This document discusses key concepts in inventory management for veterinary practices. It defines important terms like inventory, suppliers, and costs associated with inventory. Effective inventory management is critical for practice profitability as inventory is the second largest operating cost after staffing. The document outlines the goals of inventory control and describes an effective inventory system, including tracking item information, reorder points, costs, storage locations, and pricing. It also discusses determining ordering quantities and timing to balance inventory levels and costs.

1. Inventory Management

2. A Key to Success

3. Terms
• distributor / vendor / supplier are used
interchangeably. It is the entity that you are
purchasing drugs and supplies from. It can be the
manufacturer or a distributing company
• Inventory / supplies is used interchangeably. It is
the actual item that is purchased.

4. • Inventory management is a critical
component of practice profitability
• It is the second largest cost of operation of
the veterinary practice
• Remember, the first largest cost is staffing

5. • Lack of effective inventory systems is a
common cause of poor cash flow in a
veterinary practice
• In most practices a veterinary technician is
put in charge of all or parts of the inventory
management system

6. • Inventory is specifically defined as all the
goods owned and held for sale or use in the
regular course of business

7. • This includes:
• Drugs and supplies purchased to resell to
clients (dispensing items)
• All inventory items used to provide medical
and surgical services
• Office and computer supplies
• Cleaning and janitorial supplies
• Maintenance supplies

8. • Inventory control is the process whereby
the need to maintain sufficient inventory to
meet the hospitals needs is weighed against
the cost of carrying the inventory
• Tax definitions of inventory may be
different

9. • Optimum inventory control ensures that the
practice will never be out of a needed item
and that the cost of purchasing and carrying
inventory is kept to the lowest possible
level

10. 3 Costs Associated With Inventory
• Unit Cost
• Ordering Cost
• Holding Cost

11. Unit Cost
• The cost for each item of inventory
purchased must be calculated for the unit it
is used or dispensed in.
• This is called the unit price

12. • The unit price of the item includes:
• Sales tax charged to the practice by the vendor
on each item sold to the practice (not charged
by vendor in all states, but it is charged in New
York State)
• Shipping costs

13. Ordering Cost
• Most ordering costs are labor-related expenses:
• Hourly wage paid to the employee performing the work
• Associated payroll taxes
• Employee benefit programs

14. Labor Cost Includes the Following
Tasks
• Determining the amount needed
• Shopping for the best price
• Placing the order
• Meeting with the manufacturing representatives

15. Labor Cost Includes the Following
Tasks
• Accounting for back orders
• Receiving and unpacking the orders
• Comparing the purchase order with the shipping
invoice
• Pricing and placing the items on the shelf

16. Labor Cost Includes the Following
Tasks
• Posting the costs of the items in the practices
disbursement register
• Providing statements to be paid to the appropriate
person (bookkeeper, practice manager, etc)
• Logging the appropriate Controlled substance
items

17. Labor Cost Includes the Following
Tasks
• The entire inventory ordering activity
expends quite a bit of employee time
• Ordering costs can account for a much as
15-20% of the total unit cost

18. Holding Costs
• Holding costs are the costs of owning and
keeping inventory on the premises in
anticipation of use.
• The largest holding cost is the capital tied
up in purchasing the inventory

19. Holding Costs Also Include
• Personal property taxes paid on the
inventory value as of a specific valuation
date. (usually end of year to the IRS)
• Insurance premiums paid on the average
value of the inventory to protect against the
risk of loss in the event of a disaster, theft,
or damage

20. Holding Costs Also Include
• The cost of protecting inventory from heat,
cold, humidity
• Costs associated with outdating and
spoilage, especially if inventory is not used
or sold immediately

21. Holding Costs Also Include
• Pharmacy licensing fees in states where
applicable (In NYS there is no licensing
fees, but a veterinary pharmacy is under the
same regulations as the human pharmacies)
• The cost of maintaining OSHA regulation
compliance

22. Holding Costs
• The proceeding holding costs range from 8-
15% of the unit cost
• The holding and ordering costs, combined,
comprise 25-40% of the total unit cost
depending upon:
•

23. Combined Holding & Ordering
Costs
• The holding and ordering costs, combined,
comprise 25-40% of the total unit cost
depending upon:
• Amount of time inventory is held (on the shelf)
• Success of discouraging pilferage (theft)
• efficiency of purchasing

