Juggling Your Inventory Resources, Part I

By Rick Tinson
The continuing proliferation of new lens designs and materials means that wholesale labs must make some hard choices about their on-hand inventory. Without adequate controls, the cost of lens inventory on the shelf could spiral upward, and rising freight charges could eat at your margins from another direction.

The actual meaning of the word “inventory” means, “list of what is found.” In a modern business perspective, we’d like to minimize the surprise element of “found” as much as possible. And today, there is a lot more to be “found” than ever before. Opticom has over 300,000 lens SKU’s in its database. HOYA alone has over 15,000 SKU’s in our warehouse. Although labs have long ago found ways to maximize their purchasing power in terms of cost, there may be other sizable savings available through tight management of inventory resources.

Inventory Planning

Managing your lens inventory requires planning, which needs to be much deeper than just periodically sending back overstock with a cover order. Proper inventory planning would entail:

• What products to carry, how much, target fill rate, inventory budget, etc.

• Reality check—are you actually using the inventory that you think you should.

Many wholesale labs fall victim to a “Catch-22” in terms of inventory planning. We don’t stock it because we don’t use it…but we don’t use it because we don’t stock it! This Catch-22 can have expensive consequences.

There is a very illustrative example of this from HOYA’s labs. Examination of Transitions 1.50 Finished Single Vision trends showed that usage at our labs was extremely low. Further examination showed that most labs did not stock plus powers or higher cylinders because of the relative expense of Transitions FSV inventory. However, rather than short order the product, labs have the “let’s surface it to get it going today” mentality. In response, we had each of our labs stock at least one pair of the available FSV range. Within two months, usage of the plus FSV had more than tripled, and usage of minus powers also increased significantly. There were savings in surfacing labor, surfacing spoilage and consumables, stockroom labor, and most importantly, time to deliver the product. The savings easily justified the added inventory expense. But we had to “prime the pump” and actually put some on the shelf to get around this nasty Catch-22. We are now more careful with our decisions not to stock a product, particularly finished product. We also make much more use of our DVI system’s “minimum quantity to stock” function.

Similarly, the decision to stock or not stock a PAL is very important. Traditionally, we ask our inventory person to “put in an inventory” of a new lens. But without good direction, this can be expensive and misdirected. Some products, such as Transitions 1.67 and short corridor PALs, have very different and hard-to-predict frequency distributions. Their distribution curves are much different than “conventional” PALs. Short corridors, for example, tend to have their peak add power about 0.50 diopters less than their full-corridor counterparts. Stocking those products using the same distribution pattern as full-corridor styles would overstock the higher adds, and understock the lower adds. The solution is to review shorts and overstock quarterly and adjust your target stock accordingly.

Some other elements of your inventory planning get to the heart of your business. You must decide what products to stock based on cost, space, usage, and “cost of not carrying.” The cost of not carrying includes incremental shipping, and the cost of surfacing when FSV is available. The cost of not carrying also includes lower service levels than your competitors, which can be very expensive in terms of lost sales. However, there may also be no cost to not carrying—if you can set your accounts’ expectations correctly! So you’ll want to plan your fill rate carefully, based on your size, your budget, and your sales effort.

Fill Rate

Your lab’s fill rate is affected by two things:

• Which products you stock

• How often you run out of the products that you plan to have on the shelf There are two important ways to measure fill rate:

• Total Fill Rate = Percent of time you have the lens you want

• Stocked Fill Rate = Percent of time that a lens that is supposed to be on the shelf is actually there

In terms of what your customer experiences, Total Fill Rate is the important factor for good turnaround time. A good Stocked Fill Rate is essential to having a good Total Fill Rate, but so is stocking the proper products.

Your target Total Fill Rate is generally based on lab size:

• Small Labs = 80-85 percent

• Medium Labs = 85-92 percent

• Large Labs = 92-98 percent

Your mix of work will also be an important factor in determining your Total Fill Rate. Labs that sell primarily one line of progressives have an advantage over labs that sell everything. Regardless of size, your Stocked Fill Rate target should be 98 percent or higher—in other words, you should very rarely be out of a product you intend to stock.

