June 13, 2018
Inside: Managing inventory at an independent pharmacy is more difficult than for any other retailer. Learn why, and find out what that means for your pharmacy.
Every retailer’s business depends on inventory.
The better you manage the flow of goods, the more money you make. Ideal inventory management results in selling as much as you can while holding as little as you can.
That’s the name of the game for all retailers.
But managing inventory at a pharmacy is unique. Good inventory management is far more important to the success of your pharmacy business than it is for most other retailers.
Here are five ways managing inventory of a pharmacy is different from other retail businesses. We’ll also explain why it’s vital for your pharmacy’s survival.
There’s a big difference between shopping for antibiotics and shopping for a pair of jeans.
Most of the time, patients need their medication the same day their physician prescribes it. Jeans, not so much. This makes managing inventory more difficult than for other retailers.
Pharmacies need to have prescriptions in stock for patients who need them that day. But, always having prescriptions in stock brings the risk of overstocking and losing products to expiration.
Many retailers don’t have to deal with this delicate balance of inventory. And for pharmacies, getting it wrong can have negative consequences.
Patients who can’t get the medication they need when they need it will likely abandon a pharmacy for one of the national chain pharmacies. They won’t risk their health or convenience for the sake of loyalty.
Use a perpetual inventory system for measuring pharmacy inventory. This system will provide real-time updates of your inventory, so you always know exactly when to order new product.
Clothing, electronics, home, and jewelry retailers don’t have to worry about expired products. Changing trends are their products’ only expiration date. Even when those products go out of style or out of season, they can sell them to third parties for resale.
That’s not true for pharmacy.
The limited shelf life of pharmacy products restricts the quantity you can order and store at any given time. If you order extra inventory to ensure you’re never out of the products patients need, you risk losing all your profit when the products expire on the shelf.
And to prevent expiration, you run the risk of understocking. Expiration dates give pharmacies a catch-22 that’s not easy to solve.
Managing inventory of a pharmacy requires precise forecasting of sales to ensure you turn products before they expire.
By mining your sales data to follow the prescription trends at your pharmacy, you can order the right amount of product at the right time.
For other retailers, managing inventory will likely only affect their bottom line. It won’t result in harm to their customers.
If a fishing store leaves its fishing poles in the extreme heat, for example, they might break during a big catch. And that’s the worst-case scenario.
But for your pharmacy, the worst-case scenario for mishandling medication inventory is death.
For example, if you buy inventory from an illegitimate secondary supplier, you could end up with counterfeit drugs in your inventory. It may sound extreme, but counterfeit or tainted drugs can lead to terrible consequences for patients. And, accidentally selling counterfeit inventory could also bring criminal consequences to your pharmacy.
Or, patients could suffer if your pharmacy mishandles temperature-sensitive drugs. The slightest shifts in temperature can diminish the potency of refrigerated drugs, rendering them ineffective.
There’s also the danger of theft. Pharmacy inventory management requires extra-diligent precautions because of narcotics.
Independent pharmacies must thoroughly review their suppliers before they purchase inventory. That requires more time and investment than other retailers have to give to scrutinizing their suppliers.
It also means pharmacies have to create clear, systematic policies for managing refrigerated inventory. Storing refrigerated products requires extra investment in storage capacity and training for employees, among other costs.
Managing inventory well is important to the financial viability of any retailer. But it’s especially important for pharmacies. Small mistakes can cause more drastic consequences for pharmacies than other retailers.
Independent pharmacy margins on prescription products are razor-thin. And that’s where 90 percent of your revenue comes from.
Other retailers, like big box stores, earn high margins across numerous categories instead of relying on one particular category. Mismanaging their inventory will lose them money. But their diverse revenue streams will keep them profitable. And importantly, those alternative revenue streams can make up for lost cash flow.
Most independent pharmacies, on the other hand, rely on every penny of their prescription profits to keep them in business. Low reimbursements and DIR fees don’t leave any room for errors in inventory management. Ordering too much or too little inventory can swing your profits significantly and plug up cash flow quickly. For example, every 1 percent change in an average pharmacy’s costs of goods can shift profits by 20 percent.
Without alternative revenue streams, mismanaging inventory could mean you don’t have the cash you need to pay your expenses.
Independent pharmacies need to prioritize their inventory management to preserve margins and ensure steady cash flow. Practice good pharmacy inventory management and use the most effective pharmacy inventory control methods to optimize your balance of shortage, holding, and ordering costs.
Pharmacies also need to minimize their total cost of inventory. Even if your pharmacy manages your inventory perfectly, you’re still losing money by paying too much for inventory.
ProfitGuard®, a primary wholesaler contract negotiation and management service from PBA Health, negotiates primary wholesaler contracts to get your pharmacy the best cost of inventory. On average, you’ll experience up to a 6 percent increase on your margins. That’ll get you closer to the inventory margin of the big retailers.
Not all retailers have fast-turning inventory like pharmacies. For example, a good stock turn for a jeweler would never be acceptable for a pharmacy.
The difference in the rate of turnover is huge.
Independent pharmacies sell inventory at a near-constant rate. Anywhere from 100 to 1000 prescriptions leave your inventory per day.
Other retailers, like Apple, sell far less inventory. And that fact changes the approach to inventory management.
Pharmacies have a particularly strong need for efficient inventory workflow. Because your inventory moves more quickly, bottlenecks can drastically stifle your sales.
For example, inefficient inventory workflow at Apple might result in a single lost iPhone sale because a few people had to wait too long. But inefficient workflow in a pharmacy could result in a backup for dozens of patients even if inventory stalls for as little as 30 minutes.
Pharmacies should use a point-of-sale or inventory control system that adjusts inventory levels in real time. Ideally, it also recommends reordering products automatically according to preset numbers.
Managing inventory at your pharmacy is unique in retail. Make it a priority.
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their businesses. The company is an independently owned pharmacy services organization based in Kansas City, Mo., that serves independent pharmacies with group purchasing services, expert contract negotiations, distribution services, and more.
PBA Health, an HDA member, 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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