Help your clinics manage their second largest expense
By Fritz Wood, CPA, CFP
There is a huge opportunity in most practices to more effectively and efficiently manage inventory. This is critically important since drug and supply expense represents their second largest expense item (after labor).
To quickly review, there are four basic goals of inventory management:
1. Sell products before you pay for them
2. Minimize stock-outs
3. Minimize excess on-hand inventory, and
4. Minimize losses due to obsolescence and shrinkage
An inventory control system should:
• Be easy to use
• Minimize stock-outs and emergency shipments
• Signal when an item needs to be reordered
• Signal quantity to reorder
• Track past and present costs and indicate pricing
• Ensure ordered items are received and back-ordered items are tracked
• Identify expired or outdated items for removal
• Help reduce the risk of theft
• Fulfill certain accounting, tax, and insurance requirements for reporting value of inventory on hand.
Specific elements of the inventory control system include:
Reorder log (“want list”). The entire clinic staff must be trained to identify items that need to be reordered. The inventory control manager should not have to check inventory more than once a week. Day-to-day depletion of supplies must be monitored by everyone. The “want list” can take the form of a white board, notebook, clipboard or basket.
Reorder point. The reorder point is the level to allow a product supply to deplete before reordering. Once the reorder point is set, the reorder quantity must be determined.
Reorder quantity. The reorder quantity is the amount that should be ordered once the reorder point is reached. The inventory manager should continuously look for opportunities to reduce both the reorder point and reorder quantity.
Several methods can be used to signal the reorder point.
The simplest method – when someone sees that an item is getting low they simply write it on the “Want List.”
Some clinics use a reorder tag (sometimes called a “Red Tag Inventory System”) which is placed directly in front of or on top of the last unit of the minimum quantity. When removing items for sale or use, when a staffer sees the Red Tag, he/she simply picks it up and deposits it in a box or basket. Then, the inventory manager will collect the Red Tags and place orders.
An order book shows when, what and from whom you ordered. It typically lists order date, quantity ordered, size ordered, item name, vendor, unit cost, total cost, date received, quantity received, and discount (if applicable). A vendor list (complete with names, telephone numbers, account numbers, fax numbers, email addresses, etc.) is often stored in the front of this book. Anyone at any time should be able to quickly see what was ordered and when. This book is a valuable reference when the inventory manager is out of the clinic.
While the initial set-up of a computerized inventory system is labor intensive, the efficiencies gained can be significant. Each item (that goes through the receipting process) must be counted and entered into the computer. The next task is to set a minimum number of items that must be on hand (the reorder point). Next, enter the reorder quantity (a one-month supply might be a good starting point). Finally, enter the vendor information for each product.
Each time a client is invoiced for an item, it is automatically taken out of inventory. When the quantity dips below the required minimum, the computer will indicate that the product needs to be reordered. It will tell you what to order, who to order from, when you last ordered, how many you ordered, and how much it cost. Each time you receive a shipment you will need to add each item (that goes through the receipting process) into the computer.
Many veterinary practice management consultants recommend two inventory control systems – the computer is used to track items that go through the receipting process, and for everything else one of the manual systems is used (e.g. suture material, gauze pads, bandages, syringes, toilet paper, paper towels, etc.).
The shipment arrived: When an order is received, there should be an out-of-the-way place where it can be stored until someone has a chance to unpack it. All shipments should be untouched until the inventory manager can answer the following questions:
• Did we receive exactly the same amount as we ordered?
• Did we receive the right form (capsules, tablets, or powder)?
• Did we receive the right size (50 mg, 100 mg, or 500 mg)?
• Is the product “short-dated” (will it expire before it’s used or sold)?
• Does the invoice list the price quoted and recorded in the order book?
• Does it cost more than the last order (if so, the sale price should be adjusted upward)?
• Was anything backordered (if so, immediately note in the order book)?
• Is anything damaged or missing?
• Is the bill OK for payment?
• Clinics should periodically perform a physical inventory count of high-dollar items on-hand, and compare with the quantity per the computer system. Exceptions should be investigated.
• Continuously lower reorder points.
• Continuously lower reorder quantities.
• Place relatively larger orders immediately after the billing cutoff date. For example, if the distributor or manufacturer billing cutoff date is July 25, an order placed on July 26 might be received on July 27. Under traditional terms, payment will be due September 20. If the practice sells the product in 56 days or less, the product was sold before bought!
• If retail prices are calculated by the computer system, ensure that “sale prices” are not automatically markedup. Ensure the system defaults to the “highest price,” not the “sale price.”
• It’s expensive for a veterinarian to be a pharmacist. Every practice should establish a minimum inventory price and a reasonable dispensing fee.
• If a vendor requires a higher minimum order than the clinic wants or needs, perhaps they can split an order with other local practices.
• Clinics should offer an online pharmacy/ home-delivery option for convenience- minded clients.
• To visually gauge how quickly or slowly inventory items are moving through a clinic, affix brightly colored adhesive stickers to select inventory items. Note the date. Return 30 days later and look for items with the brightly colored stickers. Those are slower moving items that may be candidates for dramatically shortened reorder points and quantities.
• Encourage clinics to take advantage of vendor promotions offering delayed billing. Remember the first goal of inventory management: sell products before you pay for them!
• If the clinic has cash available and turns inventory quickly, early-pay discounts make good sense.
• The practice should take full advantage of vendor training opportunities.
• The distributor rep should add value with every visit and be an integral part of the practice’s success.
A minority of clinics professionally manage their inventory. If you choose to bring your competence to bear, you could realistically put $30,000 in the pocket of every practice you call on. For most practice owners and managers, that would be a relationship gamechanger that would earn you loyalty for years to come.