The pharmacy and its inventory are vital for any veterinary practice. They represent a medical toolbox for the practitioner to treat patients, a significant source of revenue for the owner, and a substantial investment of time and money for the business. This article will address the importance of pharmacy inventory to the veterinary practice. To do so, we will explore some of the challenges that a practice faces in regards to inventory management and then exhibit advantageous of good inventory management.

1. Doctor, we have an
inventory problem. How can we have an
inventory problem? If we
are running low you just
write it on the list, order
it, and put it on the shelf.
No problem
The pharmacy and its inventory are vital for any veterinary practice. They represent a
medical toolbox for the practitioner to treat patients, a significant source of revenue for
the owner, and a substantial investment of time and money for the business.
Lets explore some of the challenges that a practice faces in regards to inventory
management and then exhibit advantageous of good inventory management.
Location
Many veterinary practices organize their inventory and tools around cellular workflow.
The idea is to have what you need, where you need it, at the time it is needed. This is
wonderful for workflow but tends to decentralize inventory. Inventory supplies are
scattered throughout the practice: paracitisides are located near the front desk, in the
pharmacy, and sometimes a back stock located somewhere else. Surgical supplies can be
located in the surgical suite but we might also have suture stock in an emergency kit, in
the dental suite, and in the exam room. Essentially the convenience of cellular workflow
adds a layer of complexity to tracking and monitoring inventory. The goal of keeping
inventory close-by is to enable the provider to be efficient and effective without having to
search for supplies. But inevitably it results in a cumbersome inventory system that
needs to be actively managed.
Products stored in multiple locations will get re-stocked at different time intervals. Each
time inventory is received and stocked, special considerations should be made in regards
to expiration dates. Many times inventory is received and stocked in the location where it
is needed most. The inventory just received will likely be the inventory with the longest
shelf life. This leaves the less utilized inventory locations with potentially expiring stock.
In the example below, the reception and pharmacy stock gets utilized with far more
frequency. The back stock is right next to the receiving door. Theoretically the stock
should be received and stocked in the back stock location. However, in the rush of a

2. busy day, some of the received product gets moved up front and the danger of expiring
inventory in other locations of the practice becomes a real possibility.
Pharmacy stock Back stock
Reception stock
People
These mistakes happen even in the best scenarios but a dedicated person to manage
inventory is the best way to limit these types of mistakes. Very few practices have one
person who oversees inventory for the organization. Even fewer have a defined
procedure for how inventory is requested, requisitioned, received, stocked, and
monitored. The business of the veterinary pharmacy has not advanced to the point of
buying products based upon projected needs identified through historical use. Instead, a
team member is appointed to take care of inventory and they purchase based upon
experience and a “need to order” list.
The "need to order" list is posted somewhere in the practice where almost everyone can
add to the list. In many cases, the actual order placed is generated from the “need to
order” list without regard to usage patterns. To further compound the problem, some
individuals within the practice may hide back stock so the practice doesn’t completely
run out of a certain product. Naturally this adds yet another inventory location to the
mix. The problem in this case is not solely location based, it is also people based.
A technician will “hide” supplies so the veterinarian they work with doesn’t run out of
their favorite product. This well meaning individual will keep a secret stash as an
emergency stock. This good intention adds to the complexity of tracking inventory
within the practice.

3. Pharmacy stock Back stock
Reception stock “hidden” stock
Ideally, those who order inventory should receive and stock inventory. This is not always
the case. In our example above, we would potentially not need to order if “hidden” stock
was added to inventory. Even with an inventory manager, inventory can be mismanaged
by the lack of a coordinated and understood inventory plan. Very often the stock is put
on the shelves by whoever is available to do it that day. Additionally the inventory is
stocked where it is most needed without considering expiration dates.
Of course this is a worst case scenario. And most practices do not let the problem
become that pronounced. Instead these problems rear their heads in various ways. When
this happens often enough, the owner usually decides to have someone in the practice
“keep an eye” on inventory.
Training
Many times an individual within the practice rises to a position of relative stature due to
their performance as a technician or receptionist. This person is given the added
authority of handling inventory. While this individual might be knowledgeable
regarding the basic inventory items, they very rarely receive any formal training on
inventory management. These individuals have to learn the intricacies of more complex
inventory items like anesthesia and equipment while they are on the job. And, most
often, they have a core position within the organization for which they are also
responsible. This results in the newly appointed inventory manager learning just enough
to keep inventory on the shelves with the minimal amount of interruption to both their
"normal job" and inventory supply. The likely result is more product stocked on the
shelves to simplify inventory management.
The new inventory manager is not at the clinic at all times. Therefore, inventory is not
properly requested, requisitioned, received, stocked, and monitored without the inventory
manager present. Unless, of course, there are good procedures and protocols written.
However, because this individual has other core responsibilities, this documentation and

