Efficient inventory management is about minimizing costs, optimizing cash flow and creating an environment where products are readily available to meet client demand. It is a fundamental aspect of a well-managed and financially successful veterinary hospital. Can you leave inventory management to your PIMS?
Static vs. Dynamic Consumption
The limitations of inventory management through PIMS become evident when considering the realities of the utilization of stock in hospital workflows. While practice information management systems rely on transactional data, up to 50% of the inventory, in fact, doesn’t transact. It is consumed in the hospital, for example, in soft goods such as gauze, syringes and catheters.
Although some veterinary hospitals meticulously detail packages and account for these items, the majority struggle to keep pace with the changes in consumption patterns. This challenge is exacerbated by the fact that many transactions processed through the PIMS involve predefined service packages. For instance, a service package for a large dog spay might include anesthesia, fluids, catheters and other supplies required to perform the procedure. Most PIMS assume static consumption as if every procedure uses the same amount of each item when the utilization of these items actually can vary quite a bit.
These discrepancies result in incomplete and inaccurate data being used to manage inventory. Subsequently, inventory managers find themselves spending substantial time auditing PIMS data and updating the system to gauge what items need replenishment.
In certain situations, hospitals may inadvertently end up with negative inventory balances due to a lack of regular audits and the maintenance of data accuracy in the PIMS. While PIMS functionality provides a general sense of direction, it falls short of offering a comprehensive solution to the challenges posed by dynamic consumption patterns.
Data Inaccuracies
Many PIMS systems provide the option to link products to inventory items, yet this approach presents two primary issues. First, manual data entry often introduces inconsistencies in product names, creating challenges in the mapping and automated replenishment of inventory. Second, the linkages tend to be too loose, resulting in inaccurate deductions.
Depending solely on PIMS to deduct accurately, invoice by invoice, is risky because inaccurate data might miss the trigger for replenishment or, conversely, prompt a false replenishment, causing excess inventory carry. So again, inventory managers need to spend time reviewing PIMS data to make sure it is accurate.
Manual Processes
A notable limitation of relying solely on PIMS is the lack of automated reorder points to dynamically adjust stock levels based on changing demand. The responsibility falls on the hospital staff to manually monitor these levels for every individual product in their inventory. Ideally, reordering decisions should be informed by optimized replenishment cycles and demand monitoring rather than simply relying on preset reorder quantities. Without automated calculations, the risk of oversights or inaccuracies in inventory levels increases significantly because it is nearly impossible to keep track of changing demand for all products with manual effort.
Another issue is the necessity for physical counts, as the PIMS inherently struggles to maintain an accurate perpetual inventory on hand. Many hospitals need to conduct manual full inventory counts periodically, ranging from monthly to yearly, to ensure the accuracy of their financial balance sheets. However, this approach proves to be inefficient, placing a laborious burden on the team responsible for the counts, while hospital leadership still ends up with dramatic swings in asset value due to the infrequent adjustments. This inconsistency in inventory counts can complicate financial planning and decision making for hospital management.
Integration Challenges
Sixty-five percent of veterinary hospitals still use server-based PIMS, which means they can’t benefit from integrations with modern systems used for procurement, supplier management or analytics. Even if the PIMS is integrated with an online procurement solution, inventory managers need to review their shopping list for accuracy before submitting it, and then they end up with piles of invoices from multiple suppliers that need to be confirmed and received in the system. In theory, this is great practice, but it is time spent collecting data that does not accurately enable optimized inventory management within the PIMS because of the inaccuracies outlined above.
Insights for Optimization
What about optimizing inventory management to save time, reduce the cost of goods sold and maximize profit margins? To achieve this, some hospitals adopt a cost-containment approach, often referred to as a budget, by focusing on expenditure reduction. A strategy might involve limiting COGS to a specific percentage of the previous week’s revenue, aiming to keep it at, for example, 18%. This method serves as a straightforward way for these hospitals to manage their spending and ensure that a predetermined portion of revenue is allocated to cover the costs associated with goods and services. However, this approach most often forces stockouts and frustration in the hospital, and in the end, critical items will be ordered as an exception, and extra effort will go into balancing the full set of inventory needs.
The real levers to efficient inventory management are:
- Increasing inventory turnover: Through optimized replenishment cycles based on item volume and value, you can reduce holding costs and prevent overstocking. Increased turnover also reduces the risk of expiration and allows for faster adjustments to changes in demand.
- Product margin management: Monitoring and adjusting inventory prices relative to their costs is a critical component of inventory management and allows you to prioritize products that contribute the most to your profitability. By focusing on high-margin items, you can optimize inventory to maximize revenue and profitability, including offsets to other expenses like labor, equipment and overhead.
- Removing slow-moving inventory: Products that take a long time to sell sit on the shelf, having added cost without generating return. By identifying and removing these items, you can free up capital for faster-moving items or other investments. This analysis can help in making data-driven decisions on whether to discount, promote or discontinue slow-moving products.
- Eliminating redundant formulary: This involves avoiding overstocking similar items that tie up capital and shelf space. Rationalizing the product range allows you to eliminate redundancies and improve overall cost-effectiveness.
- Analyzing your sales mix: At the end of the day, a veterinary hospital is a service business that sells both products and services. COGS is generally measured by comparing the total cost of products with total sales. By increasing the mix of service sales relative to product sales, you can decrease the relative cost of goods to total revenue.
- Managing shrink: Inventory loss due to theft, damage, expiration or discounts eliminates the opportunity to generate revenue on items that were already expensed. Most hospitals are losing 2 to 4 percentage points of profitability associated with this invisible shrink.
All these components provide valuable insights into the dynamics of a hospital’s inventory and directly impact COGS and, consequently, your revenue. Efficiently managing these levers allows for strategic decision making, reduced costs and optimized product offerings, ensuring that capital is invested in products that contribute most to the bottom line. While a PIMS might handle basic inventory functions, a deeper analysis of these levers often requires additional tools or a dedicated inventory management system with robust analytic capabilities.