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Simplify your supply closet and increase profits

May 1, 2021
Dentists should not take the out of sight, out of mind approach to ordering dental supplies. It's important to develop a method to keep track and save money on supplies.

Use Lean dental inventory management to reduce waste, minimize disruption, and increase profitability.

For many dental practices, the costs of inefficient inventory management and the related strains on cash flow and profitability are not immediately visible. The inventory management process is out-of-mind for many dental practitioners, with supply purchases often an unstructured and sometimes purely reactive process. As supply costs rise and profit margins thin, dental practices need to embrace the best practices of Lean inventory management to maintain and grow profitability.

But what exactly is inventory management, and why should you care?

Inventory management is a systematic approach to purchasing, receiving, storing, and accounting for the use of inventory. Because it can have such a substantial impact on cash flow and profits, inventory management is an important business process that every dental practice should make a primary focus. In business terms, inventory management means having the right stock, at the right levels, in the right place, at the right time, and at the right cost.1

The heavy costs of inventory

Inventory carrying costs are the total expenses, both tangible and intangible, of holding inventory. Carrying inventory ties up cash flow as well as physical holding space, and it puts you at risk of incurring a financial write-off if goods become obsolete, damaged, expired, or otherwise unusable.

The formula for calculating the cost of carrying inventory includes amounts associated with buying, storing, and managing inventory—the costs of which are the result of other practice-specific variables. For example, a practice with debt, limited space, and inventory with a limited shelf life will have high inventory holding costs. On the flip side, a practice with a large cash balance, no investment opportunities that it is likely to take advantage of, available unneeded space for storage, and items with a low probability for obsolescence will have minimal carrying costs.

Across all industries, it is estimated that inventory carrying costs can range from 20% to 30% of the total cost of inventory.2 For a dental practice with a total annual inventory value of $40,000, the annual carrying costs are an estimated $8,000–$12,000. This cost is multiplied by the number of locations in a given practice and is often overlooked because it doesn’t appear as a line item on the practice’s profit and loss statement.

Lean: The philosophy and methodology

In his efforts to improve manufacturing and logistics, Taiichi Ohno of Toyota developed what later would be referred to as Lean, the Toyota Production System (TPS.)3 Lean is a methodology that provides tools and techniques to systematically reduce waste of all kinds, including excess inventory and time from processes, thereby increasing efficiencies and improving profits.

Since its inception, the Lean methodology has proven effective for businesses in nearly every industry, of all sizes, and for almost any business process. Some of its well-known adopters include Nike, Amazon, and Motorola, which are reported to have saved a collective $16 billion due to their efforts.4 While dollar amounts may vary, the potential benefits for dental practices of all sizes are no less meaningful.

Lean inventory management practices ensure that you run lean and efficiently, buying just what your dental practice needs to operate, without the extra “fat” that strangles cash flow and bogs down your balance sheet. Adopting a Lean mindset and incorporating it in a systematic and simplified way can improve operational efficiencies, save on supply costs, and ease workloads.

Operationalizing the Lean philosophy

Stocking the right products, in the right quantities, and bought at the right price is the ultimate goal. As the Lean philosophy is focused on building efficiencies and reducing waste of all kinds (especially time), its methodologies are straightforward, repeatable, and measurable.

Here are some of the fundamental definitions and concepts that dental practices can implement to realize the benefits of the Lean philosophy.

First-in, first-out (FIFO): FIFO is an inventory process where goods are used in chronological order, either by received date or expiration date. Although it’s a good practice for all goods, FIFO is key to avoiding waste of perishable items, including dental anesthetics and other products with expiration dates. The easiest way to implement FIFO is a physical system where the newest items (or items with the latest expiration dates) are added at the back, and the oldest are kept in the front.

Kanban: Kanban (Japanese for billboard or signboard) is a pull system, meaning it creates a demand signal based upon usage rather than forecasted demand. Grocery store shelves are the most commonly recognized example of a Kanban system. Many dental practices may choose to implement a tag-based process as part of this system.

Kanban also incorporates FIFO as new products are stocked from the back and practice staff pull from the front. As Kanban is a demand-centric system, it helps avoid bottlenecks or pileups of inventory in case of a slowdown or sudden stop in use. As a method for physically managing inventory, Kanban is not reliant on accurate inventory numbers and triggers purchasing action. It can help avoid stockouts due to inventory discrepancies.

A comprehensive Kanban system combines data from demand signals, order lead times, reorder points, and reorder quantities to inform purchasing decisions.

