# Thread: 5 Steps to an optimum product mix

1. ## 5 Steps to an optimum product mix

Check out my blog post on how to prepare your product mix at http://bit.ly/info/bZUyr6

2. Originally Posted by Richard Hom
Check out my blog post on how to prepare your product mix at http://bit.ly/info/bZUyr6
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GrandRounds4ODsWhat frame and how many frames to buy? 5 Steps to an optimum product mix http://bit.ly/bZUyr6 #visionweb #optometry #optical #optician

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3. Dr Hom,

I was under the impression your office didn't have a dispensary? How long have you been dispensing? Are you still practicing low vision?

4. YrahG,

I don't dispense still. I was just musing over a simple approach to a mathematical model that i had played around for an inventory mix based upon optimal production planning. In a later installment, I will discuss the application of some other notions as the Cobbs Douglas Equation, isocost lines, effects of price discounts on revenue and elasticity of price demand.

Richard Hom, OD, MPA Candidate
http://grandrounds4ods.com

5. How will you factor in things like fashion, style, and discontinuation of a product. I don't see how a widget model can represent custom made eye wear. Don't get me wrong I think approaching the scenario as a mathematical problem is very interesting, but there sure is a lot left to the imagination.

6. YrahG,

The approach is merely one to stratify frame categories by price. You can use this approach with one variable or more than 1 variable. If you're using more than one variable, then the spreadsheet approach isn't going to work and you'll have to derive the price elasticity demand and marginal utility equations by regression and then apply either a derivative or partial derivative to isolate one variable against the other.

The spreadsheet model or this approach isn't meant for everybody. As I started out in the blog, you have to ask yourself what should I buy and what mix should I have. If you don't have those questions in your head, then you don't need to use my approach.

Respectfully,
Richard Hom, OD, MPA Candidate
http://grandrounds4ods.com

7. We use an inventory turnover report generated from our database that consistently outperforms our reps recommendations and our own speculations. It is quick and to the point.

Our report takes any given set, whether it be one manufacturer (company X, y or z, etc.) or one style (men's metal, women's zyl, youth's metal, sun, safety, etc.) and tallys the number of board spaces allotted to each frame model in the set. It tells us when we first received one of that model and when we last received one of that model. The program documents the number of units of that model sold within a given time frame (usually 12 mos.), the unit cost (after discounts) and the unit board retail price. From there it calculates the profit per unit for that model and the number of product turns per board space over the time frame chosen. The final result is the profit per board space for a particular model. It will also report the averages of each of those stats so we can compare vendor performance based on their average profit per board space.

This method allows niche items to prove themselves nicely because if you don't have a large enough quantity on hand of any particular type, then that particular type will turnover too frequently, indicating that more of that type are required in the mix. The same is true for slow items. Any frame that cannot stand out from the crowd will have poor profit per board space and can't pay it's rent.

My reps are my allies or we can't have a relationship. When they come in, we shake hands and share jokes. We then look at the turnover report and they know that if their turnover averages are poor that their board allotment will be reduced. If their stats are good, they'll earn more board space. Eventually, the process weeds out the bad and self-manages the product mix.

Example:
All frames from "Safilon"
One model in the list is the TXM1141
Board spaces allotted = 3
Unit cost = \$58.76
Board retail = \$176
Profit per unit = \$117.24
Number sold over 12 mos = 5
Turnover = 5/3 = 1.667
Profit per board space = 1.667 x 117.24 = \$195.40

That one figure, profit per board space, tells you what you need to know. From there you can easily isolate better performers and make clear decisions about which products to keep or let go. If a given line's overall figures average better than most, then their board spaces stay constant or increase. If the overall line's average is poor, it's time to reduce their inventory and give the space to the lines that earn their keep.

This has been a very successful approach for us for some time. I'm happy to hear from anyone regarding areas for improvement. :)

8. icare,

Thanks. The inventory turnover technique is good but it cannot visualize for you the marginal or incremental improvement or "optimal" level of an additional sale. In some respects, the most firms want to sell so long there is an increase in profit, but would not sell where it costs more than than the product sold. This incremental information is the key.

