Optimizing Inventory Management: Key Strategies for Effective Inventory Control

If your cost of goods sold (COGS) is more than 20%, this article can help. As a veterinary practice owner, optimizing your inventory management is crucial for maximizing profits and ensuring quality patient care. With inventory costs at many practices accounting for 20% or more of gross revenue, saving money on COGS is money that goes straight to your bottom line.

Assign a Dedicated Team

Designate a trustworthy, organized individual to lead your inventory management efforts. This person should be knowledgeable about veterinary products and fiscally responsible. Having a backup team member is essential for continuity and risk management.

Implement a Color-Coding System

Categorize your inventory using a color-coded system:

• Red (A): High-priority items (20% of stock, 80% of revenue)
• Yellow (B): Regularly used items (30% of stock)
• Green (C): Infrequently used items (50% of stock)

This system helps prioritize stock counts and ensures critical items are always available. Count A items weekly, B items quarterly, and C items twice annually.

Understand Markups and Margins

Avoid confusing markup with profit margin. Calculate markup for each product individually to maximize profitability. Less expensive products can usually be sold at a lower markup than more expensive ones. Periodically review purchase invoices to adjust product markups as needed.

Optimize Your Ordering Process

Look for opportunities to substitute less costly materials that won’t negatively impact quality. Make use of bulk orders for drugs used in large quantities, but be cautious not to overstock, which can lead to waste and expired products. If you haven’t already, consider using an online purchasing platform like Vetcove.

Monitor Expiration Dates

Implement a system to track and manage product expiration dates. This helps reduce waste and ensures that you’re always providing fresh, effective medications to your patients.

Leverage Technology

Implementing technology is crucial for modern inventory management. It’s well known that many hospitals still manage inventory by hand. Embracing inventory management software could make a huge difference, both in controlling and managing inventory and reducing labor costs. Your Practice Information Management System (PIMS) may or may not have inventory management features. If not or if they are not sufficiently robust, consider a dedicated veterinary inventory management software that integrates with your existing system. These platforms can provide:

• Real-time data on stock levels
• Usage tracking
• Automated reorder alerts
• Enhanced efficiency in inventory processes

Utilizing such technology can significantly reduce labor costs, improve accuracy, and streamline your overall inventory management.

Monitor Key Metrics

Tracking Your Percentage Spend. If your PIMS doesn’t do it for you, create a tracker that compares your spend on cost of goods sold to your gross revenue. Ideally, start doing this weekly and then move to monthly when your percentage stabilizes. The formula is:

COGS % = Total Purchases (or Cost of Goods Sold) ÷ Gross Revenue x 100

Inventory Turnover. Regularly assess your inventory turnover rate, aiming for 6-8 turnovers per year for most small animal practices. This metric provides valuable insights into your inventory management effectiveness. The formula for inventory turnover is:

Turnover = Total Purchases (or Cost of Goods Sold) ÷ Average Inventory

By implementing these strategies, you can significantly improve your practice’s inventory control and reduce your cost of goods sold.