5.3 ABC Analysis, Min-Max, Par & Reorder Points

Once the tracking system (perpetual, periodic, or want book) tells you what is on hand, the control system decides what to order, when, and how much. The PTCB Supply Chain outline names four control concepts directly: ABC analysis, par levels, just-in-time (covered in Section 5.4), and the min-max family. This section covers ABC, min-max, par, reorder point, and safety stock and how they fit together.

ABC Analysis and the Pareto Principle

ABC analysis applies the Pareto principle (the 80/20 rule) to the inventory: a small fraction of items accounts for a large fraction of annual usage value, and a large fraction of items accounts for a small fraction of value. The inventory is divided into three classes:

• Class A — A small percentage of SKUs (often ~15–20%) that account for a large percentage of annual usage value (often ~70–80%). These get tight control: frequent counts, tight par levels, close review, often daily or weekly review by the pharmacist-in-charge. Examples in a pharmacy: high-cost biologics, expensive oncologic orals, remdesivir, factor VIII, expensive controlled substances.
• Class B — A moderate percentage of SKUs (~30%) accounting for a moderate percentage of value (~15–20%). These get moderate control: regular counts and par review but less scrutiny than A.
• Class C — A large percentage of SKUs (often ~50–55%) accounting for a small percentage of value (~5–10%). These get loose control: bulk ordering, infrequent counts, larger safety stocks. Examples: most generic oral solids, OTC analgesics, simple IV solutions.

Worked ABC Example

A pharmacy totals the annual usage value (annual units used × unit cost) for ten representative drugs and sorts descending to assign classes.

Total annual usage value across the ten items is $1,940,200. Sorted highest value first, with each row's cumulative share of that total:

Applying the conventional ~80% / ~95% cumulative cut-lines: Class A is rows 1–2 — 20% of SKUs carrying 86.6% of the value. Class B is rows 3–4, which carry cumulative value from 86.6% up through 96.0% — another 20% of SKUs for 9.4% of value. Class C is rows 5–10 — 60% of SKUs for just 4.0% of value.

Two procedural points the exam can test. First, you must sort descending by annual usage value before you cut — normal saline sits at row 8 despite its large unit volume, because 8,000 bags at $0.80 is only $6,400. Second, class is assigned on annual usage value (units × unit cost), never on unit price alone and never on units alone: acetaminophen is the highest-volume item on the list and is still Class C.

What 'Control' Means in Practice

• Class A is counted frequently (often monthly or more often), kept at tight pars, and reviewed by the pharmacist-in-charge. Stockouts are expensive and carrying too much is expensive.
• Class B is counted and reordered on a regular cycle.
• Class C is ordered in bulk and counted less often; the carrying cost of extra units is low, so the pharmacy can afford a larger safety stock to avoid stockouts entirely.

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The Min-Max System

A min-max system sets two numbers per SKU:

• Minimum — the on-hand level that triggers a reorder.
• Maximum — the order-up-to level, i.e., the target on-hand quantity after the order arrives.

The order quantity when the minimum is reached is: Order Quantity = Maximum − current on-hand − on-order. (If there is already an order in transit, you subtract the on-order amount so you do not double-up.)

Example

A drug has a minimum of 20 and a maximum of 60. The on-hand quantity falls to 18, and there is no open order. Order quantity = 60 − 18 = 42 units.

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Par Level

Par level (from the restaurant and hospitality 'par' concept) is the quantity of an item that should be on hand to meet expected demand until the next order arrives. In pharmacy it is usually expressed as a number of units (or bottles, or boxes) per SKU per location. Par is not the same as the maximum — it is a target level that balances availability against carrying cost. A common formula:

Par ≈ (average daily usage × order interval in days) + safety stock

Reorder Point

The reorder point (ROP) is the on-hand level at which an order is placed. In a simple system the reorder point often equals the minimum in a min-max system, or equals par if the system uses par as both the trigger and the target. A common general formula that accounts for lead time:

Reorder Point = (average daily usage × lead time in days) + safety stock

Safety Stock

Safety stock is the buffer carried above the expected-demand calculation to absorb variability in two things: variability in demand (an unexpected surge — flu season, a local outbreak) and variability in supplier lead time (a wholesaler delay, a backorder, a short). The more variability, or the less tolerance the pharmacy has for a stockout, the more safety stock is warranted.

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How the Levers Fit Together

In a perpetual system, the PIS watches the on-hand quantity. When on-hand falls to the reorder point, the system (or the technician, prompted by the system) places an order sized to bring stock up to the par level (or to the maximum in a min-max formulation). The safety stock is the cushion that remains on the shelf while the order is in transit, sized to cover demand-and-lead-time variability during the lead time.

Worked Example

A Class A drug averages 10 units/day in usage. The wholesaler's lead time is 3 days. The pharmacy wants a safety stock of 15 units to cover variability.

• Reorder point = (10 units/day × 3 days) + 15 = 45 units.
• If the order is placed when on-hand = 45, then during the 3-day lead time expected usage is 30 units, leaving the 15-unit safety stock on the shelf when the order arrives.
• If par is set at 90 units, the order quantity at the reorder point = 90 − 45 = 45 units.

This is the kind of arithmetic the PTCB Supply Chain exam tests under the Inventory Management domain (35%).