How Controlling Inventory Helps the Bottom Line
Louise S. Dunn, Snowgoose Veterinary Management Consulting, Pfafftown, North Carolina
Most practice managers know inventory is the second-largest expense for a veterinary practice1; however, many are at a loss when it comes to controlling this expense.
Successfully managing the cost of goods (COGs) is the golden ticket for a profitable practice and involves monitoring income from various profit centers, costs, and ratios; knowing the top 20% of inventory items that generate 80% of sales; and knowing how to make strategic changes and how those changes affect the practice. But remember change is not only about increasing the price of services or inventory items but also fine-tuning inventory processes, protocols, and procedures, and ensuring team members understand how their actions impact inventory management.
The Three Ts of Inventory Management
Team Involvement
Tracking Metrics
Transforming the Inventory System
If a review of the practices inventory reveals chaos (eg, outdated drugs, the same drug listed under 2 or 3 different names, pricing that does not cover costs), the inventory manager needs some help. Focus on the 3 Ts of inventory management: Team Involvement, Tracking Metrics, and Transforming the Inventory System. Each step impacts the others, so each must be given equal focus.
Steps to Tame Inventory Chaos
Identify the practices strengths and weaknesses in the three Ts.
Develop an action plan for correcting flawed processes.
Optimize the three Ts to gain control over inventory.
The Team
Inventory is about more than bottles of drugs on a shelf; it is also about the team. Consider the following questions:
Who is on the inventory team? Is it a team of 1 or many?
Who is in charge? Who establishes rules and fixes errors?
Is the entire practice team trained in inventory awareness?
An inventory team of more than 1 is preferable.
From an operational standpoint, an inventory team of at least 2 people is best to mitigate the risk of omission, error, or theft, and ensure the practice is not solely dependent on 1 person.
Know the required tasks.
Team members must be equipped with clear expectations when managing one of the largest practice expenses. Consider creating a job description listing the following tasks for the inventory coordinator(s):
Train the rest of the team
Monitor turnover rates
Negotiate with vendors
Order and receive inventory
Stock
Price
Oversee controlled drugs
Manage the online pharmacy
Follow practice budget limits
Make sure inventory team members have access to additional training resources and are equipped with the information they need to succeed. (See Resources, under References.)
Spell out the process.
The inventory coordinator must be familiar with the nuances of inventory management; he or she must know when to order, whom to order from, how to price items, how to list the items in the practice management system (eg, per tablet, per bottle, per injection, according to profit center), and what to do in special circumstances (eg, purchasing large quantities, vendor incentive programs, vendor gifts). These policies and procedures should be written out and easily accessible to simplify new team member education and to hold all team members accountable.
Involve the whole team.
This does not mean every team member has carte blanche to order; it means ensuring the rest of the team understands how to keep inventory under control. Train the team to recognize low inventory and notify the inventory coordinator when items need to be ordered. When team members attend conferences, ensure they know what details to gather about new products and who in the practice will need the information to make ordering decisions.
The whole team should be educated on all inventory protocols and procedures, including the following:
Which drugs are or are not being used
When a new drug is coming in or replacing another drug
Which drugs are on backorder and what to do until the backorder is resolved
How to properly document the use of controlled drugs
Where errors have occurred when invoicing medications
How to avoid repeating errors
Making Changes
Which comes first: the inventory coordinator? Protocols and procedures? Job descriptions? Team training? The answer depends on the practices current inventory needs. Consider the following examples:
If an inventory coordinator is not in place, write a job description first and interview team members to find the right person for the job.
If inventory errors are being made, review the practices procedures and protocols, update them if necessary, inform the team of changes, and enforce the rules.
Every team member has his or her hands on the inventory, so keeping everyone informed is essential.
Metrics for Tracking Inventory
Tracking inventory requires the team to identify the key metrics that need to be monitored, collect data, and use the data to inform protocols, procedures, inventory, patient care, and practice success. The primary metrics and categorization techniques for tracking and managing inventory are KPIs, COGs, and ABC Analysis.