4. strategy rarely gets developed. And, as previously mentioned, the new inventory
manager might not know where to begin creating those policies and procedures without
some level of formalized inventory management training.
Historically, veterinary and technician schools do not offer formalized training systems
for inventory management in their curriculum. While more schools are starting to offer
these classes that fact remains that the staff within a practice today have never had any
exposure to formal inventory management. As such, a new inventory manager would
need to train the remaining staff on basic principles of managing inventory.
Veterinarians
Veterinarians, like their human doctor counterpart, have products they employ for
different problems or procedures. Those product choices vary from practitioner to
practitioner. One veterinarian might like a more pliable suture for one procedure but not
for all. One veterinarian prefers one flea control over another. And so on. As the
number of veterinarians in the practice increases the more product preferences become
something that needs to be monitored, managed, and discussed. The inventory manager
needs to learn what each veterinarian prefers and monitor those preferences across a
landscape of business seasonality. The practices without a focused inventory person have
very little chance of effectively keeping a handle on these complexities.
The alternative, of course, is for veterinarians to have an inventory rationalization process
whereby products are chosen and standardized. This represents a significant challenge
and opportunity for the veterinary practice. The challenge is to provide enough flexibility
and efficacy within the product choices so the veterinarian can practice medicine
comfortably and confidently. The opportunity lies in streamlined inventory categories
(NSAIDS, Parasiticides, etc) and less products for the staff to learn.
Nomenclature
Practitioners refer to products by different names: brand names, generic names, jargon,
what they used to use, etc. This requires the inventory manager to have an overall
knowledge of the various product names and indications. Also, each product might have
different package sizes and dosage formulations. The inventory manager will have to
learn the nomenclature used by each practitioner, by each vendor, and by the staff.
Practices that have performed an inventory rationalization process will limit the impact of
different nomenclatures.
Practice management systems
Practices struggle to trust their practice management software inventory system. The
current practice management systems have adequate inventory management systems yet
most practices do not use them effectively. Little mistakes can add up to huge problems
if the inventory manager does not fully understand the software. When items get
refunded, how does the practice management software work? Does it put the product
back into inventory? Has the inventory manager received a case quantity of one, yet is
selling individual doses? How does the purchase order system handle backorders?

5. For practices who utilize the inventory management module of the system, it is still
essential to perform a physical count. Verifying the inventory on hand on a monthly
basis is imperative to accurate counts. Practices that rely on counts from their software
can easily identify when it is time to order without looking at each inventory location or
relying on a “need to order” list as long as inventory counts have been periodically
performed. This assumes the practice has eliminated the need and practice of having
“hidden” stock. When a physical count is completed the practice must be counting
everything that is in the practice. If those counting parasiticides didn’t know there was a
hidden stash then the inventory manager has to assume the computer is wrong. This is a
very common reconciliation problem and has the unintended consequence of reinforcing
a mistrust of the practice management inventory system.
While practice management systems are adequate for inventory management, they all
lack the sophistication to automatically ascertain shipping times when creating suggested
purchase orders. Those calculations must be performed and factored into the reorder
quantities. Most systems do not have flexible pricing models. And lastly, they all lack
the sophisticated inventory reporting mechanisms that other industries have utilized for
decades. The concept of “demand forecasting”1 has long been used in the automotive
and manufacturing industries but has yet to be built into veterinary practice management
systems
One important fact not to be missed is many veterinary businesses lack knowledge of
their inventory on hand value. This is a once per year calculation conducted in
preparation for taxes. The reality is the veterinary practice can see how much they have
purchased and how much they have sold but have not properly invested time to set up the
inventory module so that they can get a proper on-hand quantity and value. As such, the
true financial picture of the practice is devoid of cost of goods sold (COGS) until the end
of each fiscal year when a physical count of inventory is conducted. The on-hand
inventory value is also important for calculating the practices inventory turn rate.
Turn Over
Historically practices have not invested significant time and energy into analyzing their
turn rates because they have not had accurate numbers from which to begin. The formula
is quite simple. Divide the annual usage by the current on hand inventory to derive the
number of times the inventory turns over.
7.5 turns per year
2,000 15,000 yearly
Generally speaking, this analysis should be done by therapeutic category: biologicals,
parasiticides, antibiotics, controlled drugs, etc. In this way, the inventory manager can
systematize how each category should be handled. The next step is to calculate the
1
George, L. Michael. Lean Six Sigma: Combining Six Sigma Quality with Lean Speed, 1st ed. McGrawHill
2002

