Practices make perfect

September 15, 2006

San Francisco-Effective optical dispensary management revolves around key areas, including inventory, cost of goods, capture rates, and staffing, according to Carolyn Salvato, director of optical consulting for The BSM Consulting Group, Incline Village, NV.

San Francisco-Effective optical dispensary management revolves around key areas, including inventory, cost of goods, capture rates, and staffing, according to Carolyn Salvato, director of optical consulting for The BSM Consulting Group, Incline Village, NV.

Addressing the American Society of Ophthalmic Administrators, Salvato used two practices as case studies to demonstrate that similar issues exist in different environments and similar changes improve the bottom line.

Her presentation, "Revitalizing Your Optical Dispensary," was made at the congress on ophthalmic practice management and clinical and surgical staff program.

Practice 1 is in a large, north central city. It has two primary locations and eight satellite locations around the state. It has no lab. The practice includes 10 ophthalmologists and 11 optometrists. In 2003, its combined net collections were $1.3 million. The cost of goods was 50% and operating expenses were 45%, leaving 5% net profit.

Practice 2 is in a large, southwestern city, and runs one primary location and a small satellite office. It had an on-site finishing lab in 2003. The practice includes two ophthalmologists and two optometrists. In 2003, net collections were $500,000. The cost of goods was 54% and operating expenses were 40% (most of which was payroll), leaving 6% net profit.

Similar concerns

"The first thing we looked at, in both practices, was the frame inventory," Salvato said. She found both practices had too many vendors.

"Practice 1 had 69 different frame vendors," Salvato said. "I didn't know 69 different vendors even existed!"

Both offices also had large quantities of back stock. And, both had numerous discontinued frames.

Both practices had low percentages of frame sales. Practice 2, with an on-site lab, was selling new frames to only 28% of its customers because it was easy for customers to opt for new lenses in their existing frames, explained Salvato.

"Cost of goods was high because there was no monitoring of frame expenditures," Salvato said. "There were no controls for ordering, no returns or exchanges. The inventory investments were getting way out of hand."

Practice 1 outsourced lab work and lost money through billing errors and overcharges from the lab. Its retail pricing was low, especially in remote areas where it was unsuccessfully trying to compete with big chain stores, such as Wal-Mart.

"I also found, in investigating the cost of goods, that there was excessive amount of discretionary discounting going on," Salvato said. The opticians were allowed to give a $50 coupon to save sales, but they used it too often, according to Salvato.

Practice 2 made its own lab errors because there was no dedicated lab technician.

"Anyone who was available was going back and cutting glasses, and they'd get interrupted time and time again," she said. The pricing structure was more reasonable.

Salvato was also concerned with staffing and payroll percentages (including any employee-related expenses, such as payroll tax, benefits, commissions, bonuses, 401K contributions, etc.). It was too high at both businesses.

At Practice 1, employee-related expenses were especially a problem in the satellite locations where opticians couldn't meet benchmarks because they were also acting as receptionists and techs. Their time needed to be allocated more accurately. Instead of generating the expected $250K annually, full-time employees at both practices were averaging net collections of only $100,000 a year.

Action plan

"First, we wanted to tackle the inventory," Salvato said.

To manage inventory at both practices, Salvato started with a review of historical sales of each vendor and evaluated customer demographics.