I want to tell you a story about how we changed our pharmacy and subsequently our lives. My dad always said “This is a nickel and dime business, but it’s becoming a penny business”, and he was right. Drug prices, DIR fees (Direct & Indirect Remuneration), PBMs (Pharmacy Benefit Managers), Insurance Reimbursement, it’s almost as painful for me to read these terms as it is to adjust to their impact on our business. Almost. There’s one common denominator with these thorns in our side – a simple lack of transparency. We fill prescriptions with little to no idea how much money we actually make! Try pitching that business plan to a group of investors, and see what type of response you get. Luckily, some congressional support is beginning to address these situations. Luckier still, my story isn’t about any of these topics. What if I told you there is an additional culprit sitting right behind you, and it’s costing most pharmacies more each year than all four of these parasites combined.
This Is a Nickel and Dime Business
I’ll give you some hints:
- We spend millions of dollars on it each year.
- For most of us, it makes up 75-80% of our revenue.
- It is one of our largest assets.
- There are 1500 individual pieces to this puzzle for an average retail pharmacy
- Demand for it is constantly shifting due to patients changing meds, pharmacies, dosages, etc.
As most of you have now guessed, I’m talking about drug inventory. Drug inventory can single-handedly make or break your pharmacy. The amount you purchase and how you manage those purchases will make all the difference in the world.
Now, I know what most of you are thinking and it sounds a little something like this… “Wade, we have a really good handle on our inventory”; “I’ve been doing this for 30 years! I know my patients and what they need!”; “I have someone dedicated strictly to inventory management already!”; “I have the best buying agreement in the history of independent pharmacy, because I have 10 pharmacies.” Sound familiar?
I cannot disagree with you. You probably have a good handle on inventory by your standards. Experience does matter, but math sheds light on inefficiencies Rain Man couldn’t possibly keep track of. I guarantee you know your patients, because I know mine. I don’t doubt there is a conscientious, hardworking individual assigned to manage your inventory. And what wholesaler in their right mind wouldn’t reduce their price .00002% to win your business and make millions of dollars per year from your hard work?
Five Truths of Inventory Management
Here’s the truth:
The national average for Rx inventory turns (10-11) in the pharmaceutical industry is embarrassing. Comparing yourself to it is like saying you’re underweight by American standards. Just don’t do it.
Customer demand fluctuates up or down 10-20 times per day. There are about 23 working days in a month. That means 230-460 optimum stock level changes PER month. Are you extracting your drug usage data and calculating a new stock equilibrium? If not, then you have inefficiencies.
While having one person dedicated to inventory management is a good idea, you still have more than one hand in the cookie jar correct? Everyone who touches inventory should know the implications of poor inventory management.
Inventory Carrying Cost is a hidden expense endured PER YEAR. It ranges anywhere from 20-30% of your average inventory holdings according to an NCPA study. So yes, overstock is not only destroying your cash but it’s also charging you a 20-30% commission PER YEAR.
85% of pharmacies are not on a perpetual inventory system and most take their “best guess” on how much capital they have tied up in inventory. Even those on a perpetual system are still experiencing expired goods in the thousands of dollars per year! This is unacceptable.
Transparency Always Wins
Now for the good news. We don’t need an act of congress to OVERCOME THIS CHALLENGE.
All you need is transparency!
In the beginning, focus on two actions: Install a perpetual inventory system and the correct procedures to manage such a system. For those of you confronting physical illness just thinking about counting your entire inventory and learning new ways to keep it under control, there are companies who help with this entire process. Contact me or visit www.InventoryIQ.net, and I’ll point you in the right direction.
Some of you are probably thinking, “I don’t want a computer telling me how much to order”, “There’s no way that’ll save me money”, “That’s going to take more time than it’s worth”, or “I don’t know anything about computers”.
People fear what they don’t understand, and there’s no question the business of pharmacy can be confusing, especially inventory. I want you to think of a perpetual inventory system as a buying assistant, not a buyer. Ultimately, the decision still lies with you or your designated inventory manager, because you can always say no to any suggestions it makes. Doubters beware, we started this in our pharmacy years ago and generated $50,000 in cash flow for our 230 rx per day store, INSTANTLY.
