Inventory management specifics in retail pharmacy

Pharmacy chains are one of the recognized retail leaders in terms of the complexity of inventory management. The pharmacy retail industry is characterized by significant state regulation, limited shelf capacity, and, most importantly, a wide and complex product range.

There are tens of thousands of products. Medicines are on the market in different forms and dosages. A very specific area is the sale of prescription drugs.

A significant part of the assortment is also a para pharmacy, which includes products for hygiene and patient care, cosmetics, and dietary supplements. In addition, drug stores sell medical devices, equipment, and supplies.

This set of features and limitations makes drug and parapharmaceutical inventory management a tough task.

The key to growth for inventory management in drugstores

As the turnover and the number of outlets increase for any pharmacy or drugstore chain, effective inventory management involves: 

• Order centralization brings better conditions from suppliers and optimizes logistics.
• The increased volume of information about goods cannot be processed manually or by makeshift methods such as spreadsheets.
• Decisions about order quantities and inventory levels should not be made solely on the basis of analyst forecasts or subjective judgments of field managers. The cost of mistakes is too high to blindly rely on someone's intuition or past success.

Comprehensive automation based on operational data processing and proven algorithms is needed. An example of this approach is the LEAFIO Inventory Optimization system, which optimizes the assortment and ensures the availability of goods at a reasonable and sufficient level. This is a cloud service that operates according to the SaaS (Software as a Service) model and is available via a web browser on smartphones or computers with any operating system.

“Before the implementation of Leafio Inventory Optimization, our inventory management was decentralized. At each of the hundreds of pharmacies, managers created orders manually. With such a formation of orders, problems mainly arose due to the human factor. Sometimes managers missed important SKUs, and sometimes they ordered the wrong amount. Therefore, the main thing we wanted was to calculate orders centrally, using software, and not by a person. And the system provided us with this,” says Oto Gvaramia, chief programmer of the Aversi pharmacy chain (Georgia).

Related: What is Distributed Order Management (DOM)?

The combination of pull and forecasting practices, the use of actual demand data, various inventory management algorithms for retail outlets and distribution centers, and a powerful analytical unit make Leafio Inventory Optimization a reliable tool for pharmaceutical retail management.

“Now we have completely changed the approach to ordering. This is done by 8 people in our office, not each pharmacy separately. This greatly simplified the process and accelerated the supply of outlets. With Leafio, pharmacies order as much as they really need to sell, not to reserve and create a surplus, or just to keep stock. Our surplus of goods has decreased by several million. This is a huge effect for business.”

Oto Gvaramia is completely satisfied with the results of the implementation of the automated system. In his experience, the use of Leafio allows the retailer to calculate the optimal order volumes and maintain the availability of goods in outlets to avoid lost sales.

Functionality for complex situations and "pitfalls"

The Leafio Inventory Optimization online platform is a one-stop retail solution that takes into account the specifics and experience of the pharmacy. Just as a recommended medicine is prescribed to treat a disease, the corresponding functionality of the cloud system solves the problems of pharmacy inventory management.

Characteristics of demand and its fluctuations, low frequency of purchases of some SKUs

Not all medicines are regularly in demand. Very expensive drugs or remedies for quite rare diseases have a low purchase frequency. However, such medicines should be available for order and in stock. At the same time, in the case of a surplus of such drugs, the risk of expiration of their shelf life and related financial losses increases.

Based on this industry specificity, the software implements the approach of separating goods by sales frequency. Three groups are defined: frequently sold, moderately sold, and rarely sold goods, for which separate settings are entered into the system. 

For each of these groups, the average daily consumption is automatically calculated. Taking into account the frequency of sales, the target level of inventory (buffer) is set.

Dealing with products of low demand frequency is simplified by managing statuses. Each SKU in the pharmacy is assigned a status, according to which the order is made either automatically, according to a schedule, or by creating a special order. Since the status is set in the context of the outlet, this allows you to manage orders depending on the needs of different pharmacies, while the product is always in the assortment matrix and available.

Analogues and substitute products

Along with original medicines, new generics are constantly appearing on the market, and pharmaceutical brands are developing and releasing their own versions of popular drugs. In the absence of the desired product, it is much more difficult for the buyer to make a new choice in a pharmacy than in a regular store. Correct replacement of the drug, as a rule, requires a responsible dialogue between the patient, their doctor, and pharmacist, and the availability of comprehensive verified information in the pharmacy about possible alternatives to the requested medication. Managers, in turn, when submitting orders, must make a choice among entire lines of similar medicines.

In addition, for drugs already on the market, the dosage, the quantity in the package, and the package itself periodically change, and rebranding or changes in registration documents are ongoing.

Sometimes patients may not agree with the selection of an analogue of the drug to which they are accustomed and make a special order. The pharmacy chain should be ready to anticipate this. Insufficient attention to such an indicator can result in lost sales and customers may go to a competitor.

Working with such complex analogues as part of the assortment is also accounted for by the inventory management system. If the quantity of the product package has changed or has been rebranded, it is considered a new SKU, but, when entered into the system, is designated as a similar product. As a result, buffer planning for this medicine will be based on the history of sales of previous analogues. You can do the same for drugs that have just arrived at the pharmacy, but their composition corresponds to the drugs previously sold in it. Thus, orders, even for new commodity items, are formed based on sales data.

Seasonality and regional specificity of assortment

All of this is typical of pharmacy retail. Autumn-winter is the peak season for cold and flu medications. In turn, drugstores in hotter climates should have sunscreen and sunburn ointments by the beginning of the summer season.

To account for the change in seasons, the program has a seasonality functionality. Seasonality coefficients (monthly and weekly) for each group of goods are calculated automatically based on the actual sales of previous periods, and are taken into account by the system when placing orders. If, for example, according to the epidemiological forecast, a surge in some diseases is expected earlier or later than in previous years, then the actions of the program can be adjusted by highlighting the past period with similar indicators.

