Inventory is a key profit center for veterinary practices, significantly impacting patient care and client relationships. A well-managed inventory system is more than just stocking cupboards, it’s detailed tracking of expired products, reviewing the accuracy of inventory reports to ensure quantities on hand, mitigating inventory loss due to theft, counting inaccuracies, or damage, navigating product shortages and availabilities, and more. More than 35% of respondents in a recent VHMA study did not feel this represented their practice.
How does a practice navigate these inventory risks to ensure the best patient care and maximized profits? We’ve rounded up seven best practices to help you streamline inventory processes and navigate supplier partnerships.
Best Practices for Managing Your Manufactured (Bulk) Products Inventory
1. Understand the Difference Between Markups and Margins.
Markup will always be larger than profit margin; the two are often confused or mistakenly thought to be equal (practices set prices using markups, but mistake it for profitability). To maximize profitability, calculate the markup for each product individually rather than relying on a computer program to do a standard markup. Less expensive products can usually be sold at a lower markup than more expensive products. Periodically review purchase invoices to determine if product markups need to be adjusted.
- Markups and Margins:
- Markup = % difference between actual item cost and selling price (Price-Cost/Cost)
- Margin = % difference between selling price and profit (Price-Cost/Price)
- Example: Cost = $100; Selling price = $125; Markup = ($125-$100)/$100 = 25%; Margin = ($125-$100)/$125 = 0.2 or 20%
2. Identify Your Top Selling Inventory.
Use the 80/20 rule: Assess the top 20% of inventory sold to the top 20% of clients – both are responsible for 80% of revenue. Those items are the ones that should be prioritized for stock/availability, affordability, and convenience.
- Competition from big-box retail stores (Costco, Target) and online sites (PetMed Express) is a big challenge and has resulted in lost sales and revenue for veterinary practices. Having meds on hand can help practices compete.
- Consider color-coding and ABC methods to identify products and prevent stock shortages of critical products. Using structured methods to count inventory is beneficial in reducing shrinkage (inventory loss due to theft, inaccurate counting of unit measurement, and damage), mitigating expiration waste, and improving reorder frequency.
- Color Coding
Color Coding Example
- “Green” products = not critical: these are dispensed infrequently, easily reordered, and restocked within a matter of a couple of days; typically, about 50% of practice inventory consists of “green” products (based on units sold/used)
- “Yellow” products = valuable, medium-priority items: you need to keep a closer eye on this stock; these represent about 30% of your stock.
- “Red” products = top-selling, high-priority stock: these are the ones you should not run out of, they are used almost daily and ordered regularly. These products represent the top 20% of the products you sell/use and are determined based on your practice’s focus areas. This 20% of your inventory yields 80% of your revenues.
Categorize stock using ABC analysis, which is similar to color-coding methods: “A” is equivalent to “red,” “B” = “yellow,” “C”=” green.”
- First, categorize your inventory into one of the three groups (ABC). To do this, generate a report that tells you how much money your practice generates from the sale of each product.
- Then create a schedule for counting your inventory. Count A items weekly, B items quarterly, and C items twice annually.
3. Monitor Expiration Dates.
Pro Tip: When you partner with Epicur, we will tell you which products have a short shelf life to help you optimize your stock.
4. Save Money Without Sacrificing Quality.
Substitute less costly materials that won’t negatively impact quality and make use of bulk orders for drugs that are used in large quantities in your practice. Consider individual orders from 503A pharmacies vs bulk orders from 503B manufacturers.
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5 Actions for Easy Inventory Management
5. Set Reorder Points.
Ordering in large volumes to get a bulk discount may not always be the most cost-effective option.
- It can lead to waste from unused products.
- Disposal of expired products can be costly.
6. Determine Order Frequency and Quantity Based on the Size of Your Storage Area and Your Inventory Turnover Rate.
- Turn rate means 100% replacement of inventory due to sales.
- Turnover = Total Purchases (or Cost of Goods Sold)/Average Inventory
The ideal inventory turnover rate is 10-12 times per year. But we know inventory managers have to also consider storage space constraints, available time for inventory management, and practice owners’ concerns or demands about inventory costs and waste. It’s typical for most companion animal veterinary practices with sufficient inventory levels to turn rates of 6-8 times per year.
Is your practice seeing high inventory turnover rates? This can be caused by too much time being spent order products when that time could be more optimally spent with patients.
7. Use Software to Manage Your Inventory.
It’s common knowledge that many hospitals or clinics still manage inventory by hand. Embracing inventory management software could make a huge difference in a veterinary practice, both in controlling and managing inventory and reducing labor costs. The efficiencies created by software in time spent locating inventory, counting it, and placing orders are substantial. Moving to online or digital management also increases the prevention of out-of-stock issues, identifying theft, tracking expiration dates, and managing recalled products.
Once you have practice management software make sure your team uses it to its fullest extent! Take advantage of the benefits this software provides, including tracking order quantities, tracking inventory dispensed via prescription and medical procedure, checkpoints against your physical inventory counts, and daily, monthly, and annual gap reporting to determine opportunities for efficiencies. Many even feature expiration reports to help reduce waste. Not sure what software is best? Your supplier may be able to help – Epicur’s iFill online ordering integrates with some ERP systems.
Pet medications are trending toward becoming one of the highest growth areas in the veterinary industry. Set your hospital up for success if optimized inventory management.
