Those new to retail pharmacy, whether pharmacists or technicians, may have heard about the infamous “inventory” day and be wondering what it is all about. I’m about to explain it. Welcome to Inventory 101! In my 20 years of retail pharmacy (plus at least 8 years prior to graduating pharmacy school) I have seen my fair share of inventories. As a manager and a consultant, I take them pretty seriously. This blog post is just an introduction to the purpose of these inventories and is not intended to be an exhaustive discussion.
An “inventory” (also sometimes called a “physical inventory”) in the pharmacy is when an outside agency (usually) is paid to come and make a complete count of all of the prescription and OTC medications in the store. On the prescription side, this typically means scanning each and every Rx bottle as well as estimating (maybe to the nearest 1/10) the amount of tablets/capsules in all the open bottles. The goal of the inventory is to get a dollar amount for the full value of the prescription and non-prescription medications on your shelves.
THE PURPOSE OF AN INVENTORY
Why do companies pay to conduct these often time-consuming and labor intensive inventories? Well, one quick answer is that they are required by Federal Income Tax Law. But aside from that, there are several other reasons for a physical inventory. Allow me to explain a few of them.
1) P&L Adjustments. Remember that in the eyes of a (smart) business owner the medicine sitting on your shelves is basically “dollars” the he/she owns. Your inventory is a portion of your net worth. As your inventory grows, all other things being equal, you are accumulating value. For example, if your inventory in 2014 was $300,000 and your inventory in 2015 was $350,000 then you experienced a $50,000 growth in an important business asset. Depending on how you do your accounting, this could and should be reflected on your P&L to indicate this growth.
2) Shrink. Another reason for conducting annual inventories is to look for “shrink.” “Shrink” is a euphemism for theft or other unexplained loss of product. Based on invoice records of purchases and POS records of sales, your software can calculate what your inventory dollar amount should be to a fairly exact number. Any significant divergence from this (a smaller number is a “shrink” and a larger number is a “swell”) could mean trouble. It may be simply an accounting error. There may be some discrepancies in the invoice processing system. But all other things excluded, if your inventory results reveal a significantly larger or smaller value than expected…you will likely need to further investigate this.
3) Turns. Finally, the last purpose we’ll discuss for conducting an inventory in the pharmacy is to provide an accurate figure from which to calculate your pharmacy “turns.” What are turns? “Turns” is the term used to describe the number of times you sell your average inventory value every year. To be specific, it is the total amount of pharmacy purchases per year divided by your average inventory amount. If, for example, your inventory was valued at 150K (and we assume this is fairly average) and your annual inventory purchases are 1.2 million dollars, your pharmacy would average 8 turns per year.
Why does that matter? Well…explaining that might move us just slightly into Inventory 201, but the simple answer is that higher turns represents a more efficient use of your inventory and better cash flow (money sitting on the shelf in the form of tablets and pills can’t be used to pay employees or vendors or taxes or rent).
PREPARING FOR INVENTORY
As a manager I have done enough inventories that preparing for them is an almost constant thought in the back of my mind. But suffice it to say that basic preparation best-practices include:
- Get organized. Make sure all your saleable product is easily accessible and reasonably easy to count.
- Rx bottles. Put a big black “X” on open bottles to make it easier for the inventory crew to identify open bottles. Get all the drugs neatly organized too.
- RTS bottles. Bottles which are Returned To Stock (RTS) should be easy to count (have an NDC number on them) and organized.
- Returns. Ensure you have received credit for all returns and account for any returns which have been processed (i.e. the product has left your store) but not credited yet.
- Will-Call-Bin. Determine if the value of the drugs already filled, but waiting to be picked up, will be counted or not. Typically your software can run a cost-value for them – but some pharmacies decide to treat those as already sold. Just be consistent. I prefer to exclude them.
- Invoices & Credits. Keep all your invoices & credits organized throughout the year. Always. If your store experiences a significant shrink or swell, they may need to be researched.
AFTER THE INVENTORY
Part of the responsibility of the pharmacy management is to check the inventory results for accuracy. Most inventory crews will provide printouts to review their counts in all areas. These should be checked for accuracy. I typically will check at least 1 section completely, then, depending on what I find, I will spot check the other sections. Special focus must always be made to verify high dollar amounts – small mistakes on your most expensive medications can have a dramatic influence on the accuracy of your inventory.
Annual inventories (or biannually sometimes) are a part of retail pharmacy life and business. Those new to retail pharmacy would do well to acquaint themselves with the inventory procedures for their own store and be prepared for such events when they come.
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