Inventory Management, Independent Pharmacies

How to Build Your Business Case for Pharmacy Automation

Datarithm Team March 17 2022

Did you know that pharmacies turn their inventories, on average, 12 times per year? Your pharmacy’s turn rate is a key measurement of inventory efficiency. This ratio indicates how often inventory is “turned over” to meet dispensing demand. The best way to improve your pharmacy’s turn rate is to reduce overstock and dead inventory. With the right inventory stock levels, the average dollar value of inventory will go down, leading to improved turn rates.

You can calculate your turn rate by using the following formula: Total cost of goods sold (COGS) over a set period of time, divided by the average dollar value of inventory maintained over the same time period. So, for example: $3,600,000 divided by $300,000 would equal 12 turns per year.


Understand Your Pharmacy's Costs

Implementing an automated, pharmacy inventory management system will reduce the various costs associated with maintaining, replenishing, and returning inventory over the course of a year. 

Let's look first at carry costs, which can range from 20% to 30% annually. These include interest, state insurance, taxes, and general inventory handling. Carry costs can be calculated with the following formula: Average Inventory Value x Carry Cost %

Replenishment costs equate to the time your staff spends on finalizing and placing orders, confirming receipt of those orders, verifying that the receipt matches the invoice, payment processing, and other tasks.

Then you have to consider expired drug return costs which include all expenses that come along with purchasing, carrying, and returning unused short-dated or expired inventory. Write-off loss is the difference between the cost it took to acquire a drug and the return credit value received from the manufacturer. 

While return processing fees on expired drugs vary, a widely accepted estimate is 8% of the drug's value. If 10% of a pharmacy's average inventory value expires every year and only 80% of returnable inventory is ever recouped, the pharmacy is essentially leaving valuable cash on the shelf.


Let the Cash Flow, flow


Carrying the right inventories at the right levels means that a pharmacy can cover demand without overstocking. Reduction of overstocked inventories reduces cash investment levels (cash inflow) and, ultimately, reduces future dead stock levels and expired return volumes. A perpetual inventory management solution can reduce cash outflow and improve overall cash flows.

Poor inventory management can quickly lead to bloated, slow-moving, and dead stock, as well as excessive levels of expired drug returns. This means pharmacies carrying too much can cripple their cash flows. On the other hand, carrying insufficient inventory can result in the loss of business and, potentially, the loss of future business when customers buy elsewhere. It is imperative to know which items are in surplus and identify wholesaler returns to get what’s not needed off your shelves.

This is a delicate balance for pharmacies to strike, and one that an automated inventory management system can handle proactively for you. 

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Automate for Financial Wellness

An automated solution offers the most precise way for pharmacies to maintain accurate inventory. This is because it tracks your pharmacy’s inventory continuously and in real-time. Otherwise, pharmacies rely on potentially inaccurate information which can lead to stock-outs, over-stocking, and elevated expired returns. Pharmacy automation software will assure:

  • Monthly re-order point optimization is always in lockstep with changing demand and the preferences of management/owners.
  • Optimized re-order points coupled with automatic return and transfer recommendations reduce overstock and dead inventory, lowering overall drug spend.
  • Reduced ordering time gives you more time to care for patients.
  • Improved fill-rates and inventory turns.
  • Intelligent cycle counting to maintain on-hand accuracy.

With on-hands accurate and re-order points/quantities established, a style of replenishment must be determined. Additionally, inventory levels can become inaccurate over time due to shrink, staff and wholesaler errors, and other issues, so periodic counting (also known as cycle counting) will assist in maintaining on-hand accuracy throughout the calendar year through real-time corrections when errors are discovered.

The level of precision that automation provides helps pharmacies avoid both overstocking and stock-outs while providing a stronger basis for inventory reports and decision-making.

Schedule a free demo with Datarithm today

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