The Low Hanging Fruit: Key Procurement Performance Metrics for the Dental Industry

April 18, 2023

Procurement is the low-hanging fruit.

Increasing revenue may get all the glory, garnering the attention of dental organizations looking to increase profits and scale—however, procurement is the low-hanging fruit it seems everyone keeps forgetting about, and to the great detriment of profits.

Driving patient traffic, clinical results, patient experience, case acceptance, marketing—offices looking to scale often focus on the revenue side of things. But if we take a moment to do the math, increasing production may come with limited results.

Let's say you grow your business to between $800 to $1million in production. IF you can grow to that number all without hiring, then after you pay some expenses, supplies, and other costs, the balance of that growth makes it to your bottom line.

But what happens if your business doesn't run effectively, or has simply reached its capacity, and to reach that $800 to $1million in production, you now have to hire new staff? Let's estimate that employees' salary at $50,000 per annum, that comes right of those expected profits. Worse yet, increasing revenue is a costly venture that comes with no guarantee. It's a roll of the dice, with your earnings on the line.

And that's just on the "soft" side of things.

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But now, let's flip the script. Say you choose to focus on transforming your procurement processes, finding efficiencies while reducing the cost of your dental supplies? Well, suddenly, doing business costs you less. On the "soft" side, the day-to-day running of the business now requires less employee time, freeing up your staff to focus on increasing those production rates. On the "hard" side, your supplies cost you less, immediately improving your bottom line, and unlike revenue, it's dollar for dollar. So when you DO increase your production, that production is more profitable.

Suddenly, focusing on procurement seems to make good business sense, doesn't it? And best yet, it doesn't have to be either-or. If you have the resources, go ahead and improve your procurement practices while you strive for growth. Just don't forget about procurement, the low-hanging fruit, and sure bet that after a quick and easy implementation with a low barrier to entry guarantees improved profits and a fast ROI.

On that note, let's take a look at some of the key procurement performance metrics you should be monitoring so you can make sure to improve and fatten up that bottom line.

Overhead Costs

Overhead costs impact all aspects of your business. Want to know if you can afford to hire that new dental assistant, market your dental organization so you can increase revenue, or buy the dental supplies you need?

Estimating and forecasting your overhead costs should play a significant role in informing business decisions.

Non-labor expenses, such as dental supplies that are necessary for running a dental practice (referred to as overhead costs), are an integral part of your business plan, which is required to secure loans or grants from investors or loan institutions.

But what constitutes a "healthy" overhead cost, what do they consist of, and how can you calculate them?

Firstly, there are two types of overhead costs, fixed and variable. Fixed are, not surprisingly, fixed, meaning they do not change regardless of your production rates. They consist of things like salaries and payroll, office rent or lease, utilities, and administration costs such as accounting or legal. In other words, it's an expense related to the running of a practice that doesn't fluctuate. And as they don't vary, they're easy to budget and account for.

Variable expenses (you guessed it!) vary month-to-month. They include items such as dental and office supplies, services, and marketing costs. Due to their variability, variable expenses are more difficult to budget. A best practice is to take your average over your fiscal year and make any adjustments for known changes, such as the significant purchase of assets or large upcoming promotional events.

When it comes to your dental supplies, knowing your purchasing habits, supply requirements, and what you're likely to spend on a monthly basis empowers you to find opportunities for improvements, highlighting where you may be able to drive out costs and make better buying decisions for your business.

Number of Suppliers

As we stated in The Dental Procurement Lifecycle Explained, it's important to consider how many suppliers you want to work with, keeping in mind that every purchase order comes with its own costs. From issuing and placing orders to receiving shipments and paying invoices, each step of the procurement lifecycle takes time out of your employees' day and, therefore, comes at a cost.

However, the number of suppliers you choose to work with affects your efficiencies, but it could also impact your supply costs. Manufacturers and distributors like to take advantage of economies of scale. Having reliable business, they can count on (and therefore make and buy products knowing it will sell) or streamlining logistics or other workflows allows them to work efficiently and, therefore, increase profits.

By controlling the number of suppliers you work with, you can better leverage your purchasing volumes through Request for Quotes (RFQs), negotiating special discounts, or simply buying at larger price breaks.

