept goods.
Cons: One of the biggest difficulties with outsourcing your warehousing requirements is
that your goods won’t be on sight with the rest of your business. Since your warehouse may
not be physically available, it may be difficult to fix a problem as fast as if the warehouse
was on sight. If your warehouse is not nearby, you will need to travel there for the
preliminary inspection and to periodically to inspect on how well your good is being taken
care of. This additional expense may not factor into the budget of the company.
c. Proper storage of the inventories
Pros:
Cons:
d. Maximize the use of Point of Sale (POS) system
Pros:
Cons:
e. Proper segregation of duties among available employees
Pros: Segregation of duties is one of several steps to improve the internal control of the
organization’s assets. These benefits include increased internal control, reducing the
opportunity for theft, limiting the potential for intentional or unintentional errors that could
be made and not detected.
Cons: Prolonged internal controls add processing time to accounting functions which takes
a lot of time for financial information. In addition to that, the employees must make sure
that all paperwork is accurate and authorized by supervisors. This increases the number of
functions of internal controls which slows the closing time for each accounting period.
f. Supervision of operational and other related activities
Pros:
Cons:
g. Periodic stocks reconciliation
Pros:
Cons:

5. Recommendation(s) and Implementation:

Based on the analysis of the options, state what you would do to correct the problem
(recommendation) and how you would do this (implementation). Your recommendation is
usually a restatement of the best option. This is not the time to analyze new options. The
implementation plan should list the steps and include a time frame or target date.
Out of the abovementioned options, we considered the alternatives that we think that are
more advantageous to the company. The researchers recommend that the organization of the
storage area of the medicines and retail products be divided accordingly to its classification and
required conditions, and most importantly maintain a clean and good environment. Researchers
recommend also that the Point of Sale (POS) system must be maximized as to its functionality to be
able to record all purchases from the delivery receipts, and the system must be able to inform or
alert them of the critical stocks and know when to order at the re-ordering point. In terms of
information and communication the pharmacy must update their current system and be flexible
with the changes in the market.
The Golden Care and General Merchandise Inc. must have internal control measures to be
applied firmly. The management and the staff must have effective controls that adopt the size of the
company, the staff must have a segregation of duties to avoid overlapping of work. Duties and
responsibilities must be clearly defined and understood by the individuals concerned and recorded
as written job descriptions. Certain activities may require special attention, such as the supervision
of performance of activities, in accordance with local legislation. At every level of the supply chain,
employees must be fully informed and trained in their duties and responsibilities. There must be
arrangements in place to ensure that management and personnel are not subject to commercial,
political, financial and other pressures or conflict of interest that may have an adverse effect on the
quality of service provided or on the integrity of pharmaceutical products. The pharmacy must also
assess the riskiest areas to prevent and detect the errors and fraud. The control activities to be
applied must have someone to supervise the physical inventory count and reconcile it with the
recorded transactions.
All personnel must receive proper training in relation to good storage practice, regulations,
procedures and safety. Personnel employed in storage areas must wear suitable protective or
working garments appropriate for the activities they perform. In their warehousing and storage
area, precautions must be taken to prevent unauthorized persons from entering storage areas.
Storage areas must be of sufficient capacity to allow the orderly storage of the various categories of
materials and products, namely starting and packaging materials, intermediates, bulk and products
in quarantine, and released, rejected, returned or recalled products. The receiving and dispatch
bays must protect materials and products from the weather. Reception areas must be designed and
equipped to allow containers of incoming materials and pharmaceutical products to be cleaned, if
necessary, before storage.
A periodic stock reconciliation must be performed by comparing the actual and recorded
stocks. All significant stock discrepancies must be investigated as a check against inadvertent mix-
ups and/or incorrect issue. Damaged containers must not be issued unless the quality of the
material has been shown to be unaffected. Where possible, this must be brought to the attention of
the person responsible for quality control. Any action taken must be documented.

