Do the math
Proper inventory management is more than just tracking products that come in the door and go out. Sloppy recordkeeping and poor decision making can be costly.
Inventory management is a challenge for most veterinary practices. How much is enough, and how much is too much?
Managers and nurses spend a great deal of time in this area, whether tackling the job themselves or managing others who do it. Wouldn’t it be great if the efforts were rewarded? They can be by using some simple strategies.
There is much more to managing inventory than placing and receiving orders. You want to ensure that:
- Items are available when needed.
- Overstock is controlled.
- Reports are accurate.
- Guidelines are in place for adding products.
- Adequate markups and pricing are done.
- Budgets are adhered to.
- Turnover rates are appropriate.
- Protection measures are maintained.
How Do You Compare?
The first step in getting a handle on inventory is to figure out your status. Look at financial statements to see the percentage of monthly revenue being spent on inventory items. Drugs and medical supplies are typically the largest inventory expense and among the most difficult to control.
Benchmarks are available from sources such as the “The Well-Managed Practice” and should be used as a guideline for acceptable inventory costs. The purpose of benchmarking is to understand what is “normal” in veterinary medicine and to provide guidance when setting goals. Compare your numbers. Once you have a feel for your situation, the next step is to enact systems to manage inventory levels.
Out-of-control inventory can have many causes. A lack of time and training and inadequate software use are the most common reasons. Make inventory management a priority. Think of inventory as money sitting on the shelf. Inventory is an asset, and like any other asset it needs to be controlled and protected.
Start with your reports. Print a complete inventory list and then clean it up by:
- Deleting or inactivating obsolete products.
- Checking for and consolidating duplicate items.
- Making sure everything is correctly classified.
- Removing or reclassifying medical supplies that cannot be tracked accurately.
Limit the Choices
Address the issue of duplicate products with the doctors. If you have several products that accomplish the same thing — whether they are heartworm medications, flea and tick products, antibiotics or NSAIDs — the doctors should be able to agree on which ones you need to keep in stock.
When new products become available, careful consideration should be given before they are added to your inventory. If the new item can replace your current one, there is no reason to carry both. Perform a review based on best medical practices and carry only the products that support that philosophy. Other products can be made available through your online pharmacy. You can still provide the products your clients may demand and not carry them on your shelves. This applies to diets as well.
Once the cleanup and consolidation are complete, the next step is to physically count what you have on hand. Update your software with the correct inventory totals as they will be your starting points going forward. All items received must now be entered into the practice management software. As items are dispensed, sold or used in house, they will be tracked within the software. You will now have a reliable accounting of product movement.
Accurate reports are essential in inventory management. It is truly a garbage in, garbage out scenario from this point on.
What Should You Charge?
Factoring in all costs when pricing your inventory is important. You need to consider both the soft and hard costs. Personnel time, storage and other ancillary expenses must be taken into account. Appropriate markups will address these costs. Here are benchmarks that will help you determine an appropriate pricing strategy:
National Average Markups
- Meds dispensed: 150%
- Meds administered: 150%
- Flea/heartworm: 100%
- Chronic conditions: 100%
- OTC items: 120%
- Oncology: 150%
- Rx diets: 45%
- Non-Rx diets: 38%
Consider other costs as well. Dispensing fees are generally added to anything transferred from its original container and counted, measured or reconstituted. This fee covers the nurse’s time, vial, label and printer costs, pharmacy fees and licenses. The national average is $7 to $9. A labeling fee should be added to any prescription item dispensed in the original package. This fee would be appropriate for products such as prescription shampoos, heartworm and flea control products, and certain NSAIDs. The typical fee is 25 to 30 percent of your dispensing fee. Your safety net would be the minimum prescription charge, which is the lowest fee for which a prescription will be sold. The average is $12 to $13.
A budget is important when establishing inventory management goals. To get started, compare your historical inventory expenses against the benchmarks available to you. Project your income and your expenses. Keep in mind that many expense problems are the result of income problems. Correcting income issues should be your focus in order to bring a new level of financial health to the practice. Look at your inventory expense as a percentage of income or revenue.
Attention to turnover rates, lead time and reorder points will help control overstock while ensuring that items are available when needed. The ideal turnover rate for most inventory items is 12 times a year, or once a month. With good inventory management processes, you should be able to order weekly the items most used. Ordering more frequently is not cost effective as it results in increased staff time. Consider a large monthly order for the “must haves” that you are certain to use within the month. With good inventory management, you will sell or use the items before you have to pay for them.
The potential for shrinkage is an issue when inventory is stocked in-house. Inventory protection is important. Factors that contribute to shrinkage include items that become damaged or outdated or grow legs. Store your items appropriately and closely monitor expiration dates. Establish a first-in, first-out inventory rotation policy.
Theft is a common shrinkage factor and is something that happens at most practices. Security measures will minimize this scenario. Limit access and lock up your expensive inventory items, such as heartworm and flea products.
Proper inventory control systems are essential for every practice in order to manage your income and expenses. They will bring positive financial results to your practice.
Getting Technical columnist Sandy Walsh is a practice management consultant, speaker, writer and instructor for Patterson Veterinary University.