Maximizing ROI Through Inventory Management

Transcription

1 Maximizing ROI Through Inventory Phernell Walker II, AS, NCLC, ABOM Matt Nicholson Rachel Rich Introduction One of the most overlooked yet most important costs to running an optical business is the cost associated with managing inventory. Measuring Success It is essential for the successful owner or optical manager to be able to manage and measure the effectiveness of his or her inventory investment. 1

2 Inventory Defined Inventory is defined as the products (e.g., frames, contact lenses, contact lens solutions, accessories) that are stocked and on hand for sale at a given time. Each business must decide which inventory items should be tracked in inventory. Inventory Every business owner and manager needs to realize that inventory is not about the product, but the dollars andcents (total value) thatthethe product represents. Factors That Influence Inventory and Budget Mistagged products (e.g., frames) Frames in transit Using or not using purchase orders Miscount/scan Varying Cost of Goods (COG) Remember that inventory is actually money and fluctuates with cost 2

3 Factors That Influence Inventory and Budget (cont d.) Cannibalizing frames Internal and external theft) Adjustments (e.g., returned to vendor, received from vendor) not processed properly Price of the product effects the number of turns (sales) Making Inventory Simple Making inventory management simple by using the tools within OfficeMate and OfficeMate Enterprise is as easy as one, two, and three: 1. Use the inventory module (monthly or quarterly). 2. Analyze the data/reports (use GMROI). 3. Compare against budget and benchmarks (COG and turn rates). Gross Margin Return On Investment Gross Margin Return On Inventory (GMROI) can be used to determine the price point on a given inventory item andtrue eprofitability or Return on Investment (ROI). True ratio of measuring inventory profit as it relates to the gross profit margin earned on gross revenues. 3

4 Gross Margin Return On Investment GMROI is calculated using the following formula: Gross Margin $ Average Inventory Cost = GMROI Example: Gross Margin Return On Investment Gross Margin Dollars / Average Inventory Cost = GMROI Gross Margins on Frames = $ (Avg.) X 500 frames Average Inventory Cost or Valuation (Monthly) = $35,000 70,000 / 35,000 = 2 (which means I m not making a true 3 times markup) Question How are you currently selling your products? 4

5 Planogram Planogram is the inventory method of using a specific quantity on hand for each frame SKU at a given location within the dispensary (board location) and maintaining a certain quantity on hand of a given SKU. Planogram vs. Selling off the Board What are the ramifications of using a planogram vs. selling off the frame board? Selling off the Frame Board Selling directly from your frame boards is using the stocked frames on hand to produce the eyewear without allocating a minimum and maximum quantity of a given SKU, or allocating the specific location of the frame on the frame boards/fixtures. 5

6 Planogram Pros & Cons Pros: Clear consistent outline of the inventory. Cons: Staff may pull wrong product Product may be backordered without staff s knowledge Wear and tear on display product Products not fresh Selling Off the Board Pros & Cons Pros: Patient sees exactly what they re purchasing Replenished inventory regularly with fresh product Backorder not an issue Cons: Inconsistent inventory Special Orders Pros: Superior service to patient Cons: More staff handling Increased shipping cost More room for errors Backorder problems 6

7 Reality Most providers use a combination of all of the above methods. Issue: The more variations to managing inventory, the more room for errors! Recommendation: Determine what works best for you and stick to it! Inventory Resources If not managed properly, inventory can tie up valuable cash that can be allocated to other areas of the business. Although the inventory principles described in this course can be applied to spectacle lenses, contact lenses, and accessories, only frame inventory will be discussed. Inventory Reports Use the resources that are available to you. OfficeMate features a robust report generator that will guide you to help make the best decisions for your practice. It s up to you to make the best use of the reports available. 7

8 Formula for Inventory Success The faster you turn inventory, the less capital you have stagnant. Inventory Turnover Formula Revenues / Average Inventory = Inventory Turnover Example: Inventory Turnover Formula Frame Revenues $66,000 (in three months) Frame Valuation $42,000 / 3 = $14,000 Revenues / Average Inventory = Inventory Turnover $66,000 / $14,000 = 4.71 Turns 8

