Article Date: 2/1/2004

business advisor
A Tale of Three Inventories
Take the time to assess your frame inventory. You may want to tweak it.
By Jerry Hayes, O.D.

If you're like most dispensing optometrists, then the spectacle side of your practice is an important part of your income. But it's my impression that most dispensing optometrists aren't systematic about how many frames they stock. They often base the number on the size of their frame boards instead of on what's really right for the economics of their practice.

Consider an optometrist who has 600 frames on hand (including those he has stashed in a closet). At an average price of $50 each piece, he has $30,000 worth of inventory. Now how do we know how much of that $30,000 is working for him versus how much is just sitting there as dead inventory?

The answer is simply how often his frame inventory turns over on a yearly basis. Consider the following example scenarios for a better understanding of inventory turns.


ILLUSTRATION BY SIMON SHAW

This inventory is too big

If you stock 600 frames and dispense 150 each month, that means you dispense 1,800 each year (150 frames x 12 months = 1,800). At that rate, you'll turn your frame inventory three times each year (1,800/600 = three turns).

Many O.D.s get less than three turns, but I think that three to four frame turns each year is about right for most. Anything less than two turns each year generally tells me that you have more inventory than you need. To see why, consider the O.D. who displays 1,200 frames and dispenses only 100 each month (1,200/year). He's only getting one turn each year, which means that he has 800 frames too many in stock. At $50 each frame, this doctor has $40,000 tied up in slow-moving inventory ($50 x 800 excess frames = $40,000).

This O.D. no doubt likes having a large frame display, but it's too much for his current patient volume and he should invest that $40,000 elsewhere in his practice. He could upgrade the décor in his frame room and install new displays or buy some new exam equipment. But there's no way this doctor can financially justify maintaining a $60,000 inventory when he only dispenses 100 frames each month.

This inventory is too small

On the other hand, a doctor who displays only 200 frames but dispenses 100 frames each month gets six turns each year (100 x 12 = 1,200; 1200/200 = six turns each year). That sounds great, but in this case, his frame display is probably too small. This doctor's sales volume would probably be even greater if he displayed more frames.

Many O.D.s feel that they have to offer a large frame selection to keep up with the competition. While there's some truth to that, it's not just the raw number that counts; your presentation is also important. The décor of the dispensing area and attractive displays can make even a modest selection seem both attractive and extensive.

This inventory is just right

Beefing up a weak inventory is easy, but how do you pare down a bigger-than-necessary inventory?

If your patients are at all fashion conscious, then you want your inventory to look fresh. Start by identifying every style that hasn't sold in the last year, mark it down and move it out. Next, count your inventory every month and have your staff tie your new purchases to your actual needs. (I've known many O.D.s who've unknowingly built up $20,000 to $30,000 in excess frame inventory over time.) You're better off investing that money in your practice or taking it out in profits.

A frequent writer and speaker on practice management issues, Dr. Hayes is the founder and director of Hayes Consulting.  You can reach him at (800) 588-9636 or JHAYES@HAYESCONSULTING.NET.

 



Optometric Management, Issue: February 2004