Few would argue the benefits of integrating retail into an aesthetic dermatology practice. The advantages include the ability to generate passive income, improve patient retention, and enhance patient outcomes. Integrating retail, however, must be done tactically and in a fiscally responsible manner. Effective inventory management is the key to accomplishing successful retail integration.
Inventory management is the cornerstone of all retail endeavors, requiring careful adherence to best- practice processes. To incorporate these efforts into an effective plan, strong consideration should be given to the questions and answers outlined in this article.
Inventory Strategy Q&A
A practice will be well on its way to having a successful inventory strategy if team members carefully consider the information presented in the following questions and answers.
Who will champion your plan? Inventory management will quickly turn to inventory mismanagement if the primary duties are not delegated and an internal “champion” is not identified. When forming a dedicated inventory-management team, it is helpful to view the process in terms of three main responsibilities:
- Introducing and/or deleting new products or SKUs. This responsibility is best managed by a team consisting of providers, marketing staff members, accounting staff members, and any staff member closely involved with patients. Providers have a good feel for what patients need and want, marketing representatives can decide if products fit the practice’s current branding and demographics, and accounting members can verify that the product will be profitable at the recommended price point.
- Ordering and maintaining inventory. This responsibility includes placing, receiving, reconciling, and entering the order into the practice’s POS system. It should also include ensuring the inventory is properly merchandized, monitored for expiring product, maintained for cleanliness, and not damaged in any way.
- Managing and tracking profitability. This responsibility includes accurately accounting for cost of goods, ensuring correct pricing on the shelf and in the POS system, taking a periodic physical inventory for audit purposes, accounting for samples and free goods, and monitoring for inventory turnover and obsolescence.
Who should be your partners? There are several elements to consider when a practice selects its vendors. Intuitively, product efficacy is important; but, equally important is the following:
- Product selection. A good vendor offers a wide breadth of quality products. Additionally important is a vendor’s dedication to research, development, and innovation; practices want a partner that is ahead of the curve and regularly introducing new products with technologies that are best in class. Ideally there will be some brand recognition and public relations to support the brand and product launches.
- Ease of working relationship and resources. The ideal vendor has representatives who are readily available to speak with a practice’s team and are willing to visit the office as necessary. In the optimal vendor-practice relationship, the vendor offers staff education and training (both online and on-site), provides marketing materials, and offers financial support via marketing or loyalty programs. Additionally, the vendor’s ordering system should be straightforward and intuitive. Determining ease of ordering requires asking these questions: Are there quantity minimums? Are shipping costs included or extra? Are there time constraints for placing and receiving orders?
- The “fit.” Look for brand synergy opportunities and try to limit the number of vendors as much as possible. Partnering with just one vendor—or fewer vendors—offers a better chance for leveraging a practice’s buying power and reducing the overall cost of goods. A good fit, ideally, is a vendor dedicated to the physician channel. This means the vendor does not offer products in places where the general public can purchase products (e.g., department stores, spas, pharmacies) in the absence of a medical professional.
What products will you carry? Product selection should not be based on emotion or any single patient request. The decision should be based on current industry trends, existing or shifting patient demographics, and office branding or fit. Most importantly, products should address patient concerns and compliment or support in-office procedures. When a practice wants to bring in a particular product or product line, careful consideration should be given to the following:
- Efficacy and ease of use. The ideal product performs as intended or implied, is easy to use, and meets basic patient expectations. There should be sufficient science-based evidence supporting any product claims. Ideally there should be published studies, before-and-after pictures, and personal testimonials.
- Safety. A product should be safe to use and should not contain controversial ingredients. Practices must understand all ingredients to ensure the product will not interfere with related in-office procedures.
- Demand. A new product should have a distinct value proposition and a sufficient expected demand. It should be unique in the practice so it does not cannibalize an existing product. There is usually little reason to have multiple products that offer the same or similar benefit.
Do you have an ordering process in place? It is imperative to have a reliable process ready for placing orders in a consistent and timely manner. Having the proper quantities of products on hand at all times should be a major objective. Consider these best practices for an order process:
- When to order. Essential to an effective order process is having an established order cycle (i.e., weekly, monthly, or quarterly) with a designated ordering day. It can be every Monday, the last Friday of the month, or the last Wednesday of the quarter—it is really up to the practice. When everyone knows that orders are placed on a specific day, those responsible can have their physical count ready.
- Forecasted usage. The biggest challenge in ordering is understanding what a practice needs over its next ordering cycle. Practices should start by establishing a run rate for each product. A run rate reflects the average amount sold. The run rate for mature products is best determined by calculating the average of the last six to 12 months or the previous year’s cycle. For recent product additions, consider a shorter time frame, e.g., over the last few months, weeks, or days, depending on recent demand. Once a product’s run rate is established, practices should identify a “par” amount. This is the number of units to keep on hand at the beginning of the cycle. One popular method is simply aiming for 1.5 to 2 times the run rate. Once established, it’s just a matter of counting the physical inventory on hand and subtracting that amount from the par amount to obtain the appropriate order amount. Once an order amount is determined, other factors may need consideration. These include planned promotions or events, seasonality, staff vacancies (i.e., vacations, meetings, maternity leave, employment terminations), and planned marketing initiatives related to the product(s) in the proposed order.
- Vendor loyalty programs and promotions. Many vendors have minimum order requirements (both dollar and quantity) to consider during ordering; and, more importantly, they may provide price breaks, free goods, samples, free shipping, or other perks based on various criteria including overall relationship, previous spend, current promotions, or current order quantity.
Inventory Management Solution
Maintaining strict inventory protocols and having the right team, products, vendors, and processes in place is the key to successful retail inventory management. When implemented properly, a practice’s inventory strategy will improve employee productivity, prevent out-of-stock situations, minimize patient disruptions, improve cash flow, reduce expenses, eliminate overspending, and ultimately contribute to a practice’s bottom line in a positive way. n
Andrew Rabinovich is a management consultant with the Allergan Practice Consulting Group, of Allergan, Inc., in Irvine, CA. He consults with dermatology and plastic surgery practices in the areas of financial analysis, practice valuations, human resources, internal and external marketing, leadership training, team building, sales training, compensation, and aesthetic practice development. He has more than 16 years of experience in sales, sales management, and training. Prior to joining the Allergan Practice Consulting Group, he served as the national manager for strategic accounts in the consulting division of SkinMedica. Mr. Rabinovich is a frequent speaker at various health care organizations and hospitals. He earned his bachelor of science in finance from the Stern School of Business at New York University, New York.