Introducing… the ABC Analysis!!
I have found that one of the most valuable tools that you can use in inventory management is a veterinary ABC analysis. I’ll explain exactly what it is further down, but it can provide SO MUCH information! It is one of the best ways to determine a) if you have a problem or area of opportunity in your inventory management system, and the b) even more importantly, you can determine how to fix the problem! I have worked with countless hospitals using this tool, and it just provides such many answers and clarity that may not have been otherwise found.
So let’s dig deeper what an ABC analysis is, and how it can help your hospital.
For veterinary hospitals, inventory is the second largest asset in the hospital (only second to payroll). Knowing this, it is important to allocate time, money, and resources appropriately to maintain profitability. What does this mean for you? Several things;
- It is important to prioritize your inventory and determine which items are of highest value (both cost and amount of inventory sold)
- Using several pieces of information, you can determine which products are most important in the hospital and use tight controls, daily counting and/or logging, shrinkage (loss) control, and other tools to ensure you never run of these items
- Prioritizing your time to devote to the most important parts of your inventory
You may be thinking, what is the easiest way to determine this information? An ABC Analysis!! It is by far my favorite report to put together for the year! So what is this analysis exactly? So at the minimum, it breaks your inventory out into three categories. Essentially, it examines the top 20% of your inventory products that produce 80% of your inventory. This will tell you where the “breadwinner” products are and where most to focus most of your energy and time. The three categories are:
- A products: Like I mentioned before, this category will have 20% of your products that give you 80% of your profit. The top products in this category, call them “AA” should be counted daily and monitored on a constant, consistent basis to ensure you never, ever run out of them.
- B products: This category will have the top 30% of your products that make up 15% of your revenue. This items will need to be monitored on a less frequent basis, but are still important to your inventory.
- C products: This category will have the remaining 50% of your items that make up 5% of your revenue. These items are often special order, and care needs to placed to ensure these items are not ordered too frequently or in excessive quantities to cause loss due to expiration.
Beyond the basics of a product breakdown, it can provide so much more information. This is where it gets really exciting!! Using the product and revenue list, you can determine the profit margin (the amount of revenue left after all costs, fees, taxes, etc.) and the markup % (the amount added to the cost of an item to cover overhead, costs, and profit). You can determine the cost of goods (COGS) as a percentage of revenue for each category, and review them against industry benchmarks and standards to see where you place. On top of that; you can determine your annual usage, and the reorder points for each and every item. Isn’t that just incredible!
Side note: I am getting excited just talking about an ABC analysis (I told you I’m an inventory nerd!)!!
It is usually the best practice if the practice manager or inventory manager compiles an ABC analysis and reports to the owners, or upper management. It is great to one an analysis once a year to see where your hospital lands, and if you need to make improvements. If you think your COGS (cost of goods) is too high (it really should be under 20% at any given time), and ABC analysis can provide very helpful information in determining where costs may be too high.
When looking at the mark-up % and profit margin, you will be able to tell if any products are priced too low to cover the costs (either direct or indirect) of an item and if you need to raise your prices. There are so many pieces of important and critical information to gain from this report.