Juggling Your Inventory Resources, Part II

By Rick Tinson
Part I of Juggling Your Inventory Resources explored issues related to inventory planning, fill-rate issues, and maximizing efficiency of wholesale lens inventory. There are also issues related to reordering, freight efficiency, shelving, and accuracy that need to be addressed. Last time, I presented methods of maximizing your lens fill rate. That should minimize the volume of “shorts” being ordered, which should lower your in-bound freight bill and maximize your service levels. But most lenses are purchased via regular stocking reorders. There are ample opportunities for savings there as well. A stockroom is a non-value-added area of your business. The key components to a successful stockroom are accuracy, efficiency, and minimal additional cost.

Frequency of Reordering

Many wholesale labs that deal with multiple lens distributors habitually reorder every day from every manufacturer that they purchase from. Combined with a thin inventory plan, the behavior approximates “Just In Time” inventory like we read about in management books. So labs tend to have a steady flow of inventory in transit, but frequently pay extra for Next Day or 2nd Day shipping.

In practice, however, this may not be the most efficient means of re-stocking our shelves. Optical labs produce custom work, wheras automobile manufacturers don’t. So a different inventory model may be in order. It is impossible to plan for when exactly you’re going to need that 10 base 3.50 add lens. Inbound freight costs are skyrocketing due to fuel surcharges, and oddly many of our lab management systems don’t allow us to directly capture the cost of inbound freight on a per pair basis. In-bound freight is a hidden cost that is easily overlooked. Given the increase in inbound freight costs, it is logical to look for alternate shipping strategies for normal restocking. Our target is to have once-per-week restocking orders shipped via less costly ground methods. You may need to order twice-per-week if a typical weekly order from a manufacturer would be larger than your receiving area can handle.

Add up your in-bound freight costs by manufacturer, and calculate a per-lens freight cost. When the U.S. HOYA labs implemented a weekly reorder process, we experienced savings of between $0.10 and $0.15 per lens in inbound freight. The reordering functions in your lab management system should provide tools for you to plan the inventory based on the nominal shipping lead-time. As I’ve noted frequently in memos…UPS is not a wholly owned subsidiary of our company. So let’s stop giving them all our money!

Another argument for weekly reordering is related to the amount of time required to shelve lenses once they are received. If you use five pair of a base/add per week, doesn’t it make more sense to pay your stock person to make one trip to shelve five pairs, instead of five trips to shelve one pair per trip?

Remember, non-value-added steps require efficiency, so plan on using less labor to get the lenses to the shelf.

Lot Size Reordering

Another scheme for maximizing in-bound efficiency is to use the notion of Lot Sizes when reordering. You may have noticed that most semi-finished lenses come in cartons that typically hold 40 lenses. For the most frequently used items, it would be advantageous to order in multiples of the carton size, to minimize handling of lenses. If your reorder calculations indicate that you want to order 30 lenses of a base/add, why not order 40? It is far easier to place a full box of 40 on your shelves, rather than having to handle the 30 lenses individually to put them on the shelf. Lot size ordering is a perfect complement to weekly reorders—the larger order size means that you can take advantage of the lot size for more items. You may need to rethink your shelving in some cases, but that’s a minor nuisance.

Remember, lot size ordering only makes sense on your most frequently used items (“A” items), but can save time during receiving. The dollar impact on the total inventory value turns out to be extremely small, especially compared to the ease of receiving and shelving. Your LMS should be able to support lot-size reordering on a lens-by-lens basis.

Reorder Size

Most labs define their desired minimum on-hand amount in terms of number of days supply, based on average daily usage. Typical U.S. wholesale labs set a target for three to five days minimum inventory on hand. If the target is too small, a low fill rate can result. If the target is too high, inventory costs increase with minimal improvement in fill rates. A balance is necessary.

Stockroom labor efficiency occurs when SKU’s are not reordered every single order. The goal is to balance the number of shelf restocking trips per item per month, the high-water mark (the greatest number of lenses you’ll have to provide space for), and the minimum safety level of stock (so you don’t run out). Based on some computer modeling that I’ve done, it can be stated:

• Greatest shelf and order efficiency occurs if Order Size (in Days) is greater than the Minimum Inventory Level (in Days).

• Specifically, your Order Size should be between 1.5 and 2.0 times your target Minimum Inventory level.

So if you want to carry a target of four days inventory on the shelf, configure your LMS to order six days to eight days worth of inventory each time you place an order. Smaller labs should order on the high side to maximize fill rate, larger labs should order on the low side to reduce storage requirements. This scheme minimizes average amount on the shelf and the high-water mark, without lowering the minimum amount on hand. It also maximizes the efficiency of your stockroom labor by reducing the number of restocking trips per lens item.

True Cost of Each Lens Order

There is a fixed cost to each and every order received. You have to go through the same overhead and paperwork whether you ordered 1 lens or 1,000. Overhead factors include:

• Time spent with the delivery person

• Reconciling Packing List versus lenses received

• Reconciling Packing List versus lenses ordered

• Reconciling Packing List versus Invoice

We have calculated that the fixed cost of paperwork can be $2 to $5 per order received. Multiply this figure times the number of lens vendors used daily. Astoundingly, the cost of paperwork can easily run into the hundreds or thousands of dollars per month. Clearly, if we place fewer orders, we have less paperwork cost.

