Give your practice an inventory intervention

It's time to face facts: You've got a problem with inventory, and it's hurting your practice and your profit margin. You may not even know this is happening. That's where I come in.

First, you have to recognize the signs. Many of you think of inventory as an investment, but investments appreciate in value. Which of your drugs or supplies have ever increased in value over time? Almost none. Inventory isn't an investment—it's a way of making money because you charge clients when you use it or sell it. Inventory that's just sitting on your shelf is an expense and it's costly to your practice. Now's the time to let go. It's time for an inventory intervention.

STEP 1: ASSESS THE PROBLEM

First, the denial has to stop. You need to know whether inventory is being handled properly at your hospital. One way to determine this is to calculate inventory as a percentage of your practice's gross income. Take the inventory purchases for the month and divide that by your gross revenue for that month. Experts agree that this number should run between 14 percent and 16 percent, unless you sell a lot of pet food or retail items.

So let's say you find that your inventory purchases to gross is closer to 20 percent. Well, I'm here to help. Your fears of tackling your inventory issues can be conquered. You can face your overloaded, profit-sucking shelves and get your practice back on track. Recovery is just eight more steps away.

STEP 2: KEEP YOUR INVENTORY MOVING

The major reason most clinics lose control of inventory costs is that items stay on the shelf too long. Shelf life is defined as the time between when a product shows up and when it's used or sold. Here's a quick question: What's the ideal shelf life for a product at your practice? Ideally, of course, the right answer is 60 seconds or less. You want to purchase only what you need at any given time. Inventory that sits on your shelves ties up your hard-earned money and cuts into your practice revenue.

Now we all know that a 60-second shelf life is a pipe dream. A more realistic turnaround time is 30 to 60 days. And there will be exceptions to this rule. Certain products such as gallons of alcohol or pills that come in large bottles can't be bought in smaller quantities and will sit around even longer. There are also items you buy in smaller units, like pet food, that should sit no longer than two weeks. For most products in your clinic, however, aim for a shelf life of one to two months.

STEP 3: SET UP REORDER POINTS

Reorder points automate the inventory process wonderfully. When stock of an item depletes a certain amount, you order more—that's the reorder point. And reordering when you have one month's worth of a product left is the best way to achieve a 30-to-60-day shelf life. For example, if you normally use 24 bottles of ear cleaner on a monthly basis, you'll set a reorder point of 23 or 24. You can glean inventory usage information from your veterinary software, but beware of seasonal variations. Adjust for high-demand and low-demand periods.

STEP 4: ESTABLISH REGULAR REORDER QUANTITIES

Once you know your reorder point for an item, the next step is to set up a reorder quantity. Your reorder point and reorder quantity should be the same. In the above example, if you use 24 bottles of ear cleaner each month, you let the product get down to 23 or 24 (the reorder point) and once it does, you order 23 or 24 of that item (reorder quantity). Even if the product comes in the next day, you have a two-month supply—the perfect shelf life for that product. That's not so hard, is it?

STEP 5: CUT OUT MULTIPLES

Product duplication can also cause your inventory costs to careen out of control. Do you carry four ear cleaners that all do the same thing? How about similar shampoos or brands of food? If so, you're extending your shelf life and tying up cash in your inventory. You'll be better off if the doctors select just one or two products for a specific purpose. This will help you standardize purchases and recommendations at your hospital.

If a doctor decides to prescribe something that your practice doesn't normally carry, he or she can suggest the client buy it from your practice's Web site—you do have a venue for selling items you don't carry in the clinic, don't you? Product duplication complicates inventory management. Eliminate it.

STEP 6: REMEMBER TO CHECK YOUR PRODUCT MARKUPS

If the above tips don't solve your inventory crisis, then look at your markups. Make sure that someone is entering inventory into the computer every time it's received and that your software is marking up the price correctly. I once consulted with a practice whose inventory to gross revenue percentage was way off. I checked the practice's computer and found that the option for automatic markups was turned off. No one knew! The team had been dutifully entering inventory into the computer and assumed the software was marking it up correctly.

A normal markup is between 100 percent and 150 percent, depending on whether the product is one that clients shop around for or not. Some practices may have substantially greater markups, some a little less. Double-check that your team is promptly entering new inventory into the computer and entering prices correctly. Also verify that your team or management software is adding a dispensing fee and a minimum prescription charge.

STEP 7: PROTECT YOURSELF AGAINST EMBEZZLEMENT

No one likes to think that theft might be happening in their own practice, but unfortunately, it happens all too frequently. I once got a call from a veterinarian whose client had asked her whether she was selling a certain flea control product on eBay. The veterinarian said she didn't sell products on eBay. The client then asked if "Susie Smith" was an employee, because that's who was selling the product. Turns out Susie was the receptionist. The veterinarian contacted eBay and learned that Susie had received more than $37,000 from the sale of veterinary products. Any guess where Susie was getting her inventory from?

The moral of the story: Regularly monitor your inventory numbers. If you buy $2,300 of food in one month and only receive $2,500 of revenue, you have a problem. When I review financial information with veterinarians, we compare certain inventory costs to income on a monthly basis. This lets us know if inventory is walking off. Don't neglect total inventory checkups either. Most accountants recommend that you perform a complete inventory at year-rend or a rolling inventory count. (In a rolling count, you tally different product lines each month—antibiotics in January, suture materials in February, and so on—until you've finished everything by the end of the year.)

STEP 8: CHECK YOUR DOLLARS AND CENTS

If your inventory-to-gross-income comparison is too high, there may be another factor at work that has nothing to do with inventory. It may be that your practice's gross revenue is too low. You're not charging appropriately for your services, you're giving too many things away, or you're discounting your services. Or (see step 7) an employee is stealing money from under your nose.

Regularly compare your gross revenue to data from similar practices, both regionally and nationally. Sources of this data include Benchmarks: A Study of Well-Managed Practices and the AVMA. If your income from laboratory, radiography, surgery, and anesthesia fees is less than regional and national averages, you could have a problem with the fees you charge or with missed charges, not with your inventory.

STEP 9: TAKE THE RED DOT CHALLENGE

Here's a simple way to find out if you have a shelf life problem: Ask someone in your practice to walk around the hospital and put a red dot sticker on every inventory product you own. Thirty days later, go back and see how many items still have a red dot on them. In 60 days and in 90 days, do the same thing. Ideally, there should only be a few red dots left after 60 days. Those items that still have dots on them may be a problem for the practice. Many practice owners and managers I work with have tried this and are surprised at how many items still have dots after 60 and 90 days.

Recovering from an inventory problem may sound like a lot of work—and it is—but the savings you realize as a result will be substantial. Your new inventory control system will ensure that items are on hand when you need them and turn your practice from a warehouse back to into a tightly run veterinary clinic.

And consider this: If you've got inventory issues, you're not alone. After the last recession in the 1990s, a reporter asked chief executives of Fortune 500 companies how they helped their businesses survive the economic downturn. Their answer? They reduced inventory. That may not have been your first idea when you thought of ways to combat this recession, but it needs to be high on the list. Face your inventory problems one day at a time, and you'll be recovered in no time.

Mark Opperman, CVPM, is Veterinary Economics' Hospital Management Editor and owner of consulting firm VMC Inc. in Evergreen, Colo. He's speaking on management and team motivation at the Veterinary Economics Managers' Retreat April 23. He'll also be speaking about updating employee manuals on April 26 at CVC East in Baltimore. Visit TheCVC.com for details.