9. Originally Posted by Richard Hom
icare,

Thanks. The inventory turnover technique is good but it cannot visualize for you the marginal or incremental improvement or "optimal" level of an additional sale. In some respects, the most firms want to sell so long there is an increase in profit, but would not sell where it costs more than than the product sold. This incremental information is the key.
I can see the incremental approach if you have an unlimited customer base and you're not concerned about overfilling the customers' needs. Thank you for your insight, Richard.

10. icare,

Very nice approach doctor, the turn rate is what I have successfully used as well in all practices I have been in. Dr Hom's approach as interesting as it seems might be more theoretical than practical, but I am always interested in different ways of doing things so I will keep a skeptical eye on it. I am not always interested in the highest profit per board space though, sometimes I carry unique and weird frames knowing that it will probably never sell instead I try to use them as center pieces or conversation starters. Everyones got at least one in the shop everyone tries it but no one buys it I chalk them up as display pieces or advertising if you will.

11. icare,

Actually, an infinite supply of patients is not a consideration. I am focusing on the optimum mix(!) of frames. The question, what should I buy to fill my frame board that will give me the highest percentage profit and that mix that gives the most revenue. This means that this approach works whether you have 10 or 100 patients. What you're looking for is the proper inventory level that give you that incremental change in profitability or profit.

12. Thank you YrahG,

It may be theoretical in the practice b/c no one has used it before, but I like to talk about equipping the small business owner with the same tools that the big chains have. Right now this approach is being used to set electricity and water prices throughout the United States.

13. Originally Posted by Richard Hom
icare,

Actually, an infinite supply of patients is not a consideration. I am focusing on the optimum mix(!) of frames. The question, what should I buy to fill my frame board that will give me the highest percentage profit and that mix that gives the most revenue. This means that this approach works whether you have 10 or 100 patients. What you're looking for is the proper inventory level that give you that incremental change in profitability or profit.
This is a very beneficial discussion, Richard. Thanks for your insight. Try to go with me on this discussion, if you may -

You're correct that using the term infinite was a poor choice. Of course, there is no infinite supply of patients. The point I'm trying to make is that the large commercial chains have never really aligned their marketing plans with the concept of satisfying the individual patient. They may say that the customer comes first, but in actuality it is the customers who come first. Large chains are always concerned with immediate dollar volume and continue their attempts to maximize every aspect of the singular sale experience, as if there may never be an additional sale experience in the future. They are focused on short term sales and not long term. Their promotional plans are centered on drawing a steady flow of new patients even at the risk of undermining those that are loyal over the long term. Consider how readily the large chains disenfranchise their professionally certified opticians and OD 'employees' and how the eyewear service after the sale inevitably fails as a result of executive cost cutting measures.

In private practice, we don't want to routinely maximize immediate incremental profit at the risk of losing long term incremental profit. Maximizing patient loyalty is tantamount to success in individual practices. Maximizing second pair sales will yield a set of patients who will go longer between frame replacements, spend less time in our offices and wear more dated styles that are more difficult to service. Many second pair sales, for example, are 'gimme' or gimick driven and often of inferior quality in order to meet a profit margin. If private practices load up their patients with such items, the patients will be far less satisfied. Those patients won't be back as often and they are more likely to pursue similarly perceived big chain solutions against which smaller offices cannot compete.

So, in reality, I'm not convinced that we all wish to incorporate the same set of tools that the big chains use in managing their boards. In actuality, the big chains ought to consider incorporating the tools used by smaller offices. The obvious obstacle large chains face by incorporating such measures is that their stockholders are always more interested in short term gains. The net worth of a chain store in 5, 10 or 20 years is not the primary focus of its business model.

14. Dear icare,

I'm actually not in disagreement with your argument about patient management and care. The model isn't about trying to sell multiple pairs to patients. It is strictly about the mix on your board that will yield the maximum incremental profit. Of course, this model will not account for unique requirements . It wasn't supposed to.

Respectfully,
Richard Hom OD MPA Candidate
http://grandrounds4ods.com

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