Veterinary Practice Management

Veterinary Practice Management Inventory Management for Veterinary Practices Although it plays a critical role in any business, inventory management is a task that is often handled ineffectively in veterinary practices. Successful inventory management may appear to be a complex challenge, but it is actually a very logical, straightforward process. This paper reviews basic principles of inventory control and how a comprehensive Information Technology system can be effective in making it successful. It explores the need for a disciplined process and discusses the essential functions of inventory management. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 1

Executive Summary There is no argument that controlling your inventory is critical to a successful practice. It is also a supportable argument that to do an effective job manually is impractical unless you wish to increase the number and cost of your administrative staff! It s essential that your computer system has fully integrated functions and useful management tools that support the inventory strategies of your practice. Simply recording issues and receipts is not enough. Using the power of information technology to transfer information automatically between your practice and your suppliers is also a key to optimizing your inventory investment. To accept anything less is to settle for poor inventory management! Basic Principles There are multiple factors to consider in order to effectively manage inventory in veterinary practice: Product ordering Product Receipt Costing and pricing Charging out inventory Tracking Usage Stock levels Batch/Lot and Expiry Date tracking and reporting Linked communicative text to display on labels and invoices Vendor history and Accounts Payable Establishment of a Process or Protocol in the practice for handling all of the above factors Training and supervision of staff regarding the practice s Inventory Management protocols These have to be considered whether the inventory control is done manually or by computer. If all of them are not managed effectively, the end result will be poor inventory control and may not justify the time and effort expended. Your practice management software can help by automating some of the functions required, often as a by-product of other practice tasks. For example, the system should be set up so that the invoicing of items will automatically reduce inventory. The role of your staff should not be underestimated. You will only be successful when staff know the practice s inventory management protocols and follow them. The principle of GIGO (Garbage In/Garbage Out) applies! 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 2

Breakdowns in inventory management often occur because: Management strategies and protocols have not been clearly defined or adequately communicated to staff or There are too many transactions and not enough time to performs the tasks manually or The practice has no confidence in the tools provided by the software to manage inventory. Most inventory management software is structured to record each unit of every item added to inventory and each unit of every item removed from inventory as it is administered, dispensed, wasted or returned for vendor credit. This system should enable a practice to know precisely how much of each item is on hand at any given time. It also helps with automatic ordering accurate reports records of what items have been used on which patients calculating the amount of money you have tied up in the inventory. Government regulations in some countries require that you use bar code scanning to capture product batch/lot numbers and expiration dates on every item carried in inventory. You are also required to show batch/lot and expiry dates on client invoices. In other countries, practices only track such information for rabies vaccines and controlled substances. Due to the spread of infectious disease and product recalls, consultants predict that the more stringent European regulations will be introduced around the world. It is important to understand that not using management tools affects the accuracy of ordering, reports and usage tracking, etc. You must decide whether to be proactive regarding inventory management or not. Will you anticipate regulatory requirements and consider the best protocols that enhance patient care, increase efficiency, minimize risk liability and improve profitability? Discipline is essential for successful inventory management. Failure of all staff to follow established management protocols can sabotage your system. How many times has a case of medication been opened and used before it is accounted for in inventory? And often - veterinarians are the culprits! One member of staff not following the process will destroy the value of the whole system. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 3

Inventory Terms Once you have established your inventory management protocols, be sure everyone understands the terms commonly used in inventory. Unfortunately, terminology used by different software programs can vary. We ll look at the terms used in RxWorks. Critical level the quantity of an item that you have in inventory which, when reached, will trigger a new re-order from your vendor. This considers the normal usage of the item during the time it takes to deliver from the vendor plus how many you want to have available in case the usage suddenly increases or there is a problem in delivery. Another name for this term is safety stock. Ideal level the maximum quantity of an item that you want to keep on hand at any one time. If the product is subject to seasonal variations, the inventory system should allow you to set a new ideal level during that season. In a perfect world, the critical level and ideal level would be the same; this is the principle behind just-in-time inventory. But in the real world, order quantity price breaks and other economic factors affect the ideal level. On Hand the quantity of an item you have in stock at any particular time. This number changes constantly as you receive new shipments of orders and dispense new medications, use consumables, etc. The process of maintaining the accuracy of on-hand item counts is sometimes called perpetual inventory. Pack Size the unit that you use to order an item. If you dispense a medication in individual pills, but they are ordered in boxes of 100, then the Pack Size is 100. This number is used to convert your order quantity to on hand quantities at the time of receiving the item. If you order 5 Packs (and the Pack Size is 100), when you receive the 5 packs, the on hand quantity will be increased by 500. It s also used to convert the on hand quantity to the equivalent number of packs to compare against the critical level. Inventory Control Functions Let s review each of the functions and see how and where a good computerized system can help. It is important that the inventory management process cannot be isolated from other functions in the practice management system; they must be fully integrated to be effective. For instance any items billed should automatically reduce the on hand quantity of the items - integrating the invoicing function with inventory control. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 4

