5 problems with inventory—and how to solve them
Inventory is the second-highest expense in a veterinary practice. If you don’t properly manage inventory, it can quickly become the No. 1 expense and eat away at any profitability or potential for growth.
1. Is your problem “too much” or “not enough”?
One of the biggest sources of excessive inventory costs is overordering and carrying an excessive number of products. Combat this by evaluating your hospital’s usage and sales data to determine when and how much to order. As a general rule, when you have two weeks of stock on hand, order 30 days’ worth.
Calculate this by first determining your annual usage, divide by 12 months for your monthly usage, and divide that by two for your reorder point. In most practice management systems, you can enter the reorder points and quantities so the software will flag when it’s time to reorder a specific product. Automating this can save you time and help your hospital to be less reliant on the “want book.”
2. Is your problem “too many”?
An excessive number of duplicate products—think 10 kinds of ear cleaner or flea-and-tick preventive—can increase costs. Think about it: You keep significantly more different products on your shelves, which can quickly increase time and money in ordering, buying and managing those items.
It’s best practice to have a primary and secondary product, and then use your hospital’s online pharmacy to prescribe special order products.
3. Is your problem “too price-y”?
Several years ago, the school of thought was that price matching was a mistake, because the amount of time spent researching lower prices canceled out any possible savings. That may have changed with the debut of Vetcove, an online purchasing platform that compares your prices across all your vendors. The service can help you determine the best price, check for availability and find alternative products. Vetcove is free for independently owned veterinary practices; corporate-owned practice groups pay monthly for services that go beyond what an independently owned practice needs.
Unfortunately, prior to Vetcove, there wasn’t an efficient way to price-match. To know for sure what distributors were charging to compare prices, you needed to log into each distributor and check each individual item.
4. Is your problem “not enough info”?
An important piece of keeping your costs under control is understanding how much you’re currently spending on inventory and what you should be spending. Generally speaking, an industry-wide COGS (cost of goods sold) benchmark is 20 percent of your gross revenue. The COGS label covers a wide range of expenses, including pharmaceuticals, medical supplies, equipment, inside and reference laboratory fees, pet food, over-the-counter products and cremation services.
A budget can be an excellent tool to create a roadmap and guideline for knowing exactly how much to spend every week and month. It can be especially helpful to break the budget down into subcategories such as prescription diets; drugs and medical supplies; laboratory expenses; equipment; or any other labels helpful to your hospital.
Creating and using a budget might seem overwhelming, but there are ways to make the process easier. Quickbooks, for instance, has a great feature that will help create a budget by applying an expected growth percentage to each month for the previous year to give you budget guidelines going forward. If your accounting software doesn’t do this, you could project next year’s revenue by applying the average change in revenue over the last three years to the revenue of each month of the previous year.
For example, if your average change in revenue was 5.3 percent for the past three years, in January 2018 your revenue was $197,853.21 and your projected revenue January 2019 would be $208,339.43. To maintain at or below the benchmark of COGS at 20 percent, your monthly budget is $41,667.89. If all of your COGS expenses are under one umbrella category, visit AAHA.org for an excellent, free chart of accounts to help define your subcategories.
Setting and using a budget can take time and effort to set up, but once it’s established it will help clarify exactly what should be spent every month and keep your COGS at an optimal level.
5. Is your problem “not enough money”?
On the flipside of cutting inventory costs is ensuring revenue is properly captured. If there are consistently charges missed or discounted items, your costs will seem relatively high.
One advanced tool for recapturing revenue is a record-keeping inventory cabinet like Cubex, which integrates with your practice management system to allow the dispensing of only ordered products and can act as a double-check system to ensure there are no missed inventory charges.
Outside of using a dispensing system, setting up clear protocols and procedures is crucial—for example, a sample chart or standard for exactly what should be included when a patient is hospitalized for a single day or multiple hospital stays.
Another key piece many hospitals miss? Keep the pharmacy area as stress- and distraction-free as possible. For example, limiting small talk, music playing or other distractions can really help team members focus on the five rights of the patient: the right patient, the right drug, the right dose, the right route and the right time.
Your hospital’s inventory is like a business within a business. Uncontrolled inventory directly eats into hospital profits, and properly controlled inventory can help a hospital invest in new services, expand and grow, and reinvest in the hospital and, yes, the veterinary team.