Carrying Costs – The Inventory Management Paradox

Carrying Costs – The Inventory Management Paradox

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By ScriptPro
June 14, 2018

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• Astute financial managers understand this: When it comes to inventory, the “More equals Less” rule applies. It is obvious that more money tied up in inventory means less money available for other purposes, but there are other insidious ongoing effects from having too much stock on hand. One of these is carrying costs. Money is not free, so added monthly interest or money costs go hand-in-hand with dollars invested in inventory.

• There are also storage space, insurance, property taxes, material handling, accounting, and obsolescence costs that are incurred in proportion to inventory levels. These costs continue month after month, year after year with a negative impact on financial performance. A common rule of thumb is that annual carrying costs average about 20% of the value of the inventory itself. So a $25,000 reduction in inventory results in a $5,000 per year reduction in carrying costs.
• The paradox also reads as “Less equals More.” Less inventory means more money freed up for debt reduction or other uses. Lower carrying costs reduce pressure on the bottom line and result in more profits. Lower, better managed inventories enable improved patient service through fewer stockouts and partial fills. You might think that having excessive inventory on hand means better stock availability, but experience has shown it’s just the opposite.
• The excess inventory is often the wrong stock, or even expired stock – not what’s needed to fill prescriptions for the waiting patients. Bulging inventories slow down operations by making it hard to find items quickly, or even find them at all. In short, a lean, well run inventory management function beats a sloppy, overstocked system in every way.
• ScriptPro’s SP Central Pharmacy Management System runs a Perpetual Inventory that improves your bottom line. Features below:
• Creates, sends, and receives purchase order for pharmaceutical and retail items
• Downloads acquisition pricing on supplier’s schedule
• Segregates inventories – orders and tracks pricing separately (340B split billing)

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