Ordering Inventory Items To ensure that you always have enough product available to meet your needs, a re-order should occur when the on hand quantity reaches the critical level quantity. You arrive at the amount to order by subtracting the on hand quantity from the ideal level. Sounds simple? Perhaps not, as you must also consider Pack Size, quantity price breaks and any promotional deals being offered. Your software should generate a list of items that need reordering and the quantity needed. It should also generate an electronic purchase order for the vendor that you can review. You can amend the quantity to order if necessary and send the order to the vendor electronically, or using the vendor s on-line data entry system, or by phone, or by mail. Electronic Links between Vendors and Your Practice While we are discussing a direct electronic link between the vendor s computer system and your own, we can also look at other functions that will help control your inventory investment. What about price updates? If your vendor s system has the capability of automatically downloading the latest prices to your computer, the benefit is obvious. Equally obvious is that your software must be capable of accepting them. When ordering, you should be able to quickly view a list of out-of-stock items to allow you to order an alternative. Once your vendors provide information about alternative products, your software program should be capable of using the information. It could also replace products that have been superseded, in your database with the alternatives. Purchase Orders There are other electronic links that can be very useful as you receive items into your inventory. When an order is sent electronically, faxed, emailed, entered on-line in the vendor system, discussed with the vendor s order-entry person or mailed - a file of outstanding Purchase Orders (POs) should be maintained. This list shows expected delivery dates and details of each order. If orders are not generated by the computer, the details should be manually entered into the computer. Your program should easily print a report on demand preferably selected by vendor - that lists all outstanding orders and expected arrival dates. Unfortunately, some practices do not use the Purchase Order process. Orders are placed on vendors without any detailed records big mistake! This approach can lead to double orders, missed orders and many other problems. You need POs to ensure that you maintain optimum inventory levels and that any purchases you are making are appropriate for your product usage. A comprehensive inventory management 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 5

protocol including the use of purchase orders can help ensure that your records are accurate and effective in keeping inventory at sensible levels. We can now look at tasks involved with receiving shipments from vendors. Receiving Inventory Items A key requirement to achieving effective inventory control is proper recording of all receipts. No system, manual or computerized, will work unless all items received are added into the inventory records in a timely manner. If items are entered into inventory after they are used but before they are recorded as receipts, on hand quantities are wrong - making re-order calculations and inventory reports meaningless. Probably of all of the regular tasks associated with inventory control, product receiving involves the most effort and time. It is also the most error-prone task with greatest impact on the success of inventory control. Unfortunately, other demands placed on staff time can result in delayed recording of received items into inventory in many practices. A multi-tasking, comprehensive computer system can really help with this problem. When a practice utilizes a purchase order process, staff can review a list of outstanding POs. They can select the PO that represents the products just received. They can then make any necessary adjustments for back-orders, missed shipments and new pricing and let the computer add the items from the PO. Assuming that the vendor ships most of what you ordered, this process dramatically speeds up the receiving task. Using Information Technology to make Receiving more effective Vendors normally have a computer system that prints the shipping document/packing slip. It is logical that if the packing slip can be created electronically, it can be read directly by the practice s computer system. The whole receiving system can be streamlined. The most effective method is for the vendor s system to send the shipping information electronically directly to the practice s system. The only manual intervention is to check the physical delivery with the computer generated shipping document. You would only enter any changes where the items received are not the same as on the slip. This would automatically update all inventory counts, prices, batch numbers and expiration dates, etc. Your practice management system should have the capability of directly accepting electronic shipping documents either directly from the vendor s computer or via an emailed HTML document. There is an alternative method available today that could be an easier implementation for product vendors. By using similar barcode technology to that used on airline boarding passes (2D), a barcode can be printed on the shipping document that contains all of the details that are 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 6