6. Monitor and Control:

State the method(s) you will use to determine if your recommendation and implementation
plan are working. Some examples are use of budgets, regularly scheduled meetings
or scheduled reviews. The approach you use will depend on the nature of the recommendation.

To be able to determine if our recommendations and implementations are working, we will use
the following approach for monitoring and controlling the inventory management of the company.

SETTING UP OF VARIOUS STOCK LEVELS

To avoid over-stocking and under stocking of inventory, the management has to decide about
the maximum level, minimum level, re-order level, danger level and average level of inventory to be
kept in the store or in the warehouse.

(a) Re-ordering level:

It is also known as ‘ordering level’ or ‘ordering point’ or ‘ordering limit’. It is a point at which
order for supply of material should be made. This level is fixed somewhere between the maximum
level and the minimum level in such a way that the quantity of materials represented by the
difference between the re-ordering level and the minimum level will be sufficient to meet the
demands of the products till such time as the items are replenished. Reorder level depends mainly
on the maximum rate of consumption and order lead time. When this level is reached, the store and
warehouse keeper will initiate the purchase requisition. Reordering level is calculated with the
following formula:
Re-order level =Maximum Rate of consumption x maximum lead time

(b) Maximum Level:

Maximum level is the level above which stock should never reach. It is also known as
‘maximum limit’ or ‘maximum stock’. The function of maximum level is essential to avoid
unnecessary blocking up of capital in inventories, losses on account of deterioration and
obsolescence of materials, extra overheads and temptation to thefts etc. This level can be
determined with the following formula.

Maximum Stock level = Reordering level + Reordering quantity —(Minimum Consumption x


Minimum re-ordering period)

(c) Minimum Level:

It represents the lowest quantity of a particular item or product below which stock should not
be allowed to fall. This level must be maintained at every time so that operation is not held up due
to shortage of any products. It is that level of inventories of which a fresh order must be placed to
replenish the stock. This level is usually determined through the following formula:

Minimum Level = Re-ordering level — (Normal rate of consumption x Normal delivery period)

(d) Average Stock Level:

Average stock level is determined by averaging the minimum and maximum level of stock. The
formula for determination of the level is as follows:

Average level =1/2 (Minimum stock level + Maximum stock level)

This may also be expressed by minimum level + 1/2 of Re-ordering Quantity.

(e) Danger Level:

Danger level is that level below which the stock should under no circumstances be allowed to
fall, danger level is slightly below the minimum level. This level can be calculated with the help of
following formula:

Danger Level =Average rate of consumption x Emergency supply time.

(f) Economic Order Quantity (E.O.Q.):

One of the most important problems faced by the purchasing department is how much to order
at a time. Purchasing in large quantities involve lesser purchasing cost. But cost of carrying them
tends to be higher. Likewise if purchases are made in smaller quantities, holding costs are lower
while purchasing costs tend to be higher. Hence, the most economic buying quantity or the
optimum quantity should be determined by the purchase department by considering the factors
such as cost of ordering, holding or carrying.
This can be calculated by the following formula:

Q = √2AS/I

where Q stands for quantity per order ;

A stands for annual requirements of an item in terms of rupees;

S stands for cost of placement of an order in rupees; and

I stand for inventory carrying cost per unit per year in rupees.

PREPARATION OF INVENTORY BUDGETS:

Organizations having huge material requirement normally prepare purchase budgets. The
purchase budget should be prepared well in advance. Sales budget generally provides the basis for
preparation of purchasing plans. Therefore, the first step in the preparation of a purchase budget is
the establishment of sales budget.

As per the purchasing plan, products schedule is prepared depending upon the amount and
return contained in the plan. To determine the net quantities to be procured, necessary
adjustments for the stock already held is to be made. They are valued as standard rate or current
market. In this way, product procurement budget is prepared. The budget so prepared should be
communicated to all departments concerned so that the actual purchase commitments can be
regulated as per budgets. At periodical intervals actuals are compared with the budgeted figures
and reported to management which provide a suitable basis for controlling the purchase of
materials.