6. average number of days the product sits on the shelf. For that calculation, the inventory
manager should divide the number of days in a year (365) by the number of turns per
year. Using our above example:
48.7 days of supply
7.5 365 days
Profit and revenue
Practice owners have a number of important decisions to make regarding inventory
management. Inventory accounts for a major portion of the veterinary business from a
revenue and an expense perspective yet very few practices dedicate the necessary
resources to managing it effectively. Thirty nine percent of a practices’ gross revenue
comes from product related sales.2
Gross Revenue
Product Sales
Service and other sales
As such, the inventory manager is responsible for a large percentage of practice revenue
and is a vital piece of the opportunity puzzle. A practice that is out of a certain inventory
item for three days will directly lose gross revenue on the missed sale of that item. Every
missed sale is a missed profit opportunity.
From an expense perspective, product related expenses represent 17.4% of gross
revenue.3 Inventory expenditures are the single largest outside expense for a practice.
Interestingly, many practices spend very little effort managing inventory in a
systematized and documented fashion. Instead, for many, the goal has been to simply
lower those expenditures. In theory that is a good goal but not at the cost of missing
2
Wutchiett Tublin and Assoc. Veterinary Economics: Benchmarks 2009. C 2010
3
Wutchiett Tublin and Assoc. Veterinary Economics: Benchmarks 2009. C 2010

7. opportunities vital to the 39% of gross revenue that most practices enjoy from carrying
inventory.
The inventory manager is also responsible for profitability in a very real way. Suppliers
may update pricing throughout the year. The practice management software is designed
to markup a product based upon its cost. If the inventory manager does not enter the new
cost into the system the practice is instantly giving up a percentage of profits. For
example, the supplier charges $10 for product x. If the supplier raises the cost to $11 that
cost must be updated in the system. This is the direct cost associated with that inventory
item. However, there are other costs, namely indirect costs, which must be taken into
consideration. Depending on the pricing strategy of the practice, the true cost of the item
sold may not be accurately assessed.
The true cost of inventory encompasses several areas. The easiest cost to recognize is the
direct or capital costs associated with inventory mainly because the costs are identifiable
in a businesses accounts payables4. There are, however, a number of indirect costs
associated with inventory that should be recognized. Below is a description of direct and
indirect costs:
A. Capital Costs (direct cost): This is the direct cost of financing the inventory. It
also reflects an opportunity cost of tying up capital in the form of inventory rather
than using the capital for other purposes. This figure should include any shipping
charges or sales tax charges.
B. Inventory Service Costs (indirect): These are typically in the form of taxes and
insurance. Taxes would be a short term variable cost that goes up and down
depending on inventory levels. Insurance however, (property, fire, theft, etc) does
not typically vary and, as such, is a fixed overhead cost
C. Storage Space Costs (indirect): This is also a fixed overhead cost that should be
expressed as an operating rate divided by total square footage in the practice
D. Inventory Risk Costs (indirect): There are risks associated with inventory.
Products could get damaged or even become obsolete. Also, the cost of moving
inventory from one location to another is an example of a risk related cost.
True costing is not entered into most systems and, as such, automatic markup processes
built into the practice management software will yield a profit far less than anticipated.
While many practices use a dispensing fee to cover the indirect costs of inventory, many
practices miss the direct costs associated with sales tax and shipping fees because they do
not apportion those fees to the individual line item from the vendor invoice.
Cash flow
The inventory manager is also responsible for cash flow. As discussed earlier, the capital
costs of inventory also represent cash that is not available to be spent or invested in other
things. This is an opportunity cost. That money could be utilized for other investments
but could also be completely liquid to improve cash flow.
4
George, L. Michael. Lean Six Sigma: Combining Six Sigma Quality with Lean Speed, 1st ed. McGrawHill
2002