printed on the document. Then one scan by a barcode reader in your practice, can capture all the items detailed on the document item code, batch number, quantity, price, etc. The computer system can then use that to update inventory, accurately, quickly and automatically. This is already available from some vendors and is supported by RxWorks. Sample 2D Barcode The most basic of computer-assisted product receiving tools is to use the barcodes that are printed on the product packages. These are typically 1D barcodes and identify the individual product but not the price, quantity being shipped, any batch number or expiry dates. Typical 1D Barcode Each product received has to be swiped and the quantity received plus the price needs to be entered into the computer. This ensures the accuracy of the product code, but not of the remaining information being entered but it still faster than manually entering everything from a shipping document. Interface with Accounts Payable To complete the recording receipts into inventory, some consideration should be given to their effect on Accounts Payable and corresponding vendor records. A considerable part of the data collected for inventory is also required by the Accounts Payable system. In most practice management systems this function is not included for very good reasons. Accounts Payable is a sub-ledger of a General Ledger and full financial accounting system. To include that within a practice management system is to dilute its focus of managing client and patient activities. The most accepted method is to generate transactions from the practice management system that can be imported into a full accounting system such as QuickBooks. As yet there are no systems to our knowledge that provide the necessary audit trails and controls to make them reliable. So the practice is left with manually entering the vendor invoices into their financial system. It is anticipated that the integration functions will be included in future releases of RxWorks. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 7

Costing and Pricing One of the key pieces of information from goods received is the cost of the item. It s used to update the cost of your inventory and a new selling price when appropriate. The cost is also used to establish the cost of any of the products you sell or use (Cost of Goods Sold COGS) and the value of your on hand inventory. These are used in the Profit/Loss Report and the Balance Sheet in your financial accounts. There are several methods that are accepted by the accounting profession (and the tax authorities!) for costing inventory. The most regularly used are: First In First Out (FIFO) - This method assumes that the first unit making its way into inventory is the first sold. For example, let's say that you receive 200 tablets of medication on Monday at a cost of $1 each, and 200 more on Tuesday at $1.25 each. FIFO says that if you sell 100 tablets on Wednesday, the COGS is $1 per tablet, because that was the cost of each of the first tablets in inventory. The remaining 300 in inventory would be valued at 100 at $1 and 200 at $1.25. This is the most complicated of the costing methods as you have to keep the status of each separate batch of receipts until they are sold. Last In First Out (LIFO) - This method assumes that the last tablet making its way into inventory is sold first. The older inventory, therefore, is left over at the end of the accounting period. In the example above, the 200 tablets sold on Wednesday, you would assign $1.25 per tablet to COGS while the remaining $1 tablets would be used to calculate the value of inventory at the end of the period. Average Cost - This method is quite straightforward and the one most often used in computer systems; it takes the weighted average of all units available for sale during the accounting period and then uses that average cost to calculate the value of COGS and ending inventory. In our example, the average cost for inventory would be $1.125 per tablet, calculated as [(200 x $1) + (200 x $1.25)]/400. This cost is only updated each time you receive goods. You will need to discuss which method is best for your practice with your accountant. For our immediate purposes we are interested in the effect that the cost has on our selling price or fee. Once you have established the cost of the item, the next task is to calculate the price for resale. This can be done quite easily by allocating markup percentages that are used to as a multiple of the cost to arrive at the price. This is quite simple as long as your system allows you to have varying markup percentages according to the type of product. It is unlikely that you will want the same margin for medications, vaccines and consumables.. Fees can be automatically be adjusted to reflect changes in costs by having a markup percentage included in the inventory item information. If you wish to have "stepped" pricing - vary the pricing by range of quantity sold, example between 1 and 99 sell for $1.00 each and 100 to 199 at $.90 each - you can establish a percentage for each range. Your alternative to 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 8

