While veterinary practices are considered service-based businesses, they must also get involved in the sale of products by virtue of the services they provide. These sales account for approximately 15 percent of overall practice revenue (depending on the type of practice as well as the veterinarian’s specialty). The profit margins on these items, however, have decreased significantly over the past several years, largely due to stiff competition from catalog and online outlets through which horse owners can more easily procure many of the most commonly sought-after goods.
“The challenge is all of the other places that exist for clients to get products,” says James E. Guenther, DVM, of Strategic Veterinary Consulting in Asheville, North Carolina. “There is a variation between products that only veterinarians can sell, and products that are over the counter. However, they can be similar in nature, so it gets hard to compete against places like that.” If equine vets are to respond to this challenge effectively, they must apply the same methodology that successful retailers apply when it comes to inventory management.
Hire a Helping Hand
In an equine veterinary setting, Guenther advises that the first step towards creating a successful inventory management system is to appoint someone specific to be in charge of the task. “A lot of times, it’s a matter of finding an individual who is extremely knowledgeable about products and can manage them well so that the doctor can do what he does best, which is practice veterinary medicine,” he says. “If you find a good individual to do this, they can usually earn their keep if they can manage it, and manage it wisely and well.”
This person should, however, be equipped with the proper tools for the job, such as basic inventory-management training and good inventory-tracking software. Some distribution companies offer their own customer-training programs, and many communities offer continuing-education courses or seminars on the subject, even if they aren’t industry-specific. “In some cases, it’s a matter of looking outside the equine market to other sources,” says Guenther. “Inventory is inventory, whether you are talking about widgets or drugs.”
Write it Down
Kirk A. Augustine, president and CEO of Forays, Inc., a consulting firm based in Omaha, Nebraska, notes that aside from providing proper inventory-management training, practice owners should develop a documented set of Standard Operating Procedures that cover the inventory process. “Almost every one of these practices has an employee handbook,” he says, “but almost none of them will even have the beginning documentation for inventory-control procedures. There are no processes written down. When they change who’s buying product, they start over again.” He emphasizes that practices should assign a person to handle inventory according to a set of recorded procedures, and take steps to instill in the entire organization’s culture the importance of abiding by the process. “The owners of the practice have to have the attitude that inventory management is everyone’s responsibility in a practice. If you touch product, you’re responsible.”
Because clients are going to other sources for products, vets are under pressure to compete on price—making it more challenging for them to earn a profit. Angela Aisbet-Schneider, CVT, inventory-management consultant at MWI Veterinary Supply Company in Meridian, Idaho, emphasizes that when building in margins, inventory managers need to account for all of the factors that have an impact on the cost of goods sold, such as the time and labor required to purchase the product, and how much it costs the practice to have it sitting on the shelf.
To counter holding costs, some practices engage in delayed billing—an exercise that the experts declare should be approached with caution. “If you are a responsible clinic that takes a delayed billing and you are properly paying yourself on a monthly basis, at the end of the period when you receive this huge bill, you pay it,” Aisbet-Schneider says. “A lot of clinics do this because it sounds good, but they don’t put money aside, so when that big bill comes, they end up putting it on a credit card and the interest takes away the sparkle of the deal that you just got.”
Delayed billing, when applied effectively, can significantly decrease holding costs—which, depending on the item, can be anywhere from eight to 25 percent per unit. After all, if a practice does a bulk purchase of a year’s worth of product and pays for it up front, that money can no longer be re-invested back into the business to generate income. “Delayed billing at least takes away the holding cost, because you’re not spending that money up front,” Aisbet-Schneider says.
When taking on a delayed-billing commitment, Aisbet-Schneider advises practices to run a report from the previous year to determine how much of that specific product was used during the period of the delayed billing, then do a physical inventory count of that product. “Sometimes, clinics will base their projection on last year, and then order that much, but they didn’t count ahead of time to see that they already have two months’ worth of that product on hand,” she observes. “The key is to order exactly what you are going to use in the five-month period in addition to what you already have on hand right now. You should not have any more than about 45 days’ worth of product when that bill comes due.”
