Effective Veterinary Inventory Management
Inventory includes drugs, medicines, ointments, clinic consumable supplies, pet food and other over the counter products. It does not however, include outside diagnostic fees, cremation expenses, temporary locum services or referral services, which can be reported as one total expense on financial statements under the general caption, Cost of Goods Sold.
Although we mainly look at inventory as something we have to order once or twice a week and/or something we have to painstakingly count for the accountant every year, it is a profit center that contributes significantly to a veterinary practice. Not only does inventory generate revenue, but it represents a significant contribution to the practice's relationship with clients.
From a revenue point of view, inventory sales represent 25% to 30% of the overall practice revenue. Out of every dollar received in the form of revenue, approximately 24% goes to pay to replace inventory that has been either consumed or sold. Dependent on the overall practice revenue and practice philosophy, the average one doctor practice will carry between $20,000 to $25,000 dollars in inventory.
Clients visit the veterinarian to ensure the continued good health of their pets as well as treatment of their pet for unusual symptoms or treating something to their pet's physical being. Within the industry this demand if you like, is satisfied through what I refer to as "Veterinary Health Care Delivery." If the veterinarian cannot, for whatever reason, treat the animal or the clinic doesn't have the appropriate product in inventory, the opportunity then exists for the client to go elsewhere for these services or products resulting in the loss of a client which over the years contributes significantly to the overall revenue and profitability of the practice.
From the client's perspective, there is a very real relationship between the veterinarian and inventory. Some veterinarians treat pain medication as an option, where as other veterinarians believe pain medication is not optional and automatically include (and invoice) the dispensing of this drug as part of their professional services delivered. Some veterinarians believe writing prescriptions and sending their clients to a local pharmacy is better than delivering the prescription as the appointment is completing. Some veterinarians carry only basic prescription pet food used for very specific short term health treatment needs, whereas other veterinarians carry a full complement of food products and promote its use as part of their Veterinary Health Care Delivery. There are some veterinarians who only carry raw diets as well as promote supplements and other sorts of natural pet wellness products.
If the clinic's veterinary health care delivery is not in line with the client's perceived value demands, revenue patterns will decline or simply stagnate much to the horror of the veterinarian thinking it is the economy!
Inventory Investment (Management)
A veterinary clinic's investment in inventory is tied specifically to not having excess inventory on hand at any one given time, as well as having just enough inventories in stock so the clinic is never (within reason) without a particular product when needed. Within most inventory management programs, one can manage their inventory level through minimum and maximum unit levels computerized environment, which in turn leads to generating inventory order forms. Obviously with software programs like this, inventory management and administration time is reduced which in turn lowers administration costs.
Practitioners maintaining an inventory investment of $25,000 dollars or more should be using an inventory management software program and, in particular the application related to minimum and maximum unit sections to control their inventory costs and minimize the time to complete their order sheets accurately and effectively. As with any business carrying inventory, effective management includes balancing the capital investment in inventory, having just enough inventory and minimizing the administration costs of ordering and controlling inventory.
As to how much a practice should carry in inventory, is a function of revenue patterns and practice philosophy (Veterinary Health Care Delivery). Statistically, the majority of companion animal veterinary practices having reasonable inventory levels achieve an overall inventory turn rate (100% replacement of inventories) of between six and eight times per year. Naturally this would represent the overall inventory with items such as pet food turning upwards of 24 and higher times per year, while prescription medicaments may only turn three to four times a year.
Inventory turn rates can be calculated as follows:
Annual Inventory Purchases equals Average turn per year Average inventory value
Annual Inventory Purchases equals Average Inventory Desired "Turn" Rate Balance
Inventory turn rates are an important tool in controlling inventory costs as well as measuring the inventory product composition as new products are always being introduced. Particular attention has to be paid to new products to ensure there is the anticipated positive market reaction.