automatic price updating is to review each inventory item that has had a change in cost and establish the price manually. Fee Components Most practices when establishing a fee for medication, injection and vaccines, establish one amount that is to be charged to the client. No consideration is given to the fact that there is a professional service component for each of these services dispensing, injection service, etc. This is misleading when reviewing income that is generated by these headings. The product-based income will be overstated and the professional service income will be understated by the amount of the service component. We strongly recommend that you establish standard fees for each service component for dispensing, injection, etc. These will then be used in conjunction with the selling price of the medication in calculating the fee to the client. So the service component is the fixed fee and the medication fee is variable based on the quantity being used. The client will see only one combined fee on the bill. But your revenue reports will reflect the actual income generated by the products (medication, vaccine, etc.) and the professional services (dispensing, injection fees). This is particularly important in today s environment where internet pharmacies are impacting your revenue stream. You must know where and how much you are actually at risk from this competition. This helps when reviewing your policies for writing prescriptions for outside vendors. Multiple Inventory Locations Many larger practices and most ambulatory practices have inventory stored in multiple places. For ambulatory, the most common alternative location is the truck. This creates an extra administration task. A record must be kept of stocked items at each location. When an item is billed, the quantity on hand for the location it is billed from must be reduced. For example if a veterinarian is at a barn and dispenses and bills a medication from the truck inventory, the on hand quantity for that item in the truck must be reduced. You must make a decision as to how you are going receive items into your inventory. Do you receive items directly from the vendor into each location or do you designate one location as being the receiving/main location? It is much easier to control levels if a single receiving location is used. You then transfer inventory from that location to the location you are restocking. The administration tasks are made much easier if you have a computer system that provides for multiple location control. The only task needed beyond a single location system, is the transfer process. The system will keep records of current stock levels at each location and aggregate them to determine re-orders, etc. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 9

Managing your Inventory There are two components of your investment in inventory. 1. Cost of the individual items 2. How many you have in inventory. The cost is typically outside of your control as prices are set by your vendors. Shopping around will obviously have some effect, but not in any major way. What s under your control are choice of the items to wish to stock and how many to keep onhand. You now have the age-old problem of service level versus investment. To give 100% service, which means you are guaranteed to always have the item required in stock, results in an investment in inventory that will bankrupt you. Fortunately the service level/investment curve is exponential and providing a 95% service level requires an investment of much less than 95% of the inventory value for 100% service. Choosing which items to stock is relatively simple they are the items most commonly used for the services you provide. You need sufficient information on historical usage for each item you stock to establish an ideal stock level and a critical level. Your computer system can build this up over a period of time. You should review the ideal and critical stock levels on a regular basis to ensure that they reflect recent usage. Otherwise you will be either overstocking an item if usage has decreased or running the danger of an out-of-stock condition if there has been an increase. We have already determined that we do not exist in an environment where every issue from and receipt into inventory are recorded. The process we use to make the inventory as accurate as possible is to count what we have in stock. This is an expensive, disruptive and timeconsuming task. A method to achieve reasonable control is to classify your items into three types, A, B and C. A items are high value/high usage. As well as Controlled Substances B items are high value/low usage and low value/high usage. C items are low value/low usage. We can now establish a routine for counting the items by class. Maybe count the A items once per month. This sounds a lot but typically the A items will constitute less than 20% of your inventory. Count the B items every three months and the C items every year. You can get more sophisticated by spreading the B and C items over the year, counting some of them every month. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 10

There are a considerable number of reports to help manage inventory provided in a comprehensive inventory system such as that in RxWorks. Other management tools should also be available such as calculating ideal levels for each item based on usage. These should all be used on a regular basis to keep your investment in inventory at its optimum level. Setup and Maintenance of Inventory Items One of the most overlooked and critically important tasks is keeping the details of the items you stock, up-to-date, accurate and complete. The information has to include all details needed for ordering and billing the items. Below are just a few of the details needed in any item table for a comprehensive inventory/fees system: Item Code Item Description used within the practice Item Description to be printed on the client invoice Pack Size Species Income Analysis Heading Service Analysis Heading Markup Category Pack Cost Unit Cost Fixed Fee component Variable Fee component Vendor (s) Vendor (s) product codes Active Ingredients. Obviously keeping these up-to-date with changes and new products is a significant task. RxWorks has addressed this by building and maintaining a central product database (Veterinary Supply Database or VSD) that is used to update your system every day. The reason for VSD is that all information is checked by our staff to ensure that it is complete and accurate and it s not an additional burden on your own staff s time. We are very aware that if these details are not reliable, any usage analysis, inventory management or billing will be adversely affected. All too often, your staff do not have enough time to make sure of its accuracy. 2008 RxWorks, Inc. ; www.rxworks.com; 888-779-5163; ussales@rxworks.com Page 11