Order lead time: Order lead time is the estimated length of time, typically in days, between placing an order and receiving it. Lead time is a critical input in calculating safety stock and reorder points.

Safety stock: Safety stock safeguards your continuity of business by holding a “buffer” of inventory, just in case. While the Lean philosophy seeks to minimize the amount of safety stock a dental practice holds, this extra stock mitigates the risk of stockouts due to unforeseen events (such as late delivery, inaccurate inventory levels, or increased use). Safety stock should be calculated separately for each item, as usage volumes and lead times may vary by product.

Reorder point (ROP): ROP is the level of inventory that triggers a replenishment order.

Reorder quantity (ROQ): ROQ is a preset order quantity for placing replenishment orders.

Physical inventory count: Physical inventory count is the process of physically verifying the quantities held in inventory. During a physical count, each item is counted and recorded manually or with a barcode scanner, which is then updated in the system to identify discrepancies and ensure accurate stock levels are maintained.

Cycle count: A cycle count is an inventory auditing procedure where physical inventory counts are broken down by product type, allowing for the distribution of counts over time versus all at once. For example, you may count gloves one week and masks the next. These smaller subcounts cause less disruption to daily operations and allow you to tailor your focus to your most critical items, either by volume or dollar value.

Leveraging technology

In the face of competing priorities spread across a limited number of team members, it’s not surprising that many dental practices find it difficult to implement Lean methodologies without the support of technology. Leveraging technology, such as a cloud-based procurement platform that combines an inventory management module with barcode scanning, allows practices to establish a streamlined and systematic approach to lowering costs through Lean principles. The resulting efficiencies free staff to focus on patient care and help the practice enjoy improved cash flow and profitability.

Technology also allows you to aggregate your data so that you can analyze your purchasing habits for better decision-making and leverage your purchasing volume for better pricing and optimum service levels.

An effective dental practice inventory management software should:

Track the inventory currently in your practice.
Support logging product expiration dates.
Support ROP, ROQ, and safety stock levels.
Facilitate the receiving of products into the inventory counts.
Facilitate the depletion of inventory levels as products are used.
Effortlessly combine ROP, ROQ, and current inventory levels to initiate the purchasing process.
Include visibility into what is already on order (so it isn’t ordered again).
Offer barcode scanning to improve data accuracy and efficiencies, including support for unique device identifier (UDI) barcodes.
Provide analytical reports for data-driven action plans.
Allow for multilocation management so you can standardize processes and leverage efficiency across all of your locations.

The benefits of inventory management

Lean inventory management principles are rooted in the Kaizen (Japanese for “continuous improvement’) philosophy, involving small but consistent improvements that bring incredible long-term value. In a dental setting, striving for simple, repeatable processes that can be adapted over time impacts the bottom line, allowing all members of the team to achieve great wins together. Inventory management best practices are the building blocks of a healthy cash flow and balance sheet. Poor management of your dental supply inventory can increase labor costs and ultimately frustrate employees. Deficient processes increase the risk of a stockout, resulting in reduced production rates and service levels.

Proper inventory management is the framework that allows for improved financial control and procurement practices, ensuring you pay what you should, avoid maverick spend, and remain within budget. It’s the basis for an intuitive, systematic ordering process and a procurement strategy that leverages your purchasing volume to effectively negotiate with suppliers and keep them accountable.

References

1. What is inventory management? Intuit Quickbooks. Accessed December 10, 2020. https://www.tradegecko.com/inventory-management
2. Inventory carrying costs. Investopedia. Accessed December 10, 2020. https://www.investopedia.com/terms/c/carryingcostofinventory.asp#:~:text=Inventory
3. Ohno T. Six Sigma definition. LeanSixSigma.com.Accessed April 7, 2021. https://www.leansixsigmadefinition.com/glossary/taiichi-ohno/
4. The History of Six Sigma. ISIXSIGMA. Accessed December 10, 2020. https://www.isixsigma.com/new-to-six-sigma/history/history-six-sigma/

DANIEL M. TRAUB serves as vice president of product at Method Procurement Technologies. Widely regarded as an expert on procurement technology and process optimization in the dental space, his experience spans more than 25 years. Prior to joining Method, Traub founded a procurement analytics provider, led one of the nation’s first e-procurement programs in higher education, and held leadership roles with Ernst & Young, Cap Gemini, and Jaggaer. For more information about Method Procurement Technologies, visit methodusa.com, call (800) 742-2100, or email [email protected].