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Drugs, medical supplies and food costs are some of the biggest expenses a practice incurs and these costs are increasing in most practices. Effective inventory management is key to keeping these costs under control. Inventory control is sometimes seen as a boring and tedious task, but it can have a huge impact on your profitability and is actually much easier to control than all the ongoing staff drama!

VHMA’s July 2018 Insiders’ Insight survey drilled deeper into how practices feel about their inventory control and various aspects of their inventory systems.

The majority of responding managers, 64%, feel they have an efficient and effective inventory system. 95% of the respondents also indicated that their inventory systems could use improvement in one or more areas. Eighteen percent indicated they need the most improvement counting inventory regularly to mitigate shrinkage.

When asked “Do you think your practice’s inventory costs (drugs and medical supplies, pet food, other pet products) are in line with or better than the average practice?” over 80% of the respondents said yes. According to the AAHA Financial and Productivity Pulsepoints 9^thedition (2015 data), drugs and medical supplies (including flea, tick and heartworm products) represent 17.5% of gross revenue in a typical companion animal practice. Dietary product costs are 2.5% and OTC products are 1.2%. The AAHA report is generally meant to be representative of the average practice. Data from Benchmarks 2017: A Study of Well-Managed Practices (2016 data) shows 15.6% for drugs and medical supplies expense (again as a % of gross revenue) and 2.9% for dietary product expense. The Benchmarks study data comes from 100 hand-picked “well-managed” practices; in general it is thought that these practices perform better than the “average” practice and that is why their inventory costs are lower than those of practices included in the AAHA study.

When asked “Which of the following tasks do you use to monitor your inventory system?”Respondents could select multiple answers but only ½ of the managers responded that they perform specific procedures to identify whether or not their inventory system has problems or how their figures compare to others.

Regular counting of the products on the shelves with comparison to the PIMS records is very effective in reducing product that is stolen or given away either accidentally or deliberately. The annual count done for tax purposes is not sufficient to make sure that the inventory system is working effectively. All items need to be counted on a more regular basis.

The survey asked a series of questions concerning the physical count of inventory. 87% of managers responding count all of their inventory at least once a year. 88% indicated that they perform periodic cycle counts of some products. Controlled substances topped the list in cycle counts by 95% of respondents. Flea/tick products and heartworm preventatives are monitored with cycle counts by more than 80% of respondents. Forty-two percent of managers perform cycle counts monthly, 37% perform cycle counts quarterly.

While most practices said they were doing regular counts here is some advice for getting started for those who don’t or who aren’t doing it for all products. If a practice hasn’t been counting, there may initially be many discrepancies between the PIMS and what is on the shelves. Before implementing regular counting of certain products, it may be necessary to first count everything in the hospital and update the PIMS records. This project should generally be done when the practice is closed and it is essential that all inventory is counted. Going through every room of the hospital and making a list of all storage places (shelves, drawers, etc.) will help.

Once the actual inventory in the clinic equals the PIMS, a regular counting system can be initiated. The items most susceptible to theft are food, heartworm preventative and flea/tick products; these should be counted at least monthly to make sure they are not being given to clients without being charged for or stolen. In the beginning, it may be necessary to count them more frequently if the practice is having problems keeping track of the inventory.

Count the product on hand and immediately check the balance indicated in the computer for this product. It is critical to do these two steps right after each other so that the comparisons are between “apples and apples.” If the product is counted and the computer balance checked later, the product could be sold or received and added or deducted from the computer balance which would then not agree with the amount counted.

The counts and computer work should be “visible”; i.e. done during business hours so that the staff is aware that this procedure is taking place. The counts should not be done before or after hours and they should be done when several staff members are around. The counts shouldn’t be treated as an unusual procedure nor should it be suggested that they are being implemented due to the possibility of staff theft, but do let it be known that this is a new procedure that will be done regularly. If asked why the counts are being implemented it should be said that the cost of inventory is one of the biggest expenses in the hospital and with the growth of the practice, the owners want to control this cost a little better by improving the inventory system.

If there are discrepancies in the counts, ask the appropriate questions of the staff people:

• Are there any product purchase invoices that haven’t been entered into the inventory module?
• Was any product used in-house that hasn’t been recorded in the inventory module? (I.e. through a dummy client account?)
• Was any product sent home with either clients or employees that haven’t yet been recorded on an invoice? This is more often a problem with hospitalized or boarding patients than with out-patients.
• Was any product returned to the manufacturer that hasn’t been deleted from the inventory module?
• Was the product used for any other reason and not deleted from the inventory module? Is product stored in some other location which may not have been counted?
• Does the staff have any other ideas as to why the discrepancies exist?

Depending on the level of the discrepancies and whether or not reasonable explanations can be found for the discrepancies, it may be necessary to institute more stringent inventory control procedures until the problem can be found.

Once this part of the system is in place for food, heartworm preventative and flea and tick products, expand the counts to include other products. Unless the practice is experiencing a problem, the counts on the other products usually do not need to be done as frequently. The frequency will be determined by the $ value of the item, its likelihood of being stolen or given away and your experience with this product in your clinic. Don’t forget that controlled substances should be counted much more frequently.

Read VHMA’s July 2018 Insiders’ Insight survey for more detailed survey results, as well as a list of critical steps and questions to be asked in reviewing your inventory system.

While setting up and administering an inventory system can seem daunting at first, good inventory control is actually one of the easiest things to achieve in a practice as long as the system is appropriately designed and all tasks are regularly performed.