COST & MANAGERIAL ACCOUNTING

Inventory Management
Report on GlaxoSmithKline (GSK) Pakistan Ltd.

Report Submitted By:

Submitted to :
Report Submitted By
Sir SHAHAM AHMED
 ACKNOWLEGEMENT

We are grateful to Almighty ALLAH, who gave us the strength to strive for our
goal and paved the path in the completion of this report.

This report provides an over view of the GlaxoSmithKline (GSK), as well as

Inventory Management Systems adopted at GSK”.

We render due respect and appreciation to our course Faculty SIR SHAHAM
AHMED, who provided us all the guidance and required information about the
report.

We would also like to acknowledge our parents for their utmost co-operation
and their love and affection which have become our strength.

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 TABLE OF CONTENTS
Index Page
1. History of GlaxoSmithKline (GSK) 4
2. World of GSK 4
3. GSK Global Presence 4
4. GSK Headquarters – Brentford, London, England 5
5. GSK Pakistan – Company Profile 6
6. GSK Pakistan Vision, Mission & Values 8
7. Our Assignment at GSK Pakistan 9
8. Inventory 10
9. Inventory Management 10
10. Economic Order Quantity 11
11. Inventory Turnover Ratio 11
12. Objectives of Inventory Management 11
13. Key substance of Inventory Management 14
14. Purpose of Inventory Management at GSK Pakistan 14
15. Key Functions of Inventory Management System 14
16. Types of Inventory at GSK Pakistan 15
- Raw Material
- Work-in-Process
- Finished Goods
- Packing Material
- Laboratory & Promotional Material
- Packaging Material
- Goods-in-Transit
17. Inventory Management Flowchart 17
18. Economic Order Quantity Analysis 18

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HISTORY OF GLAXOSMITHKLINE (GSK)
GlaxoSmithKline (GSK) is a British multinational pharmaceutical company
headquartered in Brentford, London. In 2014, it was the sixth-largest
pharmaceutical company in the world. In 1995 Glaxo being a self representative
Company merged with Wellcome to form GlaxoWellcome. After few years,
GlaxoWellcome and SmithKline Beecham merged to form GlaxoSmithKline.
Now they have acquired Cooper and Stiefel. Stiefel is a global leader in the field
of dermatology.

World Of GSK
GSK employs over 99000 people in 114 countries. They have manufactured
over 4 billion packs per year in 28000 different locations, which are then
supplied to over 160 markets. They currently make more than 100 prescription
medicines and vaccines. GSK is the global leader in respiratory, anti-viral and
vaccines.

GSK GLOBAL PRESENCE

ASIA, AUSTRALIA. EUROPE, & AFRICA

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NORTH, SOUTH & CENTRAL AMERICA

GSK Headquarters – Brentford, London, England.

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GSK PAKISTAN COMPANY PROFILE

GlaxoSmithKline Pakistan Limited was created January 1st, 2001 through the
merger of SmithKline and French of Pakistan Limited, Beecham Pakistan
(Private) Limited and Glaxo Wellcome (Pakistan) Limited and stands today as
the largest pharmaceutical company in Pakistan. GSK is a long established
investor in Pakistan. Glaxo’s legacy company - Glaxo Laboratories Pakistan
Ltd. - was the first pharmaceutical company to be listed on the Karachi Stock
Exchange in 1951. GSK Pakistan operates mainly in two industry segments:
Pharmaceuticals (prescription drugs and vaccines) and consumer healthcare
(over-the-counter-medicines, oral care and nutritional care). In Pakistan, the
Company deals in Anti-infective, Respiratory, Vaccines, Dermatological,
Analgesics, Oncology, Urology, Central Nervous System, Allergy,
Cardiovascular and Vitamins therapy areas.

GSK is committed to their mission of providing patients quality products to

help improve the quality of their lives. Some of the leading pharmaceutical
brands include Augmentin, Seretide, Amoxil, Velosef, Zantac and Calpol and
renowned consumer healthcare brands, which include Panadol, Horlicks,
Sensodyne and ENO. Prominent vaccines include Synflorix, Infanrix Hexa,
Rotarix, Havrix and Priorix Tetra.

