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December 2023
Taking Stock
As the end of the year approaches, it’s time to do more than just count tablets, reconcile your count with your computer records, and pledge to track things better next year. Now is the time to rethink what you have on your hospital shelves, and whether that is consistent with your strategies for hospital success and customer service.
What You Should Be Stocking in Your Pharmacy
As the end of the year approaches, it’s time to do more than just count tablets, reconcile your count with your computer records, and pledge to track things better next year. Now is the time to rethink what you have on your hospital shelves, and whether that is consistent with your strategies for hospital success and customer service. You may be surprised to learn that you and your clients might be better served by considering other options.
Dispensing (including prescription medications, nonprescription over-the-counter products, and therapeutic diets) has long been a solid revenue generator for veterinary practices, typically accounting for 25–30% of income in primary-care hospitals. This makes dispensing the largest revenue source in most veterinary practices, but sadly, not necessarily the most profitable. If the veterinary pharmacy allows practices to deliver the level of care to which they aspire, clients benefit from the customized advice and instructions from the veterinary team. And if dispensing revenue can contribute to hospital profitability, then it makes sense to consider all your options.
The Purpose of Retail Inventory
In a bygone era (not that long ago, really), veterinary teams stocked the shelves with products that were required to meet medical needs and also products that they thought clients would want to buy, and that individual team members wanted to dispense. At a time when the profession had a relative monopoly on healthcare products sold for pets, this might have even made sense. However, times have changed.
It’s easy to misclassify products as being profitable if one only looks at revenue generation, but this is deceptive.
Retail human pharmacies maintain a large inventory because they need to be responsive to physicians who could potentially write prescriptions for a variety of products and have them filled at the pharmacy of the patient’s choice. Big box retailers maintain a large inventory because they need to be responsive to the fact that customers appreciate variety in the products they select. This really isn’t true for veterinary practices, however. Clients rarely have the opportunity to browse for products in veterinary clinics, and there is no need to be a repository for every pharmaceutical that a veterinarian may ever choose to prescribe, so there is an opportunity for veterinary practices to be very selective as to what they choose to stock.
Of course, there is a difference between products that need to be stocked for internal use or to be dispensed and those products that might be prescribed or recommended, but may actually be provided more efficiently by others (e.g., partner pharmacies). Inventory occupies expensive real estate within a veterinary clinic, so it pays to be selective; there should be a compelling reason for each product to take up space on the shelf.
If veterinary businesses don’t need to provide clients with endless selection, and if they don’t need to stock every product that teams might ever need or want, then what is the purpose of retail inventory? Pharmacy items that become part of retail inventory need to serve a purpose, and that has both medical and business implications. Products stocked need to be medically relevant, and they need to be profitable for the hospital while still being competitively priced for the consumer. How does your inventory measure up?
It’s easy to misclassify products as being profitable if one only looks at revenue generation, but this is deceptive. Profit is what is left over after all the costs of inventory have been considered, including the direct cost of acquisition; indirect costs associated with ordering, receiving, and “carrying” products; the money tied up in inventory that could have been used for other purposes (opportunity cost); any commission (production) paid; and the wasteful cost of “shrinkage,” in which product was purchased and no longer available for sale, but for which no revenue was generated (e.g., theft, didn’t appear on invoice, and so on).
Even though veterinary clinics have a relatively small retail footprint, in most cases they are still carrying many more products than make sense from a business standpoint. In fact, most hospitals could cut in half the number of products they are carrying, and it would streamline their operation and potentially be more, not less, profitable.
As we approach year-end, look at your inventory critically, and decide whether each item you intend to restock in the new year meets the following criteria for inclusion:
- Products dispensed should reflect a hospital’s standard of care, and should be labeled for use in the species being treated.
- Products should promote client success at home, as convenience and compliance are important factors. Medications that don’t get administered as intended don’t benefit anyone.
- Products that have a unique competitive advantage for veterinary hospitals and that cannot be duplicated by other retailers (e.g., injectables) should be prioritized if medically prudent to do so.
- Products needing to be on hand for immediate medical use, even if not routinely used (e.g., emergency drugs), need to be managed and priced by different criteria than other inventory items. They warrant premium classification.
- Products should have predictable shelf-time between purchase and sale, so ordering and holding (carrying) costs can be effectively analyzed and managed.
- Preferred products should be profitable to dispense even when competitively priced for clients.
- Products stocked should promote healthy long-term vendor relationships, so inventory can be managed cost-effectively, while encouraging vendors to remain committed to your practice success and prioritize your business when the need arises (e.g., product shortages, stockouts, and so on).
Standards of Care
Standards of care can refer to many different things in clinical practice, but for the purposes of inventory selection and management, consider these standards to be consensus strategies as to the preferred way a given practice will approach common situations. Most standards of care are derived from guidelines that are produced by professional organizations, and AAHA has many such guidelines available for veterinary practices (aaha.org/guidelines).
