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Smart Inventory Management©
Veterinary practices throughout the country invest massive amounts of
capital into their pharmaceutical inventories every week; in fact, it
should be your single largest expense.
Most clinic owners have, through sheer force of will, trained
themselves to suppress the wince impulse when signing those ginormous
checks to their vendors.
“It’s a lot
of money, but I guess I don’t have a choice.”
Or do you? Most
owners are surprised to learn that a practice generating $500,000 in
annual sales will have, on average, $40,000 in excess inventory on the
shelf at any given time1.
That is capital which belongs in the bank, not quietly waiting to
expire in an out-of-the-way corner of the clinic.
Rapid inventory turnovers are one of the three keys to remaining
financially viable in today’s economy.
It has been estimated that the average veterinary hospital turns
over their inventory only 3.4 times per year, or once every 3½ months.
Unless your practice is in some deserted outpost of civilization,
you receive deliveries far more regularly than that and can always get
more, so why carry so much inventory?
Usually, it’s because of a horrible memory of running out of
something in the past, back before your inventory was under control.
VMS is currently offering an inventory management education program in
Assume your practice sells 12,000 tablets of the popular NSAID ‘Doginol’
every year. Let’s also
assume that your sales do not fluctuate with seasonality; you dispense
exactly 1,000 tablets each month.
You currently pay $1.00 per tablet for Doginol and have a markup
of 100%, charging $2.00 per tablet.
This grants you a number of purchase options:
Purchase a full year’s supply on Jan 1 (Turnover = 1.0)
Purchase a 6 month supply on Jan 1 and another six month’s on
July 1 (Turnover = 2.0)
Purchase a 3 month supply every quarter (Turnover = 4.0)
Purchase a 2 month supply every other month (Turnover = 6.0)
Purchase a 1 month supply every month
(Turnover = 12.0)
Purchase only what you need to meet your actual demand (Turnover
= ???)
What is actual demand? It’s
the amount of product consumed
between one delivery and the next.
If you receive weekly deliveries of a product, the actual demand
for that product is equal to one week’s sales.
If you receive bi-monthly deliveries, it is equal to two week’s
sales. In our scenario, we
will assume weekly deliveries; therefore our actual demand is
approximately 250 tablets or: 1,000 per month divided by four weeks.
In all of these purchase scenarios, the end result is always the same.
Regardless of how frequently we bought them, at the end of the
year:
We will have sold 12,000 tablets, which will have
cost us $12,000 and generated $24,000 in income.
Our profits will be $12,000; $24,000 (sales) minus
$12,000 (cost).
The only differences come in when we look at how rapidly we recover our
initial investment or ‘turned-over’ our on-hand inventory.
In the first example, we invest $12,000 on Jan 1.
We will not become profitable (recover more than our initial
investment) until August 1st!
That leaves us in the red for
seven months!
There are limited funds to cover payroll, make payments on a
digital X-ray or go on a vacation until late summer.
In the second example, we aren’t profitable until August 1st
again! We go into the black
in May, but then we drain the account once more on July 1st.
‘This stinks.
Why am I working so hard and not making any money?’
When buying quarterly, we become profitable by May 1st.
When buying every other month, we become profitable by April 1st
and buying monthly we are already profitable by Feb 1st.
As you can see, the higher the turnover, the more rapidly one becomes
profitable. In this
imaginary world where sales volume never changes and there is no
fluctuation in consumption, we could order exactly enough to meet our
actual demand of 250 tablets every week and have a Doginol turnover of
52.0! We could become
profitable in three days and never look back.
Sadly, that reality only exists on paper.
In the real world, we might sell 250 tablets week one, 200
week two, 250 week three and 300 week four.
If we were stocking exactly 250 tablets, we would run out on week
four and it would create one more example of ‘That
one time when we ran out of Doginol and Dr. Angerman flipped out on
everyone and so now we always keep 7,000 tablets on hand just in case.’
So where is the happy medium?
It can be a daunting task to break down inventory usage, particularly if
you currently have all of your dispensables in a single ‘Pharmacy’ item
category. That’s a massive
list! Split it down into
smaller, more manageable categories such as; ‘NSAIDs,’ ‘Behavioral,’
‘Gastro-Intestinal,’ ‘Parasiticides’ and so on.
Then, for each item, begin determining actual demand (the amount
of product consumed between one delivery and the next) by looking at
your sales histories and discovering
A) what the average actual
demand is and B) what the
greatest single actual demand was in the past year.
Finally, establish order points and order quantities that you are
comfortable with and stick to
them! You can be
flexible with points and quantities at first, but let your long term
goal be to run as low as comfortable before the next delivery.
By working to increase turnover you will not only put that average
$40,000 back in the bank where it belongs, but will also enjoy fewer
expired drugs, more storage space in your clinic and a significant
reduction in the aforementioned ‘wince impulse.’
To calculate your own total inventory turnover for last year,
simply divide your total cost of goods sold for the year by your total
end-of-year inventory on hand.
If the result is less than 6.0, you have improvements to make. If
you have further questions about inventory management feel free to email
VMS at jim@vmsmn.com or by phone at
1- “Harness Your Inventory,” Veterinary Economics Magazine, Oct 2007
- © 2011, Veterinary Management Services