8. Another key area of improving cash flow is limiting the amount of time between when a
practice must pay the supplier and when the practice sells the product. A cash gap refers
to the time interval between when a product is paid for and when it is sold. See the
example below
Cash gap
Order is placed Shipping Product stocked Supplier is paid Product sold
Product on shelf
Follow the above model from left to right. You will see that more inventory is sitting on
the shelf than necessary. There are only two ways to improve the cash gap: negotiate a
longer billing period with a vendor or increase the number of stock turns. This assumes
that all customers visiting the practice pay their bill at the time of service. If a customer
does not pay their bill this, of course, increases the cash gap.
Safety and “in transit” stock
The inventory manager must ensure that drugs and suppliers are available. Toward that
end, there might be some inventory that must always be on the shelf. To account for this
the manager must have some safety stock in case of supplier back orders. If the supplier
back orders an item and the practice has no safety stock then there is a product gap. The
inventory manager must also take into consideration the time it takes to ship the product
from the vendor. If the practice runs out of a product due to a backorder from a vendor or
they are simply waiting on the next shipment, it represents lost revenue to the business.
In this case, we have a product gap. See example below
Product gap
Product sold Order is placed Product stocked
Backorder Shipping
Promotional buying
Suppliers to the industry occasionally offer a promotional price and program in exchange
for purchasing a larger volume of product. This strategy can put an enormous cash
burden on the practice but offers the inventory manager a supply of stock that does not
actively need to be ordered. Additionally, the practice may focus their dispensing
energies on that supply of stock which creates an economy of scale. Suppliers give
discounts off the purchase price which, in the long run, will net more revenue. Many
suppliers also offer delayed billing in an effort to smooth out the cash flow problems
volume buying can create.

9. Buying Restrictions
In some instances a product cannot be purchased in a quantity that is ideal to the practice
usage patterns. A buying restriction might include a minimum order, case quantity,
dosage and formulation limitations, etc. Buying restrictions exist in almost every
industry. The goal for the inventory manager is to purchase as little as possible in low
volume stock or inventory that does not move quickly. This presents a problem when a
case quantity is the only way to purchase. Those practices with a proper inventory
rationalization process in place might find they can limit the amount of products in any
one category which will make case quantity purchase far more palatable.
The ideal cash flow scenario
The cash gap is money that cannot be spent and is technically at risk. Every day the
money sits on the shelf it actually becomes worth less. The goal of the inventory
manager is to limit or completely eliminate the cash gap by purchasing in smaller
quantities that reflect the projected demand for that product.
Order is placed Shipping
Order is placed Shipping Product stocked Product sold Supplier is paid Product stocked
Product on shelf
In the illustration above, we have product sold prior to the supplier’s billing due date.
After the product is sold, or we reach our reorder point, the order is placed in enough
time to ship and restock the product. This is the ideal scenario as inventory purchasing
will have the least amount of impact to cash flow.
As the practice nears its reorder point, the inventory on the shelf should be the inventory
with the longest shelf life. And this product should be sold before any of the new product
is sold. This is a concept known as FIFO (first in, first out). The method simply states
the first items placed in inventory are the first items sold from inventory.
Summary:
Businesses must pay attention to inventory. Even if the approach towards inventory is
born from necessity and/or convenience, the business has an inventory strategy. The
extent to which the strategy is thought out and purposeful will be the extent to which
inventory becomes a business advantage. Without a focused plan, inventory will manage
the business. With a focused plan, the business will manage inventory. The clear
demarcation point is stepping away from convenience and necessity towards business

10. intent. When the business intends to use inventory as a tool and financial vehicle, the
business will reap the rewards of that tool.