The purpose of guidelines is not to create a cookie-cutter approach to medicine, but rather to provide an evidence-based roadmap around which team consensus can be built. From an inventory perspective, standards of care are important because there is often needless duplication of product categories within veterinary practices, and this affects the ability to provide products cost-effectively and profitably to clients. While every veterinary professional is bound to have their favorites in each category, choosing consensus products as first-choice options allows the hospital to secure the best purchase terms while reducing similar inventory items. It also lessens medical errors because hospital teams need to be familiar with fewer products.
Even though veterinary clinics have a relatively small retail footprint, in most cases they are still carrying many more products than make sense from a business standpoint.
This also allows practices to purchase larger volumes of prioritized products (rather than splitting the purchase across multiple products providing similar benefits), which often allows better pricing to the client. After all, is there really a need to keep six different parasite-control products on the shelf? Does it make sense to have three different benzoyl peroxide shampoos in stock? You might decide that the go-to nonsteroidal anti-inflammatory drug for your canine pain management standard is Product X, and that is the predominant such product on the shelf, but that still wouldn’t stop you from dispensing Product Y from your partner pharmacy if you thought it was more appropriate for a given patient.
Standards of care are not meant to stifle innovation or personalized medicine (pet-specific care). They are just a recognition of what the practice hopes to accomplish in the routine management of common clinical situations. Building consensus of entire hospital teams around standards also allows the practice to consider which products that are medically acceptable also make sense to stock from a business perspective. Even if it is a very good product, if it doesn’t meet the criteria established in the last section, it probably hasn’t earned a place on your product shelves. That doesn’t mean it can’t be dispensed from your partner pharmacy, only that it doesn’t make financial sense to stock it in your in-house pharmacy.
Product, Price, and Profitability
When it comes to product selection, it is important to keep in mind that one of the features of a suitable product to be stocked in a veterinary hospital is that it needs to be sold at a price that is at least comparable with other retail channels available to them, while still being profitable for the hospital to maintain in inventory and sell. This can be challenging and must be evaluated for each individual potential product meeting the hospital’s standard of care.
When it comes to products for which veterinarians have a competitive advantage (e.g., injectables) it is much easier to prioritize them within standards of care, and there is more leeway in pricing that can be acceptable to both veterinary practices and consumers. In fact, if injectables are appropriate therapies in some situations, there are distinct advantages for the profession, because they are not going to be available through most other retail outlets that don’t have veterinary professionals or paraprofessionals able to administer them.
For many other dispensed items, the veterinary team may need to decide whether it makes sense to stock certain items in the hospital pharmacy or dispense them through a partner pharmacy. In a very simplistic sense, it may at first seem like it is worth stocking more products simply because they generate revenue, but unless costs can be effectively managed, such items can detract from practice profitability. Revenue is not the same as profit. Revenue numbers can be misleading because they don’t consider the indirect costs associated with inventory, which can be substantial. Certain items may be more profitable for the hospital if a commission can be generated from a partner pharmacy without the need to incur inventory costs.
Recommended ReadingAckerman, L. “Pharmacy Management as a Profit Center” in Blackwell’s Five-Minute Veterinary Practice Management Consult, 3rd Edition. Edited by Ackerman, L. Ames, (New Jersey: Wiley-Blackwell, 2020), 622–23. Ackerman, L. “Dispensing and Prescribing” in Pet-Specific Care for the Veterinary Team. Edited by Ackerman, L. (New Jersey: Wiley-Blackwell, 2021), 735–38. Ackerman, L. “Ready to Partner with an Online Pharmacy?” AAHA Trends, 2019; 35(1): 49–53. Aisbet-Schneider, A. “Effective Inventory Management” in Blackwell’s Five-Minute Veterinary Practice Management Consult, 3rd Edition. Edited by Ackerman, L. (New Jersey: Wiley-Blackwell, 2020), 616–19. |
There are also many products that just don’t make sense to stock in an in-house pharmacy because they can’t be sold at a price point that is competitive with other channels. For example, human generic medications may be cheaper than similar veterinary-labeled medications, but it is typically not possible to sell them to clients at a comparable price to that of a human pharmacy. If certain veterinarians truly believe that extra-label drug use meets their standard of care, then clients would be better served getting a prescription and buying those heavily discounted items elsewhere. If our commitment is to delivering client value, we can often better serve pet owners’ needs with products licensed for use in the species being treated.
‘Tis the time of year when thoughts often turn, begrudgingly, to inventory. This year, perhaps there is an opportunity to do more than just product counts. It’s worth considering what you would like your inventory to be able to do for you in the year ahead—and work toward that New Year’s resolution now.
Note: Some of this material has been abstracted from Five-Minute Veterinary Practice Management Consult, 3rd Edition, and from Pet-Specific Care for the Veterinary Team.
Lowell Ackerman, DVM, DACVD (Emeritus), MBA, MPA, CVA, MRCVS, is an independent consultant, author, and lecturer and the editor-in-chief of Five-Minute Veterinary Practice Management Consult, and Pet-Specific Care for the Veterinary Team. Find him online at lowellackerman.com. |
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