It’s not much of a secret, but very little is standardized nationwide when it comes to running an optical practice, and even less is standardized from vendors that support these practices. After speaking with multiple optical professionals, and reading other optical blogs, I have heard multiple definitions of the term “Turn Rate.” This lack of standardization generates confusion. Everyone uses the same verbiage, but not everyone is talking about the same thing. In today’s post, I intend to give you an economist’s perspective on turn rate, why it’s important, how I calculate it, how to use the information to optimize your optical dispensary, and what factors in your practice can constrain or skew the results. With that, let’s dive in.

What is Turn Rate?

Turn rate is a metric used to determine how the inventory on hand is selling through. By accurately measuring turns, you can gauge how well your dispensary is catering to your patient demand and ensure your cashflow is not being compromised by over investing, and that you’re not limiting your capture rate by under investing in frame inventory.

Why is turn rate important

Turn rate acts as a flag within your practice. Because many frame styles are geared toward fashion, most frames have a relatively short life-cycle. Segmented turn rate helps determine what is moving, and what is not. It also helps determine if you’re exposed from a cashflow perspective based on your inventory levels. Having a firm grasp of turn rate and monitoring it over time can help you manage the appropriate level of inventory. I will showcase examples a bit later.

How to calculate turn rate

The calculation for turn rate is below:

This seems very basic, but it’s important to highlight a couple of key components in this simple equation.

Inventory specifically means one count per SKU.
- When calculating turn rate, inventory does not include backstock or understock. We are interested in using turn rate to see our customers buying behaviors with regards to the styles we have available. If we were to include backstock, the metric would be influenced by our purchasing behavior instead of our customers preferences.
LTM Sales (Last 12 months) is a lagging indicator. Purchasing behavior influences the metric. If you add to your inventory, and increase the frames in your office by 10%, you will reduce your turn rate immediately. Over time it will stabilize, but it’s important to understand the impact that fluctuating inventory has on the metric.

How to use turn rate information to optimize your dispensary

The most important thing to keep in mind when approaching inventory management, is that we’re not here to optimize turn rate, we’re here to optimize profitability. Turn rate is one metric that we use to accomplish this. If used correctly, we can leverage turn rate as a gauge on what inventory tweaks are needed to increase our success. To showcase the analysis process, I will leverage a generic data set. The data contains 1,000 unique SKU’s within the dispensary, and 3,448 annual unit sales.

First things first, we want to pull a sales report and determine our LTM sales, and an inventory report to understand our total inventory being showcased. Remember, backstock is not included, so we will want to remove any duplicate SKU’s from the analysis. Once we merge these data sets together, we can see a nice distribution of unit sales. We can identify from this visual how many SKU’s had zero sales in the last 12 months. In this example 126 frames, or 12.6% of the inventory, had zero frame sales. We will address exactly what that means in a bit.

Using the calculation showcased before, we calculate the turn rate for this dispensary.

For some, this is where the analysis ends, but if we really break it down, how can we use this information? All we really know for sure, is that we sell 3.448 frames for every frame on the board. Sounds pretty good, but it doesn’t tell us anything about where we can improve. It doesn’t tell us anything about our profitability. Overall, it doesn’t tell us much by itself. We need to get a bit more granular.

A logical next step in this analysis is to look at turn rate by vendor and by brand. As dispensary managers, we spend a lot of time working with vendors, flipping frames, and in some cases, completely relinquishing control of our frame boards to sales reps tasked with selling us product. I often hear the comment, “…it’s the frame rep’s job to do the inventory. They look at what I’ve sold, then tell me what I need to buy.” This mindset of extending trust to business partners, which I am very much in favor of, can be dangerous without a governance process to ensure priorities are aligned.

Knowing how important a sales rep’s role is, it’s imperative to keep internal measures to ensure the recommendations being made are catered specifically to your practice and your patient base. Frame reps have a lot of insight into market trends and can help identify gaps in your inventory. Having a good pulse on your inventory turn rate can generate productive conversations about these inventory gaps to help overcome them.

Looking at our sample data set, we can see there is a wide distribution between our highest turning vendor at 6.37, and our lowest turning vendor turning at 1.97. This gap is indicative of patient preferences given the current selection. It showcases where patients place their value. This preference can be influenced by multiple factors such as brand, price, vision care coverage, frame style, material, disposable income, lens needs, etc. This visual is useful to view at the brand level as well. By viewing each brand supplied by these vendors, we can determine where we can make necessary adjustments at the vendor level.