Beware of Bulk Buys
One of the key components of good inventory management is not having too much money tied up in inventory. However, this flies in the face of bulk purchasing, the practice of buying products in large quantities in order to take advantage of a lower per-unit price. “If you are buying items in bulk, you had better get a tremendous discount, or else you are tying up a lot of money that could have been generating other income for the practice,” Guenther warns. “You only want to buy as much as what you would possibly use in a two- to three-month period of time.” If this is the case, he advises that the savings should be at least five percent per month, which would add up to a 10- to 15-percent overall discount.
The Science (and Art) of Reordering
For normal purchases, practices can establish reorder points for specific items by determining how many units of that product are sold in a year, and then dividing that number by the desired turnover. Generally, it’s advised that a practice’s inventory should turn over five to eight times a year, though some organizations prefer to boost that to eight, and sometimes all the way up to 12 times annually. Aisbet-Schneider underlines that vets should try not to allow their products to sit on the shelf for longer than 30 to 45 days.
Establishing reorder points, however, is part science, part art; after all, some products may see seasonal demand. “You are going to have different products that are going to go faster at different times of the year,” Guenther says. “Then there are products that move faster in one type of practice than they do in another.” In determining an approximate reorder point, it’s necessary to review how and when that product has moved in the past, and then decide whether or not that is representative of what may happen this year. “Your distributor can tell you how many you bought and what month you bought them in, and your computer can tell you what month you sold these products. You can put this information together to come up with a reorder point.” In tailoring your purchasing according to the cycles of your business, you have a better chance of being well stocked when necessary and leaner when items aren’t in demand.
However, relying on historical data alone can be risky, Augustine notes, if the practice doesn’t take into consideration current trends. He uses the purchasing of West Nile virus vaccine as an example: “Let’s say that last year you moved through 3,000 doses of West Nile vaccine because it was a hot disease in your area,” he illustrates. Do you buy 3,500 doses of West Nile vaccine this year, or do you think about your customer and whether or not they are going to re-vaccinate and boost? “Probably in year two, your compliance in re-vaccinations and boosters is not going to be as high as your early doses,” says Augustine. “Plus, your early doses, in some cases, were two doses to get them started. Three thousand doses last year were only for 1,500 horses.”
Ultimately, inventory management is an endeavor that requires time, the proper tools and an individual equipped with the knowledge to oversee it. This is clearly an investment, but one that can both save, and make, money. “Practi-tioners that have taken the time to identify somebody that can do this, and that are doing it properly, have been able to manage it a lot better than other people,” Guenther says. “If you can reduce your cost of goods sold by one or two percent, that’s one or two percent more going to the bottom line. Take the time and the energy—it’s worth it.”
MWI Veterinary Supply Company www.mwivet.com
Strategic Veterinary Consulting www.strategicveterinaryconsulting.com
Inventory is Money
One of the mistakes that many practices make is treating inventory as an investment rather than an asset, says James E. Guenther, DVM, of Strategic Veterinary Consulting in Asheville, North Carolina. “It’s not going to appreciate in value from the day you bought it to the day you sell it,” he explains. “It’s going to lose money if you’re not careful.”
Guenther further argues that not only should inventory be treated as an asset, it should also be regarded in much the same way as cold, hard cash—especially drugs, which, he believes, should be kept under lock and key. “You put money in a bank because it’s safer than it is in your cash drawer, so why leave drugs on the shelf when you could be putting them into a secured location?” he says. “There is a disconnect in people thinking that drugs aren’t money. They are money, so treat them that way.”
It’s as Easy as ABC...
To categorize inventory, equine practices should divide products into three groups: A, B and C.
For “A” items, apply the 80/20 rule: your top 20 products generate 80 percent of sales, 80 percent of usage and 80 percent of your costs. Your “B” products make up for the next 30 percent, and generate approximately 15 percent of sales or total usage. “C” products make up 50 percent of your supplies that generate only five percent of sales. Therefore, when trimming inventory, it’s the “C” products that should be cut first, especially if they are vulnerable to expiration dates.
Software Solutions for Vets
AVImark Veterinary Management System
Business Infusions: HVMS Veterinary Practice Management Software