SCHEDULE PERIODIC HAND INVENTORY

To make sure that the actual stock figures match what the inventory control system says, they
will need to do periodic hand inventory. This means printing out stock sheets from their inventory
system and then hand counting items to see if the totals match.

ACCOUNT FOR RETURNS, EXCHANGES AND DAMAGES


These factors can throw off inventory numbers, especially if retail clerks do not enter the
information into the system correctly. Merchandise that is returned, exchanged or damaged should
be accounted for in inventory systems every day.
SET UP LOSS PREVENTION MEASURES
To monitor inventory that is disappearing, the company may need to have a loss prevention
department. This is common in retail stores and helps deter both shoplifting and employee theft.
Simple loss prevention measures include mirrors and video surveillance. More complicated
scenarios include hiring security personnel to monitor the store and inventory.

ESTABLISHING PROPER PURCHASE PROCEDURES:


A proper purchase procedure has to be established and adopted to ensure necessary inventory
control. The following steps are involved.

(a) Purchase Requisition:

It is the requisition made by the various departmental heads or storekeeper for their various
product or material requirements. The initiation of purchase begins with the receipts of a purchase
requisition by the purchase department.

(b) Inviting Quotations:

The purchase department will invite quotations for supply of goods on the receipt of purchase
requisition.

(c) Schedule of Quotations:

The schedule of quotations will be prepared by the purchase department on the basis of
quotations received.

(d) Approving the supplier:

The schedule of quotations is put before the purchase committee who selects the supplier by
considering factors like price, quality of products or materials, terms of payment, delivery schedule
etc.

(e) Purchase Order:

It is the last step and the purchase order is prepared by the purchase department. It is a
written authorization to the supplier to supply a specified quality and quantity of product or
materials at the specified time and place mentioned at the stipulated terms.

INVENTORY TURNOVER RATIO:

The ratio indicates how quickly the inventory is used for production. Higher the ratio, shorter
will be the duration of inventory at the factory. It is the index of efficiency of material management.
These are calculated to minimize the inventory by the use of the following formula:

Inventory Turnover Ratio = Cost of goods consumed/sold during the period/Average inventory
held during the period

The comparison of various inventory turnover ratios at different items with those of
previous years may reveal the following four types of inventories:

(a) Slow moving Inventories:


These inventories have a very low turnover ratio. Management should take all possible steps to
keep such inventories at the lowest levels.

(b) Dormant Inventories:

These inventories have no demand. The finance manager has to take a decision whether such
inventories should be retained or scrapped based upon the current market price, conditions etc.

(c) Obsolete Inventories:

These inventories are no longer in demand due to their becoming out of demand. Such
inventories should be immediately scrapped.

(d) Fast moving inventories:

These inventories are in hot demand. Proper and special care should be taken in respect of
these inventories so that the manufacturing process does not suffer due to shortage of such
inventories.

ABC ANALYSIS:

In order to exercise effective control over the produts or materials, A.B.C. (Always Better
Control) method is of immense use. Under this method materials are classified into three categories
in accordance with their respective values. Group ‘A’ constitutes costly items which may be only 10
to 20% of the total items but account for about 50% of the total value of the stores. A greater degree
of control is exercised to preserve these items. Group ‘B’ consists of items which constitutes 20 to
30% of the store items and represent about 30% of the total value of stores.

A reasonable degree of care may be taken in order to control these items. In the last category i.e.
group ‘Q’ about 70 to 80% of the items is covered costing about 20% of the total value. This can be
referred to as residuary category. A routine type of care may be taken in the case of third
category. This method is also known as ‘stock control according to value method’, ‘selective value
approach’ and ‘proportional parts value approach’. If this method is applied with care, it ensures
considerable reduction in the storage expenses and it is also greatly helpful in preserving costly
items.

Regular Auditing