Inventory Misconceptions that Affects Your Lab’s Performance

As a lab owner or a manager, you are required to keep track of multiple things such as the number of tests booked, addition of new tests, acknowledging revenue ups and downs, hiring talent and resources, budget planning and more. With so many responsibilities in hand, equally important tasks like tracing suppliers relationships, inventory management, optimising inventory, reducing leakage and wastage is usually neglected.

Considering the workload, the owners/managers need to prioritise the daily task based on importance and relevance. Doing so, the majority of the people end up making the mistake of deprioritizing inventory-related workload. This scenario is very much evidence-based on our discussion with our customers and also due to the availability of limited inventory software options in the market; for labs.

This is why we are targeting topics to help labs understand and relate to such ends of a laboratory and make wise decisions as they go about it. So we started this series to explain two major misconceptions about lab inventory management.

1. You can de-prioritize inventory management because it is not one of the most important aspects of lab business.
2. You have to keep track of too many things in order to manage the inventory

In our opinion, both of these points are actually a misconception or can be called a myth. We hope that at the end of the article you will be convinced that inventory management is one of the most important aspects of lab business and you don’t have to track too many things to manage this area effectively.

Myth 1:

You can de-prioritize inventory management because it is not one of the most important aspects of lab business

This is the data from the KPMG report “The Healthcare Diagnostics Value Game”, they took inputs from the top executives of the diagnostic industry on what are the top challenges that they are facing in the market and rated them accordingly. The biggest challenge we learnt is pricing pressure from competitors and in some countries from government price cappings.

In addition to this, many tests are becoming commoditized, so differentiating is going to be difficult with time. (Commodised products are the ones that cannot be differentiated. For example, there are 2 stores that are selling 24-carat gold. If both of the stores have ISO certificates then buying gold from any of these 2 stores is not different from a consumer point of view. This means you cannot differentiate your offerings to customers. So gold is a commoditized product.)

As there is a lot of price pressure in the overall industry, the only way to be competitive in this business is by reducing the cost. In the diagnostic business, 30-40% of the cost is associated with inventory.

So if you want to be competitive in your business, inventory management has to be one of your top priorities. This is also evident as per the above image where the capacity to control and limit cost base is the 4th biggest challenge for diagnostic businesses.

To summarise this point, inventory management has to be a laboratory’s top priority.

We hope this convinces you about inventory being one of the most important aspects of the diagnostic business. Now we will focus on the 2nd misconception about inventory management.

Myth 2:

You have to keep track of too many things in order to manage the inventory

The first thought that comes to mind when you think about inventory management is finding a good supplier, price negotiations, purchase management, expiry management, reducing leakages, reducing overstocking of stock, unavailability of stock etc.

So people get very overwhelmed with this which discourages them to set a plan and work on inventory. It is also very difficult to know what to track, what to maximise, what to minimise in this arena. But, as an owner or inventory manager, you don’t have to worry about these things.

There are 2 major parameters that you have to keep track of, to understand whether inventory management is getting worse or better. With this, there are 3 additional aspects of inventory that you can keep track of. Although, the other three it is not essential to keep track of the health of inventory. They give you a better understanding of your inventory management.

Must follow:

1. Inventory turnover ratio – covers wastage due to expiry, wastage due to leakage, wastage due to device inefficiency problems
2. Days in inventory- covers overstocking problem

Good to follow:

1. Days to move stock from purchase to consumption
2. Swot analysis of all the tests with their gross margins
3. Credit cycle management to maintain good relations with suppliers.

We will discuss all of the above 5 aspects in upcoming articles. Stay tuned.