If we think back to our time in pharmacy school, many of us remember the excitement of learning new clinical skills, discovering drug therapy problems, and the satisfaction of patient care. These are all important, and to this day I still get excited for the unknown clinical realms that I will venture into any given day: no two days are alike.
As a pharmacy owner, I also think back on how little time was spent in pharmacy school learning about the various aspects of running a business. And let’s face it, back when I went thought pharmacy school, we did spend time on this. Today, with the emphasis increasingly on clinical skills, new pharmacists have even less exposure to the business aspects of running a pharmacy. It is left for them to learn this on the job.
Ironically, I also have noted an uptick in young pharmacists with interest in pharmacy ownership, in part due to dissatisfaction with some of their first experiences in the pharmacy work force. Having a solid grasp on the mechanics of operating a business is again becoming more important. Today we will look at an important concept in any retail facing business: Turns.
The standard definition of inventory turns is the cost of goods sold (CGS) / average inventory. This is closely related to two other metrics, sell-through rate and days of inventory on hand. A store’s “Turns” metric is a benchmark for inventory turnover. The average retail store nationally has just under 11 “turns” of its inventory each year. Another way of stating this would be: the average item on your shelf sells 11 times a year.
Turns are important because inventory is money. For example, my pharmacies have between $100,000 and $260,000 of inventory on their shelves at any given time. That represents cash on the shelf, not in my bank account. Yes, you need inventory on the shelf to do business. With too little inventory and you will be known as the “out house” and with too much inventory you will suffer cash flow issues. Optimizing your turns is optimizing your cash position.
Like any financial measure, it is simple to see how one can impact turns. Given the two parameters — Cost of goods sold and inventory on the shelf, one can logically increase turns by increasing sales or decreasing inventory. Being a pharmacy, however, makes this a little more nuanced. In a pharmacy in the United States, the inventory is typically not unit of use (one bottle is one patient prescription): we tend to have a lot of items that will have a remainder once something is used.
In pharmacy, therefore, the trick is to balance the reorder points for items to cost of and demand for the product. Because your turns equate directly to dollars, it makes sense that the best way to positively impact the metric is to concentrate on the high dollar items. Let’s look at three examples:
At one of my pharmacies, Atorvastatin 20 mg tablets are dispensed 40-50 times a month and we use 2500 to 3000 tablets every month. This is a low cost and high use item. Selling more Atorvastatin 20 mg would not appreciably increase my cost of goods sold (as it is inexpensive) and having a month’s supply on my shelf might represent $100-$150. This is not a good candidate.
On the other end of the spectrum might be Ozempic 4mg/3ml. This product is unit-of-use: we don’t have to worry about having a partial box on the shelf after we dispense it. Each month we dispense 7 prescriptions, representing 20-30 boxes. Each box costs between $800-$900. With this product, I can significantly impact my turns because sales represent roughly $250,000 per year, which is about my average inventory on the shelf.
My goal the Ozempic is to keep the absolute minimum necessary in my refrigerator. This takes a little work: I need to know who is taking the medication and when their next prescription is due so I can order it shortly before the prescription will be filled. I determine that I only need to keep one or two boxes of the drug in my refrigerator for any new patient started on the medication.
By performing a variant of Medication Synchronization (MedSync) on all patients with this medication might be able to decrease the number of boxes of the medication in inventory from 10 to 2. A pharmacy with an average $210K of inventory and $2.3M in CGS/yr has 10.95 turns. Taking 9 boxes out of inventory over the course of the year increases turns to 11.3, a significant change with one medication.
Not all medications are unit of use. Our third example is a vaccine: Shingrix. We currently give 8-10 doses of this every month and the product comes in a box of 10 doses. The drug isn’t quite as expensive as our Ozempic, having just 12 doses in the refrigerator puts the value north of $2,000. With this drug, I cannot adjust the quantity I keep on hand: I have to order 10 doses at a time.
So how can I impact turns? In my case, giving 10 doses/month on average, I reorder only when I get down to one dose (called a Re-Order Point or ROP of 1). This means that I will never have more than 11 doses in my fridge and I’m risking being out of the vaccine on occasion, when we have several walk-ins near the end of the box. But I can also take an additional step: I can schedule my vaccinations. This way, I can ensure I have stock on hand. Scheduling can also allow you to use the entire box in a short period of time: schedule 10 doses over a few days and order what you need immediately prior.
This drug, using the prior example, will add 0.1 turns if we can decrease our average inventory on hand from 12 to 1. This might not seem like a significant change, but it represents, on average, having and extra $2000 in your bank account over the course of the entire year. This helps take pressure off of paying other bills, like payroll, by having additional cushion in the checkbook.
This is the essence of managing turns. Obviously, a pharmacy has hundreds or even thousands of different items in its inventory. The trick is to identify which items have the most impact and work with these first. There are, of course, tools you can use to further manage and even predict demand. These can used to further increase your turns and improve your cash flow.
As always, if you have questions, or need further help, our consultants can help. In this case, help you Make Every (inventory) Encounter Count!