Glossary
ABC Analysis is an inventory categorization technique that sorts items by their value to the practice and resulting level of control. This technique is used to identify the top 20% of items that result in 80% of sales. The goal of ABC analysis is to help the inventory coordinator manage items that are most important to the business. Items in the A category need to be managed differently than items in the C category (eg, items the practice simply cannot run out of vs items that have substitutions if the practice runs out). Critical items on the A list will require more time to monitor than items on the B or C lists.
Cost of Goods Sold (COGs) refers to the cost of materials used to provide services and the cost of products sold to clients.
Key Performance Indicators (KPIs) are metrics frequently derived from the accounting softwares chart of accounts that help determine the practices progress in achieving its goals.
Measure the data against industry benchmarks and the practices performance history. Remember, while industry benchmarks are a good starting point, a practices numbers may be better or worse than the benchmarks, meaning that monitoring the practices performance over time is also important. (See Resources & Handout: Inventory Benchmarks & Tracking Tips & Tricks.)
When using industry benchmarks, be aware of the practice types (eg, small animal practices, mixed, specialty) that provided the benchmark numbers. Each practice type will have a different percentage of inventory on hand; a good percentage for one type of practice may be too high for another (eg, general practice vs specialty practice). Consider reviewing trends from resources such as PantheraT, Simmons & Associates, and Well-Managed Practices, as well as studies from AVMA and AAHA. (See Resources.)
While inventory management is not always all about the numbers, the numbers can point to errors that need to be addressed. Errors may result from a lack of team compliance with medical protocols and procedures; for example, if an income-to-expense ratio falls lower than key benchmarks, gather the team and review procedures for ordering, pricing, and number of turns per year.
On the other hand, team members may not be following protocols (eg, recommending laboratory tests) or properly charging for inventory or services (eg, not recording charges for laboratory tests). Low income-to-expense ratio could also mean the practice lacks enough stock to sell. Consider keeping food stock edit can be great passive income.
Follow the numbers when the numbers buck the trends, flag concerns for further study.
Transforming Inventory
Transforming the practices inventory can take many forms. On the one hand, it may be about transforming the processes. On the other hand, it may be about investing in different methods for stocking or providing inventory to clients.
Inventory Processes
If the practice is having issues with inventory, reviewing and transforming processes (eg, ordering, stocking, tracking, training) may be helpful. For example:
Are current inventory processes costing more money than they save? How much time is spent on inventory every week (ie, driving up wage percentages)? Consider using bar code scanners or specific computer programs to streamline the process.
How much time is spent dispensing medications and how often does this process result in human errors? Consider reviewing dispensing procedures for inefficient and error-prone steps and adjusting the processes. For example, instead of requiring team members to find a veterinarian each time a refill is needed, consider documenting the number of refills on the initial prescription, thus reducing the amount of time spent dispensing medications.
Inventory Availability
Depending on the problems the practice is facing, transforming the way inventory items are stored and provided to clients may be necessary. How much inventory is kept on the shelves or locked in storage? Can the amount be reduced to free up valuable space? The key is to have the right number of turns on inventory and to rotate the stock regularly to prevent expired stock from sitting on shelves. Considering the high value of square footage, transforming delivery techniques may also be necessary.
Online pharmacies may simplify storage and ordering by allowing the practice to have numerous medications available without having to stock them physically. Evaluate the benefits of additional technology to monitor inventory activity and inform the team about necessary changes.
Conclusion
Inventory control is crucial to patient care and business success. Not only is inventory the second-highest practice expense, but it can also place pressure on wages, which are the highest expense (ie, hours the team spends trying to gain control). Beyond directly affecting the practices bottom line, inventory control also affects the teams ability to treat patients successfully. To effectively gain control of the practices inventory, focus on the 3 Ts: Team Involvement, Tracking Metrics, and Transforming the Inventory System.