Arecession occurs when there is a decline in the country's gross national product (or negative real economic growth) for two or more successive quarters. This cycle of events can affect a medical practice dramatically, unless certain steps are taken to ensure the practice's viability during this period. Expenses are inevitable and money is tight during these difficult times; a medical practice manager therefore must develop a strategic plan to reduce expenses and keep the cash flowing. One of the best ways to optimize cash flow during tough times is to ffectively manage product inventory.
Costs associated with inventory make up a critical cost area in a medical practice. Having the “wrong” amount of inventory on hand can result in a need for additional storage space, increased material handling and record-keeping costs, added tax obligations, and depreciation challenges.
The JIT Model
The Just-in-Time (JIT) inventory model can help practices meet their inventory challenges. The JIT model is a process for optimizing inventory management and flow that was originally made famous by Taiichi Ohno of the Toyota Motor Company in Japan and was quickly adopted by many American corporations. The primary benefit of JIT is that it reduces the total cost of ordering and the holding of large amounts of product inventory.
High-holding costs and low-ordering costs are the factors that drive the JIT model. For a medical practice, the ability to lower ordering costs can create a viable solution to financial challenges. By utilizing the JIT model, medical practices can speed inventory turnover and maximize use of the company's liquid resource: cash. Properly implemented, the JIT method can help increase a practice's net profit.
Wal-Mart is an example of a company that successfully has utilized the JIT model. Instead of having large holding costs, Wal-Mart minimizes its product-ordering costs with each vendor. By lowering its ordering costs, Wal-Mart achieves greater cash flow and better inventory control.
JIT Inventory Control: Four Key Policies
Listed below are four key policies every practice can follow to create a seamless JIT model:
1. Use the First In/First Out (FI/FO) method
to handle inventory.
FI/FO basically means the first item bought is the first item sold. This method helps practices organize turnover (old products versus new) and control inventory management and age of product. FI/FO is especially important if your aesthetic goods are perishable or could become outdated quickly.
2. Keep inventory low. Avoid tying up cash with items that may or may not sell. You might consider ordering more frequently but in smaller quantities. This may result in slightly higher shipping costs, but it reduces the risk of items that do not sell quickly and allows for a better cash flow. Additionally, sitting on a wealth of inventory (i.e., fillers, implants, retail products, etc.) makes tracking and the control of products more difficult. Note that product theft increases in tough economic times. Carrying a smaller inventory can help reduce theft.
3. Control your payment terms. Vendors are likely to offer different payment term options on purchases. You may have to be approved for credit or establish a payment record on your first few orders. However, beyond this, you should expect manufacturers to extend 30-, 60-, and even 90-day payment terms. The longer payment term you can achieve, the better off you will be. Longer payment terms (90-120 days) will enable you to resell inventory and pay suppliers with customer's money, not your own. For example, if you invest $2,500 in a product and sell it, and then buy another $2,500- worth of product and sell it, some of the second product buy is made with a portion of the profit from the initial investment (which is revenue from your patients' product purchases). This methodology (versus one where you buy in bulk up-front) will free up money for you to invest in other things. Additionally, this will give you a more optimal cash flow. Also, paying with a credit card can extend your terms another 15 to 30 days.
4. Choose vendors wisely. It makes sense to partner with vendors that provide the best quality product for the lowest quantity order. When analyzing vendors, avoid buying large volumes, unless you can turn over the inventory quickly due to customer demand. Partner with vendors who understand the JIT model and are willing to work with you to assist with the product pull-through. It is important to have a firm grasp on your patients' needs before you invest in inventory that you may not need.
You may want to utilize a checklist like the sample below to track your inventory purchases. Some software systems can track this data automatically, but a simple spreadsheet can work just as well.
It is important to note that when using the JIT inventory model you must be sure to have enough product on hand for daily business. If you have seasonal peaks in customer need or a large event coming up, be sure you have enough product on hand to take care of your patients.
One good way to ensure that your inventory is correct is to balance your daily inventory to your practice management system. Many software management systems have inventory modules that help you track inventory on hand and track peak times, seasonal changes, etc.
Even if you do not have a software system that provides this function, you can implement checks and balances to make sure that you have an accurate daily count for your operating needs. Additionally, proper checks and balances with daily inventory counts help prevent theft and misuse of product.
Inventory Management Analysis
For further inventory management analysis, you may want to look at the following data points in order to determine whether your JIT model is working:
- Annual Consumption Value. Aging inventory can be a large hurdle for the cash flow of your practice. A simple analysis of the annual consumption of each product can be helpful in determining what your product needs truly are on a monthly/yearly basis.
- Target Marketing. Focus your marketing budget and sales efforts on products that are profitable and turn over quickly. Moving forward, a return on investment (ROI) analysis of your marketing efforts versus product consumption should give you a solid idea of where to maximize your resources.
Proper Inventory Control
Proper inventory control is critical to medical practice management during tough economic times. By implementing systems such as the JIT method, medical practices can overcome many problems that exist with managing inventory and controlling cash flow.