The importance of managing inventory

On 9 September, 2015 in Financials by Mark Hardwick

Inventory management is vital for any business. Did you know that it represents the second largest expense in veterinary practice? Care must be taken to ensure accurate products and stock are on hand as having the wrong inventory on hand, or housing too much inventory can deplete resources to dangerous levels. This highlights the need for effective management ensuring the business is aware of what stock they need to replenish and what needs to be shifted.

 

If inventory management is taken seriously and undertaken correctly, a business may find that it can reduce its costs and increase sales. An effective way of achieving this is by having an inventory management system in place, which will track and maintain inventory so that customer demand can be met. They can also be linked to the accounting or management aspects so that all operations can become more effective at reducing costs and maximising profit.

This is what we call “Intelligent Inventory”

When we think of some objectives of Intelligent Inventory management we can identify them as being:

1.    To ensure adequate supply of products to a customer and to avoid shortages as far as possible.

2.    To make sure that the financial investment in inventories is minimum (i.e. to see that the working capital of the business is maintained to the optimal level).

3.    To ensure efficient purchasing, storing, consumption and accounting for materials are carried out in a systematic manner.

4.    To maintain a timely record of inventories of all the items within the business and to maintain the stock within the desired limits.

 

The purpose of Intelligent Inventory is to:

·         Maximise sales, through the range and mix of products;

·         Maximise gross profit, via smart purchasing, sensible pricing and reduced shrinkage;

·         Maximise effective use of space;

·         Maximise liquidity (saleable products) and return on inventory dollar;

·         Maximise image through better presentation of stock;

·         Minimise stock-outs and potential lost sales;

·         Minimise dead, tired stock;

·         Minimise stock handling and holding costs like insurance, labour and interest.

 

Costs Associated with Inventory

As inventory is the second largest expense in the Veterinary Practice, next to the cost of labour. It often consumes 20% or more of gross revenue and left unchecked may swell to considerably more. Profitability becomes a challenge when large expense categories (like inventory) are not constrained to appropriate benchmark levels.

When planning for "intelligent inventory" consider some of the actual costs of inventory in the veterinary practice:
 

What percentage of your revenue is spent on Inventory?

%

What is the value of one day’s inventory?

$

How many days inventory do you hold?

Days

How many days Inventory do you have between routine orders?

Days

How many days Inventory can you reduce without affecting sales or production?

Days

How many orders do you place per annum?

#

What is your cost associated with freight?

$

What is the cost on labour time used on managing Inventory?

$

How much time is there from placing the order to receiving the order?

Days

 

Want to find out more about intelligent inventory and effective financial management strategies for your practice? Join CCG at the upcoming Practice Management School, October 2015. http://bit.ly/1HF17at