Inventory Management

Add value and differentiate yourself by helping your veterinarian customers better manage their inventory

One of the basic needs in a veterinary practice is an adequate inventory of drugs and supplies. After labor, drugs and supplies represent the second largest expense item for most practices.

One of the basic needs in a veterinary practice is an adequate inventory of drugs and supplies. After labor, drugs and supplies represent the second largest expense item for most practices.

Effective inventory management is a huge opportunity in veterinary medicine today. For example, according to the AVMA Report on Veterinary Practice Business Matters (2011 Edition), small animal practices turn over their inventory only 4.39 times per year – so they hold 83 days of inventory on hand (365 days per year/4.39 turns per year). As you know, most practices can receive shipments from suppliers weekly or more often, so having almost three months inventory on hand is clearly excessive. Perhaps tens of thousands of dollars are sitting idly on their shelves instead of comfortably in their bank account. This represents a target-rich opportunity for you to help, demonstrate your value to the practice, differentiate yourself and build customer loyalty.

Inventory management goals

Two important objectives of inventory management are to ensure that items are on hand when needed, and to minimize the expense of keeping supplies in stock. These two goals hang on a delicate balance; overstocking assures never running out of product, but uses up too much capital, while a lean inventory reduces the expense, but increases the risk of being out of something when needed.

Although inventory is considered an asset, it is unproductive until it is used or sold. Products sitting on a shelf too long may expire, become damaged or stolen, become obsolete with the introduction of better products, or become shopworn. The effect of time is especially evident with pet healthcare products displayed in the reception area. Products that sit in a display for too long collect dust and labels become smudged and tattered. Clients shun shopworn packages as undesirable, even though their contents may be unaffected, and it sends a very poor message to pet owners.

Therefore, another important goal of inventory management is to increase turnover. The rate of inventory turnover is defined as the number of times inventory is used up (“turned over”) and replenished each year. Higher turnover is the goal. The turnover rate should be used as a benchmark for monitoring inventory management progress from year-to-year. Ideally, a practice has no capital invested in inventory. If their turnover rate is near 12 (equivalent to about 30 days of inventory sitting on the shelves at any given time), on average its products are sold before they are bought (paid for). There is an acronym for this very good phenomenon: OPM – Other People’s Money. From a cash-flow perspective, selling a product before you pay for it is nirvana.

Since very few practices make the time and effort to evaluate their entire inventory, they should concentrate on items representing the bulk of the dollars spent: usually flea/tick control, heartworm preventives, NSAIDs and pet food. Pareto’s Law, or the “80/20” rule states that 20 percent of items stocked account for 80 percent of expenses.

Here’s the Inventory Turnover Formula for your future reference: 

Turnover Rate = Annual Drug and Supply Expense/Average Cost of Inventory on Hand

Average Cost of Inventory on Hand = Year’s Beginning Inventory + Year’s Ending Inventory/2

Does it really matter?

Let’s revisit published numbers from the AVMA Report on Veterinary Practice Business Matters (2011 Edition). Small animal practices had a median annual drug and supply expense of $209,000, and turn their inventory 4.39 times per year. So, at any given time they have $47,608 sitting on their shelves ($209,000/4.39). Next, assume that with your help over a period of time, they reach their goal of 12 inventory turns per year. Now, they have $17,417 ($209,000/12) of inventory on hand.

Their on-hand inventory shrank from $47,608 to $17,417, meaning $30,191 ($47,608-$17,417) effectively fell off their shelves and into their bank account. If you stuck $30,000 in my coffers this year, I’d be much obliged and indebted and eager to do more business with you! You will have successfully demonstrated enormous value to me and differentiated yourself from the crowd. Writer and educator Jonathan Kozol famously said, “Pick battles big enough to matter, small enough to win.” Inventory management is that battle.

Now what?

Anyone in the practice – veterinarian, hospital manager, veterinary technician, veterinary assistant, or receptionist – can manage inventory. Having a single individual in charge of inventory is critical to ensure accuracy, consistency and efficiency. At least one healthcare team member should be trained as a backup.

The inventory manager’s duties should include:

• Maintaining an adequate stock of all products used, dispensed, and sold.

• Organizing inventory so items are easy to locate.

• Identifying products that need to be reordered.

• Maintaining accurate purchasing and inventory records.

• Ordering.

• Receiving and inspecting shipments.

• Establishing and updating pricing for all inventory items.

• Rotating stock and monitoring expiration dates.

• Evaluating new or updated products and considering specials offered by suppliers (this responsibility will most likely be shared between the veterinarian(s) and the inventory manager).

Has that person been identified in each of your key accounts? Next, gather their purchase history for the last year or two on flea/ tick control, heartworm preventives, NSAIDs, pet food, and any other high-dollar items.

The next issue will get in to the nitty gritty, focusing on inventory management systems (computer vs. manual), inventory management controls, inventory management tips, the benefits of an online pharmacy, and whether or not it makes business sense for clinics to buy that big promotion.