This blog is written by Angela Schneider. She will give a workshop on Inventory Management on January 21 2019. You can sign up for her workshop via the events page on this website https://www.veterinarybusinessschool.com/event/business-workshop-on-inventory-management/.
Within the past decade, inventory has become a buzzword in the veterinary industry. Veterinarians are identifying inventory pain points, purchasers are trying to find ways to get better control and become more efficient, and manufacturers/distributors are trying to find new tools to offer veterinary hospitals to assist with their inventory struggles. Just like there is “no one size fits all,” there isn’t one tool or solution that will work in every hospital. However, there are some general inventory basics that need to be understood before any tool can work.
Key Performance Indicators (KPIs) and Budget
The wonderful thing about managing inventory is that improvements and changes can be measurable. Prior to implementing a new inventory system, there are a few questions the owner and inventory manager must ask. These answers will be the foundation to measure against.
- What is the hospital’s cost of goods sold (COGS)? (This is typically a percentage of what is spent in drugs and supplies from your gross income)
- What is the hospital’s current COGS General Ledgers/Chart of Accounts? (How inventory is entered in the hospital’s accounting system)
- How much is being utilized of each inventory item in a weekly and monthly period?
- How frequently is the purchaser ordering & receiving?
Inventory is the second largest expense in most hospitals and probably the easiest expense to control. Once you know what your COGS % is, you can set a goal of what your target expense should be. Having an understanding of your accounting software and the general ledgers within COGS, you can use industry standards and benchmarks to set goals. Small animal hospitals will typically be around 12-14% for drugs and supplies. Equine hospitals can be upwards to around 19-20% for drugs and supplies. Using your set goal monthly based on the previous month’s gross revenue, can help you stay within where you want to be with expense.
The ABCs of inventory
A common problem with any veterinary hospital is having too much of some items and running out of others. This problem often leads to products outdating and more frequent ordering being done. Not having a true understanding of how much inventory is actually being used and not having reorder points/quantities in place, leads to this problem. Most practice management software programs typically have a report that tracks usage by quantity, sales and cost. By exporting these reports and doing what is called an ABC Analysis, you will be able to measure your inventory better. The “A” products are the top 20% of your inventory that generates 80% of the usage, sales and/or cost. “B” products are the next 30% of the inventory and that generates 15% of the usage, sales and/or cost. The “C” products are the remaining 50% of inventory that is only 5% of the usage, sales and/or cost. With this analysis, you can develop reorder points/quantities which helps reduce inventory that is carried in the hospital and can also help develop count schedules.
Whether you price your products based on mark-up, profit margin or comparison pricing, it is still crucial that you consider additional inventory costs than just the item cost. These costs can include ordering costs (how much time is spent ordering and receiving) and holding costs (how much is being ordered, outdated and missing inventory). Ordering and holding costs combined will typically add another 25-40% onto the product cost. As you develop your hospital inventory system, you want to incorporate efficient ordering and receiving, utilize billing terms and track inventory loss.
By incorporating central supply and zoning the hospital with where inventory is kept can assist with better tracking of inventory in the hospital’s practice management software. Having your hospital properly mapped will help avoid over-ordering due to keeping supplies in too many areas. Central supply will help with tracking sundries or disposable items (such as gauze, syringes, etc.) and manage drugs/supplies that leave into ambulatory vehicles. Equine and large animal practices will usually have difficulties finding a way to track the inventory that leaves the hospital into the vehicles. Yet, keep in mind, that it’s not as important what goes into the vehicles as it is products being properly invoiced when the veterinarian is making field calls. Incorporating well-organized inventory isn’t just physical storage, but computerized and efficient invoicing too.
When developing the hospital’s inventory system, you shouldn’t do it alone. Many tools and other hospital “pearls of wisdom” already exist (such as managing ambulatory inventory and organization). Partner with your manufacturer or distributor representatives as they may have resources already available or can provide recommendations from other hospitals. Being in study groups such as Oculus gives you the opportunity to share ideas with other like-minded hospitals and similar benchmarks to measure against.