What is one thing you think about when you hear the term ABC analysis? If it is to run for the hills, that is usually the popular reaction. To me, in the beginning, it sounded scarier than it really was. When I first started in inventory as a practice manager, I had zero clue what an ABC analysis was nor its purpose in the clinic. Little did I know, it would be the most beneficial report I would use in my career to help keep a pulse on my inventory.
ABC analysis is a method of classifying inventory items that can ultimately be beneficial for the practice by helping reduce costs, improve customer service, and increase profitability by keeping the inventory clean.
What is it?
ABC analysis is a way to organize your inventory to focus on the most important items within your business. To understand more clearly, consider the Pareto principle, which states companies earn 80 percent of their revenue from 20 percent of their top products. Why use the 80/20 rule? It helps provide a framework in which your business can focus on its most profitable products more frequently. These items can have a significant impact on your revenue and delivery of patient care, and they are usually organized into three categories:
- A items are the most important and make up the largest percentage of sales
- B items are less important than A items, but still make up a significant percentage of sales
- C items are the least important and make up the smallest percentage of sales
When creating your ABC analysis, your A items account for your top 20 percent; B items your top 30 percent, and C items your remaining 50 percent. Anything that falls past C items should be evaluated often to either discontinue carrying or consider a better alternative.
How to organize it
Running the ABC analysis on each category is one option (e.g. pharmaceuticals, injectables, dietary, etc.). Pull the past 12 months of sales history for each category and add it to a spreadsheet. It can sometimes be tedious combining the data depending on which practice management software you are using.
Once you have your inventory sales report exported and ready, organize it by the quantity sold to see the product movement.
For example, line 1 would be the top item sold (quantity), and the last line item would be the item that sold the least for that period. If you want to go a step further, you can also do an ABC analysis on your services, reporting the revenue made instead of quantity sold.
Once the report is run and organized, establish your A, B, and C items. For example, you have 100 items total on your report. Your first 20 will be your A items, the next 30 will be your B items, and the following 50 will be your C items. Utilizing this report to organize your inventory will be an important asset for keeping your inventory clean and current.
Using ABC analysis for better patient care
A major duty in inventory management is inventory counts.
For my A items, I like to count those weekly as they move the most frequently. For the B items, I count biweekly or monthly, and then C items (or any items past the 50 percent mark), quarterly or annually as they move the least.
Another tip is to evaluate your C items annually to see if they are worth holding onto. Do you have five different types of ear cleaners in your C items? Why not discontinue a few or consolidate them into one to two items?
On the other hand, you would want to count your A items more frequently. Given the demand for those products and the revenue they bring, ensure they are always in stock. Keeping an accurate inventory does many things, but most importantly, it allows for better patient care as you make your top items available for your patients.
Additionally, it helps you keep on top of your inventory, helping manage your cost of goods (COG) throughout the year. How many of us scramble around all of December to lower our COG? Why wait until the end of the year to fix it? An ABC analysis can help you keep on track all year. It can also help spot mistakes sooner, which means less time spent on inventory. How many times has someone filled a script of 30 tablets, but the computer only charged for one? You would find that mistake sooner if it was one of your A items. I recommend running a new ABC analysis each year as your top products and needs of your patients could change.
Creating an ABC analysis for your practice can be beneficial in many ways. Not only does it help keep a pulse on your inventory, but it also helps provide better patient care by making sure you always have your top-selling items in stock. By counting you’re A items every week, you have a great understanding of how much you sell and how much you should reorder to ensure you do not run out of products.
In return, you can keep revenue in-house instead of having patients purchase that medication from an online pharmacy. ABC analysis can seem very overwhelming but is easy once you get started. Knowing what it is, how to organize it, and how to use it effectively will help you be on your way to lower your COG and better patient care overall.
Rachel Singletary is a previous practice manager who has worked in different areas of veterinary hospitals. Her top passions are inventory, staff development, budgeting, OSHA regulations, and controlled drug record keeping. Singletary enjoys writing and studying new topics in her free time. She is located in Lakeland, Fla.
Reference
- Jenkins, A. (2021, April 18). What is the 80/20 Inventory Rule? NetSuite. Retrieved January 29, 2024, from https://www.netsuite.com/portal/resource/articles/inventory-management/80-20-inventory-rule.shtml