DIR Fees, DIR Fees 2024, Independent Pharmacy Accounting, Inventory Issues, Pharmacy Growth

The Bottom Line Pharmacy Podcast Improving Cash Flow with Inventory Management

Efficient inventory management is key to improving cash flow in your pharmacy. In fact, your bottom line is directly impacted by inventory and if not managed correctly, will skew your gross margins. 

If you saw every bottle or capsule on your shelf as a $100 bill, you might be trying to find ways to get that money into your bank account, especially in the cash flow crunch that pharmacies are facing currently. 

This is exactly what a perpetual inventory management system from Inventory IQ allows you to do. 

In this episode of The Bottom Line Pharmacy Podcast, we share insights to help you keep cash in your bank, not on your shelf. We dive deep into inventory management, how to improve your cash flow, ways you can control your inventory, and more! 

Join the discussion with us! 

The Bottom Line Pharmacy Podcast is your regular dose of pharmacy CPA advice to fuel your bottom line, featuring pharmacists, key vendors, and other innovators.

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More resources about this topic:  

Blog – Maximizing Your Largest Expense: Inventory 

Webinar – Inventory: Keep Cash in the Bank, Not the Shelf 

Blog – Accrual vs. Cash Method of Accounting for Inventory Management 

Blog – Improve Cash Flow with Inventory Management 

Blog – The Three Most Important Accounting Inventory Issues 

If you prefer to read this content, the video transcript is below:

Scotty Sykes: Good morning, everybody, everybody listening in. Another episode of the Sykes Bottom Line Pharmacy Podcast. And today, we kind of have two special guests. We’ve got Mr. Ollin here who is filling in for the star of the show, Bonnie, today. And we also have Jared Barton with Inventory IQ to talk to us a little bit about inventory and the inventory space for pharmacies. Jared glad to have you on welcome, always glad to have you on our webinars and podcasts. Always bring some great content. So, tell us a little bit about what’s new in the inventory world around pharmacies today and what you’re seeing there? Kick us off. 

Jared Barton: Sure. Sure. Yeah. Thank you, guys, for having me. Glad I got to jump on with Ollin over here. You know, Bonnie’s way too tame for me. I like, I like Ollin’s razor sharp opinion, you know, when I get the opportunity to be around it. New stuff in the pharmacy inventory space is everybody’s scrambling for cashflow, right? I mean, we had the impending doom of the DIR cliff apocalypse, whatever you’d like to refer to it as. And I don’t think that we’ve completely seen what the long tail effects of that are going to be. We’ve still got some of those different contracts that are settling out over the remainder of the year, at least through Q3. And then we’ll kind of get to a situation where we stabilize and see what that’s going to do. But that has created one of the biggest reasons to manage your inventory perpetually or otherwise is to promote positive cashflow and promote healthy cashflow. And so that’s something that we’re combating right now, helping people you know, tighten up, essentially. We see these different catalysts in the industry from time to time where cash flow becomes a crunch or becomes an issue. And that’s always a good opportunity for us to work with people and try to help them tighten that up. 

Scotty Sykes: Yeah, because obviously, there’s a whole lot of cash sitting on those shelves. So, inventory management is a huge piece of that. So, talk to us a little bit about Jared what inventory IQ, y ‘all’s approach to inventory management, why that’s important, obviously from a cash flow perspective… 

Ollin B Sykes: And what you can do to increase that cash flow. 

Scotty Sykes: Yeah. 

