Independent Pharmacy: How are you Managing your Biggest Expense?
Updated: Nov 8, 2018
Many Independent pharmacies and some pharmacy groups in the United States are absolutely thriving right now. Yes, you heard me right! That may surprise some owners. Nevertheless, you can certainly gauge their success by looking at different pharmacy metrics but none greater than rising net profit. There are many independent pharmacies even during one of the most challenging decades reporting two, three, or more times net profit than other pharmacies of similar size(s) and population densities. So how can this be? What’s the secret sauce?
Certainly, there are several factors that can cause a pharmacy’s net profit to rise or fall including reimbursements and the number of scripts filled per month. However, none are greater than proper inventory management and procurement. We can all agree with this, that inventory is the biggest expenditure for any pharmacy. So how much inventory is on your shelf and how much you pay for that inventory impacts your entire business. Proper inventory management can free up valuable dollars to put back into a business.
The good news is there are several great inventory management programs on the market via pharmacy systems and wholesalers that help a pharmacy keep the delicate balance between having too much inventory which will tie up working capital and valuable shelf space or too little inventory which creates a customer service nightmare. The National Community Pharmacy Association provides many valuable suggestions on how to exercise proper control over your pharmacy’s inventory. It is essential to get a tight rein on your inventory for your business to thrive.
Now let’s talk procurement. How much a pharmacy pays for that inventory is a very important factor. To illustrate, imagine if you are running a marathon and you have a fixed budget to spend on food, clothing, equipment, etc. For the sake of argument imagine if most of your money is spent on food due to the very high cost of food. Consequently, you must scrimp on other things like optimal running shoes. How far will you be able to run on inferior shoes? How does running in sub-par shoes affect your odds of winning the race? The reality is if you weren’t spending so much money on food you would have had more money to spend on better shoes and would have had a much better shot to win the race. Similarly, if you are paying too much for inventory it will most definitely limit how much you can spend in other key areas of your pharmacy business and can force a business owner to forego necessary technology upgrades, marketing, and operational improvements.
Here’s the thing, many pharmacies pay more for their drug inventory than they should. Some choose to just stick with their current wholesaler (without actively renegotiating) believing that the wholesaler will reward them with the “best” cost of goods (COG's) for their loyalty. The reality is drug wholesalers answer to shareholders. The shareholders expect revenue and profit margins to continue to rise. If the wholesalers were to give the “best” COG's to every client, then those margins would dry up fast. Therefore, it is imperative that a pharmacy not rely solely on the relationship of their wholesaler to determine whether they have a competitive wholesale contract.
With all that being said, it becomes necessary for each stakeholder to understand that in most cases there is a better COG's out there for their pharmacy. To obtain it they will need to find someone with the experience and expertise to navigate the many subtleties and complexities of the drug wholesaler and/or pharmacy buying group negotiation process. The right pharmacy contracts consultant needs to be 100% buying group and wholesaler neutral. Otherwise, there incentives may not align with the outcome you are looking for. Once you find a competent consultant then your odds of freeing up more valuable dollars to reinvest in your business rises exponentially. I believe we will see as independent pharmacies continue to be under pressure due to a number of external factors that the need for a nonpartisan consultant to help them navigate the complexities of COG's negotiations will increase.
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