By Chad Fleming, OD, FAAO
Dec. 29, 2021
Building a profitable practice has as much to do with keeping overhead costs in check as it does with making profitable investments. Here are three ways my practice made cost cuts that boosted our profitability to new heights.
Consignment-Model Frame Inventory Purchasing
I’ve always struggled with vendors in our industry saying they are our partners and then passing the risk onto us.
This long-running challenge pushed me to think creatively about how to use a consignment frame inventory purchasing model in a way that would enable us to truly partner with large frame vendors. We had approximately $300,000, or more, tied up in cash flow on our frame boards. Spending time reading about great businesses and great business management outside of the ophthalmic industry showed me how important cash flow is for keeping a business competitive and agile. The biggest advantage a private practice will have moving forward is the ability to be agile in a quickly changing environment. Purchasing frames using a consignment model is a way to stay agile, with little-to-no money paid for inventory until it sells.
It took me two years working with the presidents and CEOs of frame companies educating them on why consignment is a win-win way of selling their products to us. Once this was done, and our five practice locations’ boards were outfitted using the consignment model, I started educating other ODs in how I had arranged to purchase frames, so this alternative approach to frame inventory management would gain traction.
The key was getting my optical manager on board and showing her the simplicity of the consignment model. The old way of purchasing and selling frames requires too much hourly overhead time for my staff members. I wanted them spending more time working with patients and less time working with reps and on back-end administration.
Now, patients order based on a frame on our board, with the staff member simply communicating with the frame company that a patient has ordered a particular frame. The frame is then sent directly to a lab to have the patient’s glasses completed. We don’t have to worry about empty slots on our board, and our staff does not have to send frames to a lab themselves.
The change to a consignment model was seamless to our patients. All they know is our frame board is always full and always has the best sellers available for purchase. Patients have complimented us on having a frame selection that has gotten significantly better. That’s because the old model sold the best frames immediately and then we had to try to sell the non-best sellers until we re-ordered the ones everyone wanted.
ROI: We only pay for frames as we sell them. Also, we removed $300,000 out of inventory. That money can now be spent on investments to equip our practice to better serve patients and generate additional profits.
Free Shipping to Patients on all CL Orders
We were short-staffed, and as the CEO, I had to do what any good CEO would do and step in and be an optician for a couple of weeks. I started my optical career as an optician, before becoming an optometrist, so doing this work was second nature to me.
During my time as an optician in my practice, I immediately saw that processing incoming orders of contact lenses was time-consuming for my staff. I saw that if my staff is spending time doing this task, it is costing me money as an owner to have them doing it. The margins on contact lenses are so small that you must reduce the overhead costs to be profitable.
A colleague suggested that I offer free shipping of contact lenses to all my patients. At the time I thought my colleague was ignorant. Then, as I pondered this suggestion, I realized I was the ignorant one.
I went to my chief financial officer and asked how much would we have to increase the cost of our contact lenses per box for us to profitably ship all contact lens orders free to our patients. About a week later he told me we would just need to increase the cost by one dollar per box. Since we price our boxes based on leading retailers, big-box online, I could afford to increase the price by one dollar. This has been a game changer as patients are pleasantly surprised to get free shipping with all of their contact-lens orders. Now my staff spends less time processing contact lens orders and more time on the floor with patients.
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I visited with our optical manager to make sure that free shipping of contact lens orders would not create more work for our team. She absolutely loved the idea. It then became a matter of educating our staff on the new system and making the decision to increase the price per box and start free contact-lens shipping.
There is no negative impact to offering free shipping of contact lenses aside from that one-in-500 patients who says they want it shipped to the office for pick-up. With these patients we charge a $10 stocking and processing fee. This has eliminated patients wanting to stick with the old way of doing things.
ROI: The cost savings of offering free shipping of contact lens orders is approximately four hours a week of each staff member’s time processing orders. The staff member is $20 an hour, multiplied by four, 80 hours a week, for 52 weeks a year. That comes to approximately $4,160 in equivalent dollars for hours saved.
Rebates on Equipment
This cost cut was the result of always asking the question, “Are there ways I can manage my business better or differently that can help give me an edge to become more profitable?”
I started looking at the many ophthalmic lens company options available. Not until I was negotiating with a leading ophthalmic lens company did I realize that they give rebates on top of normal lens rebates for equipment purchased. With five locations, the demand on the amount of equipment that we need to purchase and replace regularly is great. So, when I can buy a piece of equipment like an OCT and get rebates on this equipment through the utilization of ophthalmic lenses, it helps drive our cost of goods down by a percentage point.
I did a cost comparison between the ophthalmic lens companies to find the best deals for our practice. Many times we make the mistake of just looking at the per-lens listed price with discount. To make a move like this we had to understand that there were significant savings when bundling all rebates and discounts together and then comparing ophthalmic lens companies.
We’ve created a system in our optical in which the opticians are selling three levels of progressive lenses: Basic, Premium and Elite. They no longer get into the specific name and details of the brand of lenses when discussing eyewear options with patients. That way, if we switch companies from Essilor to HOYA or HOYA to ZEISS, there will not a big learning curve in how to present the products to patients.
ROI: Our average cost of goods has been 19-20 percent, and since making this change to optimize rebates, we are pushing those cost of goods into the 17-18 percent range. We have lowered our cost of goods by approximately 1 percent. One percent for every million in revenue is $10,000 that goes to the bottom line.
Chad Fleming, OD, FAAO, is a partner with Wichita Optometry, P. A. in Wichita, Kan. To contact: firstname.lastname@example.org