What is the Health of your Pharmacy Inventory?
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by Dr. Alex Toth<br/>
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Dr. Alex Toth is the Owner of Plustead Pharmacy in New Jersey and Co-Founder of InStockRx.<br/>
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If you are a Community Pharmacy Owner or Pharmacist in Charge looking for new strategies to improve your margins, this is for you. <br/>
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Time for a check up <br/>
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I know we are all busy working our pharmacies right now and it is easy to come up with dozens of reasons as to why things are not going well with your business. <br/>
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“The Prescription Benefit Managers are killing the industry.”<br/>
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“Credit card company fees are too high.”<br/>
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“I just lost another patient to mandatory mail order.”<br/>
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I understand and can empathize with all these daily struggles as an independent pharmacy owner; however, it is important to realize that some issues are out of our control on a day-to-day basis. Today, let’s stop worrying about things that are out of our control and instead take some time to learn more about the things that you CAN control in your pharmacy. <br/>
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While there are many aspects of your business that can fall into the “Urgent and Important” framework, one of the most important is assessing the health of your inventory. <br/>
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It takes more than a feeling<br/>
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Before taking ownership in my first pharmacy, one of my business partners told me; “If I was ever struggling to pay my bills the first thing I should do is turn around and check my pharmacy shelves because most likely the money is there somewhere.” Looking back at this, I realize that my business partner was running inventory more based on “feel” vs “metrics,” however I still agree with the concept that pharmacy inventory value is a key vital sign of a pharmacy’s health.<br/>
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Instead of using emotions to run our business, let’s leverage the concept of Inventory Turns to help standardize things. In my earlier blog, I shared that only about 35 percent of pharmacies have an accurate inventory level at any given time. This creates a challenge to do real time analysis of your inventory, but we can start with some general metrics.<br/>
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Understanding Your Inventory Turnover Rate<br/>
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Inventory turnover rate (ITR) is an important metric because one of the key factors in generating revenue is dispensing medications. In general, the more medications that leave your pharmacy shelves, the more revenue (and hopefully profit) you make. Ideally, the goal for a pharmacy is to achieve an ITR of at least 18 turns per year; however, the typical pharmacy in the US has an ITR of only 11 turns per year. That is quite a gap to goal to close.<br/>
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Use this formula to calculate the ITR for your own pharmacy.<br/>
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ITR = Annual Cost of Goods / Total Inventory<br/>
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Example: 11 Turns / Year = $3,500,000 / $318,000<br/>
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Closing the Gap<br/>
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Now you may ask, “Why is it important for a pharmacy owner to increase their ITR rate from 11 to 18?” In this example alone, if we are to increase the number of turns to 18, the pharmacy would see a significant decrease in their inventory on hand and free up approximately $124,000 in cashflow because they are operating more efficiently.<br/>
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18 Turns / Year = $3,500,000 / $194,000<br/>
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The next question that usually comes up is “How do we do this?” <br/>
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I am so glad you asked. <br/>
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I am extremely excited about this topic because there are a lot of different methods that we will cover on how to improve cashflow and efficiency of your pharmacy inventory. While you may be using pen and paper to do this exercise, there are different inventory management tools that can help you get real time feedback on the health of your pharmacy inventory. <br/>
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Stay tuned for more information about how to use inventory management tools to help your pharmacy, tips and tricks to help improve cashflow, and strategies to reduce problem inventory. <br/>
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Interested to see how you can improve your Inventory Turn Rate with InStockRx? Click here to get started. <br/>
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by Dr. Alex Toth<br/>
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Dr. Alex Toth is the Owner of Plustead Pharmacy in New Jersey and Co-Founder of InStockRx.