Article

Financial Foundations: Manage Your Inventory

Four strategies to assist you when taking control of your assets.

BUSINESS

  financial foundations

Manage Your Inventory

Four strategies to assist you when taking control of your assets.

DAVID MILLS, O.D., M.B.A.

Proper inventory control is the key to improving your business’ working capital and the return on your assets.

Many practitioners rely on manufacturer representatives to maintain the ample quantity and mix of products to satisfy patient’s needs. However, why would you let someone who has little vested interest in the business be in total control of what you sell? The value of the sales representative to the business can be an invaluable resource of current market trends and demand when used appropriately, but, due to the financial implications on the liquidity of the business, you should be involved in all inventory decisions.

Here are four major strategies to address when making inventory decisions:

1 What should inventory make-up look like?

The composition of your total inventory could warrant an entire article itself. Revisit previous OM articles on this topic, particularly strategies for frame inventory makeup, to help make this determination in your practice (see “Your Frames: Evaluate, Organize and Flourish” July 2013 page 47 and “Get in the Right Frame of Mind” November 2013 page 52).

2 What is the maximum amount of inventory?

Conflicting objectives exist in setting these levels. Business owners want to have the product mix desired by the patient readily available. At the same time, the owner desires to minimize the investment in the inventory.

No “hard and fast” rules exist, so determine what works best for you. One strategy: Use the “capture rate” in conjunction with the projected patient volume as a guide to determine proper inventory levels. You may find the overall number should vary by the time of the year based on tax strategies and volume numbers.

3 How much should I order?

This depends on three factors:

1. Sales since the last order. Subtract the number of units sold from the total inventory level. This alerts you to the total volume you should consider reordering.

2. Maximum inventory number for that category. Separate the total needed to replenish the level into specific product lines.

3. Effective cost per unit. If volume discounts or payment terms from vendors are available, take advantage. This can have a substantial impact on unit costs.

4 When to reorder?

A sophisticated inventory management construct is the Reorder Point/Reorder Quantity (ROP/ROQ) System. The basis of the system: a fixed ROQ is ordered when the inventory becomes less than or equal to ROP.

The ROQ is determined by either a financial-based formula or by management. To properly utilize this construct, you would need the resources provided by business analysts. The ROQ is set to allow for shipping time plus some amount of safety stock so the inventory does not stock out.

Typically, the value does not change, except after annual review — analyze past years’ sales to determine whether you are continuing to meet patients’ expectations.

Take control

Proper inventory control is essential to the practice retaining adequate cash flow levels. Review inventory levels and product mix on a quarterly basis for the next 12 months. OM


DR. MILLS PRACTICES AT OCEAN STATE EYE CARE IN WARWICK, R.I., AND HOLDS A M.B.A. FROM PROVIDENCE COLLEGE. E-MAIL HIM AT MILLSD@NECO.EDU, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.