The Ins and Outs of Inventory Management for Practice Owners

For starters to any business, inventory management can seem like simply stacking crates and stocking closets. But these inconspicuous expenses can very quickly build up, cutting into your profit margin with you none the wiser. Typically, between 12% to 15% of the overall practice income can be consumed by inventory costs.

Inventory management encompasses:

• counting inaccuracies or damage,
• managing product shortages,
• ensuring adequate availability,
• priority ordering based on relevant parameters,
• making timely payments and maintaining good cash flow,
• meticulous expiration date monitoring,
• verifying the accuracy of inventory reports,
• maintaining professional relationship with distributors
• minimizing inventory loss due to theft
• and much more

If this list alone is making your eyes blur over, then imagine how big of a migraine you’ll have when you look at the endless lists of stock that’s propagating in your storeroom. That is, unless you have a clear-cut system to collect, categorize and analyze the

The appropriate inventory management system is clearly vital in a veterinary hospital. Whether setting up a clinic, refreshing your practice, or adding new wings or care outlets, this article will be your guide to organizing your inventory in an efficient and intuitive manner.

What Constitutes Veterinary Inventory?

The variety and complexity of inventory will vary from small, privately owned clinic to vast veterinary hospital chains. It also depends on whether the practice is specialized or generalized. However, the overall veterinary purchases fall into two main categories: High-value assets and Supplies and Instruments.

High-Value Assets

These consist of the larger, more expensive machinery, equipment, and even technological devices that are used to operate the former. The availability and functionality of these assets is vital to the performance of your clinic and treatment of your patients. They depreciate in value, requiring regular maintenance to last in the long-term.

Image by Konstantin Kolosov from Pixabay 

• Medical machinery, such as heart rate and oxygen saturation monitors, centrifuges, autoclaves, x-ray machines, ultrasound machines, etc.
• Technology, such as laptops, printers, 3D printers, tablets, credit-card processors, patient monitors, etc.

Supplies and Instruments

This inventory is also dependent on the kind and extent of service you offer, but generally include the day to day tools, materials, and medicine that is required to complete procedures, aid your caregivers, and supply your clients directly. These should have a high turnover, and are meant to last in the short term, especially since some have an expiry date. 

Image by Hans from Pixabay 

• Medical supplies such as vaccines, antibiotics, anti-anxiety and anti-parasite medications, flea and tick products. ointments, shampoos.
• First-aid, safety, and surgical supplies, like cones, gauze, tick tweezers, self-adhesive tape, alcohol swabs, syringes, exam gloves, surgical masks, scissors, retractors, forceps, and elevators.
• Retail products and merchandise such as collars, leashes, pet clothing, pet food, treats, shopping bags, heated or insulated beds.
• Grooming supplies, including brushes and combs, scissors, nail-trimmers and clippers, ointments, wipes, shampoo, and cute accessories
• Office supplies for receptionists, veterinarians and general office staff.

Why should I care about Inventory Management?

We know that in many small-scale practices, the practice owner is the practice manager. Or the practice manager is the Operations, Finance, HR, and Marketing departments all wrapped up in one. So there just isn’t enough time to look into every single aspect of the business in minute detail. As a result, you may be used to slight losses here and there. But when it comes to inventory, you’d be feeding a massive portion of your profits to inefficiencies and oversights.

Wouldn’t it be tragic if you chose to ignore this seemingly complicated, but essential portion of the management when the simple solution was right at your feet all along? There are certain weaknesses and inventory costs that almost any service provider incurs. In order to minimize wastages and maximize profits, however, inventory must be meticulously organized and monitored.

Shortages

Sales from Inventory constitute a significant proportion of the revenue in a veterinary hospital. Having regular shortages can result in disgruntled clients who are likely to search for alternative supply sources. “ These outages can lead your clients to the conclusion that perhaps big box stores and your online competitors are more reliable.

Stock-outs can also result in delays in treatment, which may affect patient care. Unlike other businesses, a veterinary clinic deals with life-and-death situations, the treatment of which often cannot be delayed. Not having the required materials to handle an emergency is a serious red mark against your performance and reliability. It is a of immense priority to have functional inventory management workflows to prevent shortages.

Surplus

An excessive amount of stock can, conversely, indicate operational inefficiency as it means your hospital has excess working capital. To put it simply, your assets are lying idle and of course, that has an opportunity cost: increased holding costs.

Holding costs are one of two indirect costs in inventory management. They include the facility and utility costs of insulating temperature sensitive items like medication and vaccines. They also include the costs of installing CCTVs, paying insurance premiums, and other maintenance costs. Holding costs can represent as much as 15% of the unit expenses. And they can become cumbersome as the practice expands.

Labor Costs

The 5 Rs of Inventory Management are: recognize, react, reorder, receive, and restock.

