Lean Practice

Management

Jorge L. Colón, DVM, MBA

Lean Management

• Reduce waste

• Maximize value

Veterinary Practice

• Services

• Receivables

• Inventory / Lab

• Records

• Obligations

• Facility

• Employees

Income Statement

Revenues

- Cost of Goods Sold

Gross Profit

- Operating Expenses

- Depreciation

Operating Profit (EBIT)

- Interest Expense

Profit Before Taxes (EBT)

- Taxes

Net Income

Operating Expenses

Overhead

Revenue Generator

Salary

Revenue Generator

Benefits

CE

Insurance

Employment Taxes

Mileage

Retirement

Support Systems

Tech

Rent

Biz Insurance

Equipment

If Dr. A increases revenues

and reduces expenses, the

practice’s profits go:

Up or Down?

If Dr. A’s profits go up,

the practice’s value goes:

Up or Down?

Revenues (50K/month) $600,000

COGS (30%) (180,000)

DVM Salary (80,000)

DVM Benefits (25,000)

Overhead (35%) (210,000)

Depreciation (25,000)

Interest (2,000)

Profit $78,000

• Profit was $78K

• How much can Dr. A take home as distribution?

• A) $78K

• B) > 78

• C) < 78

• D) I don't know

Income Statement

Revenues

- Cost of Goods Sold

- Operations

- Depreciation

- Interest Expense

- Taxes

= Profit

Cash Flow

Profit

Depreciation

∆ Payables

∆ Receivables

∆ Net Inventory

∆ Debt

= Cash Flow

Profit is an Opinion,

Cash Flow is a Fact

Profit

Depreciation

A/P (inventory)

Debt Increase

A/R (40% of sales)

Inventory

Debt Reduction

CAPEX

Net Cash Flow

$78,000

25,000

1 mo 15,000

25,000

2 mo (40,000)

2 mo (30,000)

(5,000)

(25,000)

$43,000

LEAN

$78,000

25,000

2 mo 30,000

25,000

1 mo (20,000)

1 mo (15,000)

(5,000)

(25,000)

$93,000

Dr. A’s Distribution?

Sales

• Pricing

• ValueCompetition

based on price

transfers the

power to the

consumer

Address Revenues

Breakeven=Fixed Costs

(Revenue −Variable Costs)

Variable Costs

Producer + Benefits

Production $600,000

DVM Salary (80,000)

Benefits (25,000)

Net $495,000

DVM’s True Cost 17.5%

Variable Costs

Activity Based

Costing

• Allocate expenses

• Consumption

Overhead + COGS

• % of revenue

Variable Costs

DVM 17.5%

COGS 30%

Overhead 35%

Total 82.5%

Procedure Price

(Revenue − Variable Costs) =Fixed Costs

Breakeven

(X − 0.825X) =$35,000

5 ∗ 5 ∗ 50 ∗ 5

X =5.6

0.175= $32

(X − 0.825X) =$35,000

5∗5∗50∗5=

5.6

0.175= $32

(X − 0.825X) =$35,000+$8,750

5∗5∗50∗5=

7

0.175= $40

(X − 0.825X) =$35,000+$8,750+$42,583

5∗5∗50∗5=

13.8

0.175= $79

Value Creation

• Proper revenues

• Value in service

• Lean management

Customer Satisfaction

• Experience with Outcome & Process

Expectancy Disconfirmation Perspective

• Expectation vs Perception

• Consumer’s Perceived Quality → Differentiation

• Differentiation → Value Provision

What question

did she not ask?

You don’t leave the barn till all my

questions are answered

No one had ever paid attention or

listened to my needs before

You are too punctual

I wish my personal Dr. cared about

me as much as you care about my

horses

Deliver a level of customer service

where new biz leads to growth

instead of replacing lost sales.

Waste

Proper Record Keeping Improper Record Keeping

Per Procedure

Revenue$100 Work Needed to Break Even Sum

# of Procedures 1 1 1 1 1 1 .714 5.714

Revenue $100 $0 $100 $100 $100 $100 $71.4 $471.4

Exp 82.5% (82.5) (82.5) (82.5) (82.5) (82.5) (82.5) (58.9) (471.4)

Available Profit $17.5 (82.5) $17.5 $17.5 $17.5 $17.5 $12.5 $0

Equipment Purchase No Equipment

Revenue $600,000 600,000 $600,000 600,000

COGS/Sal/Ben/OH (495,000) (495,000) (495,000) (495,000)

Depreciation (25,000) 0 0 0

Interest (1,847) (1,495) 0 0

Pre-tax Profit $78,153 $103,505 $105,000 $105,000

Depreciation 25,000 0 0 0

A/P 30,000 30,000 30,000 30,000

Debt Increase 25,000 0 0 0

CAPEX (25,000) 0 0 0

Debt Decrease (4,236) (4,588) 0 0

A/R (20,000) (20,000) (20,000) (20,000)

Inventory (15,000) (15,000) (15,000) (15,000)

CF $93,917 $93,917 $100,000 $100,000

Tax (26,673) (32,620) (32,979) (32,979)

Cash after Tax Paid $67,244 $61,297 $128,541 $67,021 $67,021 $134,042

Total Cost of Inventory

• Purchase Costs (PC)

• Order Costs (OC)

• Holding Costs (HC)