Today GSK Pakistan is highly successful business with 11% of the value and
over 18% of the volume share. Major competitors are MNCs such as Abbott,
Novartis, Pfizer, Sanofi Aventis. GSK Pakistan has built a competent
commercial capability with a track record of successfully integrating the BMS,
UCB, and Stiefel businesses, and building a diverse and profitable business of
over 150 brands. GSK Pakistan presently employs about 2,300 persons across
its Sales, Global Manufacturing Services (GMS), Pharma division and
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Consumer Health Care functions. Global Manufacturing Services (GMS) in
Pakistan consists of three facilities - West Wharf, SITE and Korangi in
Karachi.

GSK Pakistan (SITE )

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GSK Pakistan Vision, Mission & Values
VisionK’s vision is inspiring:
“The opportunity to make a difference to the millions of
lives everyday”
Each and every member of the GSK family plays a vital role in improving the
quality of human life. GSK’s growth and development can be attributed to the
contribution of the skills, talents and ideas of its people. GSK follows its core
values of respect for people, patient, focused, transparency and integrity. We
are proud of our commitment that enables us to enhance the quality of peoples’
lives and helps us to provide them.

Mission
“Do more, feel better, live longer”
At GSK our mission acts as an underlying principle to whatever we do. We
follow a legacy of great science and innovative healthcare that provides
people around the world with healthier and fulfilled lives, every single day.

Valuesh q
At GSK respecting each other is the key to progress and growth for our
business, employees and customers. Our employment practices are designed to
create a culture, in which all GSK employees feel valued, empowered and
inspired to achieve our goals.

Patient Focused
Our commitment to our purpose of improving the lives of billions ensures that
all our efforts, be it research, manufacturing or distribution are geared towards
improving patient access to quality health solutions.

Transparency
As our business evolves to meet global challenges, so do our existing systems
for which transparency is integral. By being transparent about what we do and
how, we earn and build trust.

Integrity
Our guiding principles go beyond complying with legal and ethical regulations.
Each member of the GSK family takes pride in doing what is right for the

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patients and consumers, placing them at the heart of every decision we make. In
doing so, we demonstrate integrity in action, at every level, everyday.
OUR ASSIGNEMNT AT GSK Pakistan
Out goal was to study the Inventory Management at GSK with reference to
Cost & Managerial Accounting. The manufacturing site visited by us has
occupied 26 acre land but now 4 to 5 acre is active. They are running 2 plants
BPM (Basic Pharma Manufacturing) and the other one is Cephalosporin Plant
in which cephalosporin is a life saving drug and is an active ingredient. GSK
believes in mending lives and healing hearts.

Research Approach:
In according with the objective of the research, both qualitative and quantitative
approaches were employed. This mixed method research considered the
qualitative approach to explore the situation inventory management practice ,
and employed quantitative approach and techniques to analyze and interpret
cause –effect relationship between inventory management and financial
performance, where inventory management was considered as the independent
variable.

Data collection tools:

A data requirement model was formulated to collect information regarding
sales, inventory supply (including inventory segments information), inventory
costs, lead- time etc to conduct the EOQ analysis to find out the comparative
financial performance at pharmaceutical industry Besides this quantitative tool,
an interview schedule with close-ended items was designed to get a detail
insight on this issue.

Data collection Method:

Data was collected from both primary and secondary sources; Primary data was
collected by executing an inventory management schedule and Questionnaire.
Secondary data: Annual report and inventory statement of GSK and annual
reports of three competing pharmaceutical organizations were reviewed as
important secondary source of annual financial information. Moreover, GSK,
Website remained as a useful source.
.
Data Analysis and Interpretation:
To explore the inventory management scenario, profitability analysis, EOQ
analysis and inventory turnover ratios were found appropriate. Monetary values
of quarterly operations were used as inputs for these two quantitative analysis
models. Simple mathematical tools (ex. percentage, ratio) were used to analyze
and describe the individual and comparative financial performance. In order to
identify the level of effect on inventory management on financial performance,

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where inventory management was considered as the independent variable and
financial performance was considered as the dependent one.

