Equine inventory: How excess drugs and supplies make your practice sick

An epidemic is sweeping through equine veterinary practice. You know you're sick with it if you pay only one vendor each month. You're showing symptoms if your drug distributor demands cash on delivery. Other signs include sweat-inducing stress over accounts payable, a sinking feeling that your practice is going under, and perpetual thoughts that you're just not good enough to manage your finances. That's right. It's the dreaded EII: equine inventory irritation.

Luckily, I've got a three-step program to tackle this pervasive illness, a prescription to ease your practice's pain. It's time to take your drugs and supplies seriously: Your mental well-being and your practice's future financial success depend on it.

STEP 1: TREAT INVENTORY AS MONEY

When you pop open a bottle or peel open a package, currency doesn't pour out. But you need to act as if it does. The first step to inventory wellness is to look at inventory as dollars on the shelves, not just products. And remember that the value of your inventory comes from using or selling it for a profit, not having it sit on a shelf. If you don't sell the product, it doesn't appreciate in value—it expires.

Treat inventory like cash and keep it safe. It costs you a lot of hard-earned money to buy products to resell. It makes sense to protect that investment by securing it under lock and key. You won't need to a build a bank, though. You'll need a central pharmacy with limited access by staff.

STEP 2: SET UP A CENTRAL PHARMACY

A central pharmacy helps protect inventory from theft by employees and clients. It's also a great way to manage your inventory. With a central pharmacy you gain more control over product selection and more knowledge of quantities on hand, and you reduce drug expirations.

Most equine practitioners keep their pharmacy at home. That's fine—but it needs to be locked. And you need a system, a way to decide how drugs and supplies will be requisitioned from the pharmacy to a practice vehicle or for on-location over-the-counter sales.

A well-run central pharmacy and a consistently used requisition sheet can do a lot for a practice's finances and an owner's peace of mind. As an example, Springhill Equine in Gainesville, Fla., reduced its inventory by nearly 55 percent, or $50,000, in the first nine months of 2010. Here's how they did it:

> The practice's staff helped the two doctors map the location and quantity of products in the mobile equine practice's trucks.

> The veterinary technicians check each truck daily and prepare requisition sheets for needed products. They turn in these sheets to the inventory manager.

> The inventory manager fills the requisitions from the central pharmacy, places the drugs and medical supplies in the trucks, and records the movement in the computer.

> All invoices from the vehicles are checked for accuracy: Does what's left in the truck plus what's shown on the requisition sheet equal the original total inventory for the truck? If there's a discrepancy, the inventory manager figures out whether the product is lost or broken or if a team member or doctor failed to include it on a requisition sheet.

The system takes a little time to get used to, but it pays dividends in unmissed charges and shrinkage.

STEP 3: BENCHMARK YOUR INVENTORY

Financial benchmarks are a fantastic tool for veterinarians. They offer you a glimpse behind the scenes into average practices vs. high-functioning practices, giving you a pat on the back for a job well done or goals to shoot for. If you keep in mind that benchmarks are just averages to be consulted and not obsessively followed, they can help you manage your finances and inventory.

At first, your numbers may not be very close to the national averages. That's OK, because now you have a goal to inspire you. A practice management consultant or another practitioner familiar with equine veterinary metrics can offer you advice on daily, weekly, and monthly course adjustments to meet your new goal. And the more you fine-tune your practice, the better your cash flow and profitability will be.

In my opinion, the two most important benchmarks are inventory turns and percentage of gross revenue spent on drugs and medical supplies. Thankfully, they're easier to track than client compliance and can quickly improve your cash flow.

Inventory turns. Inventory turnover ratio is an equation that all practices need to perform, whether for a single product or for all products over a specific period of time. This calculation is crucial for success: The more you turn a product or products, the less money you have tied up in boxes and bottles and the more cash you have flowing. (See "Let's investigate inventory turns" for the formula and a sample calculation.)

Let's investigate inventory turns

The American Association of Equine Practitioners says inventory turnover should be six times a year. That means that at any time you have at least 60 days' worth of product on your shelves. If you ask me, that's way too long to tie up cash in products. Vendors won't wait for payment for two months, so this means you order the product, pay up front, and sell the product later. Ideally, you want to sell it before your invoice comes due. That translates to inventory turnover of 12 times a year or every 30 days. This is possible.

Many equine practices are turning their inventory 10 to 12 times a year. How did these veterinarians improve inventory turns? Simple—they use a central pharmacy, they use their practice management software to aid them in discovering the best reorder points, and they regularly monitor inventory usage.

Inventory as percentage of revenue. The second most important benchmark for equine practitioners is the total cost of drugs and medical supplies as a percentage of gross revenue. You can track this on a monthly basis or more frequently for a snapshot of how well you're controlling inventory. One generally accepted benchmark for this percentage is 20 percent to 22 percent.

Your challenge for 2011, should you choose to accept it, is to calculate your 2010 percentage right now. Find out how you compared last year to this benchmark. I've spoken to several equine practice owners recently who worked to improve their numbers and reached 15 percent or better.

To understand why the total cost of drugs as a percentage of gross revenue is so important, consider an example. If gross revenue stays the same and you lower your percentage of drugs and medical supplies by 5 percent, your profit goes up. Let's say your practice grosses $1 million and your drug and medical supplies expense is $250,000 (25 percent of gross). But now, through better inventory management, you generate the same gross revenue but your drug and medical expense is only $200,000 (20 percent). Your profit has just increased by $50,000. Not bad, considering your gross is the same.

Doesn't it make sense to work your inventory to improve your profitability? You can do it by building an inventory control system, incorporating a central pharmacy that operates with checks and balances, and watching key performance indicators. You'll be on your way to improving your practice's financials and healing you of that sickening equine inventory irritation.

Veterinary Economics Editorial Advisory Board member Dr. James Guenther, MBA, CVPM, is owner and president of Strategic Veterinary Consulting in Asheville, N.C. Send questions or comments to ve@advanstar.com.