From stockpile to streamlined: Stop tripping over tomorrow's profits

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It’s easy to fall into the trap of thinking that more inventory is better, driven by the fear of running out of essential items, the lure of bulk orders to save money, or a tempting special offer that seems too good to pass up.

But here’s the catch: when you start piling up inventory as a safety net, you’re actually tying up a significant amount of funds that could be better used elsewhere in your practice. It's about the ongoing carrying costs—money spent on products that sit on the shelf, risking expiration, shrinkage, or even theft. If these items are not generating revenue, they inflate your costs of goods sold (COGS) and quietly strain your practice’s finances.

Getting to the root of overstocking lets you tackle the problem head-on, making sure every dollar you spend on inventory truly pays off.

Overstocking causes and solutions

Bulk ordering for great deals

Bulk ordering can be a savvy strategy, but it's important to remember that these offers are often designed to boost sales volume or clear out stock nearing its expiration date. To make the most of bulk deals, calculate the amount you need for a specific period—like 3 months—based on your order history. This way, you can avoid overstocking and ensure you're only buying what you'll use.

Redundant formulary

Redundant formulary refers to stocking multiple products that essentially serve the same purpose, such as different brands of the same medication or both generic and brand-name options. This often arises from varying preferences among veterinarians.

Carrying multiple stock keeping units (SKUs) and extra safety stock for each product increases your total inventory, inflates carrying costs, and heightens the risk of shrinkage. Additionally, managing different interchangeable products can lead to inconsistent pricing and confusion in margin management, impacting your COGS and profitability.

Encourage doctors to engage in discussions and reach a consensus on product preferences, focusing on efficacy, product reviews, and other relevant factors. It’s also important to be strategic with your pricing strategies—whether it’s cost-plus, percentage-based, or another method—setting strategies by product category and sales type is important to create, monitor and maintain optimal results.

Misjudging demand

Misestimating the actual demand for products can cause hospitals to order too much. Without accurate forecasting, inventory levels can become skewed, leading to unnecessary excess.

Use historical data to anticipate and manage seasonal fluctuations. Year-over-year trends can serve as reliable indicators for determining both timing and quantity of orders. To address seasonal demand, consider increasing your safety stock—extra inventory held to absorb variations in demand—and adjust the frequency of replenishment accordingly. For example, if you typically reorder parasiticides every 4 weeks, you might shift to ordering every 1-2 weeks to calibrate for spring.

Poor emergency planning

Backorders are a reality, and they’re rarely predictable. The fear of a shortage can trigger panic buying, which ironically worsens the situation by depleting stock faster across the board. This overreaction can lead to excess inventory as you try to plan for these contingencies.

For critical items, it's crucial to have a clear understanding of available alternatives so you can pivot when necessary without compromising care. For low-cost items with long shelf lives, ordering in bulk may be more economical, allowing you to absorb normal market volatility without inflating your overall inventory. The key is to strike a balance—preparing for potential disruptions without creating new issues by overstocking.

Relying on Practice Information Management Systems

While Practice Information Management Systems (PIMS) are invaluable tools, they often struggle to keep up with the complexities of a service-driven environment like that of a veterinary hospital. PIMS relies on transactional data to track inventory levels—recording inventory when it is purchased and then deducting it based on sales invoices. It works well in straightforward retail settings where items are simply bought and sold in similar units. In a veterinary practice, where up to 50% of inventory is consumed directly within the hospital and never actually transacts, PIMS falls short in capturing true usage. As a result, practices can overestimate their needs and order too much, while staff end up spending extra hours on manual counts to ensure accuracy.

To manage inventory efficiently, leverage data and optimize cycle counts. Accurate data helps predict demand and account for changes, enabling you to set efficient replenishment frequencies and improve inventory turnover. Incremental cycle counts, rather than comprehensive monthly/quarterly/annual audits, can help you replenish inventory just in time and keep a close watch on your inventory's value. This approach reduces value variability, shrinkage, and the time spent managing excess inventory.