Placing your orders

If you’re not reordering electronically, you’re making a mistake. Fax orders and phone orders are more error prone and more likely to incur delays than electronic orders. It is possible that in the future, lens distributors will charge a service fee for non-electronic orders. Note that this is analogous to labs that give discounts for Rx’s ordered electronically by their ECP accounts.

It should also be noted that you may experience better service by paying attention to the day of week you place your orders. Monday through Wednesday tend to be the busiest days of the week at your lens distributor. If you place weekly orders on Thursdays or Fridays, you may experience fewer delays, and may have a greater chance of late orders being filled the same day.

Physical Shelf Organization

There are some fundamental planning questions that should be asked about the physical storing of your lenses:

• Store bifocals/progressives as R+L pairs, or have separate bins for R and L?

• Should we store FSV sorted by sphere or cyl power?

• Multiple powers per bin?

• Organize by lens style, by manufacturer, by material?

Remember, we want to minimize labor invested in non-value-added processes like putting lenses on shelves. How much more can you charge for spending lots of time putting lenses on your shelves? The answer is zero. The most efficient plan is to organize lenses on your shelf the same way you receive them from the manufacturer to minimize handling. Receive the lenses, and get them on the shelf without reorganizing. If you have space constraints, fix them! Do not continue to spend labor on elaborate shelving schemes—the time saved when picking lenses is minimal and may not justify the extra labor. Your lab management software should allow you to manage bin locations for lenses, so that you can find them. Consider organizing lenses by manufacturer instead of by product/material.

Shelving Multifocals

In most cases, you should have separate bins for R and L lenses. Lenses tend to come boxed with the rights grouped together, and the lefts grouped separately. Don’t “shuffle” lenses as they come in from the distributor! Separate R and L bins minimize labor and time to shelve lenses. Your stockroom personnel may protest that the time required to pick lenses as justifying alternating R/L in an elaborate put-away process. However, that argument rarely stands up to scrutiny. Separate R and L bins also make cycle counting and physical inventory counts much easier to do accurately. When done correctly, separate R and L bins do not increase the amount of time required to pull lenses. Statistically, half pairs are ordered five percent of the time, and single-eye breakage is also very common. If your storage method is to alternate R and L pairs, a significant number of your trips to the shelf only manage to undo that organization!

Receiving Backorders

Receiving backorders is frequently a rushed process. By definition, backordered jobs are already delayed, and you want to get the lenses into the trays and back into the lab quickly. However, a poorly implemented receiving process can have disastrous results. Our distribution office occasionally gets calls about “why do we have backorders on everyday products.” Invariably, we find that improperly maintained purchase orders on the lab’s management system are the real culprit:

• Always receive backorders against the original order, even if that means more time spent at receiving

• Do not leave open backorders—they fool your LMS into thinking that it doesn’t need to reorder, causing more shorts! A poor system spirals out of control.

• If you use DVI, “merge” backorders for easiest maintenance and receiving

• Review all open PO’s at least monthly, and purge old backorders

Cycle Counting

Any good inventory requires work to ensure accuracy. Inaccurate inventory leads to accounting headaches, delays, overstock, and undocumented manual workarounds. Given the large number of transactions in your stockroom per day, it is inevitable that the computer counts will not match what you physically have. Those inaccuracies lead to unpredictable results, which in turn mean disruptions in the service you provide.

Regular cycle counts are a powerful tool to ensure accuracy, and your LMS should support doing those counts. A good cycle counting plan will use A/B/C classifications to control frequency.

• Top five percent are A’s—count quarterly

• Next fifteen percent are B’s—count every 6 months

• The rest are C’s—count once per year

It is not sufficient to do yearly or even two times per year physical inventories, nor is it efficient to try to count all lenses monthly. Counting each item too often is as bad as not counting enough, and represents “faux accuracy.” What is necessary is to use the A/B/C system, and to cycle count daily.

If shelf organization is poor, you’ll find yourself constantly “finding” and “losing” lenses. So if your results aren’t as accurate as you like, attack the root problem and determine why lenses aren’t where they are supposed to be. Other cycle counting tips:

• Don’t use “blind” counts for cycle counts; print the counts

• Challenge the counters to “find” missing lenses and verify overages

• Don’t accept large changes without a challenge

Remember, the desired outcome of cycle counts is not just to correct your counts. You’re really doing a daily audit of the integrity of your stockroom systems. Are lenses being put away in the wrong place? Maybe you need to reorganize or retrain. Are lenses getting on or off the shelf without the movement being recorded? Identify and plug the leak. The intended result of cycle counting is to identify stockroom procedures that lead to inaccuracy. A further goal of cycle counting is to demonstrate inventory accuracy, and avoid yearly physicals.

It is important that your stockroom promote a Culture of Accuracy. Develop systems that ensure quick and accurate stocking of shelves. Each stockroom should have a “Lost and Found” box; when you find a misplaced lens, put it in Lost and Found with a note as to where it was found. Then schedule both the “Lost” lens and “Found” lens for cycle counts tomorrow. Return lenses to their home during the count; do not just put the found lens in its home. Too much trouble? Then find out why you’re putting lenses in the wrong place!

Summary

As noted, your stockroom is a non-value-added area of your business. And yet, it is an area that is frequently delegated, and where curious workarounds abound. In an ideal situation, jobs speed through your stockroom to the lab, where the money is made. In a less-than-ideal situation, your stockroom is a labor black-hole, and you’re constantly scrambling to fill orders and keep jobs moving. Promote and demand a culture of accuracy and efficiency to keep your profits from eroding.

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

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