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
www.linkedin.com/in/jorgelcolon
www.jorgelcolon.com
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