Managing inventory can be a daunting task. Is it really that important to invest the time and effort to manage inventory closely? Let's look at some numbers to illustrate what managing inventory is worth to you and your practice. First of all, what is included in this category as we do our analysis? This category can be labelled with several titles. Some call it Cost of Professional Services, others simply call it Direct Costs. These categories are typcially well-defined in a good Chart of Accounts. Either way, the following items are typically included in analyzing this category and come from a well-organized Chart of Accounts in your accounting system:
COST OF PROFESSIONAL SERVICES (COPS)
Drug & Medical Supplies, Non Medical Supplies, Laboratory Costs, Imaging Costs, Laboratory Specialist Interpretation, Archiving Costs for Imaging, Imaging Specialists, Theriogenology Costs, Dietary Product Costs, Feed - Large Animal, Bedding, Horseshoeing/Ferrier, Dentistry Costs, Surgery & Anesthesia Costs, Boarding Costs, Grooming Costs, Ancillary Companion Costs, Other Pet Supplies, Barn Supply Costs, Farm Waste Disposal, Animal Disposal, Medical Waste Disposal, Commissions & Fees, Veterinary Mileage, Practice Vehicle Expense, Purchase Discounts, and Rebate Checks.
For most practices, the COPS for their practice will range from 15% as a percent of revenue, to 35% as a percent of revenue, depending upon the level of management and scrutiny they place on managing inventory and related costs. Therefore, for every $1 million in revenue in your practice, it is likely that your inventory and related costs represent between $150,000 and $350,000. Let's assume that a practice that doesn't place much emphasis on managing inventory has a COPS at 30% of revenue. That means they spend $300,000 of every $1 million in revenue in this category. Through proper management, you can reduce this number to 15% to 20% of revenue. This would result in an additional $100,000 to $150,000 in profit for the practice for every $1 million in revenue the practice produces. Is that worthwhile?
Assuming that is an attractive result, where do you begin? First, do everything you can to secure your inventory. Put it behind a locked door, or in a locked cabinet. If that is not practical at the start, then identify those products that are most costly to the practice in terms of price, demand, and dollar volume. Select the top 10 products and lock them up, and begin managing them more closely. Also, prioritize your efforts to manage the products most closely that you cannot run out of at any cost. Account for every unit that you purchase, use, dispense, or allocate to various people and locations in your practice. Make sure that you invoice every unit that gets used and dispensed. Once you've mastered these 10 products, then expand this effort to include another 10 products. The objective is to get started. Even if you have to start small, do it. Get started. Identify the right person who is detail oriented, accounting-minded, and accountable to help you implement your inventory managment efforts. When you're ready to take the steps needed to improve your inventory management, contact your distributor partner. They will have the systems and educational resources to help your practice improve in this crucial area.