The system will accept the pattern and make calculations based on the data of the period specified by it. Also, the functionality allows you to take into account the designated periods of holidays and long weekends when suppliers may not work.

Divisibility of the amount of medicine in one package

The amount of medicine in one package can be divided and sold in parts. A common example is that a box of pills contains several blisters, each of which can be sold separately by a pharmacy, which is a potential source of confusion.

The system provides for the “Supplier Units” functionality. It is possible to specify for a certain SKU the unit of measure for both a pharmacy (for example, items for which sales are carried out) and a supplier (for example, packages in which products arrive). It is also possible to set up order quantity conversion from pharmacy units to supplier units.

Limited shelf life

The limited shelf life is tightly controlled and increases the risk of losses from surplus and non-liquid products. For pharmacies, this indicator should be taken into account not only when managing existing inventory, but also when placing orders. After all, it is important to evaluate the remaining shelf life at the time the goods arrive at the pharmacy. In addition, in pharmacies, there are no opportunities to arrange sales, traditional for supermarkets, of goods with an approaching expiration date.

The expiration dates of goods are automatically controlled by an electronic inventory management system, the users of which are able to react in a timely manner to an increase in the corresponding risk.

Related: Pharmacy Merchandising: 5 Rules to Increase Sales

Individual storage conditions for drugs

There is a need for strict control over how each SKU is stored. Temperature maintenance (cold stores), protection from sunlight (dark areas), etc. may be required.

In Leafio Inventory Optimization, you can capture and control storage conditions for each SKU.

One-off demand fluctuations or target orders

This refers to any spikes in demand that are not expected to recur in the future. Indeed, it is important that the program does not perceive any unique events (time-sensitive targeted programs, emergencies, etc.) as a sign of long-term growing demand and does not increase the corresponding stocks.

In this case, the "one-time replenishment" function is applied, increasing only one specific order, without affecting the volumes of subsequent ones, as well as the level of buffers.

Promotions

Marketing activities in the pharmaceutical industry cannot be carried out according to the templates adopted for FMCG sales. Promotion of over-the-counter drugs and related products is used, but requires careful preparation, since such goods are rarely purchased by pharmacy visitors spontaneously without expert advice.

The system automatically calculates the quantity of a consignment of goods necessary for the preparation and execution of a campaign. There is also an option to work with new promotions or products for which there is no data from previous periods. The staff can still manually set an increased buffer, and then the system will continue automatic inventory management.

Let's illustrate the work with promo campaigns using Leafio Inventory Optimization in the words of our Georgian colleague: 

The implementation of the automated system made it possible to plan promotions in a quality manner. We have even adopted an appropriate internal standard. Previously, everything depended on managers, when and how much they would order goods. As a result, campaigns were often late. And now, when planning a promotion, our specialists simply apply coefficients with an expected increase in sales of the corresponding commodity items

What are the active ingredients in this medicine?

One of the key elements of Leafio Inventory Optimization is calculating, monitoring, and changing buffers for each SKU. The buffer is the entire available quantity of goods, including stock balances, orders accepted by the supplier for execution, as well as batches in the delivery process.

The program performs the initial calculation of buffers based on data on average sales and replenishment periods imported from the accounting system. When forming the first orders, the manager monitors the level of buffers and makes the necessary adjustments. After one or two replenishment cycles, the program will adjust itself, and the operations of monitoring the availability of goods and calculating the order size sufficient to replenish the buffer will be performed automatically. Buffer recalculations occur for each SKU at each outlet, depending on actual demand.

Integration with other user software is an important feature of an automated inventory control system. Leafio Inventory Optimization is not only compatible with any accounting or ERP software but also allows you to import data from them, checking their accuracy and correcting errors.

Automated solutions such as Leafio Inventory Optimization allow pharmacy chains to meet the modern omnichannel marketing trend. This means a single model for the organization of product flows for all sales – both through retail outlets and online. With this approach, different sales and communication channels are not just simultaneously used but integrated and work synchronously. For this purpose, the functionality of the program provides that online sales units are also included in the overall inventory management system. This eliminates the problems of possible duplication of orders and the accumulation of surpluses.

AI-powered solution for building an efficient system of inventory management

Explore the LEAFIO

Leafio Inventory Optimization is a user-friendly product. All the main information of the system is displayed on dashboards. There you can constantly track the movement of the most popular SKUs, generating 80% of the company's turnover, as well as new and promotional products. Data on the main KPIs are updated daily: sales, surplus, lost sales, and turnover. The system automatically creates tasks for the manager, prioritizing them and tracking their progress.

In addition to the operational management functions, meaningful reports and analytical tools of the inventory management software are essential for every retailer.

Movement by product category, turnover rates and lost sales, stock levels, both in purchase prices and in days, are always at hand.

The representative of Aversi highlights this feature of the software:

Reports are very helpful. They are clear and informative. We monitor indicators across the entire pharmaceutical chain. Previously, for example, calculating turnover rates and lost sales required a lot of time, but now everything is available in one click.

Conclusions… will be made by the client

Unlike profit, a brand's relationship with its clientele cannot be measured, but it is nonetheless valuable. The efforts of the staff, freed from the need to manually fill out orders to suppliers, and the assortment automatically calculated according to actual demand, excluding annoying out-of-stocks, help to create a positive customer experience associated with the pharmacy. 

After all, research shows that 71% of consumers make new purchases based on their experience with previous ones, and 91% are more likely to buy a second time if their customer experience was positive. This is why it is critically important to start managing inventory in pharmacies with LEAFIO Inventory Optimization.