Inventory Creep is the Bane of Profitability
It’s the end of the month, and you’ve worked tirelessly to order vials that cost one cent less, turn down the thermostat at night to conserve on the utility bill, and find a way to eke out an additional dollar per prescription in gross profit this month. It’s time to reap the benefits of your efforts and celebrate. Surely when all the beans are counted, and the bills are paid, you just had the most profitable month you’ve ever had. It’s all very exciting! There’s only one problem. When everything shakes out you barely broke even. AGAIN. What happened?
Industry-wide, profit margins on brand name drugs are just a meager few percents, if that. Also, your patient on a monoclonal antibody hadn’t called to refill it yet even though you made sure to have it in stock for when it was due. The guy from one of your secondary wholesalers called to tell you about a dynamite special he had on generic Nexium, and you use a lot of it, so you felt like it was a good idea to order 6,000 or so at a bargain basement price. In any effect, you dispensed X amount of drugs this past month at Y profit margin, and you were satisfied. However, you spent Z dollars extra on the drug bill with your wholesalers! We here at PharmacyProud call this phenomenon “inventory creep”!
Our philosophy is relatively simple. Every store needs inventory. If you are perpetually out of stock of something, your patient is going to find another store, so you have to keep inventory in stock. However, our philosophy is also this (and don’t get us wrong, we LOVE our primary wholesaler, and have very strong bonds with a select few secondary wholesalers, one in particular who will be their own separate topic fairly soon)…anything you have on the shelf, whether it is a $2 bottle of lisinopril or a $2,000 refrigerated product, is money that you have essentially loaned to your wholesaler – interest free. That practice would bankrupt banks, so from a fiscal standpoint, it isn’t particularly optimal for a pharmacist either, right?
In a previous life, I worked for a big retail chain. They were happy to have me carry quite literally over double the inventory on a dollar for dollar basis that I’d be even remotely comfortable for one of our similar volume stores carrying. Of course, we aren’t comparing apples to apples here. This chain was quite literally its own wholesaler, so they were likely not fronting all that money. We can’t play by the same rules.
What rules DO we play by here at PharmacyProud? Find a number that you’re comfortable with for your inventory and keep it there. If you sell $10,000 worth of drugs, order $10,000 worth of drugs. Realize of course that this can’t be something that is policed daily. Week by week at least things should roughly even out. Secondary wholesalers will call and offer deals but this is 2019 and you have the internet. There is ALWAYS a sale; there shouldn’t exist a huge desire to buy many things “on spec”. Feel free to cultivate a strong relationship with a wholesaler that has proven their ability to make you money and order liberally from them. We can’t stress enough how important finding a couple strong partners among the dozens of wholesalers who want your business is. By and large, order what you sell. Keep that inventory from creeping and harvest the hard-earned fruits of your labors.