Nov
2003

L&T 101

By Richard Palmer

What was once considered to be innovative, or at the very least a novel idea, has over the years become far more commonplace for vision care professionals: Establishing an in-office laboratory. Initially, the vast majority of in-house labs were only capable of performing the finishing aspect of Rx lens production. However, continual advancements in technology resulting in smaller, easier to operate machinery has led many vision care professionals to consider establishing a lens surfacing operation.

Whether you’re considering a finishing or surfacing lab, a comprehensive and honest evaluation of a number of critical and vital issues must first be addressed. At a minimum, those “critical/vital” issues to evaluate should include:
•Rationale for establishing laboratory capability in-office.
•Other than edging equipment, what else should be carefully examined?
•What lab functions will my lab be able to perform and what jobs will I have to “farm out” to a wholesale lab?
•How do I measure the effectiveness/profitability of the lab once up and running?
Begin with the reasons you feel an in-office lab is necessary. The reasons may range from providing better service to the patient base to greater control over product quality to a lab being a profit enhancement to the practice. Whatever your reasons are, write them down and objectively start the analysis as to their validity and probable impact on the practice.

Serving the patient base
Let’s assume your lab will consist of only the finishing segment of Rx lens production. From a statistical population of 100 or more previously dispensed Rxs, devise a spreadsheet whereby you can categorize the jobs by lens style; single-vision and multli-focal/progressive lenses. Next, subdivide the single-vision Rxs by lens material prescribed and dispensed (i.e. standard plastic, high-index plastic, polycarbonate, Trivex, glass).

Create a column titled “Service or Delivery” showing the number of days that each particular Rx required makes the roundtrip from your office to your wholesale lab and back. Then subtract the number of days for weekends or holidays. Also show the percentage that each type of Rx and lens material is to the original 100 jobs. We’ll return and make reference to this spreadsheet as we progress forward in the analysis. 

Now let’s consider the nuts and bolts of this or any other lab; i.e. labor costs, insurance costs, equipment costs and an in-house inventory to feed the in-house lab. First, labor costs. Who will do the actual edging, tinting, drilling and/or mounting of lenses the lab produces? Will you have to go on the open labor market and what will that cost, or do you have qualified personnel already on your payroll? Second, examine “insurance” costs. You’ll want to check with your insurance carrier as to the cost in additional premiums regarding insurance on your new equipment and the difference between malpractice insurance and product liability insurance. Product liability suddenly becomes important because with a lab you are, as the FDA states, the “last person to materially alter the product,” hence, you are the bearer of final responsibility.

Equipment costs and the expense of finishing lab accessories will more than likely run $25,000 to $30,000 or more for the patternless edger and a few thousand dollars more for tinting equipment, hand stones, lens groover and other finishing lab essentials. Consult your accountant as to the time frame for depreciation and amortization and expensing of the equipment and lab accessories. Also, your accountant will assist you in determining your return on investment (ROI) and in developing a “P&L” for the lab. You’ll want a P&L strictly for the lab so you can accurately measure the cost effectiveness of the venture.

Managing the Lens Inventory
What about lens inventory? Ask any well-managed wholesale laboratory or any distributor in your town of any product or good and they will tell you that inventory costs are perhaps the single most crucial element affecting the “cash flow” of the business. From a business point of view, those are not lenses in the envelopes and boxes; they are, in all reality, dollar bills with ever-increasing denominations. That being the case, you will need to determine not only which lens materials and indices to stock, but also the range of foci within a specific lens product category to have on hand. And of course, the dollar amount of the initial inventory investment and, based on your patient records, the rate of inventory turnover that can reasonably be expected.   

Look back at your spreadsheet to analyze your patient and Rx base. Determine what percentage of Rxs considering such factors as lens material/index, lens coatings, frame mounting, grooved, three-piece rimless, would you have been able to fabricate in-house using available inventories and personnel? Conversely, how many Rxs would you still farm out to the wholesale lab even though you have finishing capability within the office? These two percentages become very important when determining cost effectiveness of the lab operation.

At this juncture, you have a great deal of information at hand. Projected equipment lists and costs, estimates of labor and added insurance expenses and possibly even estimates of plumbing and electrical work required in setting up the lab. Again, with assistance from your accountant, now is a good time to make “best estimates” of your operating costs for the lab.

What’s Your Operating Philosophy?
This is also a good time to determine an operating philosophy for the lab. Will you treat the lab as a cost center or a profit center? Either way, the lab should have its own operating statement projecting its own costs and operating margins as it “sells” completed eyewear via an established price list to the retail dispensing part of your business. Your lab should also operate under the same policies regarding returns, allowances and warranties that your current full-service wholesale lab grants. An accurate apples-to-apples measuring of effectiveness is step one in managing the total enterprise.

There are still two important questions that need to be answered. With no lab on the premises, you and you alone (plus your staff) perform the industry’s critical third-party independent quality control function that bridges the gap between fabricating lab and eyecare recipient. Pledge to yourself that identical standards and criteria of product quality, acceptance and rejection will prevail if and when an in-house lab is established.

Pledge number two: You’ll continue to prescribe specific lens materials for Rxs because they are best for the patient, even though your lab does not have the capability to edge that material and the Rx will have to be ordered “Rx complete” from your wholesale lab.     

Whatever you decide about establishing an in-house lab, base it on sound reasoning derived from statistical data that reflects the reality of your practice. Seek advice from other professionals, fellow eyecare providers (those with a lab and those without), your accountant or financial advisor and insurance providers, to name but a few valuable resources that are available.

This may appear to be a lot of analysis for putting in an edger and to that extent, you are correct. However, to make a decision that will alter your fundamental business practices and operations, to make an investment of upwards of $40,000, to possibly require additional personnel and to assume additional business and liability risks, this is not a lot of homework to do. Indeed, it is absolutely essential.

Richard Palmer is founder and president of Practical Engineering LLC, a Minneapolis, Minn. consulting firm specializing in
ophthalmic production.

 

|