As noted, your Total Fill Rate depends in large part upon which products/items you decide to stock. Traditionally, labs set low/high bases/adds to “Never stock”. That decision is usually made by your “inventory person”, and rarely reviewed by the lab manager. The theory is to only stock the center of the bell curve, which sounds like a sound decision to manage your inventory budget. However, this only works if you know what the bell curve looks like. Unfortunately, the bell curve changes over time—the aging US population means that average add powers are steadily increasing—we’ll need more 2.75 adds and fewer 1.75 adds than just a few years ago. Further, the introduction of lower priced higher index products “compresses” CR39 base curves, meaning that bell curve for CR39 is much tighter than in past years. And as noted earlier, short corridor PAL’s have a different bell curve than general purpose PAL’s.

One good rule is to always let the computer stock products based on actual usage. If there’s a sudden run on high add powers in your market, you’d hate to lose out on business because your 10 year old stocking model tells you to never stock a high add, regardless of usage. If you don’t have usage, your LMS won’t tell you to stock an item, so there’s no downside to letting the LMS manage your inventory. The hard part is getting your long-term “inventory guy” to let you do it! Some other inventory fill rate problems to avoid:

• Stocking level per item too small—excessive shorts, Stocked Fill Rate too low

• Long lead time not planned for—excessive shorts, Stocked Fill Rate too low

• High breakage on low usage SKU’s

• Double whammy—job delayed by breakage is then further delayed by short ordering

• Overnight inbound freight cost eats your profit

• May need to increase inventory if you can’t solve breakage issues

Executing the Plan

Once you’ve planned which products to stock, and how many, it is important that you execute that plan. Again, there is an illustrative experience that shows how even the best plans can fail to be properly implemented.

A survey of our laboratories indicated that in some of our labs, polycarbonate FSV was used approximately 60 percent of the time that the Rx called for single vision. However, in other labs, the percentage was as low as 25 percent.

Deeper investigation showed that for reasons of purchasing efficiency (i.e. lower price), we had switched our poly FSV to a manufacturer whose minimum CT was 1.2—1.3mm. However, our software was all set up for a 1.5mm minimum CT. Since the system thought our FSV was too thin, we ended up surfacing jobs needlessly. Additionally, we found situations where the stockroom clerk was overriding the recommendation to use FSV on plus powers, and always pulled SFSV. All it took was for one job to have been too thick, and the clerks responded by over-compensating. We had to correct our setup to match the products we were currently purchasing, and gain the confidence of our stockroom clerks that the system was correctly recommending lenses. This brought all of our labs up to 60 percent+ FSV usage as we had planned—at huge savings once again. The lesson here is that even if you intend to use FSV or smaller diameters whenever possible, system setup problems or an over-zealous stockroom clerk can kill your plan. The important point is that your inventory plan and execution is not a stand-alone process that you just toss to your trusted stockroom clerk. It requires planning, measurement, and action to achieve that plan.

Monitoring Inventory Performance

As part of executing the plan, you must monitor your inventory performance—you can’t just assume that you’re getting it right. Remember, inventory fill rate reaches the point of diminishing returns; to increase your fill rate a little means adding a lot of dollars. To find a balance, calculate an on-hand ratio for all products. Each month we calculate the ratio dollars on hand / used last month. Note that it is much harder to keep multifocals efficient—it depends upon distribution of base/add frequency. Some FSV products can also be hard to maintain efficiency over the entire power range. Be suspicious of “too good” a ratio—it may indicate too many short orders. Accept the fact that you may have to stock some slower moving products in order to provide the overall service levels that our accounts expect. Your overall on-hand ratio also depends upon lab size. Our rule of thumb:

• Large Labs 1.0

• Medium Labs 1.5

• Small Labs <2.5

Some strategies for increasing your fill rate:

• Increase number of days storage—increases you inventory investment

• Use of minimum stocking levels on high breakage products

• Use of FSV to stock full range

• Stocking two pair of SF to reduce in-bound freight costs

• Balance cost versus service

• Stock wider range of powers/bases/adds

• Analysis of lead time

• Don’t need faster shipping, just need lead time factored in

• Less frequent reordering

• Increases on-hand amounts only on the lower usage SKU’s

• Particularly good in smaller labs

• Sales—alter accounts’ buying habits to products that are more fully stocked

Once again, you’ll want to schedule at least a quarterly review, adjusting your stocking model as needed. But if you’re going to keep to your inventory budget, you must remember the most important rule, which has gotten me kicked off of many a Lab Manager’s Christmas Card List: Want to add something new? Find something old to get rid of.

In Part II, appearing in the Jan/Feb issue of LabTalk, I’ll examine some issues related to reordering, freight, and shelving.

Rick Tinson is the inventory control manager for HOYA Vision Care, North America

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Labtalk September/October 2018