• TAIC = PC + OC + HC

Purchase Costs

demand * unit cost

• Economies of scale

• Specials and

promotions

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

10

50

90

130

170

210

250

290

330

370

Units per Order

Order Costsdemand

order quantity* order cost

• Opportunity Cost

• Employee

• System Mgmt

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

10

50

90

130

170

210

250

290

330

370

Units per Order

Holding Costs

order quantity

2* holding rate * unit cost

• Item purchased but not

consumed

• No revenue

• Cash outflow

• Profitability $-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

10

50

90

130

170

210

250

290

330

370

Units per Order

Holding Rate

• Physical Storage

• Shrinkage / Damage

• Expiration

• Taxes / Insurance

• Forgone opportunity of tied-up capital

ABC System

• Financial impact

• A = top 80%

• B = next 15%

• C = remaining 5%

ItemUnits

Consumed

Current Per

Unit Cost

Dollar

Volume for

Period

Percent of

Dollar

Volume

Cumulative

Percent Item Class

Total Period Dollar Volume $34,166.10 100.00% 100.00%

Plasma 49 $125.00 $6,125.00 17.90% 17.90% A

Hormone 28 $189.68 $5,311.04 15.50% 33.50% A

Vaccine 89 $35.78 $3,184.42 9.30% 42.80% A

Hormone 98 $30.09 $2,948.82 8.60% 51.40% A

Fluids 411 $5.08 $2,087.88 6.10% 57.50% A

Repro 9 154 $11.86 $1,826.44 5.30% 62.90% A

Antibiotic 5,430 $0.32 $1,737.60 5.10% 68.00% A

Hormone 41 $35.93 $1,473.13 4.30% 72.30% A

Dewormer 119 $11.31 $1,345.89 3.90% 76.20% A

Tranq 69 $17.01 $1,173.69 3.40% 79.70% A

Antibiotic 23 $45.55 $1,047.65 3.10% 82.70% B

Repro 4 62 $14.40 $892.80 2.60% 85.30% B

Repro 1 46 $19.00 $874.00 2.60% 87.90% B

Vaccine 64 $13.23 $846.72 2.50% 90.40% B

Repro 7 55 $11.24 $618.20 1.80% 92.20% B

Hormone 8 $75.00 $600.00 1.80% 93.90% B

Antibiotic 3 $187.90 $563.70 1.60% 95.60% C

Repro 5 26 $21.62 $562.12 1.60% 97.20% C

Antibiotic 3,480 $0.15 $522.00 1.50% 98.80% C

Antibiotic 2,500 $0.17 $425.00 1.20% 100.00% C

What Can We Control?

Purchase Price

Order Quantity Opportunity

Holding Price Quantity Opportunity

Ordering Strategies

Fixed Time Interval

• Periodic review

• Timed order

• Target inventory

Fixed Order Quantity

• Constant review

• Re-order point

• EOQ

Economic Order Quantity

(2 ∗ demand ∗ order cost)

(holding rate ∗ unit cost)

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

10

40

70

100

130

160

190

220

250

280

310

340

370

Units per Order

Purchase Cost

+ Order Cost

+ Holding Cost

= Total Actual Inventory

Cost

Example

Demand 360

# of Months 5

Days of Lead Time 2

Cost per Unit $7.65

Sales Tax 6%

Cost per Order $5

Holding Rate 30%

Per Week EOQ

Order Quantity 18 59.6

Purchase Costs 2,919.24 2,919.24

Ordering Costs 100 30.20

Holding Costs 9.12 30.20

TAIC $3,028.36 $2,979.65

ROP 4.8 units

Savings $48.72 (1.6%) = 6 units

$2,979

$3,028

Revenue $70 $70 $70

DVM 17.5% (12) (12)

COGS 3@ $7.65 + tax (24) 0

Overhead 35% (25) (25)

Profit $9 $33

Offer: 11/1

Buy 330 @ 7.65 2524.50

Get 30 free 0

New Cost per Unit $7.01

EOQ Offer

Q 59.6 360

PC 2,919.24 2,675.02

OC 30.20 5.00

HC 30.20 167.19

TAIC $2,979.65 $2,847.20

Savings $132.45 (4.7%)

$2,979

$2,847

Lean Goal

• Satisfy needs

• Shelf time

• Avoid shortage

• Minimize TAIC

Where do I start?

• ABC

• Price

• Estimate Demand

• Order

• Cost

• Quantity

• Rate

Implementing Inventory System

• Calculator

• Post-it Note

XYZ

ABC: A

EOQ: 7

ROP: 2

Last $

Demand

Lean Receivables & Payables

• 𝑃𝑉 𝑥 (1 + 𝑟𝑎𝑡𝑒)𝑡 = FV

• 1,000 x (1 +.08

12)3 = $1,020

Lean Cash Conversion Cycle

• 𝐷𝑎𝑦𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐷𝑎𝑦𝑠 𝐴𝑅 − 𝐷𝑎𝑦𝑠 𝐴𝑃

Vendor February Statement

Payable March 8

Cash Out

March 8

Vendor February Statement

Payable March 8

Vendor charges CC on March 8

CC closes month on March 10

CC's March Statement

Payable March 25

Cash out

March 25

Vendor February

Statement

Payable March 8

Vendor charges CC on March 8

But CC closed month on March 5

Vendor's March charge

falls on

CC's April Statement

CC's April Statement

Payable April 25

Cash out

April 25

Aggregation of Marginal Gains

Dave Brailsford – Team Sky

“But Brailsford and his team didn’t stop

there. They searched for 1 percent

improvements in tiny areas that were

overlooked by almost everyone else: pillow

that offered the best sleep, testing for the

most effective type of massage gel, the best

way to wash their hands to avoid infection.

They searched for 1% improvements

everywhere.”

TDF 2012

70% Gold

2012

TDF 2013,

2015, 2016,

2017, 2018

What Have We Learned

Costs Svc Value Revenues

Efficient No Waste Profits Cash

Biz Value

Jorge L. Colón DVM MBAPO Box 11631 Lexington, KY 40576

jorgecolondvm@me.com

www.linkedin.com/in/jorgelcolon

www.jorgelcolon.com