ALL THE LITTLE THINGS – ADD UP TO INCREASING COSTS FOR LABS

By Linda Little
So how have rising gas prices affected you?” someone asked me the other day. “Oh, I don’t know,” I started. “I can’t think of one thing that hasn’t gone up in price, become harder to find, or is just plain out of my budget now. And you?”

Unfortunately, rising costs for everyday living didn’t happen overnight, nor did the increase in oil barrel prices single handedly cause our demise. The combination hit us all pretty hard though, and for many, a change in lifestyle, whether a decision to drive less, eat at home, downsize or forgo vacation plans, has had to be made. Add to the fact that every business has felt the effect of these rising costs and many have not survived. (I am writing this during the time of Lehman Brothers filing bankruptcy and AIG is in trouble, Fannie and Freddie just got bailed out and Bank of America will buy Merrill Lynch.) This issue is a big challenge for the optical laboratories, large and small.

A quick survey found most labs weathering the storm. Many labs are seeing an increase in sales over last year, but are quick to point out that these increases are not due to pricing. As Wally McLeod of McLeod Optical explained, “Our increase in revenue has allowed us to absorb the increases in costs.”

Transportation

The biggest cost increases have been seen in the area of shipping and transportation costs, averaging a minimum of 20 percent increases over last year.

“By far shipping is the biggest area of cost increases,” commented Dana Weeks of Optical Services International. “All our labs continue to look for ways to reduce these costs, but servicing the customer remains the priority. No one in our group has added a shipping surcharge yet, but I know other labs have.”

Transportation costs are being felt around the world. One can see the effects in the cost of food, product availability, and many services we might have taken for granted. Globally, rising transportation costs are causing a renewed look at the “neighborhood effect” as some economists are calling it – “putting factories closer to components suppliers and to consumers, to reduce transportation costs – could grow in importance if oil remains expensive.” Although shipping costs are not the only factor in operating a business and determining locations, suppliers and customers, the costs of transportation are not expected to take a serious downturn any time soon.

Other operations that are directly affected by transportation costs for laboratories are sales costs and travel costs. If you were able to book a plane ticket for Vision Expo West at the same or similar rate as last year – you are very lucky. For many, the increase has been 20-30 percent in the price of the plane ticket alone.

“Last year my ticket to Las Vegas was $350.00,” commented Craig Giles, of Soderberg Optical, a division of Walman Optical. “This year I struggled to find one for $490.” It’s these little increases that are adding up to be a lot of increased costs.

Soderberg Optical moved previously to a Zone Planning Process for their sales efforts, identifying those areas generating sales and that had the potential to grow. “Instead of just sending our reps out to run a route,” Giles added. “We want them to spend their time growing the business with the customers that want to grow with us.”

With this plan, the sales representatives are efficient and effective with their time and the customers’ needs are better served. Even though sales costs have become more expensive due to transportation costs, the actual sales are well above their projections to date, according to Giles.

Healthcare

Healthcare is another area of rising costs for optical laboratories. In 2007, employer health insurance premiums increased by 6.1 percent, two times the rate of inflation. Firms with less than 24 workers experienced an average increase of 6.4 percent. The annual premium for an employer health plan covering a family of four averaged nearly $12,100. The annual premium for single coverage averaged over $4,400.

The optical industry isn’t immune to these types of increases. This same article also includes statistics of the many foreclosures that occurred due to heavy medical expenses a family had to pay. Of those labs I spoke with, all had made some change within the past year or two. One changed their plan and moved to United Healthcare. Being open minded and working to maintain employee costs they started paying part of the deductibles, so the premiums for the company would be reduced and thereby overall costs have been reduced. Many moved to Healthcare Savings Accounts for their employees, where funds carry over from year-to-year to support medical needs. Although they may not have seen significant cost reductions, the costs have been flat from year-to-year.

For larger operations, such as Soderberg, with 13 laboratories, the investments in technology and consolidation previously paid off to keep costs down or level with last year.

“We’ve been able to do a good job of managing our employee benefits,” explained Giles. “We leveraged the investments in consolidation and automation to keep headcount down and costs for healthcare and benefits level to last year.”

Although shipping and transportation costs were cited as the biggest costs for labs, the ever-increasing healthcare costs are looming in second place with no significant opportunities for improvement.

Government and Legislation

This is an area where ‘all the little things’ really do add up quickly. Just a quick run down of environmental regulations, wastewater and hazardous waste removal, workman’s compensation and employee rights have all contributed to an ever-growing expense on the income statement.

As Wally McLeod noted, “The fluorescent light bulbs that cost $3.00 or $5.00 dollars to purchase, cost $10.00 to dispose of!” And who doesn’t have fluorescent lights in their facility? Environmental regulations have been affecting the optical laboratory since the EPA was formed. Many of the processes, materials and supplies must be handled and disposed of, treated or cleaned to meet regulations. The steps of testing, experts and adjustments are all costs associated with meeting regulations. Every year brings another opportunity for regulation. The costs add up. If 100 fluorescent bulbs are replaced in one year, it will cost $1,000 to dispose of them, plus the $300 to $500 to purchase.

Every business that deals with Workman’s Compensation agrees that it is an expensive and time-consuming activity. Many times the attorney’s fees and time required of valuable employees can be overwhelming, and very costly. Even if the business is right in their actions, the process is expensive.

Not only do businesses have the additional cost of paying workman comp costs for each employee based on state requirements, many have chosen to also carry Employment Practices Insurance to cover any damages that may occur.

Although laboratories today offer education and training for supervisors, managers and employees alike to prevent these types of problems, there is always that random stuation that comes up. The cost of protecting the company while protecting the employee has become a significant cost for all businesses.

General Costs of Operations

Do you really want to run that AR coating machine? Overwhelmingly noted was the increasing cost of heating and cooling specifically, AR coating facilities. Some areas of the United States, such as the Northeast, are feeling the increase in electricity and fuel costs more than others. But everyone has been impacted in some way or another.

The costs of electricity and fuel, insurance and maintenance are driving people to downsize their homes as well as business locations. Maintaining a large facility, operating multiple machines and processes, keeping a clean environment, and in some cases, running more than one shift all contributes to rising utility bills. Consolidation has made a big difference in Soderberg’s costs of operations.

“Our inventory is stronger and our operation is more efficient as a result of our move to automate and consolidate surfacing operations to one lab,” explained Giles.

Focusing on key measures has kept the Soderberg Labs moving towards improvements, which prepared them for many of the cost increases this year. “Our revenue is up over projections this year,” Giles added. “We’ve been able to hold operating costs level with last year in many areas due to our focus on these key measurements.”

Continuously measuring the turnaround time for jobs, maintaining or reducing spoilage and maintaining or reducing labor costs, the employees of Soderberg have been managing the operations and the costs they can control. Although these employees may personally benefit from their efforts since Soderberg is an employee-owned company, the concept will work anywhere. Measure and manage what you can control.

Maybe the Presidential election will fix the gas prices or environmental regulation issues or maybe, the healthcare mess. Odds are against a quick and easy solution for reducing these expenses any time soon. All the Little Things that challenge any business are the same for the optical industry. The need to be continuously looking for improvement opportunities is never ending. We’re in the downside of a business cycle again. Those laboratories that are working to offset the costs they can’t control with good business practices, good investments, and keeping “customer focused” are and will continue to see their sales increase during this difficult economy and the next.

Meanwhile, eat locally grown food and shop in your own town. All the Little Things Add Up!

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Labtalk September/October 2018