Just in the nick of time

"I don't believe in just-in-time inventory," says Joe De Deo. "Just in the nick of time is more like it." De Deo has managed the Equine Clinic at Oakencroft in Ravena, N.Y., for four years. With eight full-time veterinarians, De Deo has plenty of inventory to track. And his background of 10 years in the financial services field gives him eagle eyes when it comes to hidden costs and freeing up cash flow.

That attention to detail is anything but trivial when it comes to inventory. A few dollars here, a half hour there. It adds up. Equine practices average $46,873 in inventory at any given time and spend an average of $228,415 on supplies in a year, according to the AVMA's "Economic Report on Veterinarians and Veterinary Practices," 2005.

"I think a lot of veterinarians and managers don't pay as much attention to inventory as they should. It's one of the largest fixed costs. And a couple of percentage points in fixed dollars makes a difference. In fact, most managers can save 10 percent to 15 percent," De Deo says.

One way to save money is to get a better deal on the price of products. Another is to cut down on the hidden costs of inventory—time spent searching for distributors and ordering products, carrying costs, and so on. These costs are harder to track. One of the easiest solutions: Cut down on how much inventory you're ordering and stocking. "I'd rather have money in the bank than on the shelves," says De Deo. "It's a cash flow thing."

Of course, he says, you can never compromise the integrity of patients' well-being. "You must stock some critical items at all times—fluids, IV sets, and so on. You might not use 12 boxes of plasmalyte for a few months, but when you need it, you need it."

For other items, keeping a minimal amount in the clinic and trucks is ideal. And yes, equine practices enjoy the added challenge of stocking both. Dr. Mark Baus, an owner at Fairfield Equine Associates in Newtown, Conn., says overstocking vehicles leads to some of the biggest wastes in equine practices. "The products become outdated, disheveled, or dirty," he says. "Often you don't turn over the product nearly as quickly as you need to."

Dr. Baus' practice stocks nine ambulatory vehicles. To minimize overstocking, the practice has come up with an interesting solution: drop shipping. Here's more about this inventory management strategy and seven others that could save you time and money—and headaches.

I Consider drop shipping products. This ingenious idea is one of the ways Dr. Baus and his colleagues keep their trucks minimally stocked. Basically, the practice ships products from its facility or from the distributor directly to the client on an as-needed basis.

"In most cases, we fulfill the entire order that we'd otherwise sell in the field by mailing the product, unless the products are needed at the time service is performed."

One warning: Make sure the distributor doesn't include the invoice. Otherwise, the client could see what you pay and compare it to what he or she pays.

II Centralize inventory management. Dr. Baus recommends that one person in the practice handle inventory. "That person develops relationships with distributors," he says. And keeping this job with one person increases the accountability of this important position and also reduces the chances for duplicate ordering, Dr. Baus adds.

At Fairfield Equine Associates, the position of inventory manager is a full-time job. Previously, the position was combined with receptionist responsibilities. Dr. Baus says the change to a full-time position was remarkable and allowed the practice to start adding services like drop shipments.

III Narrow down your distributors. "You have to balance the time spent calling many distributors (an example of a hidden cost) with how much you save on price," recommends De Deo. "I initially called several distributors to establish prices and then I narrowed the field to a few that I use most often. I check prices every few months or as needed to ensure I'm still receiving the lowest cost."

Dr. Baus agrees that it's inefficient when you spend lots of time trying to shop the lowest price. His practice primarily uses one distributor.

"Cost affects how you select your primary distributor," he says. "You count on that distributor to give you the best price across the board. You'd shop other distributors only if the product you need isn't available from your primary one."

IV Watch out for bulk purchases and sale items. "A 2 percent savings isn't worthwhile if you have to tie up a chunk of capital over a long period of time," De Deo says.

He's also wary of sales: "If a distributor can sell you 50cc bottles of flunixin meglumine for $15 on Thursday and Friday, then they can do it Monday through Wednesday, as well."

V Ask for delayed billing from your distributor. "They can give it to you," says De Deo. "If they don't, consider whether your future business is worth delayed billing. For example, I usually offer to buy $5,000 to $10,000 if they delay 90 days. If they don't, the market is competitive enough that someone else will.

"Keep in mind," he continues, "distributors and owners are on opposing sides. They want your business—and for you to pay the highest price you're willing to pay—whereas you want to pay the lowest price. There's nothing wrong with making money. Just don't be lured into thinking your relationship with your distributor is more than that. As a side note, I'm sure distributors negotiate prices with their suppliers as aggressively as I negotiate with mine."

VI Do spot checks. "Pick a few items that are costly and have broad application for therapy, such as joint treatment, and assign someone in a position of authority over the inventory manager to do an occasional inventory on these items to ensure they're fully accounted for," suggests Dr. Baus. "It's important that your manager knows that level of accountability exists."

VII Keep inventory behind lock and key. Of course, you must lock up controlled substances. But Dr. Baus suggests limiting access to all inventory. More difficult access changes perceptions about the value of the products and your dedication to controlling loss, he says.

VIII Track inventory in your professional management software. "When you keep your inventory data with your accounting information, you can see the comparison side by side and really understand how much you purchase versus how much you sell," says Dr. Baus. "Plus, if you track inventory on software other than accounting or a practice management system, you're going to duplicate the work to enter the data, which may result in additional errors."

Taking stock

The practice management software De Deo uses includes an inventory component. While he says it helps him track purchasing history and costs, it's really not made to literally track inventory. So he's looking into a barcoding system.

"I could take a barcoder and enter how many of a product I have. Then I could enter a low-high number. So if I want to keep six to 12 on hand, I'll set that in the computer. Then when I run down to seven, it would order five."

Even with inventory tracking tools, you'll want to take a physical inventory at least once a year, Dr. Baus says, for accounting and tax purposes. Veterinary Economics Editorial Advisory Board member Gary Glassman, CPA, points to a year-end tax issue practitioners should be aware of. "Some states or localities have what they call a floor tax," he says. "This is a property tax on inventory that you have on your premises on Dec. 31 of each year. The interesting thing is that it's only taxed if you hold it on that day. Consequently, those that will be taxed don't want to have a lot of inventory on that particular day in the taxing location."

So taking inventory once a year is mandatory. Dr. Baus thinks doing this task quarterly would be ideal. The goal: Calculating your turn rate—the rate at which you turnover your inventory. Inventory counts also let you see what's gone out but hasn't been charged for. In this case, the fee wasn't captured. Or someone's stealing.

Some practice teams count inventory more often, says De Deo. He does it daily. "I'm sure some folks would argue that you shouldn't do this every day. But it only takes me 10 minutes."

For De Deo, more frequent orders also make sense. He says the practice has outgrown its facility, leaving limited room for inventory storage, and distributors mostly ship the next day for free. "I'd rather have a lab technician open two packages a day than sift through 20 to find what he or she needs," he says.

While they may differ on exactly how often to take a physical inventory, Dr. Baus and De Deo clearly agree on the keys to good inventory management: Limit overstocking, cut down on hidden costs, and minimize missed charges. Dr. Baus passes along this advice from Dr. Andy Clark, CEO of the Hagyard Equine Medical Institute in Lexington, Ky.: "Visualize your inventory not as rows of containers of drugs, but stacks of one dollar bills."

That's one way to keep the value of your investment top of mind. And to make it clear that managing inventory is time well spent.