I have been working on some pretty great stuff this weekend (hint: it has to do with a great training series- you can sign up for updates for when it goes live here), and I got to think about the huge number of veterinary inventory management terms they are! If you are just starting out, or are a seasoned veteran, it can be overwhelming!! I wanted to take a break and review some key terms for inventory management, what they mean, and why they are important for you and your hospital.
Please don’t forget, if there is anything you are ever confused about or have more questions on, I am always more than happy to answer questions. You can find my contact information here, or shoot me an email!
Ready to find out some key veterinary inventory management terms?
- COG’s: Cost of Goods Sold. This is typically represented as a percentage of revenue. This number is critical, as it is an excellent monitoring tool to determine the health of your inventory. If your COG’s is high, it can be a detriment to the profitability of your practice.
- Shrinkage: the excess amount of inventory listed in the accounting records, but which no longer exists in the actual inventory. Excessive shrinkage levels can indicate problems with inventory theft, damage, miscounting, incorrect units of measure, evaporation, or similar issues. Shrinkage can quickly eat away at profits, and the cause must be determined right away.
- Operating level: The inventory amount of an item that is expected to be used up between the point of order receipt and the time another order must be placed.
- Lead time: The time between the point of order and when shipment will be received. The lead time quantity should assure that at least one item will still be available when the new order is received. This can be a useful tool in determine reorder points and reorder amounts.
- Safety stock: A desired inventory cushion, in excess of lead-time quantity, to assist in the event of a stock outage or shipping delays
- Inventory turnover: The relationship between the volume of merchandise sold to the inventory amount kept on hand.
- Reorder Point (ROP): The inventory level of a product at which additional product is ordered. You can find out more about calculating reorder points here.
- Markup: The percentage different between the actual cost of an item and the selling price or the amount added to the cost to determine the selling price
- Margin: The percentage difference between the selling price and the profit
- White goods: In the veterinary field, this usually refers to products such as gauze and bandage materials
- ABC Analysis: A process for ranking or prioritizing inventory items based on annual usage value. This is necessary so your practice management system and your time & efforts can be structured and prioritized based on the value of the items and the results of the analysis.
- Annual Usage Value: Annual volume multiplied by cost
- Chart of Accounts: A list of the names of the financial accounts a practice uses to record, organize, sort, and report transactions (this can include general ledger codes, which is form of numeric coding).
- Economic Order Quantity (EOQ) formula: A mathematical formula that allows for the optimal order quantities, based on several different cost categories. This include the unit cost, ordering cost, and holding cost.
- Fixed Costs (or Expense): An expense that remains constant regardless of the differences in practice volume. An example of this is insurance, it does not increase or decrease daily based on the number of patient seen.
- Holding Cost: The costs of owning and keeping a product on the shelf based on the assumption it will eventually be sold (this can include “rent” of the shelf space, insurance, etc).
- Key Performance Indicator (KPI): any measurement or metric that is valuable to measuring the practices success
- Ordering Costs: the cumulative costs for ordering products for inventory. This does not include the actual cost of the item or any shipping or freight charges. Ordering costs can include labor costs for creating a purchase order, ordering it, receiving the product, etc).
- Physical Inventory: The accounting for the entire inventory on hand at any given time. This is usually obtained by physically counting every item.
- Stock-Out: Running out of an item before the next shipment arrives. We want to try and avoid this at all costs!
- Variable Cost: A cost that fluctuates depending on the volume of the practice, and the amount of patients that are seen.
- Variance: The difference between the physical count of an item, and what is the calculated count (usually from your practice management system) for that item. Any amount of variance for item usually suggests that there is a weakness somewhere. It is important to determine where the shortage or overage is happening.
- Inventory Turns per Year: The amount of times per year that a product must be ordered. Generally, 12 turns per year is recommended as this means that the product is on average on the shelf for 30 days.