The facts about inventory management

July 8, 2024

In our work as business sale transaction advisors, we see a lot of pharmacies, which means we see a lot of, well, stuff.

More often than we care to contemplate, the front-of-store is clogged with dusty, space-occupying, neglected and frankly not-very-appetizing items—knickknacks, tchotchkes, Styrofoam paddleboards from countless summers ago, ‘70s-era pottery, and on and on (and on).

The only thing missing from these islands of misfit merchandise is a plaster bust of Elvis.

The point is, inventory, particularly in the front-of-store, can get out of hand. Often, for pharmacist-owners, who usually spend a good deal of their time caring for patients, what they’re selling (or, rather, not selling) out front is at best an afterthought, at worst not a thought at all. And then one day, they’re coming into work and have to navigate a veritable obstacle course of junk just to get to the dispensary.

Here’s the thing: getting a handle on your store’s inventory can be one of the most important steps you can take toward keeping customers happy, improving profitability and getting maximum value when you put up your pharmacy for sale.

“OK,” you might say, “I’ve got some excess inventory sitting around, but it’s just taking up space—it’s not hurting anybody (yet). So what’s the problem?”

But that is the problem! Merchandise that you can’t sell is taking up space that could be occupied with merchandise that you can sell. When you have excess inventory, you are literally leaving money on the floor.

And there are other challenges that come with too much stuff. Excess inventory is a drag on cash flow. The money tied up in stock could have been used to pay bills, rent, salaries, and new equipment. That’s why, as a general rule, you want to keep inventory levels high enough to meet demand, but not much more. Otherwise, you are misallocating cash and heightening the risk of running of it.

As well, merchandise sitting around your store eventually starts to show its age, too. It gets jostled around (maybe by customers reaching around to get stuff they actually want to buy), it gets dusty, it gets disordered. In short, it looks bad. And making it look better takes up valuable staff time.

One last point: too much stuff turns business buyers off. Many corporate buyers simply don’t have the operational capacity to maintain it. They don’t want it, and they will often want the seller to get rid of it before closing the 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 inventory management.

• Don’t fall in love with high-margin merchandise: The one good thing about seasonal items and giftware is that they have high margins. That’s great, actually. But you need to take a very hard look at everything in the front-of-store and see if it’s actually selling. The margins might be sweet, but if it isn’t selling, you are making nothing. And if that’s the case, assess whether you need a seasonal or giftware section at all.
• Your point-of-sale system can probably help: Most POS systems today allow you to run reports that can give you real insights into your inventory management. One of the most enlightening is gross margin return on inventory (GMRI), which is a measure of how well your store is generating cash above the cost of inventory. An accurate GMRI report will quickly tell you what items are selling and generating profit and what items are not.
• Count inventory regularly, the right way: Some pharmacist-owners simply do a quick inventory and rely to a certain extent on memory—you know, “Oh, I think I have two of those, so I’ll put that in the computer.” That’s how phantoms are created. The most dependable (but still not perfect) way to know what you have in stock is to do a scanned count.
• If you’ve decided to clean up your inventory, don’t overwhelm yourself: We usually recommend that pharmacist-owners who are trying to get a handle on their inventory problems start by identifying all merchandise that is more than five years old. (That’s very generous, since the industry average turnover for front-of-store merchandise is three to six months.) If the report comes out ten pages long and you can’t make heads-nor-tails of it, then go back six years, and so on until you have a manageable starting point. Then get rid of the super-old stuff first, then the very old, then the old, then the kind of old—well, you get the point.
• “But how do I start getting rid of it?”: Good question. There are merchandising techniques that may move old inventory. Discounts, clearance bins, BOGO, flash sales—these can work well. Another approach we like is bundling—putting together related old (unselling) items with newer (selling) items, priced attractively.
• “If that doesn’t work?”: Check with your community charities to see if they will accept it. Many operate thrift stores that would be happy to take items off your hands.
• “If all else fails?”: Then it might be time to tackle your inventory problem with extreme prejudice. Pay someone to take it away or turf it into the dumpster. Throwing away stuff you’ve paid for hurts, but it is usually worth it in the long run.

Once you’ve analyzed, identified and gotten rid of useless stuff, take the most important step: ask yourself why. Why did this merchandise build up in the first place? What have you been doing wrong? Your POS system can help you answer that to a certain extent, but you might need outside experts to really identify how your inventory management went awry. (We’re here to help, too.)

And remember: the sooner and more regularly you tackle your inventory buildup, the easier it will be.