9 Inventory Turnover Benchmarks Optical frame inventory should turn a minimum of nine times annually. If it s not, ask yourself why. Factors of Inventory Turn Ratio Buying philosophy (quantity, timing, etc.) Individual selecting your inventory Optician s sales ability Patient demographics Merchandising (or lack of) Retail pricing Multiple pair sales Inventory on Hand Another factor to consider in inventory levels is the number of inventory days on hand. This number will allow you to determine if you have too much or not enough inventory, based on your buying philosophy. 9

10 Inventory on Hand Business Days on Hand is used to calculate the number of business days needed to turn inventory. Days on Hand = 365 / Inventory Turnover Ratio Inventory on Hand Example: Days on Hand = 365 / Inventory Turnover Ratio Days on Hand = 365 / 9 Days on Hand = (40.5 days to turn inventory 1 revolution) Cost of Goods (COG) Cost of Goods (or Cost Of Sales) refers to the costs associated with creating revenue. 10

11 Example Assume that you purchase 100 frames at the beginning of the year for $45.00 each. The total investment on those frames is $4,500. Numbers Game If each frame was sold for $ within a year, your gross profit on all 100 frames would be $13,495.* ($17,995 revenue $4,500 investment) *See incredibly small legal sized print below for any attorneys that may be in the room. COG The inventory investment costs a total of $4,500 to produce $17,995 in gross revenues in the course of one year. It can also be said that your Cost of Sales was $4,

12 A Better Method A more efficient way to manage inventory would be to order 25 frames every three months instead of ordering the 100 frames at the beginning of the year. The same number of frames would have been ordered for the year and the annual profit would remain the same. A Means to An End Achieving a positive profit does not validate the means as the most efficient method. Phernell Walker II, ABOM Managing by the Numbers Bottom Line The initial investment for the inventory was reduced from $4,500 to $1,125 (That is 25 frames x $45.) 12

13 Everyone has the right to manage or mismanage their business any way they d like. Jim Sotiropoulos, MBA Senior Vice President, Business Development Eyefinity/OfficeMate Secrets to Purchasing By the time 25 frames are sold, the sales generated would have funded the purchase of an additional25 frames. By ordering a smaller quantity of frames more frequently, the initial investment is effectively reduced by $3,375. These savings can be reinvested into your practice. Common Misconception A common purchasing misconception is that frames don t really have a shelf life. Nothing could be further from the truth! 13

14 COG Benchmarks Cost of Goods for ophthalmic frame inventory for the typical dispensary should be less than 20% of frame revenues (not total dispensary revenues.) ebuy What is ebuy? ebuy Taking inventory report and accessing Eyefinity s ebuy Paperlessordering using screen from OM to show list of frames to purchase Filling the Order Basket with the necessary frames Submitting orders to respective manufacturers 14

15 Using ebuy Lights, Camera, ebuy! Discussion 15

16 Maximizing your Return on Investment through Inventory Getting Started 1. Log on to Eyefinity.com and click the ebuy tab. 2. Search using one of the following options: 1. Direct search. Page 1

17 2. Browse various catalogs on the ebuy tab. Ordering Using Direct Search 1. Using the direct search, enter the Supplier and Model or Brand Number. 2. Click Search and the image of the frame will appear. 4. Click Order and you will be prompted to order the frame. 5. Select the eye size, quantity, and color. 6. Complete the order form. Page 2

18 7. Click Next Item or Order Basket. Note: Inventory status and wholesale pricing will populate after choosing the frame eye size and color. Any buying group or manufacturer discounts will be applied on your invoice. Ordering using the Browse Feature 1. Using the Browse feature, select in the manufacturer and click Go to view the manufacturer catalog. Page 3

19 2. Select the collection you wish to view. For example, the Coach collection. Page 4

20 3. Click Order to select the frame and proceed with the order. Page 5

21 Finalizing Orders Using Order Basket 1. Open the Order Basket to finalize your order. 2. View your orders and check for accuracy. If necessary, edit orders. Page 6

22 3. When the order is correct, you can submit it by manufacturer. Or, you can submit all orders at once. For more information or for help with any Eyefinity service, please contact Customer Care at or Page 7