How to manage your pharmacy’s inventory the right way
August 5, 2022
Pharmacists are so busy helping people that they sometimes don’t pay enough attention to things – especially the stuff in their pharmacy’s inventory. But inventory management matters. When done right, it can boost your pharmacy’s profitability and value. And a track record of good inventory management – with minimal excess – can make a big difference to potential buyers when you are preparing your pharmacy for sale.
Many pharmacists think managing inventory is a hassle, but it is important. If you have too little inventory, you might lose customers who can’t find the item they want. If you have too much, you’re wasting space, time, and resources, and you are losing the opportunity to sell something your customers might actually want. Certainly, anyone looking to buy a pharmacy business will also look at how well the pharmacist-owner has managed inventory.
The good news is that getting a handle on inventory does not need to be complicated – if you know how to measure and benchmark.
The two keys to inventory measurement and benchmarking
1. Know your ITR
ITR stands for “inventory turnover ratio,” which you calculate by dividing the cost of goods sold in a year by the average of your pharmacy’s inventory value at the start and the end of the year.
ITR = Cost of Goods Sold ($)/Average Inventory ($)
As an example, if your costs of goods sold in 2021 was $1 million and your average inventory was $100,000, the ITR would be 10. That means inventory “turns over” 10 times a year.
It is a good idea to calculate ITR for the prescription dispensary and the front-of-store separately, because your dispensary turnover is usually much higher than your front-of-store turnover.
Another metric to know is Gross Margin Return on Investment, or GMROI, which can help determine your inventory’s profitability. It’s more applicable to front-of-store items, and you can calculate GMROI by department, fine line, or SKU. Many point-of-sale systems can even calculate it for you.
2. Know your benchmarks
For dispensary, the industry benchmark ITR is 12. That means dispensary inventory turns over every month.
For front-of-store, the benchmark ITR is between 4 and 2, meaning inventory turns over every three to six months.
Obviously, different front-of-store items will move at different rates. Seasonal or holiday goods sell sporadically, while household and confectionary are steadier.
How to improve inventory turnover
In our transaction advisory services work with pharmacists, we have seen pharmacies whose turnover rates far exceed industry benchmarks. But those cases are rare. Lower turnover rates are much more common.
Here are four tips to getting your inventory moving:
1. Use an appointment-based model (ABM)
When you know when a patient will show up for their medication, you also know when you need to order it (and not before). An appointment-based model gives you that power, allowing you to minimize your dispensary’s idle inventory and increase turnover.
2. Pair ABM with medication synchronization
Your inventory efficiency can grow exponentially when you add medication synchronization to an ABM. With synchronization, patients with multiple medications can pick them all up in the same visit, which will help streamline ordering and storing drugs in the dispensary.
3. Make tough front-of-store decisions
We recommend finding all front-of-store items that are more than two years old and get rid of them, either through clearance or simple disposal. If customers ever wanted to buy this stuff, they would have done it already.
4. Exercise judgment
When you get down to two-year-old front-of-store items, you will have to decide whether they are worth keeping. Your customers might need some slow-moving products and expect you to keep them in stock. Other items, however, could be doing damage to your store’s brand by sitting around – chuck them out.
Improving inventory management can be one of the most effective ways to prepare your pharmacy for sale, because it reduces waste and maximizes profitability. And once you understand how to measure and benchmark, you won’t have to think of inventory management as a hassle anymore.
[…] deal. So, what can you do about it? We’ve written before about the importance of measuring your inventory turnover ratio (ITR) against benchmarks, but let’s go a little deeper now and talk about a few nuts-and-bolts of […]