Jared Barton: Sure, absolutely. So, you touched a little bit on it, you know, cash on the shelves, right? I think that we would all manage it a little bit differently if that were a more transparent $100 bill stacked up on the shelves as opposed to bottles, tablets, capsules, things like that. If we had to walk by and look at that every day, we’d be trying to figure out how to get it back in the bank more so than we do with some of those medications. But what we do, if you have zero, we try to be a turnkey solution from end to end for people that have a lot of proficiency with managing their inventory to people that have, you know, next to no proficiency with managing their inventory. So, we provide services from a complete overhaul. We refer to it as a perpetual inventory installation, where we come in and help you spin that up, train the staff on how to utilize that within your pharmacy management system, and then help you manage it moving forward. And that would be from somebody, these are from, you know, greatest complexity, more or less to least complexity or greatest lift to least lift. If somebody’s already using perpetual and they need a little bit of trim up or something like that, we provide some reorder point analysis, some consulting around what we think maybe the holes or the chinks in the armor are there and then somebody that’s high performing or just needs to satisfy a goal where they want to move a few turns. We do a monthly consulting program we refer to as inventory mining, which is focused on looking into their pharmacy management system and their inventory file on a monthly basis and identifying the greatest opportunities to improve cashflow, reduce waste that we can find. And that’s manned by a couple of our senior staff members that have been with me for a combined about 15 years. So, a lot of knowledge goes into that and that program is actually getting a facelift. Currently, we’re working on a new dashboard for that. So really excited about that aspect of things. 

Ollin B Sykes: And Jared, I’ve seen folks using that monthly service you guys have to dramatically increase inventory turns. Of course, it’s beyond me with essentially next day delivery, why so many pharmacies are totally out of control with inventory to begin with, it’s kind of a separate issue, but they are, most of them, quite frankly. And your system allows them to understand where they are and then to monitor that on an ongoing monthly basis and decrease those inventory turns. Am I correct about that? 

Jared Barton: Yes, sir. So, the shortest point I tell people I was educated in the Alabama public school system. So, I have to keep things really simple. The shortest point or the shortest path between two points is a straight line that dictates that we need to know number one, where we’re going, number two, where we are. And we find that a lot of times when we’re talking to new customers or we’re talking to folks that, that we’ve just started working with that where we are, how we sit currently and what our performance is, is kind of opaque for them. You know, they don’t know exactly if I were to go in and poll 100 pharmacy owners on what their inventory turns were. I might get a ton of, I don’t know, or I think it’s a range. It’s, you know, 14 to 17 or it’s this or that. And then some people, they can tell you “Oh, we’ll do 22 turns on average over X timeframe.” And like, those are the people that I can tell from the cuff or typically managing their inventory pretty well. So knowing where we’re starting and where we’d like to go is a big part of that program because it looks different from 12 to 15 turns, 15 to 20, and then 20 to 25 and beyond. And that kind of takes on the identity of each store. Some stores are capable of getting 25 to 30 turns and some stores just based on sales data and limitations of the volume they’re doing, they’re not, but we want to be as good as we can be. Right. 

Ollin B Sykes: And you work with most script management systems, correct? 

Jared Barton: Yes, sir. Yeah. Covering about, I would say 90% of the market, something like that. So, we’re on all the bigs and then we do some of the, you know, some of the lower, I wouldn’t call them lower tier from a performance standpoint, but just from a user base standpoint, some of the smaller ones. 

Scotty Sykes: So, what about a pharmacy owner listening in right now that really doesn’t feel like they have control over their inventory they know there’s opportunity there what things you know, what are some low -hanging fruit? Pharmacy owners can do to start to get a handle on that inventory and turn those shelves and you know put money back in their bank account? 

Jared Barton: Sure. So, step one for a lot of, a lot of this would be to get on move toward perpetual inventory because that gives us that proverbial starting point, right? In any script management system, we’ve got a place for balance on hand. We’ve got costs that are loaded in from our wholesaler and that eventually gives us that adds up to our inventory total and that would be kind of the starting point to jumping off point for, okay, well, if we feel like we have too much inventory, now, what are the steps we take to get that down or to trim that up? But I think our first step in the process would be we need to get on perpetual inventory. The second step would be we need to hone that perpetual inventory. And the third step is we need to maximize the efficiency there with the tools that are available to us. 

Scotty Sykes: And the efficiencies is reorder points, med sync, those kinds of things. 

