Our objective for ismypracticehealthy.com daily blogs is to create brief, high impact content that can immediately be used to improve a business. I look for Financial Friday nuggets all week, things that businesses need to do more or perhaps do less, that will have a positive impact on the finances of the business. I happened to observe a couple of examples this week of processes that drove down the profitability of the business.
Inventory is always the highest expense or the second highest expense in a veterinary practice. It is clear to everyone that it is better for the business to pay less for something. This is a great philosophy that serves us well, within reason. Like most things when shopping for the best price becomes an obsession, it may not serve the business well.
Let’s start with two assumptions in order to understand how much it costs the business to shop for the best price on every product.
1. The person who orders drugs and supplies in veterinary businesses probably makes $25/hour including benefits.
2. 15% is the lowest profit margin target that is compatible with a financially healthy veterinary business.
If your inventory person spends 15 minutes shopping for the best price on a rarely used $50 product, she has added $6.25 to the purchase price. If we consider the $6.25 extra we paid for the product an investment, we should return a 15% profit on that investment or $0.94 to the business. The end result of this excessive shopping is $7.19 or 14.4% increase in the cost of the product. In today’s market distributors make single digit margins on veterinary products, so it is difficult to believe that your inventory person found a 14.4% better price. Therefore, the time spent shopping was a poor investment for the business.
Compound the problem by realizing that it is unlikely for there to be a step in the veterinary business inventory process to recover the increased cost of shopping for the product and the opportunity cost of not doing something else productive with the shopping time.
Initially, I believed that “deal sites”, websites that shop for the best price on a product, would be a useful tool to manage inventory purchase cost associated with conventional shopping. It should have been but there is an unintended consequence. Using on line deal sites appears to have become a video game played by purchasing agents. It is so rewarding to see those low prices that people hang around on those sites for much more time than was required to shop. In the breakroom they boast about how much money they could have saved the business by using the site. Notice they did not brag about how much money was actually saved, but rather, how much could have been saved. The end result is more, not less, time spent in the shopping process. This adds to the cost of goods sold and is unlikely to be recouped.
In an environment in which distributors live on single digit returns, it seems to me that we should use all available tools aggressively to shop prices for high volume-high price products and rely on one or two distributors, with whom you have built a relationship, to order most other products. Spend the time and money saved by your inventory person to lock the pharmacy and count the inventory more frequently.