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How to play—and win—the numbers game in your pharmacy

inventory management

Two chronic afflictions can kill your pharmacy business – too much inventory and high overhead. If they get out of control, either one can ruin your business. With today's relatively affordable computerized business systems, there's no excuse for losing control. 

However, simply implementing systems is not enough. You must take the time to do the maintenance, study the numbers, then put words to the numbers and take decisive action.

Inventory – a big source of revenue

One of the most important aspects of every item-based business is the inventory. It’s a main source of revenue, so it’s crucial to make smart decisions about how much inventory you have, how much you should store, and how much to reorder. As much of a problem as too much inventory is too little. Not having enough inventory causes image issues as well as lost sales. Both have a profound effect on the consumer and patient experience. 

One way to ensure you always have a good balance is using software specifically designed to manage item-based businesses. For the software to generate the right amount of replenishment inventory, you must do systematic maintenance of your computerized inventory management system. Conduct regular SKU cycle counts to keep your POS inventory management system up to date with the correct on-hand inventory and make adjustments to minimum or maximum inventory levels, along with ensuring accurate lead times. If not maintained, your system can get out of whack very quickly and result in your replenishment system’s suggesting too much, too little, or no inventory at all.

The value and quality of your products decrease the longer you keep them in stock. Your priority has to be to sell your inventory after it’s received.

Controllable versus uncontrollable expenses

There are two main types of overhead expenses in your pharmacy – controllable and uncontrollable. Knowing how to effectively manage each is key to profitability.

There are many tools you can employ to help control expenses, for example, a good pharmacy policy manual describing lighting and temperature settings for winter and summer. Even something as simple as replacing older light bulbs and ballasts with newer, more efficient models can help control expenses. Most systems provide exception reports that highlight variances to plan and compare year over year.

Carrying excess inventory has significant costs. One of the highest for many companies is financing the purchase and holding of inventory. Also, the more inventory you hold, the more you have to spend on labour to manage it, space to hold it, and in some cases, insurance to protect against its loss or damage. Physically counting and monitoring the levels of inventory you hold also takes time and incurs costs.

Don't "cut" your way to profitability

When a pharmacy gets into trouble financially, often the owners try to "cut" their way to profitability by reducing expenses or controlling costs to achieve a profit. The trouble with this is that the biggest expenses are usually not controllable (rent, mortgage, salaries), therefore the expenses being cut (employee hours or benefits) directly impact the customer experience and inventory system maintenance, creating a cycle of decline. Remember, it is not the P&L (profit & loss statement) at the end of the month that matters, it is the cash flow you have during the month.

Any retail is a cash-flow management business

You have to become an expert at managing cash flow. This is done by balancing your approach to expenses and inventory. First, make sure you aren’t tying up cash flow with unchecked, escalating controllable overhead expenses. Second, recognize that the more inventory you have on hand, the greater the amount of the business’s capital that’s tied up. You risk slowing down your cash flow if either isn’t managed. 

Very few of us love spending time on the “numbers,” but if we don’t understand our numbers…we don’t understand our business. Don’t let too much inventory or high overheads “kill” you.

Gerry Spitzner is an entrepreneurial thinker, retailer and marketer with a love story for retail pharmacy. Fascinated with retail trends and customer experience I teach, guide and advise entrepreneurs.

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