Jared Barton: Absolutely. So, stock levels become a bigger deal once we know how much we have on hand and what we’re using. At the very, very base level, we have to have a count, right? Because we have to know how much of each medication we have. That’s going to help you not only from a managerial standpoint, but from an operational standpoint, because when I go to fill a prescription, I know if I’m going to be able to accurately fill it or not. And then from there, we want to dial in on, we need to be keeping an adequate amount of call it a Goldilocks zone, not too hot, not too cold, just right. You know, we want to fill the maximum number of prescriptions that we can without stocking out, but without overstocking the shelves. And then from there, like you touched on, Med Sync, Just In Time Inventory, those types of things, proactive approach to purchasing as opposed to a reactive approach of what’s coming in the door typically bodes best. 

Scotty Sykes: And that kind of ebb and flow supply and demand is constant every day in a pharmacy.  

Jared Barton: Yes. 

Scotty Sykes: How do pharmacies, you know, manage that? Is technology a key driver there or their script system? Kind of how do they manage that different ebb and flow with what they need and don’t need?  

Jared Barton: All of the above. So, I like to manage things that are highest impact first. I tell people a lot of times, and maybe anybody that’s listening has probably heard me say this on a customer call or an analysis. And I’m like, you know, in theory, inventory turns is a, it’s a financial ratio. We could talk about physical turns, but also typically when we’re calculating turns, we’re calculating cost of goods sold over inventory value, right? So that’s dollars over dollars. You could take a pallet of Simvastatin and park it in the back of your store and never touch it. And if you’re doing enough volume there, if you’re selling through enough product, it would be very difficult to see that in the financials. You’d be able to see it because you’d have to step around it. You’d trip over it. It would be a pain. But truthfully, would it damage your performance? Not a ton. So, at the end of the day, I like to order things and attack things where I’m going to get the most bang for my proverbial buck in terms of time, right? So, when we’re doing that inventory mining program, a lot of times we’re sorting those opportunities from greatest to least impact. And that’s a function of how expensive is that item versus how many times am I going to dispense it in a month? Right. Which brings us full circle back to you asked me, how can they do that? I want to really attack the items that are of highest impact to me. That’s the greatest cashflow impact and greatest dollar impact on the shelf. Slowest volume impacts my numbers a lot more than my generics. How do they approach stocking and dealing with those ebbs and flows? Well, the cost to miss on a prescription is a big consideration for a pharmacy owner. I should never miss on something that I’m making a good margin on. Most of the time that’s cheap generic medication. I’m going to get a lot of scripts for it. I’m going to move a lot of it and it’s low cost. I don’t advocate that anybody’s running out of generics, a Torvastatin, Simvastatin, things like that but the cost to miss and people see this a lot on GLP-1s cause people have started sending them out the door “oh, I don’t want to fill those cause I’m losing money.” Well, the cost to miss on somebody coming in to get a Wegovy or something like that, that you’re losing money on is positive, right? You didn’t lose money. So, we’re in a better position and I’m not advocating that everybody send all their prescriptions away or anything like that. I’m just saying we need to think in terms of when we’re trying to stock and we’re trying to handle fluctuations in needed stock to fill prescriptions. We need to think about, okay, how much outlay am I taking? How much cash outlay am I utilizing to procure this product? And then what am I receiving when I sell it? And a lot of times I think that is a kind of a compass or a Northstar that we can guide by to say, okay, I’m going to stock up on these low-cost medications because I’m going to move them. They’re not going to sit stagnant. They don’t take up a lot of cash. My higher cost brand name stuff that doesn’t move. That’s what’s impacted my inventory turns. So, let’s manage that a little more tightly. 

Ollin B Sykes: And how is AI potentially impacting everything you’re talking about, if at all? 

Jared Barton: It is. We’re getting there on the inventory management side. It’s slower to adopt to the market because independent pharmacy market is small. And I think that’s the reason that perpetual inventory is not as adopted on the independent side. The chains know how to do this. They have whole departments that are allocated to this. You know, they come into the store, anybody that’s ever worked for a chain, you had the whole team come in, get your counts right and everything else. And then you’re sending stuff all over the place to different stores based on demand. That’s what they’re doing. We’re trying to bring the same thing to the independent market. Now, AI is impacting quite a bit on the procurement side because it’s not as nuanced as management at the store level. So on the procurement side, we’re able to take algorithms, compare pricing, take into account rebates, things like that, completely a math calculation. And we’re seeing a lot of varying opinions out there in the marketplace on whether it’s correct to maximize your primary vendor agreement or to just buy everything from the secondary market. And we can get into some of that as well. So over at Pharmacy Marketplace, we have an AI driven program, a purchasing assistant that essentially helps you make those decisions while considering your primary vendor compliance, which we advocate. 