The information provided thus far is very interesting and can generate some extremely valuable conversations, but we are still not ready to make any adjustments to our inventory. We need to tie our turn rate to profitability to make an informed decision. I will discuss how to calculate gross margins in another article, but for now let’s just assume that we know the gross margin per frame, and for the sake of simplicity we’ll assume that gross margin is the difference between the retail price and the cost of goods. We will break this assumption in future articles for accuracy, but it’s not a stretch to assume all direct costs outside of COGS are evenly distributed across all frames.

Pricing strategy is going to send us down one of two paths to profit optimization.

1. If you set your pricing with a cost-plus model, it results in the same margin across the board, then the analysis is basically done. Those with higher turns are generating more profit. We can adjust accordingly, and those decisions become relatively easy. Either the product is performing or it’s not.

2. All other strategies for pricing result in a distribution of gross margins. In this example, we’re going to use the mark-up approach. Based on this approach, we can see the price & margin effects of a 2.7x mark-up in the table below.

A turn rate of 3.95 for “SKU 294” is equivalent to a turn rate of 1.0 for “SKU 117”. Now we have the necessary information to adjust our inventory to optimize our profitability. Using our sample data, the scatter plot below shows Avg. Gross Margin per unit on the y-axis and turn rate on the x-axis broken out by brand. The color is an indicator of annual profitability. Blue being high profit, and orange being low profit. As you can see within the brands with the highest turns, the volume wasn’t enough to overcome the difference in margin from our high-priced items. While this is true for the example used here, it is not only the case. Be sure to measure your specific practice data before making any decisions about your dispensary or your inventory.

Things to keep in mind

There are a few things that can bias or skew your data when reviewing turns. It’s important to account for these things, or you’ll get less than optimal results.

Time on the board – Remember that turn rate is comprised of LTM sales divided by current inventory. If any of those frames have been on the board for less than a year, then you’re looking at biased data. You’ll want to annualize any unit sales to account for newer frames. My recommendation is to exclude new product from any analysis until it has at least 3 months on the board. Once it’s been on the board for 3+ months, annualize it and include it.
Office logistics – With the calculation being a measure of sell-through, the reorder strategy and board management strategy can influence your numbers. If your practice sells off the board, then the data is skewed by the limited exposure your top frames are receiving. As an example, imagine selling a frame the same day you put it on the board. There is a good chance that frame is a high turning frame. If it’s no longer on the board because you sold it to the first patient who saw it, then you can’t sell it to another patient until you get the frame back in the office. Every patient who doesn’t see that frame is skewing your turn rate metric. There are obviously ways around this, but it’s important to understand the logistics behind the data so that you can account for them when doing any type of turn rate analysis. A symptom of this is having an average of 1 frame sale per SKU per month. This is usually a sign that reorders are done monthly, and therefore limits the sales of any given frame in the office.
Vision Care – We will address 3rd party payers in a separate article but be aware that a 3rd party subsidizing a sale will influence the patient’s preferences. It doesn’t change the calculations or the analysis but is important to recognize that the revenue in these transactions is different, and therefore impacts gross margins.
New product – Ask your vendors about turn rate for products in the local market that you’re not carrying. Leverage this information for swapping your zero-turn frames. Anything that hasn’t sold in 12 months, is not appealing to your patients. Swap it out for new product. Worst case scenario, it doesn’t sell, and you’re exactly where you started. Best case, it does sell, and you iteratively improve your turn rate over time.

Summary

With the uncertainty of preferences for every patient that walks through the door, the goal is to have complete coverage. We want something for everyone, but not everything for everyone. The goal is to cover demographics, retail price points, colors, materials, and sizes without tying up a ton of cash in frames.

Take stock of your inventory. Calculate your turns, and per unit margin. Determine your annual profit by brand and start segmenting by customer demographics and preferences. A general rule of thumb, a small practice ($500k or less) should have about 600 frames and 5-8 vendors. A large practice ($2MM+) should have roughly 1200 and 12-15 vendors. These are generalizations, and the inventory should be specific to your practice, but this guideline should be a good start. As you’ll notice it’s not linear. 4x the practice size results in a 2x increase in inventory. What does increase, is the turn rate or sell through.

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Inventory Turn Rate and Dispensary Profit Optimization