If these shelves could talk ...
I've been working more than 10 years in the veterinary industry, and I hear the same questions over and over. If you’re new to inventory management, you might find yourself asking these five questions sometime. Let’s answer ‘em!
Q. So, what’s the difference between markup and margin?
A big difference. Occasionally, you’ll see these terms used interchangeably, but that’s not accurate.
Markup is the amount added to the cost to cover overhead, indirect costs and profit to equal the price to the client. The markup is the difference between the cost to the hospital and the price to the client.
Margin (or profit margin) is the percentage difference between the selling price and the profit, and it’s less than the markup.
Both are helpful calculations in a veterinary practice. The markup helps us set prices for clients, and margin shows us the level of profit for that product.
Q. How much of everything do I need on hand?
Your overarching goal for veterinary hospital inventory is to have what you need on hand to provide the highest quality of care while maintaining (or improving!) the profitability of your practice. That means enough on hand to treat patients and selling/using it all before you need to pay for it. Generally, this means holding a maximum of 30-day supply. Exceptions might include emergency medications, seasonal items and bulk purchases.
Monitoring on-hand amounts also includes limiting the number of duplicate or similar items and staying between $15,000 to $16,000 of total inventory on hand per full-time DVM.
Q. How often do I need to reorder?
When there are two weeks of product left, order a 30-day supply. That’s a good reorder point, which is the level of inventory when your reorder and how much. Want to be more precise? Calculate the lead time—between the time you notice a product is low and the next shipment arrives and is restocked—then multiply that by average daily use. The reorder quantity can be calculated by multiplying the average daily use of an item by 30 days.
As a general rule, it’s ideal to place a large order once weekly and possibly a second smaller order towards the end of the week. Your goal is to use or sell your inventory before payment is required.
Q. Is there a helpful tool to make this inventory stuff easier that I’m missing?
Yes, an ABC analysis. In its most basic form, the analysis categorizes inventory based on a spinoff of the Pareto principle. You can learn more about it here, but it basically says 80 percent of effects are made from 20 percent of the causes. In this case, 80 percent of your profit comes from 20 percent of your products. The ABC analysis categories your inventory, with “A” items most important down to “C” items that are less so.
This analysis can help you with decisions on overall markup and profit margin percentages for each item, reorder points and quantities, cycle count schedules, and more. Professional interpretation of this report is even more helpful, with someone helping you identify areas, categories or specific products that need immediate attention and creating a priority list for exactly what should be addressed first.
Need help with your first ABC analysis? Many veterinary practice management consultants can help.
Q. How do I get my team involved in this?
You need shared vision. Everyone from the practice owner to the receptionist must support the importance and value of inventory management and understand the impact it has on the practice and patient care. Educate everyone on the financial and medical impact that mismanaged inventory can have. Out-of-control inventory can cost the hospital tens or hundreds of thousands of dollars a year. That money could be spent hiring new staff, rewarding team members with incentive bonuses, purchasing new equipment or making other important investments.
It’s crucial to remember that even though the practice or inventory manager isn’t directly involved in patient care, without inventory, adequate patient care isn’t possible. It takes a team effort to create an environment where patient care thrives, and that includes the valuable role of inventory managers.