Scotty Sykes: That’s a delicate balance between the PVA and the secondaries. Yeah. So, there’s AI tools out there to help you balance that? 

Jared Barton: Absolutely. Shameless plug, but pharmacymarketplace.com is a purchasing assistant. It’s a full-service thing. We have a couple of programs over there. So, Athena is our purchasing assistant and that ingests dispensing from your store, we have some APIs with some of the larger pharmacy management systems for us to be able to ingest what you’re dispensing and then compare that with what’s available in the secondary market and give you the best opportunities to buy advantageously on items that maybe your primary is stocked out of, they’re out of line on something like that you can’t otherwise get. But also, while taking into account your prime vendor agreement, maximizing those rebates because across all of our case studies we’re actually in the process of doing a case study on every customer that we’ve brought in over there. We’re showing how those stores are in a better position to maximize those rebates and also buy advantageously away when it’s necessary. And I think right now there’s a lot of murky water in the industry about I can see the savings in the secondary market, but I don’t necessarily know what the long tail effects of missing that rebate is. And we’re hoping to clear a lot of that up. 

Ollin B Sykes: Yeah. And again, what you’re talking about with pharmacy marketplace merges right into everything that inventory IQ is doing. If I understand that correctly, is that right? 

Jared Barton: Yeah. So, two parts of the same management issue from a pharmacy owner standpoint, right? So, I need to shepherd my dollars through the process as best I can from procurement to sale. So, the pharmacy marketplace works a lot on the procurement side, making sure that you buy the product most advantageously that you can at the best price and product that you’re actually going to sell. Cause you can get the best deal in the world on something you’re not going to sell. And guess what? It didn’t do you any good. You know, if we can’t bring it in and convert that to profit through a sale, then it’s no good to us, it’s a paperweight. Inventory IQ, on the other hand, once you get that advantageously purchased product into the store, we’re helping you manage that all the way to the sale process. So, we want to make sure that we’re not buying too much, and then once we get it in there, we will make sure we turn it over. 

Ollin B Sykes: Does that work with most of the major buying groups? 

Jared Barton: Right now, so inventory IQ is agnostic to buying group, wholesaler, any other pharmacy management system to a large extent because we’re working within that pharmacy management system. Pharmacy Marketplace is currently working with a couple of buying groups through McKesson’s prime vendor kind of tree with looking to bring on Cardinal and Amerisource as well, working with some buying groups and some customers there that have a little bit of leverage to say, hey, this is a tool that we need. Rebates, prime vendor agreements are somewhat ambiguous. And so, we need this tool to be able to bring that down to a level where we can make management decisions, quickly understand those and execute. So, all leverage that you have, if you’re a Cardinal or Amerisource customer, greatly appreciate it over there because we want to bring that tool to everybody. 

Ollin B Sykes: I don’t see any downsides. Unless I’m missing something. Especially with all those hundos sitting on the shelf. 

Scotty Sykes: Well, the prime vendor agreements are complicated. 

Jared Barton: Absolutely. 

Ollin B Sykes: Sure they are. 

Scotty Sykes: You can’t, it’s hard to, you’re ordering new inventory every day. It’s hard to manage, what should I buy this or not? You gotta have technology in there. 

Jared Barton: Right. And a lot of it is using the tools that are available to you. So, on the inventory management side at IQ, we see that somebody would be really struggling to manage or understand what they have on hand from time to time. And all of the tools are there in their pharmacy management system. We just have to learn how to use them and learn how to make them work for us. You know, we’re already paying those monthly fees. So, let’s utilize the tools available to us before we have to go out to the market and find some great, you know, groundbreaking solution. You know, let’s maximize what’s there and that’s what we try to help people do at IQ. 

