By Ken Krivacic, OD, MBA
An in-house finishing lab improves delivery time to patients and captures revenues that otherwise go out the door.
PURCHASE INSTEAD OF LEASE. Purchasing creates a long-term investment rather than an ongoing cost.
BUY NEW TO GET TRAINING INCLUDED WITH EQUIPMENT. Complimentary training is a key value-add of purchasing a new piece of equipment.
PURCHASE THE MAINTENANCE AGREEMENT. Paying for upkeep of the equipment upfront is a long-term cost-saver, as you avoid paying for costly repairs on your own.
To improve delivery time to my patients and to capture profits that were going to an outside lab, I installed an in-house finishing lab around five years ago.
A finishing lab entails cutting and edging blanks that are prescription-ready to be mounted in a frame. One step further would be a surfacing lab in which you are manufacturing the lens to a point where it can be cut and edged, which would probably cost over $50,000.
The finishing lab made more sense for my practice because it required less space, less equipment, less initial cost outlay and is less dependent on a lab-savvy employee than a surfacing lab. The business goal was two-fold: provide a quicker turnaround time for jobs, and therefore, a better patient experience, and increase profits by cutting lab costs.
An in-house finishing lab allows us to market to patients that we have the capability to produce a pair of glasses within a day. We may not do this every day, but it’s reassuring to patients that they have that as an option. We also use the lab to promote the fact that most of our work is done in-house by our trained and licensed opticians. This imparts a peace of mind to our patients knowing that the job will be done correctly and accurately.
Improve Turnaround Times
We can now offer patients same-day service in some cases–almost all single-vision prescriptions and a few multi-focal options. If the patient’s prescription is available from our stock of lenses then they can have their glasses produced in about an hour. Multifocal lenses are trickier because the amount of possible prescriptions required is staggering. The amount of space required and cost outlay is not realistic in most private practices.
In most cases the lab can send us a finished multifocal lens within a day or two and it can be edged in-house then. This again shortens the usual one-week turnaround time.
We can offer better pricing on products due to our reduced cost. We choose not to in order to retain more profit. We still are sensitive to price issues from patients and have elected to keep our overall prices competitive with the general market in our area. Some other retailers are harder to compete with, especially those that advertise ridiculously low prices. We don’t compete at that level; instead we tend to focus on faster service and the fact that most of our jobs are done in-house by qualified opticians.
Invest in Needed Equipment
For an in-house finishing lab the major pieces of equipment are an edger, a blocker and a tint unit. There are other smaller tools required although the cost is minimal compared to the aforementioned. Plan on spending around $25,000-$35,000 for the major portion of your lab. We last upgraded our equipment about four years ago and out total cost was about $27,000.
We purchased our equipment, rather than leasing it, and then financed the purchase rather than paying cash. My philosophy is that this type of equipment does not change drastically from year to year, and if you maintain the equipment it will last 10 years or more. For those reasons, purchasing an in-house lab, rather than leasing, makes sense. I would also not finance it for more than five years. Most of our purchases are financed between three to five years. My personal rule of thumb is that if I can break even within three years then the purchase is a no-brainer. This requires some assumptions and a good knowledge of your current business climate, but usually the numbers are a close reflection of what you can expect. I will provide examples of this later in this article.
Most vendors offer a service agreement that covers routine maintenance and helps if the equipment needs repair. We currently maintain a service agreement with our vendor that is renewed yearly. The costs can vary for this service, but I would plan on spending around $1,000 to $1,500 a year for an agreement. The agreement usually covers routine yearly maintenance, reduced costs on repairs, loaner units and reduced costs on supplies.
Most vendors will provide training when you purchase a new piece of equipment. They will usually send a trainer to your office who will spend a day or two with your optical staff. We have always purchased new so as to include the training. If you buy used equipment and want training, you will more than likely have to pay for it.
I would also recommend your lab person or opticians practice a few times on some inexpensive blanks. There is a learning curve and mistakes will be made in the beginning. It is best to make mistakes on an inexpensive practice blank and not a patient’s job.
The equipment could be run out of a space as small as 7 feet by 7 feet. Ours is about twice that size so that lens stock is within reach and we space to store jobs that have been completed. The equipment does produce noise and some smell. I would recommend putting your in-office lab in a room with a door that can be closed. We also installed a vent to reduce or eliminate the smell. In addition, keep in mind that you will need access to electricity and plumbing.
Conduct Break-Even Analysis
In deciding whether to install an in-house finishing lab you’ll need to do a break-even analysis.
There are several variables that go into this analysis:
• Cost of the equipment and additional installation cost
• Expected profit per job ( in this case over and above what you would make by using an outside lab)
• Number of jobs expected to be performed by the equipment
To help me make this kind of investment decision I usually break down the analysis into a monthly and yearly format.
I liked to use what’s called a break-even analysis. In other words, how long before you start seeing a profit after making an investment. In this case, the investment is the cost of equipment and other ancillary purchases made in order to turn a profit.
I will use an example from our own experience.
Cost – approx. $30,000 equipment and ancillaries
Profit per job – $75 over cost using an outside lab (this number is arrived by the average lab cost being $135 for a range of single- vision products versus $55 if done in house)
So how many jobs do I have to do per month to break even?
First we need to know how much the equipment costs us per month.
$30,000 financed over three years at 6 percent interest is approximately $915 per month
At a $75 profit per job we need to do approximately 12 jobs per month to break even. Any number higher than that means your investment will make you money. Any number lower means your investment will cost you money. Can you cut more than 12 jobs per month in-house? If the answer is yes, make the purchase.
There are several variables. The interest rate may be higher or lower. You could finance over a longer term in order to reduce the monthly cost. You have to estimate how many jobs you do per month. If you miscalculate too far on any of these categories you stand the risk of making a poor investment. Use your own previous history as a gauge for how many jobs you can cut in-house. Remember to eliminate most managed care plans as they usually require you to use their contracted labs.
In-House Finishing Lab: Making It Work
Calculate how long to break-even. If you can break even on a three-year finance plan or less, it’s a good deal for your practice.
Train staff to use equipment. Just because you have the equipment doesn’t mean it will run itself. You still need a trained and (I recommend) licensed optician to produce quality product.
Not all jobs can be done in-house. A large majority of managed care plans require you to use their labs, so do not factor these patients into the equation when trying to decide if you can afford the equipment.
You can sell equipment if all else fails. If your careful calculations were wrong and you are losing money every month, you can always sell the equipment to another ECP practice.
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