This involves forecasting what items will be needed by which date based on current sales and usage. A purchase order is then compiled and placed. Before the fresh goods arrive, the old stock must be repositioned to make place for the new. Once the inventory is received, it must be stacked and stored. The supplies must be portioned according to requirements and then transported to the different departments and each item restocked in the right cabinet, drawer, closet, and shelf.

All this must be coordinated and overseen in a precise manner. For small practices, this may require one store-room and one worker. For a veterinary hospital with multiple wings, it can involve pallet trolleys, forklifts and many workers. Remember that up to 20% of the unit costs go to labor. In other words, a practice can incur $0.20 on every dollar spent on inventory on paying labor.

Within the hospital, the role of veterinarians is to focus on their clients and help their patients, not be tied up doing manual labor. Having to leave the exam room in search of instruments during a 10 minute checkup can really negatively impact patient experience.

Practice Value

As we discussed at the onset of this article, inventory costs can have significant impacts on profit. As the ratio

The higher your proportion of spending on inventory to revenue, the lower your practice profits fall. Let’s say your inventory to revenue ratio is 30% instead of 20%, you are spending an additional 10 cents for every dollar earned. Implementing strategies to lower inventory costs, which we will discuss further along, will directly improve your bottom line.

But what does that have to do with your practice’s value?

A practice’s worth is usually a multiple of its profit. Practices can be offered between 6 to 12 times their adjusted net revenue. Simplified, every dollar of savings is worth between 6 and 12 dollars in practice value.

Now, hopefully, you understand why all this is essential to the running of your care center.

Great, now let’s talk about the fundamentals you need to grasp to start directing your inventory is an effective manner!

It’s Elementary, my Dear Veterinarians

Yes, we know this phrase was not coined by Arthur Conan Doyle. But these are the basic building blocks of veterinary inventory management. 

Of course, you could skip to the shortcuts and solutions straight away, of course. But it would be ideal to have a rock solid foundational understanding of certain concepts, calculations, and distinctions. That way, you could really appreciate the tips, tactics, and strategies we will outline further on. 

Understanding Pricing Formulas: Markup, Margin, and Multiples of Cost

The financial stage of the inventory cycle is often the most daunting one. But remember that this is what determines the survival of your entire enterprise. Be bold and courageous as you traverse this realm: the fate of your veterinary clinic hangs in the balance.

We’re kidding; inventory finance is Grade 7 math easy. It’s all about percentages:

Markup

Markup is Price-Cost/Cost (M= P-C/C).

Cross-multiply to make P the subject (or let us do it for you): P= C (1+M)

Let’s say your markup percentage is 20% and your original cost is $100, then

Price = 100(1+0.2) or 100(1.2), which gives us $120.

Markup is quite literally the additional amount you are charging beyond the cost to make a profit. For Markup, cost the base, while for Margin, Price is the base.

Margin

Margin is Price-Cost/Price (M= P-C/P).

Cross-multiply to make P the subject (or don’t; it’s already done): P = C/1-M

If your Margin is 20% and your original Cost is $100, then

Price = 100/1-0.2, or 100/0.8, which gives us $125.

Basically, margin is the ratio of profit to revenue or how much more you’re selling the product for as compared to its cost. Remember, margin is the percentage by which the original cost is lower than the price, NOT the other way around. 

Multiples of Cost

Now most lab tests that require expensive machinery and equipment are charged at up to 4 or 5 multiples of their cost. This may seem simple enough but some inventory software calls for entering a percentage, not a number. Just remember that if something has doubled, it has been multiplies by 2 but the percentage increase is 100%. If it is multiplied by 3, the percentage increase is 200%. If it is multiplied by 4, the percentage increase is 300% and so on.

Performance Evaluation

Inventory is akin to a living, expanding cycle. As a business expands, the quantity and diversity of items entering and leaving will grow. And with it, the number of blind spots, the number of discrepancies between reports and reality, the number of expiries, the risk of theft, destruction, shortages, and mis-location all grow.

This means that you must employ evolving techniques to assess the performance and flow of inventory through the veterinary business. Otherwise, you stand to face more losses, both to revenue and to reputation. Here are some of the basics – blood tests, if you will – for veterinary inventory management:

Average Inventory

Average inventory shows you the worth of average inventory held during a particular period. This is found by totaling the value of inventory at the beginning and end of the month and dividing it by two. Keep in mind that the cost of the goods at purchase must be used here, not the sale price.

This is because the sale price may change based on the promotions running at any particular time and will not be always consistent with the margin that is generally applied, whereas the cost of the goods is a well-recorded number.

Inventory Turnover Rate

Inventory turnover rate measures the number of times your stock has been refreshed within a time period. To calculate it, you divide the total spending on your inventory for the year by the average value of the inventory. If we know that the average value of CPV-2 vaccine held during a month was $350 and that $2100 was spent on CPV-2 that year, then the turnover of CPV-2 vaccine was six.

