Inside: Pharmacies make detrimental purchasing mistakes all the time without realizing it. Look out for these missteps to protect your profit.
Inventory is your pharmacy’s greatest expense and most significant source of revenue. When you’re dealing with such a large asset, even the most minor mistakes in your inventory purchasing can cause dramatic sways in profitability. But that also means correcting those mistakes can result in huge improvements to your bottom line.
Maximize your profitability by avoiding these six common—and costly—purchasing mistakes.
1. Purchasing too much
You have finite storage space for drugs, and drugs have finite shelf life. Ordering too much inventory crowds your space in the short term and increases your risk of losing money to expired drugs in the long term.
Inventory also ties up a lot of money. If you don’t move it off the shelves quickly enough, you could run into cashflow problems. Mining your sales data and using the right inventory control methods can help you zero in on the appropriate amounts to order.
While there are many methods for determining how much inventory to order, one simple calculation to have on hand is the Economic Order Quantity (EOQ). The EOQ finds a mathematical sweet spot based on annual cost and demand data to keep costs at a minimum while avoiding shortages. This formula can serve as a guideline for how much product to purchase per order. (To perform this calculation, you need to know how to calculate your ordering costs and holding costs.)
The EOQ formula:
Square root of [(2 x annual product quantity x cost per order) ÷ holding costs]
Let’s say you sell 1000 bottles of amoxicillin per year. It costs about $100 per order and $200 per year to keep them on the shelf.
Square root of [[2 x 1000 x 100) ÷ 200] = 31.62
Each time you purchase amoxicillin, you should order about 32 bottles.
2. Purchasing too little
Pharmacies sell products that are often urgently needed. At best, understocking a medication will inconvenience patients and encourage them to use a different pharmacy. That will almost definitely cost you the one-time sale, but some patients who leave your store empty-handed may never come back. The potential loss is significant.
With some drugs, insufficient stock can cause serious health issues to patients who run out and can’t get their prescription filled somewhere else. In addition to the obvious concern for patient health, these incidents are harmful because they erode trust between you and the patient—often extending to the patient’s family, medical care team, and even their circle of friends. The effects of that lost trust can cost you money in ripples.
If you’re experiencing a genuine shortage, make sure patients are aware of it. Be prepared to explain how you plan to handle the situation providing as much information as you can about when the drug is expected back in stock and how you’ll prioritize distribution.
3. Purchasing too much outside primary contract
Carefully monitor how often you buy from secondary suppliers.
When you purchase outside your source contract, you risk failing to meet your compliance requirements that trigger your rebates. Good deals from secondaries can be tempting because they seem to save you money, and you realize the savings instantly. But much of the time, those instant savings aren’t savings at all, but losses, because they prevent you from maximizing your rebates. And those losses add up quickly.
For example, you may save $100 on a one-time offer from a secondary supplier. On the surface, that seems like a smart move. But shifting that purchase away from your primary contract may have dropped you a tier on your generic rebate structure. Instead of getting 30 percent back this month, now you’ll be getting 25 percent. For the average pharmacy, that’s a potential loss of $3,000. And that’s only one of your incentives that has been skewed—your purchase decision may have also reduced other rebates available in your contract.
You’ll still need to purchase from a secondary supplier, of course. If your primary supplier doesn’t have something in stock and you need it right away, a secondary supplier can save the day. Sometimes a secondary supplier’s discounted price really is a better deal. As long as your order volume is reaping maximum incentives from your primary wholesaler, buying from secondaries is often a smart move.
The problem for many independents is the lack of time and resources to truly optimize your purchasing to ensure you’re getting the most from your rebate structure and to save on an item-by-item basis. That’s why ProfitGuard® developed a proprietary purchasing tool to save its members thousands of dollars each month by optimizing their purchasing.
