A bargain is something you don’t need at a price you can’t resist. Franklin Jones
The odds of going to the store for a loaf of bread and coming out with only a loaf of bread are three billion to one. Erma Bombeck
Just ‘cause you got the monkey off your back doesn't mean the circus has left town. George Carlin
I don’t know what that last quote has to do with this article, but I like it anyway. In this blog I’m going to address hidden and carrying costs vis-à-vis your dental office inventory.
The quotes by Jones and Bombeck above are so true. How can anyone go to the store and spend $100 and then talk about how much they saved? I go to the grocery store and put my loyalty number in the computer and money starts deducting from the ticket. The checker will then circle the number and say, “You saved $27.43 today!” Being the nice person I am I don’t point out how much I’d have saved if I’d stayed home.
In last month’s blog, I wrote about opportunity cost. I pointed out that it’s probably the least considered cost when making a purchase. In this blog, I want to finish up on those other costs. You’ll notice that I don’t mention price. That’s because, if you don’t pay attention to the other, very real, costs of inventory, the price makes little difference.
So, here’s an example of hidden cost:
-The national average salary for dental assistants is $32,537 (Dental Assistant Salaries, 2014); that of dental office managers range from around $40K to about $60K (Salaries Dental Office Managers, 2014). Let’s put that into hourly:
Assistants: $32,537/2080 (52 weeks @ 40 hours/week) = $15.64/HR
-Office Managers: $50K/2080 = $24.04/HR
Now, let’s look at some hidden Costs:
-If a dental assistant is required to spend time looking through catalogues and online to compare prices, the hidden cost here is $15.64 times the number of hours spent looking for pricing. If you order once per week and it takes 2 hours per week to look for the best price, then:
$1,000,000 practice (Forgive me for using this figure, but the math is easier) will spend ~$5,000/month on supplies (assuming they’re tracking at 6%).
$15.64 x 2 hrs. /week x 52 weeks/12 months= $135.54/month hidden cost.
$134.54/$5000= 3%
So, you’re paying 3% to save how much? Who knows? Do you track the savings? And, by the way, I think that 2 hours/ week is on the low side. I’ve had dental assistants complain to me that they take the catalogues home at night and do the work on their own time, because there’s no time at work. And, lest you think that 2 hours/week is out of line, I had a dentist in Beverly Hills brag to me that his assistant spends 200 hours per year shopping prices for the practice. That’s about 17 hours per month or, at the national average, $260/month.
From a “Lean” point of view, it would make much more sense to take a look at how much additional money would come into the practice if that assistant were challenged to turn that time into revenue-generating time.
You see, shopping for the best price on a weekly basis is not a “Zero-Sum” exercise; the loss is not zeroed-out by the gain of reduced price. Why? Because the cost of inventory is Opportunity Cost+Hidden Costs+Carrying Costs+Price. Unless O+H+C < savings on P there is very little, if any, gain. The best way to bring down the cost is to reduce O, H, and C.
How do you reduce Hidden Cost?
Reduce or eliminate the following:
- Time spent by personnel online, in catalogues, and on the phone shopping for the best price.
- Time spent by personnel on the phone tracking credits due from product returned.
- Time spent sending incorrect product back to the vendors.
- Revenue & time lost when needed product is not in stock at a critical time.
- Time spent tracking down small equipment sent for repair that is past-due.
- Time and money spent caused by outdated or faulty equipment that is in frequent need of repair.
- Time spent online manually entering order information into the dealer’s portal.
- Expired product.
- Paying for overnight delivery on product that you ran out of.
- Theft
What about Carrying Costs?
- Reducing inventory can reduce insurance costs.
- Room may be taken up with storage that could be used for a revenue-producing function. For example, where you have those 10 cases of 2x2 and bibs, put in an additional charting station. How much are you paying per square foot? Does it make sense to tie-up expensive real estate for storage?
- When you get that special deal on composite where if you buy 12 months’ worth, you get 3 months’ worth free:
- Refrigeration is required – will you need to invest in an additional refrigerator?
- Will you use it up before the expiration date?
One practice that I set up on the Grasshopper Mouse system had about $75,000 of inventory in stock. This was a practice with 1 full-time dentist and one part time dentist, plus a full-time hygienist. If this practice is producing $1.25M/year in revenue, then they have as much as a year’s worth of inventory on the shelf. The big problem is that they are not turning that over each year; they still have to spend about $75K/year on supplies. But, wow, what great prices they got! What about their costs? Well, they could literally add another operatory and still have plenty of storage room if they were to go to a maximum inventory level of 1 month’s usage.They should have no more than about $10K in inventory, and less would be best. But, if their monthly purchases are $10K, then their opportunity cost right now is about $65K. Don’t you think this office would like to have that $65,000 freed-up to spend to something else? $65,000 would nicely outfit a new operatory – which they could have if they were to reduce storage. How much revenue could he bring in with an extra operatory?
In summary, when accounting for the cost of your practice’s inventory, price is only one consideration; and, any savings in price can be readily wiped out by opportunity costs, hidden costs, and carrying costs. A much more profitable activity is reducing your inventory level to bring down those other costs. If you implement a good inventory control system, you can then focus on revenue-generating activities.
Works Cited
Dental Assistant Salaries. (2014). Retrieved December 2, 2014, from Glassdoor: http://www.glassdoor.com/Salaries/dental-assistant-salary-SRCH_KO0,16.htm
Salaries Dental Office Managers. (2014). Retrieved December 2, 2014, from Glassdoor: http://www.glassdoor.com/Salaries/dental-office-manager-salary-SRCH_KO0,21.htm