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Inventory Systems: GlaxoSmithKline Harry Smith QRB/501 September 20, 2011 Amanuel Gobena Inventory Systems: GlaxoSmithKline GlaxoSmithKline (GSK) is the world’s third largest pharmaceutical manufacturing company of over-the-counter and prescription medications, vaccines, oral health care products, and nutritional drinks. Common products manufactured by GSK are the H1N1 flu vaccine, Zantac, Paxil, Wellbutrin, Sensodyne, Crest toothpaste, Nicoderm patch, and boost energy drink, (GSK Annual Report, 2010). Last year’s sales reported growth margin up 4.5% at $48 billion; common products and medications used by consumers globally (e.g. H1N1 flu vaccine, Nicoderm patch, Zantac) contributed to GSK’s top sales. Currently, GSK has over 90,000 employees and operates worldwide. GSK is headquartered in Brentford, United Kingdom, (GSK Annual Report, 2010). GSK’s annual reporting of its net sales, gross profit margin, capital gain and loss is reported on a quarterly and annual basis to its stakeholders (e.g. shareholders, investors, board of directors, and the public) via its financial statements in December. In this paper the subject discussed will be GSK’s use of first in, first out, (or FIFO) inventory system, advantage, and disadvantage of using FIFO inventory system. This paper will also examine and display collected winter and summer historical inventory data in the attached report (Appendix A). First in, First out Inventory System GSK use a mix of inventory systems: Bar code for tracking and shipping product and first in, first out (FIFO) for accounting, tracking, and reporting sales, sales loss, and net profit gain. As reported on GSK financial statement, the cost to manufacture goods (e.g. raw materials, direct labor, and other overhead cost) plus net realizable value plus assets, such as, pre-launch product (medications awaiting FDA approval) are held as assets and listed under the asset column of the financial statement. Once approved by the FDA and cleared by internal and external quality assurance auditors, a product is reversed and deemed safe for public use/consumption; manufactured products are shipped directly to stores and distribution centers for sales. GSK rely on first in, first out inventory systems to manage and track their assets and manufactured goods. As a result of having a short shelf life, drugs and pharmaceutical products are perishable goods with very specific expiration dates that lose value over time because they lose potency. If a company retains stock for long periods of time (e.g. one years) and stock remains un-liquidated, the excess inventory may equate to profit loss. Baldenius and Reichelsten (2005) describes first in, first out inventory system as “a firm’s objective to maximize the present value of cash flows net report by a manager and constantly replacing sold product and moving product off the shelf,” (p. 1033). Advantages and Disadvantages of FIFO The advantage of FIFO is that stock is constantly moved and removed from cost ledger, thus minimizing profit loss that stems from the shelf life of medications expiring. Product movement is ongoing and consistent resulting in lowered expense to the business warehousing or storing a product. The disadvantage of FIFO is the system becomes obsolete and complicated when a supplier experiences frequent return to stock as a result of sales returns or pricing change which harbors poor sales and discounted merchandise. References Baldemius, T., & Reichelstein, C. (2005). Incentives for efficient inventory management: The role of historical cost. Management Science, 51(7), 1032-1045. Retrieved from http://www.ebscohost.com GlaxoSmithKline. (2010, December). GlaxcoSmithKline Annual Report 2010. Retrieved from http://www.gsk.com Inventory Disclosure (APPENDIX A) GlaxoSmithKline PLC, Statement of Financial Position, Inventory USD $ in millions, translated from GBP £ | | Dec 31, 2010 | Dec 31, 2009 | Dec 31, 2008 | Dec 31, 2007 | Dec 31, 2006 | | Raw materials and consumables | 2,256 | 1,864 | 1,648 | 2,192 | 1,496 | | Work in progress | 1,156 | 2,323 | 1,893 | 1,530 | 1,226 | | Finished goods | 2,493 | 2,383 | 2,389 | 2,353 | 2,051 | | Inventories | 5,906 | 6,571 | 5,930 | 6,075 | 4,773 | Source: Based on data from GlaxoSmithKline PLC, Annual Reports Item | Description | The company | Raw materials and consumables | Aggregated amount of unprocessed materials to be used in manufacturing or production process and supplies that will be consumed. | GlaxoSmithKline PLC's raw materials and consumables increased from 2008 to 2009 and from 2009 to 2010, (GSK Annual Report, 2010). | Work in progress | Carrying amount as of the balance sheet date of merchandise or goods which are partially completed, are generally comprised of raw materials, labor and factory overhead costs, and which require further materials, labor and overhead to be converted into finished goods, and which generally require the use of estimates to determine percentage complete and pricing. (GSK Annual Report, 2010). | GlaxoSmithKline PLC's work in progress increased from 2008 to 2009 but then declined significantly from 2009 to 2010, (GSK, 2010 Annual Report). | Finished goods | Carrying amount as of the balance sheet date of merchandise or goods held by the company that are readily available for sale. | GlaxoSmithKline PLC's finished goods declined from 2008 to 2009 but then increased from 2009 to 2010 exceeding 2008 level. | Inventories | Carrying amount (lower of cost or market) as of the balance sheet date of inventories less all valuation and other allowances. Excludes noncurrent inventory balances (expected to remain on hand past one year or one operating cycle, if longer). | GlaxoSmithKline PLC's inventories increased from 2008 to 2009 but then declined significantly from 2009 to 2010. (GSK Annual Report, 2010). |