Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
Optical Inventory Turnover
Contact Information:
Phernell Walker, II, AS, NCLC, ABOM
Email: [email protected]
www.pureoptics.com
(254) 338-7946
Phernell Walker, II, AS, NCLC, ABOM
Master in Ophthalmic Optics
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
10/07/2011
Setting the Direction
Introduction
One of the most over looked, yet most
important, costs to running an optical business
is the cost associated with managing inventory.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
You have a very special opportunity to set the
direction of your practice.
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Measuring Success
Inventory Resources
It is essential for the successful owner, or optical
manager, to be able to manage and measure the
effectiveness of his or her inventory investment.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
If not managed properly, inventory can tie up valuable
cash that can be allocated to other areas of the
business. Although the inventory principals described
in this course can be applied to spectacle lenses,
contact lenses, and accessories, only frame inventory
will be discussed.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
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Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
Formula for Inventory Success
Inventory Turn Over Formula
The faster you “turn inventory,” the less capital
you have stagnant.
Revenues / Avg. Inventory = Inventory T.O.
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Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over Benchmarks
Example:
Inventory Turn Over Formula
• Frame Revenues $66,000 (in 3 months)
• Frame Valuation $42,000 / 3 = $14,000
Optical frame inventory should turn a minimum
of 9 times annually. If it’s not, ask your self why.
Revenues / Avg. Inventory = Inventory T.O.
$66,000 / $14,000 = 4.71 times
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
10/07/2011
Inventory on Hand
Factors of Inventory Turn Ratio
•
•
•
•
•
•
•
Buying philosophy (qty., timing, etc.)
Individual selecting your inventory
Optician’s sales ability
Patient demographics
Merchandising (or lack of)
Retail pricing
Multiple pair sales
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Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
How much it too much?
Another factor to consider
in inventory levels is the
number of “inventory days
on hand.”
This number will allow you
to determine if you have
too much, or not enough,
inventory based on your
buying philosophy.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
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Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
Inventory on Hand
Business Days on Hand is used to calculate the
number of business days needed to turn
inventory.
Inventory on Hand
Example:
Days on Hand = 365 / Inventory T.O. Ratio
Days on Hand = 365 / 9
Days on Hand = 40.55
Days on Hand = 365 / Inventory T.O. Ratio
(40.5 days to turns inventory 1 revolution)
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
10/07/2011
Example
Cost of Goods (COG) Benchmarks
Cost of Sales (or Cost Of Goods) refers to the
costs associated with creating revenue.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Assume that you purchase 100 frames at the
beginning of the year for $45.00 each.
The total investment on those frames is $4,500.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Numbers Game
COG
If each frame was sold for $179.95 within a year,
your gross profit on all 100 frames is $13,495.*
The inventory investment costs a total of $4,500
to produce $17,995 in gross revenues in the
course of one year. It can also be said that your
Cost of Sales (COG) was $4,500.
*See incredibly small legal sized print below for any attorneys that may be in the room.
($17,995 revenue - $4,500 investment)
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
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Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
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Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
A Better Method
A more efficient way to manage inventory would be to
order 25 frames every three months instead of
ordering the 100 frames at the beginning of the year.
The same number of frames would have been ordered
for the year and the annual profit would remain the
same.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Managing By the Numbers
“Achieving a positive profit does not validate the
means as the most efficient method.”
Phernell Walker, ABOM
Managing by the Numbers
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Bottom Line
The initial investment for
the inventory was reduced
from $4,500 to $1,125
(that is 25 frames x $45).
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
“Everyone has the right to manage or
mismanage their business anyway they’d like.”
10/07/2011
Secrets to Purchasing
By the time 25 frames are sold, the sales generated
would have funded the purchase of an additional 25
frames. By ordering a smaller quantity of frames more
frequently, the initial investment was effectively
reduced by $3,375. These savings can be reinvested
into your practice.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Common Misconception
A common purchasing misconception is that
“frames don’t really have a shelf life.”
Nothing could be further from the truth!
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Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
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Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
Making Inventory Simple
COG Benchmarks
Cost of Goods for ophthalmic frame inventory
for the typical dispensary should be less than
25% of frame revenues (not total dispensary
revenues).
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory management is as easy as one, two, and three:
1. Use the inventory module (monthly or quarterly)
2. Analyze the data/reports (use GMROI)
3. Compare against budget and benchmarks (COG and
turn rates)
10/07/2011
Gross Margin Return On Investment
• GMROI or Gross Margin Return On Inventory can be
used to determine the price point on a given
inventory item (frames or contact lenses) and true
profitability or ROI (Return on Investment).
• True ratio of measuring inventory profit as it relates
to the gross profit margin earned on gross revenues.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Gross Margin Return On Investment
GMROI is calculated using the following formula:
Gross Margin $ ÷ Average Inventory Cost = GMROI
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Question
Gross Margin Return On Investment
How are you currently selling your products?
Example:
Gross Margin Dollars / Average Inventory Cost = GMROI
Gross Margins on frames = $140.00 (Avg). X 500 frames
Average Inventory Cost or Valuation (Monthly) = $35,000
70,000 / 35,000 = 2 (which means I’m not making a true 3 times mark
up)
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
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Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
Planogram
Planogram Vs. Selling off the Board
What are the ramifications of using a Planogram
vs. selling off the frame board?
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Planogram is the inventory method of using a
specific quantity on hand for each frame SKU at
given location within the dispensary (board
location) and maintaining a certain quantity on
hand of a given SKU.
10/07/2011
Selling off the Frame Board
Selling directly from your frame boards is using
the stocked frames on hand to produce the
eyewear without allocating a minimum and
maximum quantity of a given SKU or allocating
the specific location of the frame on the frame
boards/fixtures.
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Planogram Pros & Cons
Pros:
Cons:
•
•
•
Clear consistent outline of the
inventory.
•
•
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•
•
•
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Cons:
Pros:
Cons:
•
• Superior service to patient
•
•
•
•
Inconsistent inventory
Patient see’s exactly what they’re
purchasing
Replenished inventory regularly with
fresh product
Back order not an issue
10/07/2011
Staff may pull wrong product
Product may be back ordered
without staff’s knowledge
Wear and tear on display product
Products not fresh
Special Orders
Selling Off the Board Pros & Cons
Pros:
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
10/07/2011
More staff handling
Increased shipping cost
More room for errors
Back order problems
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
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Inventory Turn Over by Phernell Walker, II,
AS, NCLC, ABOM
10/07/2011
Contact Information:
Reality
Most providers use a combination of all of the above methods.
Issue: The more variations to managing inventory, the more
room for errors!
Recommendation: Determine what works best for you stick to it!
Phernell Walker, II, AS, NCLC, ABOM
Email: [email protected]
www.pureoptics.com
(254) 338-7946
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Optical Inventory Turnover
Phernell Walker, II, AS, NCLC, ABOM
Master in Ophthalmic Optics
10/07/2011
Copyright, Phernell Walker, II, AS,
NCLEC, ABOM
Inventory Turn Over - Copyright Phernell
Walker, II, AS, NCLC, ABOM
7