Scotty Sykes: So how many, I know last time we had you on Jared, we asked how many you thought were on perpetual inventory system, and it’s a small number. I think at the time 40%. Has that number changed at all? 

Jared Barton: Yeah. Yeah. I don’t feel like, I don’t feel like it has. I still think it’s less than 50 for sure and the thing is there’s nobody there to publish that figure. Right. And I get kind of a skewed view of the marketplace because I typically work with people that I’m either converting to perpetual inventory or are already on perpetual inventory. So, I feel like I have a skewed view to the upside of how many people may be on perpetual inventory. But I still run across people all the time. Oh no, I’ve never messed with it. Okay. You should, you should mess with it. So, I still think it’s far less. And I was actually on a call the other day with somebody that represents a company that works with outpatient hospital. And same thing. They essentially said, hey, these are the three large that full disclosure. That’s a place that I’m looking to take our services at Inventory IQ to next because it mimics traditional retail. You know, from an independent pharmacy standpoint, hospitals also have an outpatient pharmacy a lot of times that see a lot of the same challenges. Essentially, they’re typically masked within a larger organization, but it functions exactly the same. The business is the same as a traditional independently owned retail pharmacy. And they told me the same thing. They were like “hey, these are the three big software vendors. These are the challenges. Inventory management is number one overall.” I was like, okay. And I asked them that question. Hey, what percentage do you think it is? And they were far less than half. And I said, okay. So, that’s still my thought. I would say 40 would probably be the best guess that I can get. And I think as 

Ollin B Sykes: Hmm. 

Jared Barton: I think as stores change hands, a lot of stores in the independent pharmacy market pass via paternal or maternal lineage. A lot of times, sons and daughters buying from mothers and fathers and taking on carrying the torch into the next generation. We see some of those people that were raised with technology in their hands, folks that are getting into the millennial age and whatnot. They’re embracing technology a little bit more. And I think that’s a function of a couple of things. One, they’re familiar with it outside of pharmacy and two times are getting a little tighter. You guys see margins all the time, I would believe that margins are shrinking slightly over time and so it gets a little bit more difficult. 

Scotty Sykes: For sure, it does it certainly does 

Ollin B Sykes: Well, we push perpetual systems just hard as we can. And obviously, we talk about y’alls monthly end product because we have seen the results from so many of our clients, many of them 25, 30 plus inventory turns. And with cash being a finite source in today’s high interest rate market, nothing could be more important than what we’re talking about right here in a pharmacy, period, other than how well you’re buying. And you’ve got that figured into the process with Pharmacy Marketplace using AI to hopefully optimize your prime vendor agreement first and foremost, as I understand it, and then to tell you how to buy and where to buy, et cetera. So, it sounds like to me you’ve got the complete system. You just have to get people to understand in this industry, they’ve got to use something like this. They don’t have a choice. 

Jared Barton: I mean, we very much see it as an existential crisis currently. And I’m not a pessimist. I hear it a lot of times, and I’m a member of several social media groups and whatnot that talk about pharmacy and pharmacy challenges quite a bit. And I see the run for the hills, the world’s ending all the time. I’m not that pessimistic on it. I think that we have a very robust and intelligent group of pharmacy owners and operators out there. And I think we will adapt but I think that adaptation is typically a function of some sort of pain. And I think we’re kind of at one of those pain points. And I feel like we really need to see a wider adoption of perpetual inventory, utilizing the software at hand with procurement in the form of pharmacy marketplace. And then taking that discussion of procurement to sale to the patient out of our management decisions because we’ve got it optimized. Then we move on to branding, marketing, things like that. 

Scotty Sykes: Well, pharmacy ownership and inventory management go hand in hand now. I mean, they, if you’re a pharmacy owner, there’s gotta be inventory management right there with it. So, they go hand in hand and it’s only, as you say, continuing to grow in importance. I mean, we’ve been pushing this for years now. You go back and look at our content on this. So, it’s not going away. It’s definitely, continuing to be a need out there. 