If the practice does not have a computerized inventory management program, color coded price tags can provide an easy visual indication of what products turn or not. Creating lists of products that sell frequently ("Ten Most Wanted List") will narrow the management focus on certain items so as to prevent running out of inventory.
Inventory Turn Rates:
Annual Revenues $ 750,000 $ 600,000
Total Purchases 172,500 138,000
Average Inventory 25,000 20,000
Inventory turns 6.9 6.9
In a one doctor veterinary practice, inventory would represent approximately $25,000, comprising of approximately 50% in pharmacy supplies and the balance in pet food, consumables and other over the counter products.
A practice does not make money on inventory unless it is sold (turned) AND the inventory product is sold for a value higher than it was acquired. Within the companion animal industry, prescription pet food is sold with a 40% markup based on the acquisition cost while prescription medicines are marked up 100% with a dispensing fee of $6 - $10.
When reviewing financial statements for a companion animal veterinary practice, Inventory purchases expressed as a percentage of gross revenues are in the range of 23% to 24% and it is in this context that veterinary practices can lose money as is demonstrated in the following example;
Clinic A Clinic B
Revenue $750,000 $750,000
Inventory Purchases 172,500 (23%) 202,500 (27%)
Gross margin $ 577,500 $ 547,500
Lost Profit (27% - 23%) $ 30,000
Overall Practice Value Loss $125,000
How does the cost relationship get out of sorts like the above?
• The consumption of inventory in line with the delivery of professional service inventory is not being charged to the client or the consumption cost is not accurately reflected in the professional fees being charged;
• The individual product pricing is not updated in line with fluctuating purchase costs and/or the pricing philosophy is not in line with industry norms including prescription drugs being marked up 100% and food products achieving a 28.6% margin based on a 40% markup.
• In-clinic dispensing of medicines and when other prescription products are not being invoiced or accounted for in the service fee;
• Poor and inconsistent inventory physical counts and valuation.
Effective Inventory Management
1. Physically count inventory every year, normally in conjunction with the fiscal period end of the veterinary practice. A physical count provides the opportunity to review the inventory composition and the overall value of inventory being carried including computing the relationship of inventory costs to revenue. Take some time to review the amount of money committed to various aspects of inventory as well as the minimum and maximum quantities recorded. Are adjustments required?
Do not rely on your accountant to review and comment on the reasonableness of your inventory.
2. Review inventory pricing to the latest purchase invoice information to ensure appropriate mark up.
3. On an ongoing basis verify actual count to computer records to ensure computer records are accurate as to quantity and thus application of minimum or maximum levels used for inventory purchasing.
4. Review in clinic consumables in relationship to service fees to ensure the current pricing model is reflective of continual increases in purchase costs. Should the clinic be updating its fee structure to include additional costs? Consider implementing a "tray fee" for incidental clinic consumables if not already in place.
5. Review in hospital medical dispensing record and invoicing procedure to ensure all medication is being included in the invoice.
6. When hiring an associate, and in particular new graduates, shadow them for several days and consistently review their medical charts thereafter to ensure treatment plans are consistent with the practice philosophy, including charging for all inventory products either dispensed or consumed.
Inventory Management Delegation
It has become somewhat of an industry standard that one staff member is responsible for inventory purchasing because it is considered a demanding and boring task. At the end of the year, inventory is counted, many times without proper instructions or regard for the overall investment. After looking at hundreds of financial statements, it is clear to me, accountants preparing financial statements do not take notice of the inventory value being submitted or its fluctuation from year to year.
Consider delegating Inventory control/management as follows:
a. Drug/pharmacy and clinic consumables management and inventory levels delegated to the senior Animal Health Technician. As the person responsible for inventory, this individual should develop a listing of clinic approved drug and medicine listing with any additions or changes being subject to the approval of the principal veterinarian;
b. Pet food and over the counter inventory delegated to the senior client relations or receptionist member. It is particularly important that a budget be developed for this area of inventory with the product mix developed in conjunction with the veterinaria recommendations and client demand. Inventory management in this area is based on having preset minimum and maximum inventory levels which are based on desired inventory turn rates.
