These days, an increasing number of physicians are going into business, offering more than just medical services. We'll talk about inventory management to help you capture maximum profits.

Many physicians are moving into the world of physician-entrepreneurship. Beyond offering medical services, these physician-entrepreneurs are offering goods to their patient-customers. Managing one’s inventory can help in realizing maximum profits while not *stocking-out* and missing an opportunity to meet a customer’s demand.

First, let’s recognize that there are great mathematical calculations that one can perform to

a) predict patient-customer demand, and

b) determine the right order quantity (known as the economic order quantity, or EOQ) to request from your supplier

Both a and b can help you maximize profits while limiting the cost of holding inventory.

Made-to-stock

Perhaps the most common inventory model, MTS is what you see on the shelves of a practice. In this model, you predict patient-customer demand, order all the raw-materials or finished goods to meet that demand, and *stock* your shelf with those units of goods. You can immediately meet the demands of the patient-customer by pulling a set quantity of units from the shelves.

Advantages: immediate demand satisfaction. You’re patient-customers don’t have to wait because the product and quantity they need is sitting on your shelf.

Disadvantages: numerous.

1. A lot of your working capital (WC) is tied up in the inventory, leaving less capital for you to operate other aspects of your business (e.g., salaries, utilities, etc.).

2. Holding costs. Remember that your inventory takes up space, and you have to pay for that real estate. For most physician-entrepreneurs, they keep their stock within their office. Perhaps in a storage closet, perhaps in an extra office or exam room. If it’s the latter, you’ll lose the opportunity to see more patients and service more patient-customers because the space has been used for inventory storage.

3. Inventory can degrade/decay over time, so you’ve got to predict *immediate* demand accurately to move product. If your product reaches expiration or becomes obsolete, you’ll lose the full value of the unit (the cost of the good).

4. Theft/Fire/Flooding/other. Hey, these unfortunate events happen and when they do, it is costly.

Made-to-order

MTO is on the other end of the inventory spectrum. If MTS satisfies demand *immediately*, MTO requires a ton of patience from both the physician-entrepreneur and patient-customer.

Advantages:

1. Customization. Because the good hasn’t yet been manufactured, you can offer a number of customizations that meet the specific needs of the patient-customer. You can offer a variety of features in multiple combinations and price accordingly.

2. No holding costs. The inventory doesn’t yet exist because you haven’t manufactured it yet.

Disadvantages:

1. Patience. Demand is not immediately satisfied by any stretch. You have to take the patient-customer’s order, transfer that to your manufacturer, and wait for them to create the good. There will be multiple delays in getting the product to your customer, which gives your patient-customer and competitor physician-entrepreneurs a chance to subvert your potential sale.

2. Supply chain issues. MTO means you’re really at the mercy of your suppliers and how fast they can manufacture enough units to meet your patient-customer’s demand.

3. Price negotiation. Patient-customer’s can negotiate the final price because the product isn’t available at the time of their order. They can factor the delays in obtaining the units and offset your list price.

4. Lost customers. Patient-customers, just like all retail customers, want their demand satisfied now. And while you try to limit holding costs, expiration costs, obsolescent costs, your competitors are chomping at the bit to capture your customers by meeting their needs faster than you can.

5. Low quantity orders. Some patient-customers want a small number of units. Your manufacturer will not be pleased because low quantity orders ruin their economy of scale. As a result of the higher cost of running a lower batch size (i.e., less items per manufacturing run), they’ll allocate additional costs (a.k.a., low-order penalty) to you. You can avoid these costs by insisting that your patient-customer place a minimum quantity, but if that minimum over-satisfies their demand, they’ll look elsewhere.

Just-in-time

Somewhere in the middle of the spectrum, between MTS and MTO, is JIT. In this model, you’ve got all the raw materials in place to manufacture your product. You don’t have the finished goods just yet, so you still have some flexibility in customizing the order.

Advantages:

1. Lower holding/inventory costs. It’s easier for your supplier to hold the raw materials for you because they can use those raw materials for other products that serve other businesses. And since it’s raw materials and not finished goods, you (as a physician-entrepreneur), don’t have to incur the holding cost

2. Less likelihood of expiration or obsolescence. Raw materials usually have a longer “shelf-life” than finished goods, so you have less to worry about losing inventory to decay and expiration. Remember that a finished good is a composite of a bunch of raw materials, each with its own expiration date. The expiration date of the finished good will be impacted by the component that has the earliest expiration date.

3. A bit faster in meeting patient-customer demand than MTO, which makes it harder for your competitors to meet their demands before you do.

4. Less working capital invested in inventory. Most of the working capital is invested in the raw materials, which your supplier invests and not you.

Disadvantages:

1. Inconsistent order quantities. This limitation is also seen in MTO and adds to your cost. Suppliers want to make products in large batch sizes because it’s more cost-effective. In JIT, your patient-customers are likely to order a range of quantities, so your supplier will have to run batches that don’t always take advantage of their full capacity. Suppliers will charge you for the unused capacity and you may have to eat that cost or pass it onto your patient-customer.

2. Patience. Yup, you’re patient-customers will have to wait, but not as long as in the MTO model. You could lose goodwill if your patient-customer needs the product now and you’re competitor can satisfy that need.

These are three (3) common inventory models employed by physician-entrepreneurs. What model do you use (or will use) and how has that worked for you? Leave your comments below.