If you have never read any of my series of articles on HPM (Holistic Practice Management) then this is the one you need to pay attention too!
If you did not know, 60% of your revenue is from your optical (Prescription Frames, Lenses, and Contact Lenses).
This number is steadily increasing year over year because insurance companies are giving the providers less reimbursement for the same procedures they did in the past.
How can you grow your practice with the shrinking pool of money? The answer is in your optical! Knowing how to strategically maximize profits in this category (specifically prescription frames) of your practice will help you overcome the current and future business conditions.
The way to do this is through Forecasting.
People see forecasting inventory as something ambiguous/derivative based.
I want to un-pack what forecasting can be so you can establish a forecasting model for your practice and garner those gains I previously spoke about.
In part one of the article I will first establish the key inputs into your forecasting model.
The reason I do this is because I want to create a rock solid foundation so when we put these inputs/numbers within your forecasting model, you get the most robust information pushed out. As one of my economic teachers taught me “Trash in, Trash out” which means if you put trash information into your model then you will get the same trash information out.
In part two of the article we will run the model with the various inputs and I will give you the tools (formulas) to have your own forecasting model for your practice.
So what is forecasting?
Simply put, it is the art and science of predicting future events. As a previous sales representative for prescription eyewear and lenses I have seen various ways on how people buy product.
The majority of the time (80% to 90%) practices leave these decisions up to people that do not know/understand how to forecast.
I can give you countless stories on why people had bought product from me. Mostly it was because they either liked me as a sales representative or I had the cheapest product to fit their needs. There was no established methodology to make sound business decisions.
Also the people in charge of these major business decisions did not have/understand what forecasting was and how it could maximize their practice positions within the marketplace.
I also had various practices in which the owner (optometrist/ophthalmologist/optician) would make these decisions and still have no methodology to buying frames. I point this out not to place culpability, I want to change your mindset about this important business practice.
Good forecasting is an essential part of the services you provide! If you do not do it properly then you are just throwing your money away.
We first need to understand what type of time horizon you set out for the forecast.
There are three types which include:
- Short-range (0-3 months)
- Medium-range (3months-3 years)
- Long-range (3 or more years)
In this type of scenario, you mostly will use Medium-range.
The reason is because you want to give frame lines opportunities for growth/position in your practice. This does not mean you leave out Short-range because it can help you keep continual audits of each line to see if you want to keep them for the future or change it up to keep your product turning in your practice.
Short and Medium-range forecasts tend to be more accurate than longer range forecasts because the factors that influence demand change every day. Utilizing these two forecasts is basic business practice for HPM Forecasting.
Now we need to understand the Product Life Cycle (Graph 1).
In the graph, you see an average life cycle of product.
If we look at frame lines we know it is a fashionable purchase by the patient. Patients will buy brands because they are popular now and they will look cool within their social circle and beyond.
This makes buying and forecasting your inventory a tough proposition. This also makes your buying decisions tougher because you have to foresee the past, present, and future to fully maximize the potential that a particular line has within your practice.
Forecasts are influenced by the product position within their lifecycle. Having all of this establishes the initial blocks so you can make buying decisions and forecasts based on those buying decisions.
Now that we have stablished this core, you can add the various inputs into this model to make it as accurate as possible.
The first input needed is obtained by looking at your previous selling data of prescription frames for the optical.
Now I caution you not to take all your future recommendations from past events because it does not tell the whole story. Remember this is just a piece of the HPM forecasting puzzle/narrative you are putting together.
Next you survey (questionnaire) your staff that are involved daily in the optical.
Ask questions based on past, present, and future purchases ground upon the practice and the marketplace within your community. These questions build upon your narrative you are building for your forecasting model.
Next, start to look at your schedule of patient load (practice capacity).
This key input is one that practices FORGET.
You already have a set model from the previous patients that have come to the practice. Using the information you have gathered from previous appointments with patients, you can start to look for patterns within your forecast.
An example would be if you know a patient loves certain types of red frames. You have seen this patient for the last three years and every year they buy a red frame. You have an upcoming appointment with this patient for a comprehensive exam, and the purchase of new frames and lenses. From your weekly audits of inventory, you notice that there are no frames that this patient would be satisfied with.
You recently meet with a frame representative that had a frame that would fit this patient’s need. You input buying that frame for her into your model and you wait until she comes in. Upon the patient’s arrival, you complete the clinical work and now you present the frame that you are sure that patient needs based upon their previous history.
Having this push/pull system maximizes your practice value within the marketplace so you are not buying excessive/wasteful frames that will sit on the board.
Just remember that any and all frame lines have real estate within your practice.
That real estate is monetized by the product you place there. If you have chosen the wrong frames for this space then you have missed your fiduciary responsibility to your patients, vendors, and ownership of the practice.
Here is a simple seven step list you can use when you start to forecast.
- Determine the use of the forecast.
- Select the items to be forecast.
- Determine the time horizon of the forecast.
- Select the forecasting model.
- Gather the data needed to make the forecast.
- Make the forecast.
- Validate and implement the results.
In part two of the article I am going to address steps six and seven to give you some formulas to better statically represent your forecasting model.
I am going to attach a simple forecasting model (Graph 2) to give you a preview.
This model was put through 1000 iterations and based upon seasonal buying patterns, standard deviations of 10% for each individual input, and a normal forecasting distribution. Your models can vary based upon your inputs but I like to give you a baseline to establish and understand a simple model.
Render, J. H. (2014). Principles of Operations Management. New Jersey: Pearson.