Delivering Perceived Value to Clients
As mentioned previously, the relationship between the client and the clinic is dependent on the relationship between the veterinarian and inventory which can best be described as the delivery of veterinary care to the patient. In the consumer's eye, and in particular within today's market place, having a sustaining relationship with clients is based on the delivery of Perceived Value. As the client leaves the practice with invoice in hand, do they believe they received value for the money spent? If the answer is "yes" then there is a very good chance the client will be back. These clients usually readily accept the doctor's recommendations as well as readily refer friends and neighbors to the clinic. If the answer is "no", the present day client will look for alternatives and, in the absence of a referral, will return to "fees" being the determining factor in choice.
Before talking about actually delivering value, I believe you need to understand the person or client to whom you have to deliver this perceived value;
A description of the average client visiting a companion animal veterinary clinic today can best be described as:
As a direct result of the recent economic turmoil, the average client is very cautious with where and how they spend their money and as such, while wanting and willing to pay for the very best, they want to know there is a balance in the value being received and the cost. In the highly competitive market place, pet owners are no longer prepared to simply assume they received value because the veterinarian said so.
Delivering Perceived Health Care Through Inventory Sales
Delivering veterinary care today is all about the practice-client relationship. In the case of client/practice relationship, the relationship itself is dependent to the degree to which the practice demonstrates a leadership role. As the client builds a confident and trusting relationship in the veterinary practice as a result of the clinic's leadership, the client's perceived value is delivered; not price. When the client/practice relationship/leadership is weak or non-existent, the factor is reduced simply to fees and at this level the lowest price wins!
So, let's look at some ways a veterinary clinic can deliver perceived value in selling inventory by exercising leadership and thus building trust;
1. Working in conjunction with the support staff, "define" your clinic's Health Care Delivery Program as it relates to professional services and their relationship to inventory products, including;
• Define the role pet food plays in your clinic's delivery of health care and promote it! By this I mean, talk about the pet food products carried, why they are carried and why it is important for your client's pet to be using these as their primary food base;
• Promote your Health Care Delivery Program on the practice web site, including blogging on what and why you think the points of your Health Care Delivery Program is the absolute best for pets;
• Provide client resource information about pet food, including comparative information about alternatives. Don't tell your clients about nutrition and products. Educate them
•Demonstrate leadership in operating your pharmacy by explaining dispensed drugs, side effects, risks and household dangers. Provide resource information, including generics and alternatives.
2. Working in conjunction with your client, define a long term Wellness Program for the patient that incorporates the practice's philosophy of Health Care Delivery, including;
• Pet nutrition and weight control designed for breed and daily activities;
• Outline a vaccination protocol for the patient based on clinic Health Care Delivery philosophy and the pet's living environment;
• Talk about and reach an understanding with respect to professional fees, including consumable costs forming part of the treatment fees and those that are separately invoiced. Talk about the financial obligation of a pet owner, including pet availability.
3. Listen to the market. Listen to your clients. Listen to your support staff. React. React. React.
• Incorporate into every staff meeting, a discussion related to what is happening within the market place that has an impact on your veterinary operations, the services you provide and the products you carry.
4. Introduce an Employee Suggestion Box and reward employees for implemented suggestions.
• The support team, doctors and owners commit to improving the Health Care Delivery (services/products) at least one percent (1%) each day the clinic is open for business, including introducing new products, re-arranging products, promoting products, posting resource information, etc.
5. Introduce a Client Suggestion Box and respond to ALL contributions.
• Have every staff member commit to your defined Health Care Delivery Program through their actions and through their ongoing knowledge and experience, including ongoing communication with clients.
6. Don't sell Pet Food! Sell Great Pet Health, which starts with great nutrition!
• Communicate ongoing with your clients, through open houses, surveys, promoting products and services, etc. Follow up constantly with clients.