Managing the goods

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Leading pharmacy business expert Bruce Annabel provides his 10 essential tips for effective stock management

Pharmacies following this guide are growing and earning high margins, Mr Annabel says.

1. Determine optimal stock level 

a/ Dispensary stock level determined by the number of times it turns per annum. (cost of goods divided by average stock holdings at cost). Pitcher Pharmacy Services (PPS) clients turn over their stock 22 times per annum ie: once every two weeks and 3 days. To some that sounds high but it is a reflection of efficient ordering and storage capacity. Many turn over stock 12 times per annum because they pay their wholesaler at the same rate. But that usually means excessive stock occupies excessive space and slow moving lines are overstocked.

b/ Optimal retail stock level should be determined by ‘stock intensity’, not stock turns. That’s because many owners and managers think higher stock turns is a good thing which almost always results in carrying insufficient stock because it’s easy to cut stock levels through under ordering. Result is lost sales guaranteed and it looks like the pharmacy is going bust.

c/ On the flip side having too much stock causes clutter blocking patient sight lines, causing congestion between gondolas, confuses customers and results in low sales.

Stock Intensity (SI) formula is: retail stock at cost divided by retail floor space m2.

SI for traditional community pharmacies should be $900/m2 to $1,100/m2. Priceline and TerryMart Pharmacies are very merchandise intense and hold high beauty stocks present SI of $1,400 and $1,200.

2. Decide range selection

Write down your pharmacy’s merchandise strategy and how it fits with your purpose, pharmacist professional service, premises, service/services and marketing.

Investing the right amount of money in the right merchandise is critically important after getting the SI, or stock weight, Right.

The mix will vary depending on the purpose of the business.

Hard discounters such as Chemist Warehouse carries a huge range of stock across many health and beauty departments to make the metrics and strategy work. At the opposite end of the spectrum traditional community pharmacies competing through offering patient health solutions carry deep ranges within limited medicine/health departments and little if any sundries.

IE: Both styles of pharmacies use range selection for completely different competitive reasons

However, the rest are stuck in the middle trying to be everything to everyone while meaning not very much apart from convenience.

Remove or at least rationalise ranges lost to other channels and competitors.

3. Department roles

Dispensary and medicines remain the number one patient traffic generator.

Non hard discounter pharmacies should allocate 60% of stock and space investment to signature (eg: medicines, wound care, practitioner lines, vitamins) and health conditions departments (eg: diabetes, sleep, mother and child, chronic pain), 25%/30% to the ‘sundry’ health departments (eg: digestion, eye & lens care, ear care, therapeutic skin/hair, quit smoking, hydration, dental, weight) and the balance to basic/convenience lines (eg: general skin/hair, oral, fem hygiene).

Some banner groups push stock through to pharmacies on which they receive supplier deals that shouldn’t be in the pharmacy and often don’t sell. And to make matters worse they obscure the signature, health condition and sundry health departments. Range selection should be based on a deliberate competitive strategy mentioned in point 2 overseen by the owner, not suppliers. The two need to cohabit.

4. Presentation

To be taken seriously as a health destination pharmacies need to look like one.

When entering the premises merchandise range selection and positioning seen by customers creates an impression of what the pharmacy stands for. 

So plonking sundry lines such as gifts, jewellery, trinkets and so on at the front door presents the wrong image. Instead think about promoting seasonal condition solutions, health services, a service such as sleep disorders, or medication management etc.

5. Never ever out of stock

You can’t sell thin air! Apart from unavoidable circumstances never be out of stock as you can’t sell thin air and customers will tell their friends ‘XYZ Pharmacy never has….’.

And holding one is almost as bad because once it’s been sold guaranteed at least one sale will be missed, probably more while waiting for the order to come in.

Always replace gaps even if the discount obtained is less than the usual supply source because patient satisfaction and making some margin is much more important.

6. Merchandise family tree

Organise your merchandise family tree based on your competitive position and range selection. Department, category, brand and SKU, although some only run three levels.

Many pharmacies are doing this blending conditions in to the product categories.

7. Measure

Key things to measure:

  • Sales $ & momentum
  • Sales units & momentum
  • GP $ & %
  • Stock turns.
  • Items not sold for 6 months or longer.
  • GMROS (GP$ divided by shelf space linear metres occupied) – measure at department level and sometimes category. Impractical to measure at SKU level.
  • GMROI (GP$ divided by cost of stock investment) – drill all the way down the merchandise tree.
  • If GMROS and GMROI are underperforming drill down to determine why.

8. Review, review, review

  • Department and category reviews.

Use the above measures combined with your strategy and purpose to constantly review department performance.

Good POS system producing reliable data is critical.

  • Range reviews

A constant process that also requires understanding the ranges you should have in preference to others or is selling well elsewhere.

9. Management format

Plan-o-grams are far from perfect but they remain the best way to physically manage stock.

Planograms more or less sometimes work, but they are better than the alternative – which is usually ‘let’s cram it in somewhere’ or ‘spread it out so it looks like we have more’

10. Have an exit policy

Very slow moving, old and/or irrelevant merchandise must be exited as soon as possible.

Don’t sit on it hoping for the best because it takes up space and money that could be invested in profitable lines that patients want to buy and aligns with your strategy.

Bruce Annabel is a pharmacy business consultant and Adjutant Professor of Pharmacy Management at QUT


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