(About Abraham Lincoln) Any man who would walk five miles through the snow, barefoot, just to return a library book so he could save three cents - that's my kind of guy- Jack Benny
I gambled at the crap table all night and finally lost $8, but during that time the house gave me four drinks and two cigars, so it was still a lot cheaper than renting a room – Jack Benny
I have a little story for you. Back in the early 80’s, a dental office building in the Salt Lake Valley had a fire. At the time, I was merchandise manager for Deseret Dental Supply, a dental distributor owned by my brothers and I.
The day after the fire, we arranged for the affected practices to meet in our conference room with their insurance adjusters. As they met, we contacted dental practices in the area and arranged for space for those dentists to continue practicing while they were re-building.
We went through the offices with the insurance adjusters, helping them with valuing the equipment and merchandise that had to be replaced. After several months, the practices were up and running with remodeled offices and new equipment.
Now, of course we were hoping for a quid pro quo, and there was one; the practices purchased what they needed to get up and running from us. There was a great deal of “good will” cost on our side, as well as on the part of the manufacturers of the new inventory and equipment. We worked with the vendors to provide significant discounts, which, if you understand math, lowered our possible revenue on the deals, as well.
Now, we get to the punchline. A few weeks after the dental offices re-opened, my uncle, who had spent decades in Pharma sales and who was now an account manager for us, went into one of the offices which used Impregum impression material, and said, “Dr. ____, we have the bulk (30 unit) pack of Impregum on special for $499.” I am not exaggerating when I say that, without even looking up from the patient, the Dr. responded, “I can get it $5 cheaper from Schein.” My Uncle, a Pearl Harbor vet, by the way, spun on his heels, left the office, and never went back.
Now, we could talk about any number of lessons implicit in this little story, but here is the one I want to focus on: Hidden Cost.
Let’s leave aside the hidden costs incurred by Dr. X’s practice that were mitigated by the value-added service provided by his dental supply house. Let’s just talk about this: How much was his time worth?
I don’t know what the practice's production was (by the way, he reduced it by at least 6 patients: I, my wife, and my 4 kids), but, just to make the math easy, let’s assume that, in today’s dollars, it was a million-dollar practice.
Assuming overhead of 65%, he was taking home $350,000. That makes his time worth, using a 40 hour week and 48 weeks/year worked, 40x48= 1,920 hours per year; into $350K = $182.30/hour.
Now then, how many hours per month would one have to study the Schein catalogue and circulars, not to mention, I’m sure, Darby, etc. to be that familiar with the pricing? Even if he had an eidetic memory, it must have been worth hundreds of dollars’ worth of his time; not to mention that browsing practice management articles over lunch could have been much more profitable and beneficial for his practice. That is quite the “Hidden Cost”. I would assume that his assistants were making around $25/hour in today’s money. For crying out loud, if you’re going to waste time, do it at a rate of $25/hour and save $157/hour! Let them enjoy the privilege. By the way, I’ve had auxiliary personnel tell me that the doctor makes them take the catalogue home at night and shop it on their own time or during their un-paid lunch hour. Would it be too much to expect that they should be then be paid a bonus based upon saving the practice money on price?
As long as I’m reminiscing, I have another story for you. When I first started in the dental industry, back in 1976, I was given a gallon of IFP and told to go sell it. IFP is an x-ray developer that, back in the day, would develop and then fix an x-ray in the screaming time, if I remember correctly, of 3 minutes. Mind you, this is back in the days of darkrooms in dental offices.
I went into a Pedo practice in Salt Lake City and asked the receptionist if the doctor had time to see a new product. She asked me to have a seat. A few minutes later, I was summoned into the lab in the back of the office. The doctor asked me what I had. I handed him the gallon bottle of IFP and began to tell him about it. I finished with the kicker of telling him, that, “as time is money”, the cost of the product would be more than offset by the speed in which he could now develop an x-ray.
All of a sudden, with a flourish that would have made the “Master Thespian” proud, he put his hand up and said, “Wait a minute! Who are YOU to come in here and tell ME that time is money. You don’t know me and you don’t know that time is money in my practice!” Then from 6 feet away, he threw the gallon of IFP at me and told me to get out of his office. (By the way, thinking maybe he’d had a fight with his wife or something like that, I summoned up my courage and went back a few weeks later to tell him about Phasealloy. In a replay of the 1st experience, he let me go through the entire presentation before, “Wait a minute! If I want to know about alloy, I can read about alloy! I don’t need YOU to come in here and tell ME about alloy! Now you can take this (as the 10-oz box of silver alloy came sailing at my head) and get out of my office!” Twice was enough for me – I never gave him the benefit of my company thereafter.)
In summary, there is more to the cost of inventory than price; opportunity cost, carrying costs, and hidden costs must all be accounted for. A well-managed inventory control system will help a practice more than overcome any differences in prices by controlling all those costs that seem to be just pin-pricks in the dam, but, taken together, contribute significantly to a large collective leak in the bottom line.