Optimizing Inventory Levels in Pharmacies: What Are the Key Features?
Pharmacy chains are recognized as leaders in retail when it comes to the complexity of inventory management. The pharmaceutical retail industry is characterized by significant government regulation, limited shelf space, and, importantly, a wide and complex product range.
Pharmacy retail encompasses tens of thousands of product items. Medications are available in various forms and dosages. The sale of prescription drugs is a particularly specialized area.
A substantial portion of the assortment includes parapharmaceuticals, which consist of hygiene and patient care products, cosmetics, and dietary supplements. Additionally, pharmacies sell medical devices, equipment, and consumables.
This combination of features and restrictions makes managing the inventory of medications and parapharmaceuticals a challenging task.
Optimizing Pharmacy Inventory as the Key to Growth
With the increase in turnover and the number of retail locations, effective inventory management becomes crucial for any pharmacy or pharmacy chain:
- Centralizing orders provides better terms from suppliers and optimizes logistics.
- The increasing volume of information about products cannot be processed manually or with improvised methods such as spreadsheets.
- Decisions regarding order quantities and inventory levels should not be made solely based on analysts’ forecasts or the subjective judgments of on-site managers. The cost of errors is too high to rely blindly on someone’s intuition or past success.
Comprehensive automation is needed, based on real-time data processing and proven algorithms. An example of such an approach is the ABM Inventory system, which optimizes the product range and ensures that inventory levels are sufficient. It is a cloud service that operates on a SaaS model and is accessible through web browsers on smartphones or computers with any operating system.
Before implementing ABM Inventory, our inventory management was decentralized. In each of our hundreds of pharmacies, managers manually created orders. This method led to issues primarily due to human error. Sometimes managers overlooked important SKUs, and other times they ordered the wrong quantities. Therefore, the main goal was to have orders calculated centrally using software, rather than by a person. The system provided us with that capability, says Oto Gvaramia, Chief Programmer of the “Aversi” pharmacy network (Georgia).
The combination of pull and forecasting practices, the use of actual demand data, various inventory management algorithms for retail outlets and distribution centers, along with a powerful analytics module, makes ABM Inventory a reliable tool for managing pharmaceutical retail.
We have completely changed our approach to order creation. This is now handled by eight people in our office, rather than each pharmacy separately. This has significantly simplified the process and accelerated the supply to retail locations. With ABM Inventory, pharmacies order exactly what they need for sale, not for reservation or to create excess stock, or simply for storage. Our excess inventory has decreased by several million. This has had a huge impact on the business.
Oto Gvaramia is fully satisfied with the results of implementing the automated system. In his experience, using ABM Inventory allows retailers to calculate optimal order volumes and maintain product availability in retail locations to avoid lost sales.
The system’s functionality for dealing with complex situations or “pitfalls”
The online platform ABM Inventory is a versatile solution for retail that takes into account the specifics and operational experience of pharmacies. Just as prescribed medications are assigned to treat an illness, the corresponding functionality of the cloud system addresses the challenges of inventory management in pharmacies.
Demand characteristics and fluctuations, low purchase frequency of certain types of products
Not all medications experience regular demand. Very expensive drugs or treatments for relatively rare diseases have a low purchase frequency. However, such medications must be available for order and in stock. At the same time, having an excess of these products increases the risk of expiration and the associated financial losses.
Based on this industry specificity, the software implements an approach that categorizes products by sales frequency. Three groups are defined: fast-moving, moderately moving, and slow-moving items, for which separate settings are introduced in the system.
For each of these groups, the average daily consumption is automatically calculated. Considering the sales frequency, a target inventory level (buffer) is established.
Managing items with low demand frequency is facilitated by status management. Each SKU in the pharmacy is assigned a status that determines whether the order is placed automatically, on a schedule, or through a special order. Since the status is set in the context of the retail outlet, it allows for order management based on the needs of different pharmacies, ensuring that the product remains in the assortment matrix and is available.
Analogs and Substitute Products
Alongside original medications, new generics continuously emerge in the market, and pharmaceutical brands develop and release their own versions of popular drugs. When a desired product is unavailable, it becomes significantly more challenging for customers to make a new selection in a pharmacy compared to a regular store. A proper substitution typically requires a responsible dialogue between the patient, their doctor, and the pharmacist, as well as the availability of comprehensive, verified information about potential alternatives to the requested medication in the pharmacy. Meanwhile, managers must choose from entire lines of similar medications when placing orders.
Additionally, for products already on the market, dosage, packaging quantity, and even branding may change periodically, alongside alterations in registration documents.
Sometimes, patients may not agree with the selection of an alternative to the medication they are accustomed to and may place a special order. The pharmacy network must be prepared for this. Insufficient attention to such indicators can lead to lost sales, with customers turning to competitors.
The inventory management system also considers the challenges posed by such complex substitutes. If the packaging quantity of a product changes or rebranding occurs, it is treated as a new SKU; however, when entered into the system, it is labeled as a similar product. As a result, planning the buffer for this medication will be based on the sales history of previous substitutes. The same applies to newly arrived products that have a composition similar to those previously sold in the pharmacy. Thus, orders for even new product items are formed based on sales data.
Seasonality and Regional Specificity of the Assortment
All of this is characteristic of pharmacy retail. The fall-winter season is peak time for cold and flu medications. Conversely, as summer approaches, pharmacies in warmer climates must stock sunscreen products and ointments for sunburn.
