Harness your inventory


Harness your inventory

Don't get trampled by the cost of carrying an excess of drugs and supplies. Find the inventory amount that's just right.
Oct 22, 2008

If you can control a horse in the stall, why are you letting inventory problems run roughshod all over you? Keeping too much inventory in your practice or vehicle drains money right out of your bank account. The rule of thumb is that each extra $100 of inventory you keep on hand over the course of a year costs your practice a total of $8 in stocking and carrying. That's not chump change. It's time to use some simple calculations and your practice software to corral these inventory costs. I'll show you how.

Figure the right amount

How do you determine how much product to keep on hand? Look at your annual drug and supply purchases and divide that number by your inventory turns—the number of times in a year you go through your entire inventory and restock it. Most equine practitioners average five to six inventory turns per year, which means they use their entire inventory every 60 days, roughly. Let's say you spend $90,000 on drugs and supplies per year. If you use an average inventory turn ratio of 5.5 (halfway between the industry average of five and six), then the dollar amount of inventory you should maintain is $16,364 ($90,000 ÷ 5.5).

To compare your inventory turns to the industry standard, tally up the value of your inventory at the beginning and end of the year. Remember to include the drugs you hold for resale and the supplies you need for services. Add those numbers together and divide by two: that's your average inventory. Divide the total cost of your yearly drug purchases by that number. The result is your inventory turn ratio.

For example, let's say you take physical inventories at the beginning and end of the year and find that your average inventory is $26,895. Your yearly drug and supply purchases come to $90,000. Thus, your inventory turns over 3.35 times ($90,000 ÷ $26,895). That's low; it should turn over between five and six times, as we learned earlier. If you divide 365 days by your inventory turns (365 ÷ 3.35), you'll learn that your inventory turns once every 109 days. That's not quick enough—you're aiming for roughly every 60 days. You're almost guaranteed not to run out of anything with so much sitting inventory, but you're racking up needless carrying costs, possibly more than $800 over the course of a year.

Planning tool: Click to enlarge
To calculate your practice's inventory turns, use the formula at right, see the Related Links below for an interactive Excel spreadsheet, or search for "inventory calculation worksheet."

Set up a system

You may now realize—or suspect—that your inventory turns are off the mark. So what do you do about it? Enlist your software to help. Generic accounting programs such as QuickBooks possess a few functions for controlling inventory with invoicing, but they don't match what's available in veterinary-specific practice software. If you're like many equine practitioners, you're already using your software to keep track of client records, invoicing, and reminders, but you're not necessarily using the available inventory module. It's time to start.

Use this software to keep track of the vendors you use, the last price you paid on particular products, and the standard markup you're using to set the price you charge clients. You can also keep track of dispensing fees for each product and minimum prescription prices. More advanced features let you set economic reorder points and input the quantities you need to keep on hand, with alerts that let you know when an amount drops below that level. Automation is the easiest way to control your systems for ordering and using drugs and supplies.