- November 4, 2021
- Posted by: New School
- Category: General
By Eric Rollins, Rollins Consulting LLC
Managing your frame inventory means better cash flow and more profitability.
One of the most neglected areas of practice management is frame inventory. Other than a practice’s diagnostic equipment, it is usually the largest expense of capital for the practice, so it makes good sense to manage it efficiently.
Frame inventory levels should be based on the number of frames sold. Inventory should be turned 2 to 3 times per year (Example: if 1200 frames are sold per year, then the most frames in inventory should be 600). There is a base level of inventory that should be maintained to keep a good assortment available to service the customer base, most likely between 400-600 frames, even if the inventory turns dictate a lower number. There is also a ceiling number that doesn’t need to be exceeded, even if inventory turns indicate a higher number is allowable. This number may be anywhere from 7
00 to 1500 frames depending on factors such as available space, patient base served, inventory turn-around time from manufacturers, etc. The purpose for controlling inventory levels is simple: MONEY! Excess inventory represents dollars that are not giving a return on investment for the practice. The same dollars can be used in other areas where capital can generate more business (such as a retinal camera, automated testing equipment, advertising, etc.).
Frame companies do a great job of selling frames! They train their sales representatives well, bring discount programs at various times of the year to entice larger purchases, and have beautiful products. It is easy to get overloaded with inventory. Reducing the number of frames to get levels in line with objectives is an art and a science. It is one of the most difficult aspects in the optical field to master. Simply stopping the purchase of any new inventory is a short-term fix with negative consequences: the best selling products will disappear from the practice quickly, leaving the not-so-good products left on the shelf. A slow and balanced approach is required to reduce inventory to the correct levels without negatively impacting your patients’ selection.
Identify Preferred Vendors
The first step in reducing inventory is to categorize your frame vendors into two categories: Long-term vendors and short-term vendors. Short term vendors will be eliminated over time while long-term vendors will be your “partners” for the future. Here are some thoughts on how to select your long term vendors:
- Great frames, well constructed and fashionable at good prices
- Frame line fills a niche for the practice and patients
- Company stands behind their product with good service and fill rates
- Company has desirable programs for the practice (co-op, discounts, etc)
- Sales rep is helpful, honest, business-wise and helps the practice be successful
- Sales rep manages their board space, removing obsolete frames and not overloading the practice with additional inventory
- Sales rep offers to do trunk shows and/or other marketing and merchandising assistance
How many vendors should you have in your long-term plan? It will vary by practice, but a good rule of thumb is 6 to 12 vendors. Some “boutique” practices may have more to meet the eclectic needs of their patients.
Maintain good relationships with your short-term vendors, but let them know you need to reduce your inventory. You expect the reps to be honest with you, so you should be honest with the reps. Let them know that they won’t be part of your long-term plans at this time, but it is possible that they will be back in after your inventory is in control. Frame lines change, reps change, new licenses are added all the time, so it is very possible that some of the lines that are “out” now will be “in” next year, and vice versa. In the mean time, you should come to an agreement with these reps on how to best reduce and eliminate their product from your boards.
The best way is to sell the inventory off and not re-order, but if you have some frames that won’t sell you may want to exchange them for others that do. Maintaining a good relationship with the short-term vendor will enhance the opportunity for their cooperation and assistance.
There are also some vendors with “swap” programs that will take your inventory from lines you are eliminating and replace the frames with their product. While this doesn’t reduce your inventory, it might make it easier to manage the process.
Now that you have selected your long term vendors, the next task is allocating board space. For this example, let’s say that we have 700 spaces to divide between 10 vendors, and we currently have 1,000 frames in stock. Here is a sample allocation:
Vendor Frame % # of Frames # of Frames in Number to reduce
For future for future current inventory from inventory
A 18% 126 188 77
B 15% 105 174 79
C 15% 105 110 5
D 12% 84 122 48
E 10% 70 83 13
F 8% 56 60 4
G 6% 42 58 26
H 6% 42 85 43
I 5% 35 38 3
J 5% 35 47 12
Total 100% 700 965 265
Note that the number of frames in inventory is listed as 965; the other 35 are from the short term vendors and need to be sold/exchanged out.
Plan of Action
Now that we have a goal in place, it is important to set up a plan to reach the goal. Let’s say that this practice sells 1400 frames per year, so 700 frames in stock would give it 2 turns of inventory per year. At that rate, the practice is selling 117 frames per month. Let’s start by setting up meetings with the 10 long-term vendors and let them know our plan for their frame line, and ask them for their assistance in getting to the correct number of frames in inventory, and the correct frames styles in inventory. Let’s further state that we want to reach the correct number by reducing approximately 1/3 of frame sales per month, or about 39 frames per month. At that rate with 300 excess frames, it will take us 7.7 months to get there. So let’s set a goal of reaching 700 frames in 10 months (30 frames per month) to give us a little leeway.
Our plan of action will vary by vendor; for example Vendor C only needs to reduce by 5 frames but Vendor B needs to reduce by 79 frames over the ten month period. It will be important to set monthly goals by vendor as well as overall goals. It will also be extremely important to “inspect what you expect”. Take a physical count of the frames at the end of each month to make sure your numbers are reducing by about the 30 per month we are expecting. We can also use 10% of the overstock per month by vendor as individual goals. It is easy for the numbers to go down for a couple of months and then bump back up if you are not vigilant. Track the numbers every month!
The number of frames sold by the practice will be dictated by patient flow and business activities of the practice. The number of excess frames in inventory will not affect the number of frames sold, so in honesty will not have any long-term effect on the frame sales people or the frame company. The end result will be the practice will still sell about 117 frames per month, unless new marketing and advertising methods are used, etc. to grow the practice.
It is also important to remember the cost to the practice of excess inventory: assuming there is no obsolescence of product that is sitting in drawers or boxes (which is rarely the case), there is still the cost of the frames to the practice. In this instance the 300 excess frames at an average cost of $45 would equal $13,500.00. This money could be used in other areas. If the practice has a line of credit or a loan, the money would reduce interest charges to the practice by about $1200 per year.
Managing inventory at the correct level
Once you have achieved the correct inventory level, there are methods to keep it at a good level and keep your frame vendors motivated to help you succeed. Al Villavecchia of Alfred J. Villavecchia Buyiing Group and previously the owner of a third generation family optical shop recommends tracking the number of frames sold by vendor, and using the sales figures to re-allocate board space every six to twelve months. So if Vendor A had 20% of the board space but sold 17% of the units, the new allocation for Vendor A would drop to 17% of the board space. If Vendor D had 10% of the board space but sold 12% of the units, the board space for Vendor D would expand to 12%. Reallocation opportunities will keep the vendors’ interests aligned with the interests of the practice. If they have a product that is not moving, they will be motivated to replace it with something that does move.
The ability to change frame lines and styles in a timely fashion is an additional benefit of maintaining the correct inventory level. When you are not overloaded with frames, and particularly weak sellers, it is much easier to keep your styles fresh and adopt attractive new lines.
Continued monitoring of the board spaces is also necessary. If you don’t “inspect what you expect” it is nearly a certainty that the frame inventory will get out of control again! Reducing inventory is a difficult process, so be vigilant to avoid a repeat. In today’s business world it makes sense to be as streamlined and profitable as possible.
Rollins Consulting, LLC
4030 Loomis Drive
Norton Shores, Michigan 49441-5030