INVENTORY
Inventory is the working asset, held for eventual sale by a firm and is the stock
of the product a company is manufacturing for sale and the components that
make up a product. In general, inventory exists in three forms; raw materials,
work in progress and finished goods. Raw materials are the basic inputs that are
converted into finished goods through the manufacturing process. Work in
progress is semi-finished products. They are the products that have been
partially finished. Finished goods inventory refers to those units that are
complete and ready for sale.

Inventory Management:
Inventory management refers to the process of managing the stocks of finished
products, semi-finished products, and raw materials by a firm. Inventory
management, if done properly, can bring down costs and increase the revenue of
a firm. Ideal level of investment in inventory management depends on the
volume and value of inventory as a percentage of the total assets of a firm. The
importance of inventory management varies according to industries. For
example, an automobile dealer has very high inventories, sometimes as high as
50 per cent of the total assets, whereas in the hotel industry it may be as low
as 2 to 5 per cent. (KILAMA, ACAYE PHILIP, 2011) Inventory management
process is a continuous arid complex one. ‘Specialized staffs are required to
employ for efficient inventory management.
For manufacturing organizations, this management process begins as soon as
the production is started and raw materials are ordered. Inventory
management systems are used to establish when to place orders and in what
quantities, these management systems have an objective of minimizing
investment in inventory without necessarily impairing production. The aim of
inventory management is to manage and maintain uninterrupted supplies of
inventories for ongoing operations at the minimum possible cost.
Inventories constitute the most significant part of current assets of large number
of firms. Management of inventory requires considerable amount of planning
and funds. Transactions, precautionary and speculative motives, influence firms
to practice a Held inventory policy Kilma (2011) explains the transaction
motive is aimed at facilitating smooth sales operations, while precautionary
motive involves holding inventory to guard against unforeseen or unpredictable
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changes in demand and supply forces in the market, and speculative motive
indicating holding either excess or shortages stocks to take advantage of price
fluctuation.
Economic Order Quantity (EOQ)
Economic order quantity (EOQ) is the order quantity of inventory that
minimizes the total cost of inventory management. Two most important
categories of inventory costs are ordering costs and carrying costs. Ordering
costs are costs that are incurred on obtaining additional inventories; they include
costs incurred on communicating the order, transportation cost, etc. Carrying
costs represent the costs incurred on holding inventory in hand. They include
the opportunity cost of money held up in inventories, storage costs, spoilage
costs, etc. Ordering costs and carrying costs are quite opposite to each other. If
we need to minimize carrying costs we have to place small order which
increases the ordering costs. If we want minimize our ordering costs we have to
place few orders in a year and this requires placing large orders which in turn
increases the total carrying costs for the period. We need to minimize the total
inventory costs and EOQ model helps us just do that. An Economic order
quantity (EOQ) could assist in deciding what would be the best optimal order
quantity at the company’s lowest price. (Gonzalez, March 2010) Gonzalez, in
this study indicated an analysis of Economic Order Quantity and Reorder Point
Inventory Control Model could resolve the forecasting issues and improve
financial performance of a certain organization.

Inventory turnover ratio:

Inventory turnover ratio of a firm is the cost of goods sold to its average
inventory level, which is commonly used to measure performance of inventory.
Managers compare inventory productivity across retailers, and assess
performance improvements over time.

Objectives of Inventory Management:

The primary objectives of inventory management are:
• To minimize the possibility of disruption in the production schedule of
a firm for want of raw material, stock and spares
• To keep down capital investment in inventories
So it is essential to have necessary inventories. Excessive inventory is an idle
resource of a concern. The concern should always avoid this situation. The
investment in inventories should be just sufficient in the optimum level. The
major dangers of excessive inventories are:

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 • The unnecessary tie up of the firm’s funds and loss of profit.
• Excessive carrying cost, and
• The risk of liquidity.
The excessive level of inventories consumes the funds of business, which
cannot be used for any other purpose and thus involves an opportunity cost. The
carrying cost, such as the cost of shortage, handling insurance, recording and
inspection, are also increased in proportion to the volume of inventories. This
cost will impair the concern profitability further.