The Inventory IQ Effect
This figure doesn’t take into account the continued savings provided by scrutinizing purchases backed up by in depth data analytics. Since that time, we’ve performed similar magic in 100 other pharmacies, and inventory management, on average, generates $60,000 in capital per pharmacy. I assure you, the results are very real. Perform timed trials comparing how much time you spend a day pulling stickers and hand typing product numbers each night into your wholesalers ordering platform. EDI file transfers win every time. If you don’t believe me, I’ll be glad to take the Pepsi challenge with you anytime. If you don’t get along with computers, I completely understand. But, if an 85 year old pharmacist who can’t send emails can learn perpetual inventory, then so can you and I.
Ideally, you want to have just enough inventory on hand to fill the prescriptions that come through your door without sacrificing cash flow you could devote to other important opportunities. Turning your inventory 12-15 times per year is a very reasonable goal. However, be sure you are calculating this number correctly! To properly calculate your inventory turnover ratio, divide Rx Inventory Cost of Goods per year by your average Rx Inventory. Make certain to exclude any OTC inventory or sales. Inventory and sales on these items have dramatically different profit margins and other characteristics which can throw off your desired calculation tremendously.
Focus on Scheduling Purchases and Syncing Patients
For those of you on a perpetual system, I want you to focus on enhanced purchasing techniques such as scheduling purchases and syncing patients. The preferred method is to sync a patient. I know this doesn’t work for every patient, and some of you may hate this idea. However, at least hear the concept out! Let’s say Mrs. Johnson is your only patient on a $300 medication. You stock that medication, because you obviously want to fill her prescription and provide her the best service. If you synchronize this patient, you’re calling them 3-5 days ahead of their due date to confirm they are, in fact, planning on purchasing this $300 product. So, don’t stock the product until you have a confirmed order! It’s that simple. You’ll reduce your inventory by tens of thousands of YOUR dollars with scheduling or syncing patients. Be sure to adjust your reorder points to reflect you are no longer stocking for that certain fill.
Continuing, one massively overlooked method utilized by professionals is package size analysis. Get out of the habit of buying 500 and 1000 count bottles to save one penny per pill. Dig into your data and see if you’re dispensing enough of that medication to justify such a tremendous amount of stock! I’m serious about this, look! If you’re purchasing a large number of 500 and 1000 count bottles, I bet you have some package size inefficiencies. Grab those big bottles and check your wholesalers. Sometimes you’ll find the smaller package size is more cost effective than a bigger bottle. I understand this completely goes against the economies of scale method, but pharmacy can be crazy sometimes.
Finally, if your state does not allow pharmacy to pharmacy transactions, I strongly advise you to begin speaking to your state boards in an effort to make a change. The Drug Supply Chain Security Act (DSCSA) provides a solid framework to buy and sell non-returnable drugs to other pharmacies who are more than willing to purchase adequately dated and labeled products at a discount. This not only can reduce your unused and overstocked inventory by an enormous amount, but it can provide purchasing opportunities at deep discounts. Healthcare needs all the help it can get with driving down drug prices. Contact your board and make certain we all contribute to the cause.
Understanding Your Drug Inventory Will Help You Predict the Future
In conclusion, next time you begin agonizing over external factors such as DIR fees, rising drug prices, uncontrollable PBM’s, and seemingly ever decreasing reimbursement, take a moment to consider that your inventory may be killing your business from the inside out. We have much more control over the decisions we make daily regarding inventory that affect our businesses as greatly as any of the aforementioned issues. Your inventory isn’t rocket science, but if not managed properly it could cost you as much as a trip to the moon. If you don’t know where to start, the only thing you’re lacking is information. You were in the same position the day you began pharmacy school, but you made it through that in one piece.Get started on the best thing you’ll ever do for the transparency and prosperity of your business. And, if you need help of any kind, I’m only a phone call away.