Inventory Management Part I — The Basics
Part I in a three part series: are you controlling your inventory, or is your inventory controlling you?
There’s some great advice out there on practice management, business budgeting, and even inventory itself, but is it keeping up with the reality of day to day management? The fact is, different practices operate on different schedules of equipment updates, busy seasons, and client expectations, and that changes the way the inventory can be managed. At Vetcove, our job is to make sure you’re meeting the needs of your practice — whatever those may be — in the most efficient and profitable way. So, we’ve come up with a series on inventory management — what it entails, how to make it more efficient, and the pros and cons of different systems. We hope you can take some of these tools and implement them into your own practice. As always, if you have any questions, don’t hesitate to live chat or email us any time!
PART I — The Basics
Practice managers and veterinarians in the know have heard the numbers — 25% of revenue goes to inventory purchase; pet food should be marked up 40%; prescription drugs make up 50% of inventory costs. You might even have heard the deep tracks — turn rates should be 3–4 for drugs, shelf life of food should be limited to 30 days — but what do all these numbers mean? How do you put them to work for your clinic?
First things first — you have to streamline inventory if you’re going to maximize its efficiency. Bloated stocks of supplies — some of which must be nearing expiration — and drugs that aren’t getting used can tank revenue over the course of a fiscal period. Most vets and managers know their inventory situation isn’t in perfect shape, but often times it’s overwhelming to do anything about it — in some cases, products have been sitting in storage for years, in others there are literally thousands of individual items to account for, and someone is going to have to go through that box of mixed syringes, sort them, and count every one. And with the usual level of business in most practices it’s just not possible to dedicate that time to something so trivial as inventory — right?
At Vetcove, we believe it’s well worth your time. Because inventory does not appreciate in value, it is an asset, not an investment — which means it’s not making you any money just sitting on the shelves. Money that’s wasted on excess stocks and lost supplies is money that could be going toward increasing practice value by adding machines or instruments, hiring new staff, or updating and improving the overall client experience. On the other hand, clinics that move through inventory quickly know how important it is to have reserves of the supplies used frequently — because nothing is worse than having to divert business out of your pocket because you ran out of that capsule size of clindamycin or that correctly sized E-collar. Clearly, it’s balance — and the only way to find that balance is to know what you have on hand already.
So here are a few critical concepts to get you started.
Turn rate — this is the rate at which a particular good gets sold in a practice — in other words, how often you have to order it. For prescriptions in bulk (antibiotics, big vials of injectables), aim for around 4x per year — that is, whatever your normal order amount is, you should order it around once a quarter. If your normal stock couldn’t last that long, consider increasing the amount you order at once to make sure you don’t run into shortage problems — especially for your go-to items. For food items, the turn rate is much faster — around 2x per month, or 24x per year. Food, both prescription and OTC, is a great revenue stream for your clinic — we’ll talk about that more in a later post. But it’s also a bulky item that takes up a lot of lobby or storage space. Make sure you’re moving food effectively by ordering it more often.
Shelf life — This is the amount of time any product spends on the shelves — from the time it arrives to the time it’s sold or discarded. Shelf life is a critical component of maintaining a great inventory, but many clinics don’t realize how much stuff is staying on the shelves each week, month, and year — contributing to huge losses in wasted product and opportunity costs wasted on items that don’t serve your practice. Want to find out what your shelf life really is? Mark every item in the clinic — that’s every item, including every bag of food, box of syringes, and bottle of NSAIDs — with a sticker, a tag, or a marker. Then, a week later, walk around the clinic to see how many marked items are still around — if there’s a product that has no marked items left, you may need to increase your ordering of it to prevent an interruption of supply. Walk around again at the 30 day and 90 day mark. Most everything that was marked should be gone by 90 days — if it isn’t it, it may be time to reevaluate the use or volume of that item.
Sunk cost — this refers to expenses that you can’t recover. Anything bought for inventory is a sunk cost (unless it is returned to the distributor or manufacturer) — including anything that expires, is lost, or is wasted. A huge problem in a lot of clinics surrounding sunk costs is duplication of similar products. In our best efforts to provide our clients (or doctors) with their preferred products, we stock too many options, and then aren’t able to use any of them efficiently. Does the clinic really need to carry three brands of shampoo in three different scents each for patients with itchy skin, or eight combinations of antibiotic eyedrops with no ophthalmologist on site? What about those five kinds of oral solution antibiotics that sit in the fridge and expire a week after mixing? Of course, there is a necessity in veterinary medicine for some overlap — our patients come in all sizes and species and naturally have different medical needs. But if your clinic inventory is getting out of control, or your waste/loss is higher than you’d like, consider if you are following the 80/20 rule (read on below if you’re not sure what that is!)
80/20 Rule — simply put, 20% of your clients generate 80% of your sales. It’s surprising to hear the first time, but almost every kind of sales — including veterinary medicine — functions this way. This means that if you have a high degree of duplication, as above, serving only a few, infrequent clients, you may not serving your practice’s best fiscal interests. Additionally, when investing in new products, it’s important to follow up with them to see if they are selling, especially to the top 20% of clients — those coming back routinely, for the life of their pet. How do you make sure you’re serving this critical group of clients? Ask them what they want! What do they buy at pet stores or big box retailers or online that you could stock in your clinic lobby? What would be convenient for them to pick up annually or biannually at your office, saving them an additional trip? What new products have they wanted to try that they can’t find in more mass-market type stores? Similarly, look at your invoices to determine what your top 20% goods sold are — and make sure these are , easily visible to clients on their way in or out, affordable relative to competing retailers, and never in short supply.
Inventory may seem overwhelming, but with a few simple tools and dedication of time, you can fix inventory problems, or stop them from turning up in the first place. Remember, inventory sales, up or down, do not change labor costs — this means that one of the easiest ways to generate revenue without additional expense at your practice is to increase inventory sales, and decrease inventory loss. Inventory sales makes up around 25% of revenue of most practices, and purchasing is the second highest cost to a clinic after the cost of employees — meaning it’s worth the extra effort to keep tabs on it.
Want more? Read Part II of this series here.