On the other hand, a low level of inventories may result in frequent

interruptions in the production schedule resulting in under-utilization of
capacity and lower sales. The aim of inventory management thus should be to
avoid excessive inventory and inadequate inventory and to maintain adequate
inventory for smooth running of the business operations. Efforts should be made
to place orders at the right time with the right source to purchase the right
quantity at the right price and quality.
The effective inventory management should
• Maintain sufficient stock of raw material in the period of short supply and
anticipate price changes.
• Ensure a continuous supply of material to production department
facilitating uninterrupted production.
• Minimize the carrying cost and time.
• Maintain sufficient stock of finished goods for smooth sales operations.
• Ensure that materials are available for use in production and production
services as and when required.
• Ensure that finished goods are available for delivery to customers to fulfil
orders, smooth sales operation and efficient customer service.
• Minimize investment in inventories and minimize the carrying cost and
time.
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 • Protect the inventory against deterioration, obsolescence and
unauthorized use.
• Maintain sufficient stock of raw material in period of short supply and
anticipate price changes.
• Control investment in inventories and keep it at an optimum level.
Inventory management, therefore, should strike a balance between too much
inventory and too little inventory. The efficient management and effective
control of inventories help in achieving better operational results and reducing
investment in working capital. It has a significant influence on the profitability
of a concern.

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Key substances of Inventory Management at GSK Pakistan Ltd.
Like all other assets, inventory represents a costly investment to the firm. In
order for this investment to be worthwhile there must be some advantage in
making it. Inventory is divided into mainly three types:

Raw Material Inventory:

Having an available stock of raw materials inventory make production
schedule easier.
To keep raw materials inventory is to avoid price changes.
Keep extra raw materials inventory to hedge against supply shortages.

Work- In- Process Inventory:

Keep work-in-process inventory beyond minimum level to Buffer production

Finished goods Inventory:

Keep finished goods inventory to provide immediate service.
Keep finished goods inventory to stabilize production.

Purpose of Inventory Management at GSK Pakistan Ltd.

The firms keep a supply of inventory for the following reasons are:
To maintain independence of operations.
To meet variation in product demand.
To allow flexibility in production scheduling.
To provide a safeguard for variation in raw material delivery time.
To take advantage of economic purchase-order size.

Key Functions of Inventory Management Systems at GSK Pakistan Ltd.

The key functions of the inventory management systems are :
To ensure material is available.
Receipts, custody, and issue of materials.
To recording the record of all stock movements.
Co-ordinate with management, maintenance, production, marketing &
finance departments and other departments in the company for meeting their
requirements for materials and spares.
Assist in devising management reports.

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Types of Inventory at GSK Pakistan Ltd.
There are various types of inventory. Some of them are given below, Such as:
Raw Material
Work-in-Process.
Finished Goods
Packing Material
Laboratory and Promotion Material
Stock of Stationery (Packaging Material).
Physician Sample

Raw Materials:
The raw materials inventory contains items that are purchased by the firm from
others and are converted into finished goods through the manufacturing
(Production) process. They are important input of the final product .

Work-in-Process:
The Work-in-Process inventory consists of items currently being used in the
production process. They are normally partially or semi-finished goods that are
at various stages of production of multi-stage production process.

Finished Goods:
Finished goods represent final or completed products, which are available for
sale. The inventory of such goods consists of items that have been produced but
are yet to be sold.

Packing Materials:
The packing materials inventory contains of material packing related goods,
which things are used for the purpose of packing materials. Mainly packing
materials used for the purpose of cover the final products or to give it an
attractive look.

Laboratory & Promotional Materials:

Laboratory and promotional material refers that which goods or materials are
used for the purpose of laboratory and promotional activities. Usually this type
of material used inside of the organization.