To account for seasonal changes, the software includes seasonality functionality. Seasonal coefficients (monthly and weekly) for each product group are automatically calculated based on actual sales from previous periods and are considered by the system when placing orders. For instance, if an epidemiological forecast indicates that a spike in certain illnesses is expected earlier or later than in previous years, the program’s actions can be adjusted by highlighting the past period with similar indicators.
The system will adopt the template and perform calculations based on the data specified in it. The functionality also allows for the consideration of specific holiday periods and long weekends when suppliers may not operate.
Divisibility of Medication Quantity in a Single Package
The quantity of medication in a single package can be divided and sold in parts. A common example is a box of tablets that contains several blisters, each of which can be sold separately in the pharmacy, potentially leading to confusion.
The system includes a “Supplier Units of Measure” functionality. For a specific SKU, you can define the unit of measure for both the pharmacy (e.g., items that are sold) and the supplier (e.g., packaging in which the goods are delivered). Additionally, it is possible to set up a conversion of the order quantity from pharmacy units to supplier units.
Limited Shelf Life
Limited shelf life is strictly monitored and increases the risk of losses from excess inventory and unsellables. For pharmacies, this metric should be considered not only when managing existing stock but also when placing orders. It’s essential to evaluate the remaining shelf life at the time the products arrive at the pharmacies. Additionally, pharmacies cannot hold traditional sales for items nearing their expiration dates, as supermarkets do.
The expiration dates of products are automatically monitored by the electronic inventory management system, allowing users to respond promptly to an increased risk.
Individual Storage Conditions for Pharmaceuticals
There is a need for strict control over how each product is stored. This may require maintaining specific temperatures (refrigeration), protection from sunlight (dark storage), and so on.
In ABM Inventory, you can document and monitor storage conditions for each product category.
One-Time Demand Fluctuations or Targeted Orders
This pertains to any spikes in demand that are expected not to recur in the future. It is crucial that the program does not interpret any unique events (urgent targeted programs, emergencies, etc.) as indicators of long-term demand growth and thus does not increase the corresponding stock levels.
In this case, the “one-time replenishment” function is applied, which increases only one specific order without affecting the volumes of subsequent orders or the buffer levels.
Promotions and Offers
Marketing activities in the pharmaceutical sector cannot follow the templates typically used for selling fast-moving consumer goods. While the promotion of over-the-counter medications and related products is utilized, it requires careful preparation, as these items are rarely purchased spontaneously by pharmacy visitors without consulting a specialist.
The system automatically calculates the quantity of stock required to prepare and execute a promotion. There is also the option to manage new promotions or products for which there is no historical data. Employees can still manually set an increased buffer, and the system will continue to manage inventory automatically.
Let’s illustrate the work with promotional campaigns using ABM Inventory, as described by our Georgian colleague:
“The implementation of the automated system has allowed us to plan promotions effectively. We even adopted an internal standard for this. Previously, it all depended on the managers, when and how much product they would order. As a result, promotions often faced delays. Now, when planning a promotion, our specialists simply apply coefficients with the expected sales growth for the relevant items.”
What Active Ingredients Are Included in This Medication?
One of the key elements of ABM Inventory is the calculation, monitoring, and adjustment of buffers for each SKU. A buffer is the total available quantity of a product, including stock on hand, orders accepted by the supplier for fulfillment, and shipments in transit.
The program performs an initial buffer calculation based on data regarding average sales periods and restocking, which is imported from the accounting system. When generating the first orders, the manager tracks buffer levels and makes necessary adjustments. After one or two restocking cycles, the program will self-adjust, and the monitoring of product availability and calculation of the order size sufficient to replenish the buffer will be executed automatically. Buffer recalculations occur for each SKU at each sales point, depending on actual demand.
Integration with other user software is an important feature of the automated inventory management system. ABM Inventory is not only compatible with any accounting or ERP software but also allows data to be imported from them, verifying accuracy and correcting errors.
Automated solutions like ABM Inventory enable pharmacy networks to adhere to the modern trend of omnichannel marketing. This means a unified model for organizing product flows for all sales—both through retail outlets and online. In this approach, different sales and communication channels are not just used simultaneously but are integrated and operate synchronously. To facilitate this, the program’s functionality ensures that online sales divisions are also included in the overall inventory management system. This eliminates issues related to potential order duplication and excess accumulation.
ABM Inventory is a user-friendly product. All key information in the system is displayed on dashboards, allowing constant monitoring of the movement of the most popular SKUs that generate 80% of the company’s turnover, as well as new and promotional products. Daily updates provide data on key KPIs: sales, inventory levels, lost sales, and turnover. The system automatically creates tasks for managers, prioritizes them, and tracks their completion.
In addition to operational management functions, substantive reports and analytical tools for inventory management software are crucial for each retailer.
Movements by product categories, turnover rates, lost sales data, and inventory levels—both in purchase prices and in days—are always at hand.
A representative from Aversi emphasizes this feature of the software:
“The reports are very useful. They are clear and informative. We track metrics across the entire pharmaceutical chain. Previously, for instance, calculating turnover rates and lost sales took a lot of time, but now everything is available with a single click.”
The Conclusions Are Drawn by the Customer
Unlike profit, brand relationships with customers cannot be measured, yet they remain valuable. The efforts of staff, relieved from the need to manually fill orders to suppliers, and the assortment automatically calculated based on actual demand—eliminating frustrating stockouts—help create a positive customer experience associated with the pharmacy.
Studies show that 71% of consumers make new purchases based on their previous experiences, and 91% are more likely to make a purchase a second time if their customer experience was positive. This is why it is critically important to start managing inventory in pharmacies using ABM Inventory.
