Taking Stock: Inventory Management Best Practices for Community Pharmacies
By Danny Nelson |
When times get tough, many community pharmacies typically look first at cutting labor costs, assuming those are their biggest expense.
For most community pharmacies however, labor costs are actually the second biggest expense. Inventory costs are typically the largest expense for pharmacies.
The challenge for community pharmacies is to find just the right level of inventory. Carrying too little inventory is an obvious problem — a staff member never wants to disappoint a customer by telling them their prescription can’t be filled right away.
On the other hand, carrying too much inventory also has its perils.
Money on the shelf
The best way to think of inventory is as an investment. The bottles on shelves and the vials in the refrigerator represent real money.
If a community pharmacy is carrying excess inventory, it’s the same as cash sitting on its shelves. However, if a pharmacy can reduce its inventory without impacting its ability to meet customer demand, it can liberate money to invest in other aspects of the business.
One way to measure the efficiency of a pharmacy’s inventory management system is to consider how often a pharmacy ‘turns’ its inventory.
Consider the case of the Del Norte Pharmacy in Santa Fe, New Mexico. In 2013, one Del Norte Pharmacy location was turning its inventory approximately 5.8 times per year. By determining optimal order quantities and implementing an effective inventory management plan, the pharmacy managed to nearly double its inventory turnover to 11.86 times per year in 2015 — in line with industry averages for retail pharmacies, per the 2015 NCPA Digest.1
By maintaining its inventory more efficiently, the Santa Fe outpost of Del Norte Pharmacy freed up over $275,000 in cash, which Del Norte then used to build a new store in Las Vegas without taking out any bank loans.
Del Norte’s success shows how better inventory management practices can enable a pharmacy to free up cash that can then be reinvested into the business. With a leaner inventory, it’s also easier to keep track of products in stock, which in turn reduces risk of products getting lost, damaged or stolen.
Ten ideas for improving inventory management
Some community pharmacies already do a stellar job at inventory management, but almost everyone has some room for improvement. Here are ten ways an independent pharmacy can optimize inventory levels:
1) Get an accurate count. A pharmacy can’t manage what it doesn’t measure. Even if a manager knows his or her pharmacy like the back of their hand, a visual scan of the shelves cannot possibly provide the sort of accuracy needed. The best solution is to conduct an annual physical inventory, supported by a computerized inventory system, and monitored by a designated employee trained as the point person.
2) Maximize the value of an inventory system. Most computerized inventory management systems use a ‘perpetual inventory’ model. Such a system keeps tabs on all products in stock and automatically places an order for more product needed to maintain a certain inventory level. If demand for a certain product diminishes, an owner or manager will need to adjust the parameters so the order threshold and amount match the new future demand. Even a computerized system needs to be monitored and maintained for accuracy.
3) Let distributors carry the risk. A single Hepatitis-C drug, for instance, could cost close to $30,000. That’s not the sort of product a pharmacy can afford to hold on their shelves. In instances such as this, a pharmacy can take advantage of next-day delivery from their distributor — ordering the product right before the patient comes in to pick it up, minimizing its time on their shelf.
4) Keep tabs on the introduction of new generics. As new generics hit the market, a community pharmacy will need to adjust its perpetual inventory system to reflect those changes. If many patients start switching from a name-brand medicine to a new generic alternative, a pharmacy will probably need to adjust the reorder volume in its perpetual inventory system to scale down the size of orders on the name-brand product and ramp up orders of the generic. Fine tuning and adjusting the perpetual inventory system on an ongoing basis, should ensure it reflects all current inventory needs.
• Bonus tip – It’s also a smart idea to adjust inventory to reflect seasonal changes in demand. For example, a community pharmacy probably won’t need to have much Tamiflu® on hand in July, but once flu season starts ramping up in October, it’s necessary to boost the size of its standing order accordingly.
5) Shed Excess Inventory. Because pharmaceutical inventory loses value as it ages, carrying excess inventory amplifies the risk of losing thousands of dollars on expired, unsaleable products. A pharmacy can’t sell products once they pass their expiration date. Some manufacturers might offer partial credit on returns of expired products but in some cases, the expired drug becomes worthless, and a pharmacy loses its entire investment. It’s true that demand can fluctuate from day to day, but a week’s worth of inventory should be more than enough to accommodate even unusual spikes in daily demand.
