When you run a pharmacy, inventory control methods play an essential role in your success. Knowing what you have – and how to get more of it before you run out – is a basic building block of any competitive business, and is especially true for home infusion providers, where inventory turns over quickly and patient care depends on it.
As you and your team strategize the best ways to streamline inventory management, consider the following approaches:1
Each method has its pros and cons, and each seeks to balance the risks associated with uncontrolled spending in three areas:
- Carrying costs
- Shortage costs
- Replenishment costs
You also have the opportunity to combine elements of these methods to create the ideal pharmacy inventory control method for you. Here's what you need to know to refine your inventory control plan to optimize your business.
1 | Just-in-time inventory method
Famously introduced at Toyota automobile assembly plants in the 1970s, the just-in-time (JIT) strategy means that inventory arrives only when it's needed and no sooner. Proponents of JIT say the strategy lets them work smarter, not harder, because fewer resources are tied up in inventory with this approach.2
With JIT, you'll reorder key drugs just when they're about to run out. Ideally, you'll have a tracking system that is sophisticated enough for you to manage your supplies smoothly. Otherwise, you'll be explaining to patients, physicians and discharge planners why you can't fill prescriptions when needed.
Pros of the just-in-time method
- You can trim holding costs by keeping only the minimal inventory needed to support smooth operations
- You can reduce overstocks and expired drugs
- JIT is well-suited to pharmacies with stable patient demand and consistent censuses
Cons of the just-in-time method
- You become especially vulnerable to shipping errors and supply chain disruptions
- Lower purchase volume means you may not qualify for distributor discounts
- Per-order expenses increase with frequent small orders
2 | Open-to-buy inventory method
A second possible inventory control method for pharmacies is the open-to- buy (OTB) option. With this method, you use your projected sales to create your monthly purchasing budget.
In other words, your sales projections determine how much inventory you'll need for a given month, making OTB more proactive than reactive in outlook.
Pros of the open-to-buy method
- This method permits better cash flow management
- You can reduce or eliminate surprise inventory expenses
- OTB helps to assure that you have enough inventory on site to meet your expected demand
Cons of the open-to-buy method
- This method works best in environments with consistent monthly sales
- OTB requires a robust budget forecasting function to succeed
If you already use ABC analysis to categorize your pharmacy inventory, you'll find you've laid the groundwork for using the OTB method effectively.
In general, ABC analysis groups inventory items into three categories based on their importance to the organization.3 "A" items account for only a small percentage of the total inventory but are of outsized importance to smooth operations. Conversely, "C" items represent the highest percentage of inventory items but have the lowest value overall. "B" items fall between these two extremes.
There are no universally accepted thresholds in ABC analysis groupings, but the Pareto principle, also known as the 80/20 rule, is a good guide.3 Here's one common ABC framework:
- A items are 20% of the items and account for 70% of the total value
- B items are 30% of the items and account for 25% of the total value
- C items are 50% of the items but account for only 5% of the total value
3 | Minimum/maximum inventory method
Finally, the minimum/maximum (min/max) inventory method lets you establish minimum and maximum amounts of individual items that you plan to stock at any given moment. You do not allow your inventory to exceed the maximum or drop below the minimum.
Clearly, consistency is the key to the min/max inventory method, favoring items on your shelves in predictable amounts more than adherence to budgeted dollar amounts.
Pros of the min/max method
- This method is a good way of supporting a stable inventory so that you don't run out of any item
- The min/max method provides a balance between excessive ordering costs and excessive carrying costs of inventory
Cons of the min/max method
- Because this method is tied to stable demand, if your census fluctuates, your inventory levels might end up at either the minimum or maximum levels too often
- You have less control over spending because dollars don't drive inventory in this method
- It's time- and resource-intensive to set up and maintain appropriate min/max inventory levels
Finding the right pharmacy inventory control method for you
Given the complexity of the compounding pharmacy business, you'll probably find that combining these methods will give you the most precision and nuance in managing your inventory.
Each pharmacy inventory control method requires skill and finesse to implement accurately. But the rewards of a well-controlled inventory are a stable, profitable business able to meet even the most complex patient needs.
This is one area in which you won't want to go at it alone. Luckily, you don't have to when McKesson Medical-Surgical offers a range of inventory management solutions, including McKesson Inventory Manager. This web-based barcode-enabled system offers a secure platform that's easy to use, along with expert technical support.
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