The cost of pharmaceuticals and medical supplies is the second-largest operating expense for a practice after employee costs. Therefore, managing inventory is critical. Careful attention to inventory can have a significant effect on profitability. Managing veterinary inventory is important to your business!
A substantial amount of practice assets are invested in inventory at any given time. This is a common cause of poor cash flow. Carrying inventory for months—and needing to pay for it before it is sold or used in providing services—can cause financial struggles.
Shrinkage And Other Costs
Pharmaceuticals, medical supplies and other necessary supplies that are sitting on shelves are subject to shrinkage. Shrinkage occurs because of expiration, breakage, theft or damage. That can add significantly to the cost of holding inventory.
There are other costs associated with holding inventory that are not associated with the actual price of the item. These include the hourly wages, payroll taxes and benefits of the staff member who orders, unpacks, stocks, enters the shipment into the computer, and counts the stock to generate a “grocery list.”
Ordering costs are estimated to be 15-20% of the true total cost of the item. Holding costs also include having a dedicated, heated, lighted storage space in a building, insurance to cover the inventory from loss, OSHA compliance, and personnel to dust stock and maintain an orderly pharmacy.
The estimated holding cost is 8-15% of the true total cost of each item. So even before any shrinkage, each $1 of inventory costs the practice another $0.23-$0.35. If the pharmacy is unlocked and management is lax, the additional cost of shrinkage could be substantial.
Secure Your Drugs
Your pharmacy should be locked, and access should be limited. Controlled drugs should be secured in a safe and have procedures in place that insure compliance to DEA regulations. A system should be in place for signing out all items that are used to stock ambulatory trucks or hospital cabinets.
Having a motion-activated camera can be a deterrent to theft, as can regular counts of the inventory.
As Andy Clark DVM, MBA, says, “Would you keep $100,000 in single dollar bills on the shelves of your pharmacy and never lock the door or count it because ‘we’re all family here?’”
Inventory Control
An efficient inventory control system should be able to provide a fairly accurate idea of inventory quantities and value at any given time. Most veterinary software has inventory functionality. However, most practices struggle to link inventory used in services accurately with those service codes due to variability in how much of what is used. Sophisticated software specific to equine practice typically allows more success in this regard.
Some practices utilize QuickBooks Point of Sale or other inventory specific software to maintain accurate control of this asset.
Take-Home Message
The true cost of your inventory can be an unpleasant surprise. Keep only a limited supply on hand. Avoid shrinkage. Price medications with a method that accounts for ordering as well as holding costs. These all are important steps for managing this critical practice asset.
This article is brought to you by CareCredit.
Disclaimer: This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other medical providers with respect to any information presented. Synchrony and any of its affiliates, including CareCredit, (collectively, “Synchrony”) makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. All statements and opinions in the article are the sole opinions of the author. Your receipt of this material constitutes your acceptance of these terms and conditions.