Strategies to optimize inventory carry

Inventory turnover

Optimizing inventory turnover helps prevent overstocking by ensuring that inventory is moving efficiently and aligning with actual demand. This involves managing several key metrics. First, evaluate your COGS, which varies depending on hospital type, location, formulary, and sales mix. As a general guideline, COGS should be between 20-24% for a general practice hospital, 10-14% for an emergency or specialty practice, 26-30% for mixed animal practices, and over 30% for large animal practices.

Next, consider the value of your inventory relative to your average monthly revenue, which should ideally be around 20%. While this will vary depending on your hospital’s specifics, it serves as a solid benchmark.

Lastly, aim for an inventory turnover rate of 3-4 times per year on average. High-volume, expensive items should turn over every 2-3 weeks (15-25 times per year), while low-cost, low-volume items might only turn over 4-8 times annually. Keeping up with these turnover rates ensures your inventory stays in line with real usage, avoiding excess stock and minimizing overstocking.

Supplier relationships and Group Purchasing Organizations

Group Purchasing Organizations (GPOs) often partner with specific suppliers or groups of suppliers, allowing practices to benefit from bulk pricing in exchange for committed orders. These arrangements can help you achieve the balance between cost savings and maintaining an appropriate level of inventory.

Maintaining a close relationship with your suppliers allows you to lean on them when challenges arise, such as unexpected demand surges or inventory shortfalls. A sales representative who values your business will be more willing to go the extra mile to support you and loop you in on upcoming promotions or new product launches.

Just as it's frustrating when clients focus only on price and overlook the value of your talent and care, the same applies when selecting suppliers—don’t judge them solely on cost. The best suppliers understand that their success is tied to your success, and they focus on delivering excellent service consistently. Look for suppliers who are committed to minimizing backorders and who have a reliable supply chain management process in place.

Just-In-Time inventory and software solutions

The most effective way to streamline inventory is by implementing a Just-In-Time (JIT) process, which ensures you have the necessary supplies without accumulating excess stock. While JIT is traditionally ideal for manufacturing environments with highly predictable demand and supply chains, the concept can be adapted for veterinary hospitals by incorporating a slightly larger margin of error to account for the variability in demand.

Using inventory management software can significantly enhance this process. For example, Inventory Ally tracks your inventory in real time, providing insights into consumption patterns and guiding replenishment based on your transaction history. Data shows that after implementing Inventory Ally, one GP saw a decrease in COGS from 43% to 31.9% in just 1 month, translating into $333,000 in annual savings.¹ An emergency room and specialty hospital reduced inventory carry by $100,000 in just 3 months by optimizing turnover.² These results demonstrate how effective inventory management software can be in enhancing efficiency and improving your bottom line.

Emmitt Nantz, MBA, cofounder of Inventory Ally, has been part of the veterinary family for nearly 2 decades and is driven by a personal mission to make the veterinary domain better. Nantz spent 12 years working at Banfield, starting out as a single-site hospital manager. Having majored in agriculture business management, he expanded his education to include an MBA, a Black Belt in Six Sigma, and a Project Management Certification.

Nantz applied these learnings at Banfield and later as a Chief Operating Officer at SmartFlow where he helped hundreds of practices improve their operations. In pursuit of his passion for workflow optimization, Nantz honed his expertise in a critical area that often plagues hospitals' bottom lines – inventory management. He co-founded Inventory Ally, an all-in-one cloud software designed to help veterinary professionals reduce inventory costs, streamline processes, and save time.

References

1. Nantz E. Todd County Animal Clinic’s Inventory Success Story. Inventory Ally. Published March 13, 2024. Accessed November 20, 2024. https://inventoryally.com/news/todd-county-animal-clinic-success-story/
2. Nantz E. Inventory on Autopilot: How a Specialty Hospital Maximized Its Earning Potential. August 13, 2024. Accessed November 20, 2024. https://inventoryally.com/news/inventory-on-autopilot-how-a-specialty-hospital-maximized-its-earning-potential/