In this interview, Todd Treon, VP of eCommerce & Digital Marketing at Cardinal Health, talks about Cardinal Inventory Management (CIM), a powerful perpetual inventory tool that optimizes inventory with a direct impact on the pharmacy’s service level and bottom line. Find out how CIM works and five key benefits you can look for if you aren’t running perpetual inventory in your pharmacy.
ComputerTalk: Todd, let’s start out with some background on Cardinal Inventory Management.
Todd Treon: CIM started out as something we developed with a chain customer, but what we came to find out quickly is that the retail independent pharmacy probably has the most need for this kind of tool. Pharmaceutical inventory is almost always the biggest item on the balance sheet and the retail independent pharmacist doesn’t have the staff like a chain would have or even the finance department, often times. So there’s not the ability to manage this major asset.
And this leads to the fact that there are two parts to CIM. The technology side is one part, but the other side is the consultation that comes with it, because it can be a big help to independents to get both the technology and our expertise in how to apply it.
CT: Right. Considering how stretched your typical pharmacy’s resources are, help using a tool like CIM must be as important as the tool itself. Is the consulting you do just for on-boarding or is it ongoing.
Treon: You bet you. It’s both, because managing inventory is an ongoing task.
CT: Of course. And the moment you stop paying attention things can go off the rails quickly.
Treon: Frankly, that was part of the need that we were seeing. Pharmacy management systems often have replenishment built in, but where they fail and where there’s then a gap is when it comes to maintaining accurate on-hand inventories. We have a role within our Cardinal Health CIM staff that’s called asset management consultant. These folks, as part of the selling process, meet with the customer. The first thing they do is create an assessment where we ask the customer questions like, “What’s your baseline? What’s your inventory? What are your average prescriptions per day?” We take that assessment, put that into a model and we generate a value model for them.
Then we can show them the value proposition for their specific pharmacy. We establish the cost of getting CIM up and running for them, because your typical pharmacy probably needs to take a fresh physical inventory to start with good quality on-hand counts. Then there may be some minor integration cost to pay, because we’re getting real-time or near-real-time dispensing data from the pharmacy system data.
We can lay this all out and show a pharmacy that we believe we can save it 50 basis points using CIM. This is net of the costs and based on the pharmacy-specific assessment in the model and benchmarked against existing CIM customers like that pharmacy. We now have a broad user base so we’re pretty good at predicting the value.
CT: What can 50 basis points translate into in dollar terms at a typical pharmacy?
Treon: An average CIM customer today, we help them take $30,000 out of inventory costs. Right away. And we would calculate it in language that they know. For example, as a wholesaler, we sell to them and their price might be cost minus two. See what I’m saying? So we say, “Hey, look, and we can save you another 50 basis points because we’re a technology solution.” And reasonably enough they are going wonder why, if they’re already spending several million dollars a year with us, then why would they spend more on CIM? That’s why we take the time to build the value model for them.
CT: How’s the implementation and consulting play out over time?
Treon: In the beginning, we do monthly business reviews, and then it becomes quarterly. This is when we sit down with them and help them adjust their goals. The other tricky part of all this is every market’s different, competition’s different. Some customers we have are north of 20 turns. That might not be right for everybody, though, because another customer might say, “You know what? I have a CVS across the street. I don’t want to be out of stock.” We will adjust the order points for them based on a number of algorithms to help them manage to a different service level. Whereas you got another one that has no competition within 20 miles, and they can occasionally be out of something. That can have a dramatic impact on the amount of inventory they have to carry. These consultants help watch over and all this for them.
CT: What are some of the other ways the consulting services help CIM customers.
Treon: We have a role in the field selling organization called pharmacy operations consultant. They’re our feet on the street. Their primary responsibility, then, is to physically check in with the pharmacies and play a key role when we implement a customer. They make sure the data feeds are all working, for example, because if you’re missing data, then the order points aren’t going to be optimized. Then you have out-of-stocks and that defeats the purpose.
CT: How do seasonality or other factors that can cause spikes and dips in demand play into this?
Treon: There’s big variability at certain times of the year. The way we look at our order points, we dynamically set them daily so we can catch this variability. Now, there’s some extremes, but for certain pharmacies, for certain times of the year, you see prescriptions that go way up because it might be 90-day fills that you’re trying to get after. That’s an anomaly. We’re taking those anomalies into effect and we segment the inventory into quintiles. Then we also segment the volume and then we recalculate those order points. That allows us to adjust fairly quickly for seasonality and fluctuations.
CT: In simple terms, what’s going to be the benefit for the pharmacy of avoiding as many of those spikes in inventory demand as possible for somebody who isn’t using perpetual inventories yet, and hasn’t had a chance to experience the impact.
Treon: A store that’s not managing its inventory typically has way too much of slow-moving product and not enough of fast-moving product. They might even have the right dollars invested, it’s just in the wrong stuff because they can’t keep up with 2,000 or 3,000 SKUs.
So I’d say there at least five major benefits a pharmacy can look for from CIM.
The first benefit is going to be getting that money invested in the right inventory, which will lead to a lower cost of inventory with an immediate cash flow benefit, fewer partial fills, and fewer out-of-stocks.
The second benefit is that, when you get those slow movers out of there, you have fewer out-dates. That’s a significant value driver because if you return your outdated product you get pennies, sometimes, on a dollar.
The third benefit is to patient service level. When you have to dispense a partial fill, there are two bad things that happen. One, you disappoint the customer. You keep partial filling or out-of-stocking them and they may not come back. The second thing is even if they come back, now you’ve got to fill that prescription twice.
The fourth benefit is that there are direct labor savings from CIM, both from reducing the extra dispensing activity like we just talked about, and also from reducing the time involved for the pharmacist to generate the inventory order. A retail pharmacy typically could spend an hour or so creating their order. With CIM, it’s created automatically. Now, we would teach them that they still want to review that order and keep an eye out for anything unusual.
Fifth benefit is inventory shrink. We will create targeted product counts for customers. We help them find issues that they have if there’s internal theft.
Those are the key drivers that add up to what they get out of doing something like this. It really is a business operations solution for them.
CT: Are there any complementary technology tools that pharmacists are going to want to have to support using CIM?
Treon: No, not really. They do need to be a Cardinal Health Pharmaceutical Distribution customer, number one. We have integrated CIM into Order Express, which is our modern eCommerce platform.
Those basic requirements mean that CIM isn’t just for the retail independent. We’re also expanding into other markets, such as hospital outpatient pharmacy and long term care.
And we are continuing to invest in CIM. We have made over 50 modifications enhancements since our last Cardinal RBC. We continue to invest in the solution because our customers typically stay with us once they go on CIM.