February 18, 2020
Inside: Keep products moving off the shelf by increasing your inventory turnover rate with these simple strategies.
When your products sit on the shelf for too long, it ties up your cash flow and you run the risk of products expiring before they are purchased. Because most of your expenses are devoted to inventory, it’s crucial to turn product as quickly as possible.
Inventory turnover rate represents the number of times you turn over your inventory in a given year. The higher the rate, the faster the turnover. You can adjust this formula to calculate for specific categories and products. The rate can give you a general idea of how well your inventory is selling and alert you to make some changes if it’s not up to industry standards.
Before we dive into how you can improve your inventory turnover rate, here’s a quick reminder of how you calculate it:
Inventory Turnover = Annualized Inventory Cost of Goods ÷ Total Inventory
The annualized inventory cost of goods and total inventory can be found on your income statement and balance sheet respectively.
The number you come up with when using this formula represents the number of times your inventory turns over in one year. You should aim for that to be 10 times or more.
To calculate the number of days it takes to turn over your inventory, use this formula:
Inventory Turn Days = 365 ÷ Inventory Turnover
A healthy pharmacy will turn over its inventory in 37 days or less.
If your inventory isn’t turning over as quickly as you’d like—or you just want to improve it even further—here are some tips to keep products moving.
In order to improve your inventory turnover, you have to know how much inventory you have. Some pharmacies use the visual method of inventory measurement, where the staff eyeballs the shelves and places an order when products look low, but that method leaves a lot of room for error.
A more accurate measurement technique is the periodic method, where inventory is inspected at a recurring period—like weekly or monthly. But your inventory has the potential to change a lot over that period without you noticing.
The most accurate method of inventory measurement is the perpetual method. Every time an order is sold or received, your computer system will update, so you always have an accurate count. With the right software, this happens automatically, eliminating the need to physically count your inventory.
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If you don’t stock items patients actually want, you won’t move inventory quickly. This means knowing what the top sellers are in each category and paying attention to new trends so patients know they can come to you for the hottest new items in healthcare.
Many items you stock come in multiple sizes—like 30 count, 60 count, 90 count, and 120 count bottles—but having so many options available has the potential to slow down sales. Whittle down your selection to move those items off the shelf more quickly.
The more inventory you have in your store at one time, the longer it will take to turn over. And with more products come higher holding costs. That means you have less cash in the bank to pay your bills because it’s stored in your unsold merchandise.
Minimize your holding costs and increase your turnover rate by using an inventory management system that minimizes the amount of product you have in your store.
Consider basing your prescription stock mostly on current clientele, which is how Huy Duong, owner of Dale’s Pharmacy, manages his pharmacy’s inventory. Rather than planning certain quantities and timing based on general sales data and estimates, Duong stocks what his current patients already have prescriptions for and schedules the orders based on their refill dates. These maintenance drugs from current patients account for the majority of his stock.
“If you’ve never had a patient on a specific product, why would you carry it? It’s a waste of your inventory,” Duong said. “It’s more important to focus on who you have than to try to prepare for potential patients.” If more than one patient is using the same medication, Duong typically keeps a two-week supply available if it’s a generic and a one-week supply if it’s a brand name—unlike generics, brands are always available and have price stability.
There’s a chance you have all the products that your patients want, but they are priced in a way that makes them less appealing. If your inventory turnover rate is low and you can’t figure out why, it may be time to re-examine your pricing strategy.
You need to consider the following elements when setting a price for your merchandise:
Lowering prices on certain high-margin items will entice people to come into the pharmacy and then spend more on other items. If you have to raise prices, make sure to do so gradually so patients don’t get sticker shock and run to a competitor.
If you’ve done all the promotions and pitched patients in person but a product still isn’t selling, don’t double down. When there isn’t any demand for a product—no matter how favorable the margin would be if it eventually took off—don’t continue to waste shelf space.
Remember, the longer something sits on a shelf, the lower the return on investment will be. It’s also taking up space that could be occupied by a more profitable item. Instead of trying to show off a dud in a new light, cut your losses. Mark it down with a steep discount and throw it in a bargain bin. Once the product is sold out, don’t restock.
How you present your merchandise makes a huge difference in how much shoppers put in their carts. Tactics like cross merchandising get patients to put additional products into their basket. End caps and creative signage capture patients’ attention, while changing your featured products every season ensures that your pharmacy’s appearance doesn’t get stale. Avoid letting the shelves get too cluttered or too sparse, which makes patients think the store isn’t being looked after.
Place the most valuable items at eye level, and always keep your stock three-deep. If you’re not sure how to lay out all your front-end products, use a planogram, which is a visual diagram that shows you optimal product placement to increase turnover.
When your patients are taking their medications reliably, they won’t abandon their prescriptions behind the counter. That’s why working to increase adherence is also a good way to improve inventory turnover.
To encourage adherence, make taking prescriptions convenient for your patients using methods like med synchronization, adherence packaging, and text or phone call reminders. Medication therapy management, which helps patients understand how to juggle multiple medications, is also proven to help patients adhere to their medications.
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their business. The company is a member-owned organization that serves independent pharmacies with group purchasing services, expert contract negotiations, proprietary purchasing tools, distribution services, and more.
An HDA member, PBA Health operates its own VAWD-certified warehouse with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products.
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