Getting Control of the Pharmacy Inventory
Posted on September 23, 2015
By Betty Plummer, Software Developer
What is the current value of your pharmacy’s inventory? While there may be a single numeric answer (kudos if you can come up with it), the more realistic reply is “it depends…”
… your inventory recording method. You may have a perpetual inventory system set up, where the balance of items reflects purchases and dispenses, so that a beginning and ending balance is available for any time period. Or you may use a periodic inventory, where inventory value is determined on a periodic basis, for a specified operating period, usually through physical audits.
… your inventory valuation method:
- FIFO (First In First Out) assumes that the first items into the pharmacy are the first items sold, so the cost of goods sold (COGS) is based on the cost of earlier purchases.
- LIFO (Last In First Out) assumes the most recent items into the pharmacy are the items sold first, so the COGS is based on the cost of later purchases.
- WAC (Weighted Average Cost) determines a weighted average of older and newer items, trying to avoid the impact of changing prices.
… waste. How much is lost through waste and returns? What drugs are most commonly wasted, how much is credited? How much inventory is lost to expiration? Are your anti-diversion measures in place and working, and how do you know?
One of the foremost advantages of an automated dispensing system such as RxWorks Pro is that the data generated addresses all of these “dependencies”. At any given time, it’s possible to know the quantity and value of any item(s), for any time period, by current or purchase price.
So now that you have your number – what does it mean, is it “right”, is it optimal? Enter the inventory turn.
Knowing your inventory value allows you to obtain the COGS for a time period. Dividing that by the average inventory for that same time period gives you the inventory turn. This number is a benchmark to assess how many times inventory is used up during a time period (typically a year). An optimal inventory turn for a pharmacy is 12-16, meaning an item is used up and restocked 12-16 times a year, or every 20-30 days.
This is an example of a pharmacy monitoring their inventory turns as they implemented an inventory management system using RxWorks Pro:
Inventory turn is influenced by purchase volume and frequency, which becomes automated using RxWorks’ calculated reorder points and quantities for each item. This ensures compliance with buying group contracts; since contract items represent significant savings, stock-outs that lead to more expensive non-contract purchases are avoided.
Additionally, you can use velocity rankings (product velocity metrics) when monitoring inventory turns, to manage diverse inventory groups. Example: classify items as A, B, and C, where fast moving ‘A’ items represent the 10% of SKUs that are 60% of sales, slow moving ‘B’ items represent the 25% of SKUs that are only 10% of sales, seasonal ‘C’ items need order adjustments depending on time of year, etc. Each group has it’s own inventory turn goals.
This versatile measurement can contribute to the understanding of your inventory’s movement through the pharmacy, and will facilitate inventory control, allowing you to balance the needs of the patients against the operating costs of the pharmacy.
Financial Analysis in Pharmacy Practice, by Heist/Rollins/Matthew. Pharmaceutical Press 2011
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