Jared Barton: I’ll ask you guys another question so that nobody thinks that I plucked numbers advantageously. What’s the typical gross margin that you guys see just on average? 

Scotty Sykes: Well, it’s changed now because of the DIR fee adjustment, but I think it’s gonna be in the range of 16 and 2 % now. 20% being top of the… 

Ollin B Sykes: It’s definitely lower. The reimbursement situation has definitely changed this year. There’s no question about that. I would say mid-high teens to very low 20s. That’s assuming you’re not involved with compounding, long -term care, DME, and a lot of other clinical services. I’m talking about a regular retail independent. 

Jared Barton: Okay, so we’ll take the rosiest assumption out of those, right? So, 20% is a gross margin. All right, of that 80% of costs, how much of it is DIR affected? What’s that pulling out just percentage wise? 

Ollin B Sykes: About 5-6%, in that range. 

Jared Barton: Okay, so… 

Scotty Sykes: Well, I’m talking about like now with no DIR fees a margin of 20 %. So last year that would have been say 25 % with 5 % being DIR fee to net 20.  

Ollin B Sykes: Correct. 

Scotty Sykes: Now it nets at 20, you know from the front end.  

Jared Barton: Okay, so we’re talking about…  

Scotty Sykes: Yeah.

Ollin B Sykes: Yeah, what he’s talking about now.  

Jared Barton: Okay, I got you. Sorry. So, we’re talking cost of goods at 80.  

Ollin B Sykes: Yeah. 

Jared Barton: All right. I asked some people on occasion and I get some looks and I’ve never been beat up in the parking lot for this, cross fingers, but you know, that ship has not sailed all the way yet because I will continue to say this. I always ask people, I’m like, hey, if you could manage 80% of your cost by engaging in one set of actions or engage in one set of opportunities, would you do it and everybody you know, it’s like, oh yeah, I would totally do it. How many of y’all are doing perpetual inventory? I get like 30, 40 % hands. So, it’s not the coolest thing in the world. You know, I’m not out here shouting from the rooftops. You know, we’ve got all this magic bullet, and you just buy once cry once and it’s over and you never have to touch anything again. You know, there is management involved in it. So, I think that’s the biggest barrier to entry is we’ve got to recognize that there are some certain necessary evils we’re going to have to do to manage and move forward profitably, inventory management, the biggest of those. 

Scotty Sykes: And making it easier is key and technology is 100 % behind that. 

Jared Barton: Absolutely. And that’s where we want to go. 

Ollin B Sykes: And Scotty, I think that’s kind of the bottom line. 

Scotty Sykes: That’s a good bottom line. So yeah, I guess this is the bottom line segment. Jared, we always end on kind of the bottom line takeaway for the listener out there. So, what would be your kind of bottom line here for anybody listening? 

Jared Barton: I think that we’re in a far better position to manage inventory and to make management decisions in and around our financials than we’ve ever been. And technology has done that, even though we may be in a little bit tighter market for printing money easily in the pharmacy space than we’ve ever been. So, at the crossroads of those two, I think we’ve got to utilize the tools available to us for inventory management, also for procurement and advantageous purchasing. And I think that puts us in the best position to win long term. 

Scotty Sykes: I’ll say my bottom line is if you’re a pharmacy owner, inventory management goes hand in hand with it. You have to do it. There’s no getting out of it. I mean, if you own a pharmacy, you have to own that inventory management. That’s my bottom line. Dad? 

Ollin B Sykes: And if you’re not using this type of system, manage that inventory monthly and to tie it in with an AI product like Pharmacy Marketplace, you’re doing yourself a huge disservice if you’re a pharmacy owner. That’s my bottom line. 

Scotty Sykes: All right. That’s a good bottom line. Well, Jared, we appreciate you getting on and all the listeners out there. If you have questions, feel free to reach out to Jared. I’m sure he’d be happy to help you and we’ll see everybody on the next episode of The Bottom Line Pharmacy Podcast. Thank you.

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