24. • Inventory costs amount to much more than what is
paid to the vendor
• Optimum inventory control includes an astute
purchasing policy that minimizes ordering and
holding costs while at the same time ensuring that
the items required to operate the hospital are
available when needed

25. Goals of Inventory Control and
Management
• If inventory control and management are
effective, the following should be true:
• Medications and supplies are available to treat
patients when needed
• Clients can obtain refills and other items when
requested

26. • Quantities of drugs and supplies are
controlled to minimize hospital
expenditures to the lowest practical level.
Large stock quantities that tie up cash are
avoided unless discount savings can be
shown to adequately offset the dollars tied
up in idle inventory amounts on the practice
shelves

27. • Staff can efficiently order, stock, and dispense the
needed items
• Controlled drugs are properly monitored and
secured
• Appropriate security systems and safeguards exist
to insure that drugs and supplies will be used as
intended

28. • Staff is trained to correctly handle supplies that
represent potential health and safety hazards
• Fees charged for pharmaceuticals and supplies are
adjusted on a regular basis and price increases are
appropriately passed on to the client
• The desired level of profit is achieved

29. • To accomplish this, a workable hospital
inventory system must be:
• Planned
• Organized
• Directed
• Evaluated
• Adapted as needed

30. Effective Inventory System
Functions
• Ensures that all items used in the hospital
are available when needed
• Signals the manager when an item needs to
be reordered to avoid running out of stock

31. Effective Inventory System
Functions
• Accounts for the estimated delay between
placing and receiving an order
• Should keep supply levels that do not
unnecessarily tie up capital
• The accounting and reporting system should
be flexible

32. Effective Inventory System
Functions
• Provide accurate detail of inventory on
hand and it’s value at any given time.
(perpetual inventory)
• Act as a contact management tool – names,
phone numbers, account numbers of
vendors, log of prior orders

33. Effective Inventory System
Functions
• Should readily identify where each item is
available at the least cost, how to order, and
any quantity discounts if applicable
• Identify and track backorders and when
they will arrive

34. Effective Inventory System
Functions
• Track expiration dates so product can be
returned for refunds and taken out of
quantity on hand stock
• Identifying factors such as seasonal usage,
to better help with projecting ordering
quantities

35. Effective Inventory System
Functions
• Should help verify that received orders
agree with purchase orders
• Should allow for price increases by vendors
to automatically adjust dispensing price to
client

36. Effective Inventory System
Functions
• Should reduce pilferage and theft by
employees
• Should easily identify wastage and other
forms of loss

37. Pareto’s Law
• The 80/20 rule
• States that 20% of the inventory items
account for 80% of the annual inventory
expenses
• This should be taken into account when
determining the ideal turnover rate for the
item

38. Inventory Management Systems
• Can be either a manual card system or
computerized

39. Inventory Management Systems
• They must contain the following item
information:
• Item – size, color, strength, dispensing format
(pill, capsule, liquid, paste, can, case, etc)
• Supplier – company name, phone #, hospital
account #, discount information, billing policy

40. Inventory Management Systems
• Quantity – amount of each item ordered, price
quoted, date ordered, number of each item
received, date received and invoice price
• Reorder point – maximum and minimum level
of stock at which reordering should occur

41. Inventory Management Systems
• Invoice costs – price per item or unit, sales
taxes, shipping, handling and freight charges
• Storage location in hospital – in hospital use
and/or dispensed, areas where kept, at what
levels should restocking of secondary locations
take place (ie. Treatment area, surgery, exam
rooms, display shelves, pharmacy)

42. Inventory Management Systems
• Price to client – formula for determining price
to be charged client, including dispensing fees,
minimum price, bulk purchase price, markup
over unit cost
With this amount of information, abbreviations
are frequently used, information is customized
and organized by the user

43. • See handout on manual inventory system
• Separate lists would have to be kept for
vendors, contact #, account #, etc
• Computerized inventory system will be
shown later

44. • Whomever is selected as an inventory manager
must be able to maintain a working relationship
with the vendors, but can not develop unfair biases
for or against a particular vendor.
• It is best to price shop vendors and deal with a
small group of vendors instead of a large number
of them

45. Determining What, How, When and
How Much to Order
• Remember the “80-20 rule” – that 20% of
the products account for 80% of sales or use
• Figure out which products make up the 20%
and pay special attention to them.
• Make sure not to overstock products that
make up the other 80%

