For many pharmacies, inventory management often requires shutting down their business for a period of time so staff can meticulously count each item on every shelf. It might mean finding and then paying an independent service provider: a third party you might not really know and a company that’s probably unfamiliar with your pharmacy.
Either way, “counting inventory” often means losing time and money to a tedious process. However, while the need to do inventory isn’t going anywhere, there’s room to improve how pharmacies can manage their inventory.
In this article, I’ll explain how to make the most effective use of your inventory management system. I’ll show you how perpetual inventory enables you to understand your process better and focus on the right drugs. Along the way, I’ll advise you on the best solutions and tools for inventory.
With these strategies, you’ll accomplish much more with your inventory while discovering costly discrepancies and making things easier for you and your staff.
True Inventory On Hand
Inventory management usually means conducting a physical inventory check: physically counting and recording your products. But that’s not the best model for managing your inventory. Relying entirely on a physical inventory is like only managing your finances at the ATM: you get a snapshot of your balance at the moment, but you can’t see what you’ve spent to get there or how much money you’ll have once any checks clear.
A physical inventory only tells you what’s on your shelves at a specific point in time (assuming it was counted correctly). It won’t tell you which items a team member already ordered, whether you have too much of one product or why there might be variances. If you're only doing a physical inventory a few times a year, you’ll have a huge gap in understanding your inventory, how to use it more efficiently and why variances might be there.
Instead of solely relying on a physical inventory, pharmacies should also incorporate a perpetual inventory system. Perpetual inventory doesn’t replace physical inventory; it empowers you to make the most of your counts.
If physical inventory is your ATM balance, then perpetual inventory is your online bank account: a constantly updated picture of the current state of things along with all the information about how you got there.
That means it’s constantly updated to reflect what has been ordered, what’s on the way, what was removed (and why), any items that may benefit from transferring to another location or department, etc. In other words, it’s your true inventory beyond just what’s on your shelves. And because it’s integrated with purchasing, you see your products’ actual monetary value, which is helpful for periodic inventory reports or tracking turnover ratio.
Inventory and purchasing don’t exist in a vacuum; they should work hand in hand. A perpetual inventory system integrates processes so your data reflects the relationship between the two. This level of detail and accuracy provides the information needed to order more products, transfer items where they might be needed, assess compliance and monitor for diversion.
Understanding High-Impact Stock
In addition to greater efficiency, perpetual inventory helps you manage your inventory strategically. That means focusing on key areas of your inventory, which is possible through cycle counts.
Cycle counts analyze all of the items in your pharmacy’s inventory according to two factors:
- Unit cost: the price per item based on what you actually paid for it
- Velocity: the item’s frequency of sales movement, including periodic spikes and declines
These two variables enable you to look at the most expensive and most frequently sold items. These are the items with the highest impact on your patients and your bottom line.
This metric is especially important for inexpensive products with the highest movement. These drugs may have a lower price and might not seem to have as much of an impact as brand items. But in terms of a SKU (as opposed to a unit), they can still make a huge financial difference.
Cycle counts enable you to analyze your inventory movement—on a perpetual basis—and concentrate on high-impact items. This lens into your inventory reveals revenue opportunities, workflow possibilities, potential discrepancies, possible diversions and much more.
You can start asking important questions, such as “What percentage of my total inventory consists of these high-impact items?” or “Should I reduce my on-hand stock of any items?” and “Where can I increase my high-value sales?”
To put it simply, cycle counts from perpetual inventory add context to your analysis and inform your strategy. With the right solution, you can also schedule evaluation reports to refine these investigations or make them part of regular company reviews.
For example, maybe the data shows a higher SKU a new mix of NDCs, or an unusual number of items in one section. You can see trends and figure out which drugs to focus on. If there’s a variance, you see the history and frequency to understand workflow deficiencies and diversions. That also protects you in case of an audit.
Compared to only looking at the most expensive items (without considering cheaper items moving at high velocity) or regularly checking every item in the pharmacy (including things that don’t make a significant difference), cycle counts enable your pharmacy to focus on the right drugs. You gain transparency behind the numbers and derive better insights that enhance your purchasing.
Perpetual inventory also provides transparency into issues like variances (think shrink). Variances may or may not be a common occurrence at your pharmacy, but they can be a costly and sometimes complicated challenge. For example, why does one product or an entire category have such a significant difference?
With a perpetual inventory system’s granular level of constantly updated data, when you conduct physical inventory counts and spot a variance, you’ll have better tools to understand and prevent them. You can trace the origin of a variance through each count of an item at each point of validation. It could reveal potential diversion. More sophisticated tools will let you skip the analysis: they automatically categorize the highest percentile items into different categories to show variances.
Beyond an efficient and strategic use of your inventory, perpetual inventory also gives you and your staff a more manageable inventory.
Inventory can become resource-intensive in terms of you and your staff’s time, energy and focus. Repeating the same process, clicking the same items and typing the same orders eats up your time, tires you out and leads to errors. Even keystrokes and mouse clicks take up time! And without the right inventory tools, you also have to be at your computer managing your inventory instead of taking care of your patients.
But a perpetual inventory model eliminates the need for constant and time-consuming human intervention. Again, not all perpetual inventory models are equal, but the best ones allow you to schedule orders, automate refills for selected products and create purchase orders “on the fly” in an emergency.
You won’t need somebody standing at the computer taking requests from orders; the system can schedule those purchases for you. And the right technology is always balanced out by the people using it (as our webinar discussed), so look for solutions that give you the flexibility to check any orders you want and then place the order for you or allow you to submit it to the vendor yourself.
A smart inventory solution also protects you from unexpected staff absences or other issues. Even with highly-skilled, experienced staff who know what products are needed off the top of their head, what happens to their knowledge if they’re out on vacation, out sick or leave your pharmacy? If it's all in their head, how quickly are you going to be able to get back on your feet and know what is really needed and what you actually have?
With the right system in place, you’ll have the data on hand and can now pivot to managing inventory. Otherwise, you might not realize you're in danger until it’s too late.
Spend Time Where It Matters
Think of perpetual inventory as your instant spot-check: an accurate count of what’s physically on the shelves at any time that also accounts for how you do business. After your physical inventory establishes an on-hand count as a baseline, a perpetual inventory system integrates with your purchasing process and other pharmacy operations.
By decreasing the time spent managing inventory, perpetual inventory has given some pharmacies as much as two hours a day back to support their clinical team and help patients. Some pharmacy managers have even trained other employees on inventory and shifted some of those responsibilities away from senior staff.
In short, having a more efficient system, one that you don't have to keep pushing levers on or double-checking, allows you to allocate your time and human capital where they matter. And it lets you make the most of your inventory. You might not enjoy physical inventory, but the next time you do it, why not ensure it’s as efficient, effective and beneficial as possible?
Interested in learning more about smarter inventory? Book a meeting with one of our experts now.