The tool analyzes a pharmacy’s primary and secondary wholesaler contract information and outlines exactly which purchases to make to optimize generic compliance to receive maximum rebates from each supplier, in addition to pinpointing savings on an item-by-item basis. The tool saved one regional pharmacy nearly $18,000 per month.
4. Purchasing from suppliers without proper credentials
Buying from unverified suppliers could leave you with bad results. Distributors without proper credentials may sell you sub-standard or counterfeit drugs. And “substandard” can mean a lot of things:
- Wrong dose
- No active ingredient
- Wrong active ingredient
- Harmful added ingredients
Even if you catch the issue before passing these bad drugs on to your patients, you’ve spent money of inventory that has to be thrown out. And now you’ll have to spend more—and wait for delivery—to fix your mistake.
Prevent this by taking proactive steps to verify the credibility of any and every distributor you buy from. Working with VAWD-certified distributors ensures the products you buy will be held to the strictest standards out there.
You also have legal responsibilities under the Drug Supply Chain Security Act, including recordkeeping and verifying licensure, among others. If you need help complying with the provisions of DSCSA, which is being implemented gradually through 2023, your state pharmacy association should have resources.
5. Purchasing from lots of different secondary suppliers
Your time is valuable. Constantly jumping from one supplier to another sucks up hours that you could spend managing your books, training your staff, marketing your pharmacy, caring for your patients—or even relaxing, maybe.
Keep your purchasing to one or two secondaries that you trust. Look at it as spending your time more wisely, on activities with a better payout in the end. Plus, you can find every product you need quickly and easily using a single ordering platform (for free and with no commitments) that offers access to a broad line of brands, generics, and OTCs from a VAWD-certified, independently owned supplier. It’s called BuyLine, and it’s the easiest and fastest way to order low-cost quality drugs.
6. Purchasing without a buying group
Your contract with your primary wholesaler is the most significant determiner of your buying costs. Whatever deal you pen with the wholesaler sets the costs of your inventory. If you don’t negotiate a favorable contract, no purchasing practices can make up for the losses you’ll suffer from a poor deal.
As noted, contracts come with rebate incentives that reduce your overall cost of inventory. In addition, contracts also determine the depth of brand discount you receive. If you can negotiate the best terms on those numbers, you’ll save tens of thousands on inventory from the contract alone—not to mention the additional savings from using the purchasing strategies outlined in this article.
The problem for independent pharmacies is a lack of negotiation power and expertise. Negotiation power is based on volume, which independents can only get if they pool together with other independents. When pharmacies combine their purchase volume, you get the wholesalers to fight for your business, rather than the other way around. Which gives you the power to demand a better deal. And when you hire experts to do the talking for you, they get you the best terms possible.
Although many buying groups have negotiation expertise, most of them are handcuffed to a single supplier. If you join that group, you’ll join that supplier. A simple look at economics reveals why that’s a big problem. Competition spurs innovation and lowers prices for consumers. If one company isn’t giving people what they want (e.g., a good price), then another company will.
But monopolies give power to a single entity. Because consumers must go through them to get what they need, the entity has control over the terms.
This dynamic plays out at every level of business, including your pharmacy. When you only negotiate with a single wholesaler, you give that wholesaler considerable power over your contract terms and pricing. When you negotiate with several wholesalers, you gain considerable power by making them compete to earn your business.
Many independent pharmacies grant a single wholesaler a monopoly on their business and don’t think twice about it. They don’t realize how much they’re losing.
When’s the last time you sought a bid from another wholesaler? You can drive down your cost of inventory by negotiating with multiple wholesalers before you re-sign your contract. If you get more wholesalers to compete for your business, you’ll get a better deal. That’s what ProfitGuard does. It negotiates with up to six different national wholesalers on your behalf. And that’s only one reason why it’s guaranteed to get you a better cost of inventory than you have now.
Getting smart with your purchasing can save you thousands in unsold merchandise and lost incentives.
An Independently Owned Organization Serving Independent Pharmacies
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 NABP-accredited (formerly VAWD) 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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