Managing veterinary inventory is tricky, and the more a practice holds, the more possibilities of loss arise. Inventory, or cost of products (COPS), is the second largest operating expense after employee costs. Practices typically have a substantial amount of assets invested in inventory at any given time, making it a common cause of poor cash flow. Paying for and carrying inventory for months before it is sold or used in providing services can cause financial struggles.
Total Cost of Carrying Veterinary Inventory
Inventory held in a practice’s pharmacy must be ordered, received, unpacked, insured, cleaned, counted, and kept in a climate-controlled area safe from expiration, destruction, and theft. All those procedures cost money. In fact, ordering costs are estimated to be 15-20% of the true total cost of the item. This includes hourly wages, payroll taxes, and benefits paid to the staff member who orders, unpacks, stocks, enters the shipment into the computer, and counts the stock to generate a “grocery list.” The holding costs for inventory include OSHA compliance, a dedicated heated and lighted storage space in a building, insurance covering the inventory from loss, and personnel costs to dust stock and maintain an orderly pharmacy. The holding cost is 8-15% of the true total cost of each item. Even before shrinkage, each $1 of inventory costs the practice $0.23-$0.35. Shrinkage, which includes expiration, breakage, theft, and damage, adds additional cost.
You can calculate the total cost of carrying inventory using this simple formula: Ordering + Holding + Shrinkage = Total Cost of Carrying Inventory.
Online Pharmacy Pros and Cons
Utilizing an online pharmacy alleviates much of this hassle. Practices only need to carry the amounts of pharmaceuticals and medical supplies needed for treatments. Clients can purchase all other medications through the practice’s online pharmacy. Consumers love to buy things online because it is convenient and can be done at any time, day or night. Typically, they expect prices to be lower online, which is often true. One downside is that providing prescriptions for clients or approving medication purchases faxed in from various sources takes time. By setting up an online pharmacy linked to your practice that’s accessible from your website, you gain leeway in setting prices and expend less time and energy approving orders.
“I’m a solo ambulatory veterinarian. I have greatly reduced my stress and time by not managing shipping and billing of goods,” said one contributor on the Facebook page Equine Vet-2-Vet. “I didn’t realize how much time over the course of a day I had spent doing that until I stopped … So. Much. Time!”
Unfortunately, this approach also drains a source of revenue for your practice. One veterinarian wrote on Equine Vet-2-Vet, “As a solo practitioner with a haul-in facility, I do not have an online pharmacy. I have chosen to keep a tight inventory and utilize drop ship from my vendors. I do not charge the client extra for shipping, and it takes 2-3 minutes to write out an email and approve the medication. This has worked well for my practice model.” Another wrote, “I manage an in-house pharmacy and set up auto-ship with reminder system. I keep inventory moving monthly so money isn’t sitting on the shelf. The initial set up took some time, but now it pretty much runs itself. My pharmacy is definitely profitable!”
Final Thoughts
The Federal Trade Commission (FTC) estimated in 2015 that prescription medications made up 20% of a typical veterinary practice’s total income. By using an online pharmacy, practices generally experience little direct financial gain, but they benefit from significantly less hassle. Only you can decide what makes sense for your practice.
Related Reading
- 6 Ways to Improve Equine Practice Profitability
- The Business of Practice: Veterinary Inventory Control
- How To Turn Your Veterinary Equipment Into a Revenue Stream
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