Out-of-Control Operating Costs

By Julie Bos
Lowering operational costs is imperative to surviving tough economic times. Yet in the optical lab business—as in life—there are simply things you can control and things you can’t. As the sluggish economy continues to affect businesses everywhere, more and more optical labs are scrutinizing their operational costs carefully to reveal the areas most impacted by cost increases—and getting creative with strategies to keep these costs in line. After discussions with two of today’s leading labs, we’ve highlighted four key business areas that have seen significant increases and presented the tips they are using to reign in costs.

SHIPPING AND TRANSPORTATION
The bull market in energy commodities over the last decade has contributed to a major rise in transportation costs for manufacturers with global supply chains. Unfortunately, that fact affects optical labs everywhere—regardless of their regional location. Given growing global demand for energy, transportation costs will likely remain high for some time. Soderberg Ophthalmic Services, a division of Walman, is one lab that has felt the pinch.

“Shipping has gone up tremendously and it continues to be a major factor in operating costs,” said Craig Giles, VP and general manager. “Just in the first half of this year alone, our shipping costs are up by about six to seven percent, and if a lab is currently growing the business, as we are, the increased number of prescriptons will reflect an even higher cost of doing business.”

Higher shipping costs have also affected operating expenses for Superior Optical Labs, Ocean Springs, Miss.

“This year, we were notified by UPS that there would be an eight percent increase going forward,” said Hal Walker, president. “Unfortunately, the higher cost of transportation is something we simply have to deal with, but we don’t necessarily pass those increases on to our accounts because the market and economy is so sensitive right now. The last thing we want to do is start calling our ECP base and raising prices. What we’re hoping to do for as long as we can is to hold our prices at status quo. However, when this cost starts affecting our bottom line, obviously we’ll need to reevaluate.”

WHAT CAN BE DONE?
“The competitive environment allows you to do only so much when it comes to mitigating shipping costs,” adds Giles. “So we have to look at how we can improve our freight revenue and how to best compensate for our freight delivery costs.”
According to Giles, labs may simply need to draw the line with their clients—establishing certain volume or financial thresholds and loyalty-based incentives that qualify them for free shipping instead of standard shipping rates.

“For example, if we have a customer that only does $500 a month with us and only sends us the difficult work that they can’t send to their other laboratory, they’ll need to pay a minimum box charge,” he said. “The bottom line is that if a customer is giving us more business, we’ll give them more attention and better shipping rates.”

Walker proposes an additional strategy. “I think that lab owners would be remiss in their responsibilities if they didn’t take the time to reconsider some of the other transportation couriers out there. Both FedEx and UPS are very competitive right now, and they are both willing to negotiate. If you haven’t gotten a recent bid from the other competitive provider, maybe it’s time to sit down, shop it out and get an updated quote. They might be very willing to strike a deal to gain the business.”

TRAVEL AND ENTERTAINMENT
Those labs with field-based sales professionals are very aware of another area of rising costs: travel and entertainment expenses.

In Craig Giles’ experience, having a sales professional on the road in today’s market can cost as much as $100,000 per person annually, by the time you calculate all the cumulative costs including a salary, benefits, travel expenses, hotel costs, meals and cost of living increases.

“By the time you add up all those costs, you realize just how high the annual investment is for just one salesperson,” he said. “Having salespeople in the field is just very expensive. From our lab’s perspective, we believe that’s the way to go, but we also have to make sure we’re getting a great return on that investment. We have to examine the payout versus the payback.”

WHAT CAN BE DONE?
Of course, one strategy for controlling and/or lowering this category of expenses is simply not hiring as many salespeople. But there are other things you can do, too. You can take advantage of today’s technology to minimize your salespeople’s need to travel. For example, utilizing Skype, webinars, and live videoconferencing rooms is a great way to connect with customers without the need to board a plane.

However, if your lab believes there’s no substitute for face-to-face selling, there won’t be much you can do to shrink these travel/entertainment expenses. In that case, simply consider these expenses “a necessary evil”—or better yet, a forward-looking investment in future sales growth.

HEALTHCARE
Despite the claim of the Obama administration’s Affordable Care Act to bring health care costs under control, the ultimate fate of our nation’s health care reform efforts remains uncertain. What is certain, however, is that health care costs are continuing to eat away at business and consumer budgets alike.

CNN Money reports that the cost to cover the typical family of four under an employer plan is expected to top $20,000 this year, up more than seven percent from last year, according to projections by independent consulting firm Milliman Inc. The projected increase marks the fifth year in a row that healthcare costs will rise between seven and eight percent annually.

“For people who own small businesses—like the majority of independently owned labs in this country—we don’t know what we are all in store for, ultimately, in terms of healthcare costs,” said Walker. “But I do believe that the current healthcare reform act is going to be a very critical issue in 2014 when it kicks in.”

WHAT CAN BE DONE?
“We’re self-insured and our benefit costs are definitely up this year,” said Giles. “But one of the things we’re doing to keep healthcare costs down is to remain very active with wellness programs. We partner with our healthcare provider to execute these programs, and by keeping people healthier, we are trying to do our part to mitigate the rising cost of healthcare.”

ANOTHER TIP? KEEPING A SHARP EYE ON ACCOUNTS PAYABLE
Superior Optical Labs offers another strategy for identifying small but sometimes unnecessary expenditures. It starts and ends with a ledger that’s familiar to every business—the list of Accounts Payable.

“Our lab does between 300-400 jobs per day, and as a lab doing that many jobs, we’ve found a variety of small items that remain on our books month after month that aren’t totally necessary,” said Hal Walker.

He says one example is having a cold water fountain available for lab employees—a costly fixture that isn’t really necessary since the lab already provides two refrigerators in the kitchen/break room for employees to store water bottles.

“We’re now scrutinizing each of these small plans that we’ve had for years and putting them into one of two categories—essential and non-essential,” he said. “If it’s non-essential, we do away with it.”

Another example is the lab’s programmable HVAC thermostat, which used to keep the 12,000-square-foot building at a constant, cool temperature day and night. Today, however, after employees leave for the night, the temperature is allowed to rise another 10 degrees before the air conditioner kicks on. The building stays at that temperature until 5 a.m., when the air conditioner automatically resets ten degrees lower and cools the building in time for employees’ arrival.

“Simply controlling your lab’s air conditioning (or heat), depending on the time of year, can save hundreds of dollars—and the bigger the building, the bigger the savings,” said Walker. “We realized this was another area we could make a few wise cuts, but wouldn’t affect employee performance. Believe it or not, all these little things really do add up.”

THE BOTTOM LINE
At the end of the day, optical labs of all sizes and varieties must do the hard work of critically examining all their operating expenses and crafting new plans to stay competitive and profitable. Yet implementing just one of these ideas may help move the needle in a positive direction.

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Labtalk May/June 2018