6) Have a system for returning unsold products in time to get a refund. Even when trying to keep a lean inventory, there will still be times when a pharmacy will have too much of a certain product. These surpluses can be managed and the product can be sent back to the distributor before they expire. A manager must make sure he or she understands the distributor’s return policies. Whether the return policy is 60 days or 6 months, make sure there’s a system in place to keep track of which products aren’t moving. This will allow a community pharmacy to return them before they incur serious financial losses. It can often be helpful to designate one or more ‘inventory captains’ and have that person (or persons) check the stock to catch items approaching expiry. Make sure that inventory captains realize that each missed expired bottle represents money down the drain.
• Bonus tip – Don’t forget to include refrigerated medicines in inventory checks. Because these medicines are stored out of sight behind an opaque door, they often receive less attention during inventory checks compared to the medicines sitting out in the open on shelves.
7) Make sure customers really are going to purchase their prescriptions. What happens if a patient balks at a steep co-pay and refuses to pick up the prescription? What if that prescription was for an expensive, special order therapy? Once a pharmacy has opened and/or labeled the bottle, the pharmacy is typically stuck with the product. For liability reasons, distributors will generally refuse to accept returns on products that have been altered in any way. If another patient doesn’t try to fill a prescription for a drug before the product expires, the pharmacy could have to take a loss on the entire cost of the medication. To avoid this inventory challenge on high-cost prescriptions, the staff should be instructed to call the patient when products over a certain cost threshold arrive in the pharmacy and provide co-pay information before they open or label the bottle — especially on initial fills.
8) Implement medication synchronization programs for appropriate patients. More and more community pharmacies are moving toward med sync programs for multiple reasons. Moving patients with multiple maintenance medications onto a synchronization program not only makes it more convenient for patients to pick up refills on multiple medicines (which can improve compliance / adherence), it also makes demand more predictable from month to month, which in turn makes it easier to schedule orders so that inventory arrives right when a community pharmacy needs it. Med sync programs also make it easier to plan staff schedules so a pharmacy is neither overstaffed nor short-handed when it comes to stocking inventory or serving patients walking through the door.
9) Don’t overlook the will-call bin. There will always be plenty of prescriptions that get filled and dropped into the will-call bin. If patients never arrive to pick up those items, the pharmacy not only wastes the time and money associated with preparing the prescription in the first place, but must then spend more time and effort on cancelling and reversing the order to put the items back into stock. And a neglected will-call bin can have a significant impact on inventory levels too. It’s important for everyone on the pharmacy team to understand the monetary value of the products sitting in the will-call bin, and to do everything possible to get patients to come pick up their waiting prescriptions. It’s also the best thing for patient health.
10) Increase turnover in the front end too. Too many community pharmacy owners neglect the front-end of their stores, allowing those spaces get bare and dusty. It sounds obvious, but a pharmacy can only sell what it has on the shelves. If a pharmacy only has a single OTC item in stock, that pharmacy is limiting itself to just a single sale per day at most until the item can be reordered. Not to mention, some patients feel reluctant to buy a product if it’s the only one on the shelf because they think someone else could be more in need of the product. Instead, consider carrying at least three or four items on faster-moving SKUs to not miss out on any potential sales. Generally, it’s a good idea to have that sort of inventory depth on items like antacids, laxatives, analgesics, anti-heartburn and allergy medicines, including the nasal sprays that recently obtained approval for OTC sales.
If the prospect of making major improvements to inventory management seems a little overwhelming, get started with incremental steps. There’s no need to do everything at once – just start moving in the direction of making inventory more efficient. As a pharmacy thins out its inventory and begins seeing the positive impact on its cash flow, a pharmacy owner can take additional steps to further optimize inventory.
1. National Community Pharmacists Association. 2015 NCPA Digest. Published 13 October, 2015. Retrieved 28 June, 2017.