46. • The key to an efficient and effective
ordering policy is being familiar with the
suppliers and a good knowledge of how the
items are used in the practice
• This knowledge will make it possible to
order the right amount of goods at the least
expensive rate

47. Determining quantities and timing
• Know when drug representatives will be
visiting the hospital. Being prepared saves
lives.
• Keep a list of the items that need to be
reordered from each supplier prepared

48. Determining quantities and timing
• Deal with as few suppliers as possible
• Anticipate seasonal needs for some supplies
• Most vendors “close their books” between
the 25th
and 30th
of the month. Try to order
large amounts after that date so you will not
be billed till the next month

49. Determining quantities and timing
• Try to take advantage of vendor discounts
(ie.) 1% discount if statement is paid within
10 days
• Try to avoid ordering small quantities that
may bear additional shipping charges
• Avoid late payment finance charges

50. Determining quantities and timing
• To properly plan for proper inventory
levels, you should periodically analyze each
item or class of items to:
• Forecast demand for the next month, quarter, or
year, including seasonal trends

51. Determining quantities and timing
• Estimate the lead time
• Plan usage during the lead time
• Establish and monitor quantity on hand
• Determine safe reserve of stock requirements
• Place items on order

52. Inventory Turnover
• The higher the inventory turnover for a
given period of time, the more efficient the
inventory control
• Best to try for 8-10 times per year. This
averages 35-45 days on the shelf

53. Determining the Inventory Turnover
Rate
• Beginning inventory + ending inventory
________________________________ = average inventory on hand
2 for that period
total purchases between inventory dates
___________________________________ = inventory turnovers
average inventory
365 days
_______________________________ = average shelf life in days
inventory turnovers per year

54. Determining the Inventory Turnover
Rate
• For whole inventory annual turnover and
single item annual turnover
• see handout

55. Determining When to Order
• 3 factors control the timing of orders:
• The time needed for delivery
• The rate of inventory usage
• The safe stock levels

56. Example
• Assume that an inventory turnover rate is 6
(average inventory is used up in 60 days)
• If you have 30 days to sell the item before you
need to pay for it, and if the selling price is double
the purchase price.
• From the sale of a 30 day supply(1/2 of the order)
you have taken in in revenue the amount of money
you need to pay for the whole order

57. Product Pricing
• Inventory is an asset to the practice
• It is nonproductive until it is used or sold
• Until that happens, it costs the practice
money

58. Product Pricing
• An adequate charge needs to be assessed
and collected from the client
• Otherwise, no matter how well the expense
side of inventory is managed, there is no
profitability to the practice

59. Product Markup
• Adequate and timely product markup is
necessary
• 100% = 2 X cost
• 200% = 3 X cost
• 300% = 4 X cost

60. Product Markup
• Markup can range from a low of 40% to a
high of 400%
• A 40% markup prices the product very
close to the break even point

61. Product Markup
• Some inventory items have a recommended
dispensing price by the manufacturer. This
can range from 40-45% markup.
• Example : prescription dog foods

62. Product Markup
• High cost items are usually given a low
markup % to keep the pricing reasonable
• Many times flea/tick products and
heartworm preventative is given a low
markup to keep competitive with the online
pharmacies

63. Product Markup Example
• A bottle of 500 amoxicillin 500mg capsules
costs: $54.95
• Sales tax: 4.47
• --------------------------
• Total cost: 59.42 for bottle of 500 caps
• cost per capsule $0.12

64. Product Markup Example
• At $ 0.12 per capsule
• 100% markup = .24 dispensing price
• 200% markup = .36
• 300% markup = .48

65. Product Markup
• A dispensing fee is usually added to items
that have to be counted out and put in other
containers

66. Sales Tax
• In New York State we pay sales tax on all
the products we purchase from the vendors.
• We add sales tax we pay into our
calculation of product unit cost

67. Sales Tax
• The state tells every type of business which
items they must charge sales tax on when
they are purchased by the client
• Fortunately in veterinary medicine, we have
a very few items we need to charge sales
tax on

68. Sales Tax
• Examples:
• Boarding and grooming
• Cremations
• Collars, leashes
• Pet toys
A copy can be obtained from NYS Dept of
Taxation

69. • Reference materials from:
Practice Made Perfect by Marsha Heinke,
DVM, EA, CPA, CVPM and John Mc
Carthy, DVM, MBA