This provides you an idea of how healthy your sales are. If your turnover is unusually low, this may be a symptom of overstocking. It will inform you that there are wastages in the form of expired medications or holding costs. If your turnover is unnaturally high, it may indicate a different form of wastage entirely. Staff may be utilizing more supplies than necessary or theft may be occurring.

Checking each item or set of items separately can also show you which items are underperforming. Therefore, you can take steps to remedy this issue. You can also determine the order quantity and frequency of each product. But calculating the individual turnover rate of each item individually can be tedious and time consuming. The right inventory management system would be able to provide performance comparisons and make astute recommendations.

Accuracy of Demand Forecast

As the name suggests, demand forecasting has to do with using past and current demand to predict future demand. Obviously, this can be a game-changer, enabling you to order in a manner that optimizes revenue while minimizing holding and labor costs.

It can also be used in the execution of strategic purchase and pricing decisions based on seasonal spikes in demand for specific services.

Forecast accuracy refers to how closely a forecast aligns with actual demand. As we discussed, the types of items that need stocking within the hospital are variable. Hence, forecasting is a crucial, but complicated component of your evaluations. Between medical supplies and patient medications, different categories of inventory will be subject to various criteria and follow distinct cycles. And the ability to both track these separate categories and analyze trends within them is no small task.

You would need a highly flexible and agile inventory forecaster to accumulate data from multiple sources, including historical and real-time usage figures on active and inactive clients, appointments, cancellations, etc.

Basically, these measures act as a test by helping in the diagnosis of your inventory system. 

Lead Time and Pipeline Inventory

Lead Time is a concept mostly used in the manufacturing industry. It denotes the time between the onset and completion of a project or portion of the process. When it comes to a veterinary practice, it would mainly be used to measure Material Lead Time. Material Lead Time is the time it takes the supplier to complete the order from the initial order placement date.

This is important as it is used to measure the Pipeline Inventory. Products en route to the clinic are refers to in this manner. While on the way, goods are considered part of the standard inventory despite not physically being present within the storeroom. You get a more complete overview of total cash tied up in inventory by including the pipeline inventory. Furthermore, this allows you to pre-sell medications to manage the high demands.

Pipeline inventory is calculated as Lead Time * Demand Rate. Say your lead time is 4 weeks at 50 units a week. You would need to order 200 units each time to maintain consistent inventory levels.

Categorize Inventory according to the 80/20 Rule

Identify the top-selling and fastest-moving inventory which generates a majority of the revenue. Then prioritize these items in terms of affordability, availability, and convenience. For ease, use structured, color-coded methods of product distinction, ranging from critical to dormant. Finally, ensure that those medications and supplies are always on hand and easily within reach of your staff.

This can prove advantageous in minimizing shrinkage (loss of inventory due to theft, inaccurate unit measurement, and damage). Additionally, it can reduce waste from expired items and enhance reorder frequency.

Do keep in mind that not all inventory in the veterinary hospital will move the same way. Remember that inventory and service items are two separate categories and should be treated as such. Usually it is understood that tangible objects are inventory and the care provided is service. But vaccines and injectables, though inputted as an inventory item, should be sold as a service item. As such, unlike in a retail warehouse, medications that are not high-demand must still be stocked. This is why inventory turnover should be calculated according to their classification. 

Strategies for Effective Inventory Management

Now that our concepts are thoroughly cleared, let’s get to the meat of the inventory management matter. Inventory makes up the bulk of the tangible assets of a veterinary clinic. They are also integral to maintaining high performance and service quality in a clinic. So, effectively coordinating inventory between multiple platforms, as taxing and time consuming as it may seem, must be done. Among the most complicated elements of Inventory Management are inventory monitoring, replenishment, cost reduction, categorization. Here are some tips and techniques to eliminate the complexity from these functions and save time to focus on animal care.

Start at the Drawing Board

The movements of inventory form part of the workflows in the clinic. Like with workflow mapping, recognizing the vulnerabilities is essential before taking the initiative to strengthen them. Doing this can really highlight the flaws and failures of the current system. This will help you identify the pressure points, areas where your team is overstretched.

Begin by formatting every activity in the inventory lifecycle into a process from the point of origin to the end result. At every step, ask feedback on simpler methods and shortcuts from the team members performing the tasks. This is important when coordinating many moving parts of the inventory mechanism. Then establish or update standard operating procedures (SOPs) to prevent the past mistakes from being repeated.

Careful and Consistent Categorization

The practical basis behind your inventory management system may already be lost to the ages. Perhaps you used the ABC method at some point but this analysis was never refreshed. Perhaps you simply recognized the item by location, i.e., supply closet, cabinet, or storage unit. Other criterion may include brand, demand, criticality, medical purpose, or monetary value. When inventory is recorded in a logical fashion like this, it is easier to compare your category sales to well-established benchmarks in the veterinary industry.

