Challenged by increasing competition, tightening reimbursement and expanding customer needs, retail chain pharmacies need more working capital. A common yet often untapped source of working capital is their prescription drug inventory. Pharmacies can unlock that working capital by upgrading their drug inventory management with perpetual inventory systems.

A perpetual inventory system is a process by which a pharmacy chain uses technology to track all the prescription medications the chain and all its sites have on hand at all times. The approach provides continuous visibility of the amount of dollars tied up by the primary asset that drives the overall financial performance of the entire operation.

Why visibility of drug inventory matters to retail chain pharmacies

We estimate that only about 35 percent of retail pharmacies of all types and sizes operate perpetual inventory systems. That percentage is a little higher for retail chain pharmacies and a little lower for independent pharmacies. What that means overall is 65 percent, or nearly two of every three pharmacies, estimate their prescription drug inventory by having pharmacists look over their shoulders to see what they have on their shelves.

Optimizing Perpetual Inventory Systems for Retail Chain PharmaciesWithout continuous visibility, it’s difficult for pharmacies to know precisely what drugs they have and predict what drugs they need. But pharmacies with the continuous visibility provided by a perpetual inventory system know what they have and what they need. They can analyze the information to determine what they have too much of, what they have too little of, what they’re likely to run out of, when they’re going to run out, and how much they’re investing in each drug.

Start with a baseline drug inventory count

Ironically, a technology-driven perpetual inventory system to replenish pharmacy products starts with a labor-intensive manual process. Pharmacy staff must count every medication in every box and every bottle, on every shelf, at every dispensing site. It’s impossible for pharmacies to know what they need until they know what they have. Pharmacies must establish a baseline upon which to build their perpetual inventory system.

Operators have several options to conduct this initial, baseline drug inventory. Special expertise is not required. It can be done by existing pharmacy staff and technicians. If a pharmacy can’t spare the staff, it can hire an outside inventory service to count medications. However, pharmacies should have their own pharmacists count narcotics and other controlled substances for security purposes. Counts can be performed by travelling the shelves from A-Z.  There are also cycle counting software tools available that can organize products by cost and relative volume, which allows for a more systematic approach.

This is the point at which many pharmacy chains stop—a once- or twice-a-year physical inventory. Although knowing where the chain stands once or twice a year is valuable, it is important to know where it stands throughout the year. Pharmacy chains should use the initial inventory as a starting point for the ongoing maintenance of their drug inventory.

Learn how to use existing inventory management tools

Ongoing maintenance means learning how to use the existing inventory management tools embedded in a chain’s pharmacy management system. Pharmacies can use the tools to audit drug inventory on an ongoing basis and adjust supplies as they fill prescriptions. Most pharmacy management systems have the necessary drug inventory tools, but many chains don’t use them or don’t use them to the optimum level.

A good example is drug stock replenishment. Most pharmacies use the applications in their pharmacy management systems to keep medications in stock at their current levels. When a prescription is filled, it’s tracked by the system and replaced on a one-for-one basis with the pharmacy’s next delivery from its distributor. That happens regardless of whether the replacement medication is needed that week, the following week, next month or next quarter.

A better approach is employing tools to analyze medication use and prescription fulfillment trends and forecast when the replacement medication likely will be needed. The pharmacy can spend the money when it’s needed rather than having working capital sitting on a shelf in the form of a medication that may not be prescribed for months.  Additional software tools can be employed to manage orders in a just-in-time fashion.

Provides the basis for ongoing drug inventory maintenance

Making the most of existing tools to optimize their current drug inventory management systems is just the start of what chains can do. With more sophisticated and powerful software tools, pharmacies can transition to a “just in time” replenishment model that makes managing medication supplies a core business function rather than a biannual chore with limited financial benefit.

Such tools allow pharmacy chains to manage their inventories on an ongoing basis. That means auditing inventories two to five times a week, depending on drug type and prescription volume. For example:

  • The software tools can randomly select 20 different medications to be audited at a time. That allows pharmacies to review their entire drug inventory over a set period of time in predictable cohorts. When they start counting, they don’t have to remember where they left off.
  • The same tools can be customized. Rather than auditing a random selection of medications, pharmacies can regularly audit a targeted medication or set of medications at specific intervals.
Drive more value by making smarter drug buying decisions

Optimizing Perpetual Inventory Systems for Retail Chain Pharmacies 2With that capability, pharmacies can drive more value out of their drug spend. Perpetual inventory management gives pharmacies improved visibility into drug quantities, which in turn can alert an operator to availability, demand and prices, and gives them the ability to use data to make smarter buying decisions in at least three areas:

  • Pharmacies will know the minimum amount of a specific medication it should have on hand at any moment without the risk of the drug running out.
  • Pharmacies can adjust spending to take advantage of changes in quantity, availability, demand and price. Prices for some drugs go down over time, so they may want to wait to buy them. Prices for others tend to go up over time, so they may want to make a purchase quickly.
  • Pharmacies may want to minimize spending on common medications in order to purchase a new high-priced specialty drug that’s in limited supply.

All of those decisions are possible through a technology-driven perpetual inventory system coupled with additional demand management tools. And by decreasing the amount of money spent on the wrong drugs at the wrong times in the wrong amounts, all of those decisions increase the working capital available to pharmacies.

Additional clinical and financial benefits of perpetual inventory system

Pharmacies that adopt a perpetual inventory system will enjoy a number of ancillary, albeit important, clinical and financial benefits:

1. Better adherence. When a prescription is received, the pharmacy will know instantly whether it has the medication in stock and available for the patient when he or she arrives. If it’s out of stock, the pharmacy can order it or send the patient to a site within the same chain that has the drug available.

2. Lower tax liability. Some states tax onsite inventory. Pharmacies that maintain the minimum amount of drug inventory onsite may reduce their state tax liability.

3. Improved credit. Having an accurate inventory evaluation can help pharmacies that need working capital to obtain a line of credit or secure a loan. 

4. Greater staff engagement. By prioritizing drug inventory management, pharmacies will encourage their staffs to closely monitor medication inventory and make sound purchasing decisions. For some pharmacies, the approach will reduce employee theft, as they know everyone is watching stock levels.

Prescription medications are the most important assets that retail pharmacies have on site. Given the increasingly competitive pharmacy market, retail chain pharmacies can do more to use those assets to their benefit by adopting a perpetual inventory system.

Related: Learn more about Supplylogix’s replenishment management solutions for retail pharmacy chains

Victor Vercammen

About the author

Dr. Vercammen is currently the VP of Business Strategy & Industry Relations for Supplylogix. Within this role, he evaluates the ever-changing health care industry landscape looking for ways this high-growth software company can continue to develop and deliver practical supply chain intelligence solutions for pharmacy and related businesses. He engages with customers on their current challenges while also connecting with industry on the future needs of the health care supply chain.  He has more than 20 years of experience in the pharmacy industry including drug distribution, community pharmacy, hospital and long-term care practice and is a registered pharmacist in Illinois and Wisconsin.  He holds a Doctor of Pharmacy from the University of Illinois College of Pharmacy and has completed the GSK Executive Management Program for Pharmacy Leaders at The Wharton School, University of Pennsylvania. He also serves as a guest lecturer in pharmacy at the School of Pharmacy, Chicago State University.