Inventory is one of the biggest expenses in your veterinary practice, right behind labor.
And getting it right is a delicate balance.
Too much stock ties up capital and increases overhead costs, while insufficient stock can disrupt patient care, erode customer trust, and inflate procurement costs.
In this post, we’ll dive into the financial and operational impact of both overstocking and understocking, and explore why smart inventory control is key to your practice’s bottom line and patient care quality.
The impact of overstocking in your veterinary practice
In most animal hospitals, inventory is one of the biggest expenses, second only to labor costs. Inventory typically accounts for about 20-25% of gross revenue in your average small animal practice. In large and mixed animal practices, it tends to be slightly higher. If left to go unchecked, that percentage can balloon to considerably more and start to really impact your profitability.
When considering the financial impact of inventory management, it’s important to remember that the cost of the item is only one tiny piece of the puzzle. There are a bunch of other costs associated with inventory management, which can account for 25-40% of the cost of the products themselves. Some of these indirect costs include:
Storage costs: Costs related to storing inventory, including rental or maintenance of storage space, shelving, and refrigeration units for perishable items.
Labor costs: Wages for staff involved in inventory management activities such as ordering, receiving, stocking, and conducting inventory audits.
Inventory management software: Costs for purchasing, implementing, and maintaining inventory management software systems.
Insurance costs: Premiums for insuring inventory against risks such as theft, damage, or loss.
Depreciation and obsolescence: Costs associated with the depreciation of inventory items, especially those with limited shelf lives or items that become obsolete due to new product developments.
Shrinkage: Losses due to theft, damage, misplacement, or administrative errors, which can lead to discrepancies between actual and recorded inventory levels.
Waste and expiration: Costs incurred from expired or spoiled items that need to be disposed of, including pharmaceuticals and perishable medical supplies. Experts estimate that inventory waste due to expired medicine can cost as much as 1.5-2% of a practice’s total revenue.
Regulatory compliance: Expenses related to ensuring that inventory management practices comply with relevant regulations, such as those governing the storage and handling of controlled substances or medical waste.
Documentation and reporting: Costs associated with maintaining accurate records and generating required reports for regulatory agencies or internal audits.
Cash flow and opportunity cost
Overstocking can also impact cash flow. Holding onto excess inventory means that a large portion of your practice’s capital is tied up in products that are not immediately generating revenue. This reduces the amount of liquid assets available for other essential expenses, such as salaries, utilities, and investments in new equipment or technology. It can also make it challenging to cover operational expenses or respond to unexpected costs, potentially leading to short-term borrowing and associated interest expenses.
There’s also the opportunity cost to consider. The money that you’ve got tied up inventory could be used for other revenue-generating activities, including marketing initiatives, new services, or upgrading your facilities - investments in the business that could potentially bring in more income than the stagnant inventory.
The impact of understocking in your veterinary practice
As discussed in the previous section, keeping too much stock on hand isn't good for business. But, as you might have guessed, running out of stock isn’t great, either.
Effective inventory management directly contributes to patient care outcomes. Timely access to medications, surgical supplies, and diagnostic tools is obviously important for delivering quality treatments and achieving positive health outcomes. Maintaining appropriate stock levels minimizes the risk treatment delays, mitigates healthcare risks associated with stockouts, and enables your team to provide prompt and effective care.
There are also financial factors to think about. Just as overstocking can eat into your profit margin, running out of stock can cause serious damage to your revenue.
Lost sales opportunities: You can’t sell a product that you don’t have in stock. Medications, vaccines, and other veterinary supplies are integral to the services provided, and their unavailability means lost sales opportunities. Over time, repeated stockouts can result in a significant cumulative loss of revenue.
Damage the customer experience: Veterinary practices thrive on repeat business and long-term relationships with pet owners. Frequent stockouts can frustrate clients, leading them to seek services elsewhere. Retaining loyal clients is financially beneficial as it reduces the costs associated with acquiring new clients and helps promote word-of-mouth referrals.
Workflow disruptions: Stockouts disrupt the normal workflow, causing delays in patient care and administrative processes. Staff must spend additional time managing stockout situations, such as communicating with suppliers, seeking alternatives, and updating clients, which detracts from their primary responsibilities.
Higher prices: When a practice needs to procure supplies urgently due to a stockout, it often faces higher prices. Suppliers may charge a premium for expedited orders, and shipping costs can be significantly higher for rush deliveries. Beyond direct financial costs, emergency procurement involves hidden costs such as the administrative burden of finding alternative suppliers, negotiating prices, and managing the logistics of expedited shipments. These tasks consume time and resources that could be better spent on patient care and other critical operations.
Takeaway
Effective inventory management is more than a logistical necessity - it’s a strategic process that’s crucial for the overall financial health of your practice. By maintaining optimal inventory levels, you can achieve significant cost savings, enhance cash flow, and elevate the standard of patient care.
Want to see how ezyVet could simplify your inventory management processes? Book a demo today!