But which of these is the most important indicator of treatment and quantity of supplies? 

Studies have shown that a multi-criteria decision support model could result in a more efficient hospital inventory management system [1]. Using sensitivity analysis, the items were classified into W, B, and M sets. This signified that the items be monitored on weekly, bi-weekly, and monthly basis respectively.

Perpetual Inventory

Are you mentally wincing at the thought of having to take count of stocks so very often? Then a perpetual inventory system might be the solution for you. Perpetual Inventory Management System (PIMS) is a real-time stock monitoring and updating system. Using your electronic records and point-of-sales systems, it maintains an accurate and highly-detailed account of changes in inventory. Recording methods can range from manual to RFID (which is recommended) and the software tracks the order, delivery, transfers, usage, and any kind of transaction. This includes the pipeline inventory so that it is never overlooked by staff. If the order is delayed or unable to be fulfilled, the PIMS will record that. It will even provide the location of each category of stock to ease accessibility and prevent theft.

Unlike periodic method, where regular physically counts are required, perpetual inventory provides accuracy and leaves no place for inconsistencies. This eradicates the issue of stock-outs and customer disappointments with one stone.

Smart Ordering

Remember that, when ordering, there is no size that will fit every item. If you have utilized a multi-criteria classification model, you can distinguish items based on their demand. For medications and supplies that are used in large quantities and at high rates, bulk buying is suggested. But this would not be feasible for high urgency, low usage supplies.

Inventory replenishment is no easy task. Re-ordering the right amount at the right time requires lots of historical data to accurately forecast. The software must take into consideration the lead time or else the order may be filled up late. Rely on your inventory management software by feeding it a minimum quantity point for each item. Once it reaches that threshold, it should automatically ping you or add that item to your reorder list.

Consolidating suppliers can streamline the price comparison process. This will also cut down the time spent by staff paying invoices, loading, transporting, and restocking goods. Make use of our Suggested Order App to maximize your gains and your savings by comparing discounts from multiple suppliers, pharmacies, and manufacturers in one place. The app is easily integrated with our inventory management system so that you can get suggestions that are relevant to your precise needs. 

Tipping the Balance in your Favor

The major issue with managing costs is that there is no precise solution. You cannot simply reduce the size of your order to reduce holding costs. Conversely, that would increase the labor costs. Why? It takes time and effort to compile, place, receive, and restock the product throughout the hospital floor. And it’s the same vice versa. If you do not strike a balance, you not only forego precious revenue, you also fail to provide care that you have promised your patient.

When ordering, consider your sales based on frequency. Order certain items weekly, monthly, or after a fortnight, based on their demand. Even if you require only 40 units of white goods, if they come in a box of 50, order the full box instead.

Use your storage area size and inventory turnover rate to determine the frequency and quantity of your order. The ideal inventory turnover rate is 10 to 12 times per year. But of course, veterinary clinics work differently than your typical retailer. The average veterinary practice typically has a healthy turnover rate of 6 to 8 times a year. Keeping in mind your storage level can really help optimize your inventory management system and improve overall efficiency.

Drop-shipping

Let’s face it: having enough medications, supplies, injections, and vaccine available to customers at all times is nigh-impossible. But when products are unavailable to clients, those Big Box retailers start to look pretty attractive. And then there go your sales rates. Yet what if you could have every single animal care item under the sun available at the push of a button? And better yet, what if it took up no extra space on your shelf? And neither did you have to build an extra warehouse to hold it all?

If balancing the costs is too much hassle, consider drop-shipping. Show all the merchandise as “available” at your ecommerce outlet without having to hold it all in the clinic. Once the client places the order, the goods are shipped directly from supplier to customer. It’s so convenient for the pet’s parent, not to mention the cost-savings to your business. Obviously, this cannot apply to your entire inventory. Service goods and other items vital to the clinic’s operation would have to be available on hand. But it can immensely reduce the burden of sales stock. 

In Conclusion

Achieving effective inventory control requires striking a delicate balance between maintaining sufficient inventory levels and not overburdening your financial resources and storage capacity. Given the diverse range of challenges involved in inventory management, including those related to geopolitical events and technology advancements, there is no one-size-fits-all approach that guarantees success across all enterprises. In addition, it may be necessary to manage different types of inventories differently, such as perishable versus non-perishable goods. To determine the most effective approach for your business, it’s essential to keep accurate records while experimenting with different methods, and to use specialized software to monitor key metrics, generate reports, and develop dashboards that provide valuable insights.

[1] de Assis, A.G., dos Santos, A.F.A., dos Santos, L.A. et al. Classification of medicines and materials in hospital inventory management: a multi-criteria analysis. BMC Med Inform Decis Mak 22, 325 (2022).