Packaging Material

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Packaging Material refers to the material used in preparing goods for transport,
warehousing, logistics, sale to distributors etc.

Goods-in-Transit
Goods that have been dispatched from the warehouse ( shipping point) but
have not yet arrived at the delivery point.

Product quantity, which is the average of latest 3 months’ sale, is ordered by

the primary customer ZPL. Besides, GSK processes shipment of pharmaceutical
finished goods to other country organizations as per ordered by the global
organization. Both accounts payables, accounts receivables and labor costs or
employee payroll are recorded in the general ledger, which accordingly affects
the company budget.

All of the respondents identified high COGS as one of the reasons behind the
diminishing revenue and GPM. GSK focuses immensely on the quality of raw
materials and machine equipment. Most of these two categories are imported,
which is a major reason behind high shipping and ordering cost, as well as high
inventory value.

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Inventory Management Flowchart

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Economic Order Quantity Analysis:
The EOQ model considers the tradeoff between ordering cost and storage cost
in choosing the quantity to use in replenishing item inventories. This cost
minimizing order-quantity called EOQ, is the order point at which total cost and
order cost is minimum than other ordering quantity).

Followings are assumption for calculating EOQ:

Relatively uniform & known demand rate
Fixed item cost
Fixed ordering and holding cost
Constant lead time Annual sales unit = annual inventory units

This study calculated the annual EOQ s for years 2012, 2013 and 2014 by using
this formula
EOQ = √[( 2*D*K) / (H *P)]

Here, K= Ordering cost per order

D= Annual demand of inventory (raw materials and packing material) in
units
H= Holding carrying costs expresses as a percentage of inventory value
P= Purchase price the firm must pay per unit of inventory
Ordering period (Practicing) = 2 weeks

Assumption was made that, annual/quarterly finished goods amount is the total
amount desired to be sold. As no interest rate is paid for COGS (fully equity
financed),current average FDR rate practice by the commercial banks ( 11.395)
was considered and calculated as the opportunity cost, Annual carrying cost
18.39% on inventory value was calculated based on the cost information
provided by GSK . Average selling price per unit for years 2012, 2013 and 2014
were respectively 140,175 and 110 as par the information provided by GSK:

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Description Year 2012 Year 2013 Year 2014
Cost per order 4,856,847.15 4,250,019.54 5,463,674.75
Annual Demand 114,194 164,562 155,532
Value of inventory per 2,570 3,257 2,993
unit

Inventory Carrying cost .31% .27% .29%

rate

Number of units 5,000 5,000 5,000

produced per batch

Cost of carrying 2,022,901.61 2,183,808.31 2,160,829.73

inventory

Cost of orders 110,924,560.59 139,878,343.16 169,955,252.24

Total Inventory carrying 112,947,462.20 142,062,151.47 172,116,081,97
cost& Setups

EOQ 37,025 40,016 44,343

Times of orders required 3 4 4

The excel calculation of EOQ reveals , 37025, 40016 and 44343 units were
respectively the cost minimizing order quantity for the years 2012,2013 and
2014. Highest cost per order, total cost of orders, total cost of inventory carrying
and setups and EOQ was experienced on year 2014. In contrast to that, annual
demand and per unit inventory value were seen on year 2013. Inventory
carrying cost rate was highest on year 2012.
The growth in EOQ over years seems relatively stable. However, times of
inventory required calculated by the study for the year 2012 (3 times) is longer
which may indicate inventory damage or obsolete rate.

Analysis revealed for year 2014 units of sales raised significantly, while EOQ
declined sharply as well. On the other hand, year 2012 experienced as increased
EOQ along with decreased annual net sales. This indicated no straight
interrelationship between EOQ and annual net sales. Large order-quantity

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reduced ordering frequency, and hence ordering cost month, but requires
holding a larger average inventory, which increases storage cost month. On the
other hand, a smaller order- quantity reduces average inventory but requires
more frequent ordering and higher ordering cost/month.

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