Knowing you're working with limited preferred suppliers, or worse, are single-sourced, gives little motivation to vendors to offer you better pricing and top service. To be frank, they're confident they're getting your business without it, so why would they bother? Creating the right strategic competitive supplier landscape ensures suppliers continue to fight for your business and offer you the best possible price to gain it.

To create this competitive environment while maintaining your efficiencies, we suggest sticking to 2-3 main distribution suppliers. By leveraging their purchasing power with a limited number of vendors, dental organization can get better pricing and more favorable contract terms and will establish themselves as an important customer suppliers, and are more likely to receive optimal service and security of supply, and generally get more support from suppliers.

Number of Orders

As we began to explain above, there is a sweet spot when it comes to placing orders. While you want to take advantage of economies of scale and limit shipping and other service charges or minimum order requirements, you also don't want to impede your cash flow or risk the financial hits from damaged, lost, or expired supplies that come with over-ordering.

For many, the sweet spot is generally around 2 to 3 orders per month.

Tracking how much you order and how often, on an item level basis, allows you to plan for your requirements, ensuring you have enough room in your stock area or the available staff to do the receiving, for instance. The data also informs RFQs and allows suppliers to bid knowledgeably and sharpen their pencils as best they can.Knowing the number of orders you place is a standard procurement metric that allows you to identify room for improvement.

Delivery Times

The dental supply chain can be a complicated one. Knowing how your dental supply chain works can help you mitigate your risks and build a strategic procurement plan that extracts the maximum value for your dollars and safeguards your organization against disruption.

Over the last couple of years, the dental industry has begun to feel the impacts of supply chain issues as manufacturers and their partners faced decreased production rates while demand continued to spike globally. As a result, demand for PPE and all the associated raw materials skyrocketed. For those not monitoring their delivery times or open purchase orders, production rates and service levels suffered.

Although most tend to think of full-service dealers and mail-order distributors as the main sources of supply, the market is much more complicated and carries varying risks and service levels- whether they stem from a global pandemic or one of the many other areas of risk.

This makes delivery times one of the most critical metrics to measure in order to mitigate risk.

You may have grown accustomed to your vendors regularly delivering in 1-3 business days, which should be the goal. However, if you don't pick the right partners with regional warehouses, you could get stuck with extended lead times and risk stockouts, putting your production rates and service levels at risk.

Measuring delivery times is a way to monitor supplier performance and ensure your vendors do their due diligence in assuring supply. From sourcing the raw materials required through the final manufacturing and delivery of the end product, supply chains can be long, intricate, and may cross many trade borders. And the longer the chain, the more opportunity for disruption to happen anywhere along the chain with severe reciprocal effects all the way down the line.

If your suppliers don't have the right contingency plans in place, your business could be at risk. Extended delivery times are a warning sign that something may be amiss, and if you've planned your ordering assuming average delivery times, you may find yourself in deep water. Simply put, keep an eye on delivery times because when your suppliers deliver matters—greatly.

Practice Profit

Let's be honest; this one seems like a no-brainer. Yes, you should be monitoring your profits. But, as the old saying goes, you can't affect what you can't measure. At the end of the month, you should know what you've spent, what you've brought in, and how you're doing.

Monitoring your margins can help you see if you need to cut down on your inventory costs to increase profits. On average, here's what dental supplies should be costing you:

5% of Revenue- You're doing well

6% of Revenue- You're a little high. There may be some opportunity for improvement

7% of Revenue- It's time to address your procurement practices

Just as you monitor your patients' dental health through benchmarks and metrics that allow you to quickly assess how your patients are doing and where problems may lay, key procurement performance metrics allow you to see issues and identify priorities for effecting change.

The long-term viability of your dental organization is reliant on ensuring profitability and growth. By establishing benchmarks and setting targets, you can measure and improve its health, ensuring your organization is around to continue serving its patients with the best possible service for a long time to come.

Ready to optimize your procurement and inventory management with Method Procurement Technologies? It doesn't have to be complicated.

Give us a call to discuss or arrange a demo, and let us show you just how simple it can be.

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