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Dental Formularies for DSOs: What They Are and Why You Should Build One

October 11, 2021

“The whole is greater than the sum of its parts.”Aristotle

A formulary is a list of dental supplies. It’s that simple. So why is something so simple so important?

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    Creating a formulary allows multi-practice DSOs to better manage and control their total procurement spend.

    The main objective for procurement is always to buy the right items, at the right time, in the right quantities, and at the best possible price. Building a formulary is your ticket to getting there.

    Inventory management, purchase orders, monitoring spending practices, tracking pricing, paying invoices, and analyzing historical data for insights-driven decision making are all eased when you scale down and solidify the list of dental supplies being purchased.

    We’ve all heard of economies of scale. When you spread a fixed cost over a number of goods, the larger the number, the lower the total cost of each good. In sales, these economies of scale are, in part, then passed onto customers as an incentive to buy in larger quantities. It’s a win/ win, as both buyer and seller reap the rewards. In production, this same principle is referred to as improving efficiencies (doing more with less) and applies just as well under your own roof as it does when purchasing from a supplier.

    Leveraging Volumes

    Leveraging volumes is an exchange, an agreement to a price for a certain volume. Building and adhering to a formulary allows you to implement efficient, streamlined processes so you can negotiate and execute on volume commitments.

    Let’s for a minute imagine a DSO with five dental practices, each with their own spending habits, buying a different item as they see fit every time they purchase. The DSO could be spending, let’s say, $1,000,000 in dental supplies per year across all practices. This DSO should, in all rational, be enjoying much more favorable pricing than a singular practice with only one-fifth of the spend. However, the reason they may not be is threefold.

    Firstly, the whole of your like items is worth far more than the sum of its parts. When purchasing volumes are spread out over too many items, this weakens their power as you are unable to take advantage of larger quantity price breaks. Amalgamating your purchases to a limited number of items through the use of a formulary both increases your total volume per item while giving you the data and the control you need to leverage them for further savings.

    Second, without a formulary, the purchasing habits of the five practices are unmanageable as a whole. Over the five practices, the company could be purchasing hundreds if not thousands of different items. This brings us back to efficiencies of scale, tracking usage, pricing, and inventory (so you know what to purchase when), all become too labor-intensive and unmanageable.

    And lastly, if each practice continues to buy as they wish, the lack of control and unity over purchasing decisions leaves multi-location DSOs unable to execute on agreements. Suppose quotes and the subsequent awarding of business do not translate into actual orders. In that case, the savings for your dental organization aren’t actualized, and suppliers aren’t likely to continue to expend efforts on future bids. This not only causes them to continue to pay more than they should but can damage their reputation and hinder future negotiations.

    Improving visibility and gaining control over the spending habits of each of your dental practices ensures suppliers that they will, in fact, gain the business you are looking to leverage in return for profit-improving cost savings.

    Level Up and Mitigate Your Risks

    Poor procurement practices come at a very high cost. Building a formulary not only brings the manageability needed to extract the pricing your buying power should afford you, but it is also the first step in adopting more mature procurement strategies. Implementing best practices and leveling up with tactical procurement further mitigates your risks, increases organizational efficiencies with streamlined workflows, and safeguards your profits.

    Building Dental Formularies for DSOs

    Alright, we’ll be honest, there’s not too much magic here. The actions are fairly simple. However, there may be a large amount of data that may seem overwhelming. As you work through it and design your format, remember not to get lost in the granular by keeping an eye on your overarching goals and what data you are looking to extract.
    Hopefully, you’ve brushed up on your excel skills. Here are some quick tips and tricks to getting ‘er done:

    Step 1: Gather Your Data

    If you are unable to do so from your own record keeping, your suppliers, whether they be distribution partners or manufacturers, should be able to provide you with a record of your purchases. This should include the item/SKU number or manufacturer part number, category, name and description, unity of measure, and breakdown (sold by the box with 12 units per box), as well as detailed order history and purchase price.

    Quick tip #1: Whether it be Darby, Henry Shein, or Brasseler, your suppliers should be able to provide your information in a digital format, most preferably excel. Also, there’s no need to hide what you are doing. This may be the perfect time to put a bug in your suppliers’ ear and let them know you’re upping your game, and perhaps they will too.

    Step 2: Organize Your Data

    You’ll now want to organize your disparate data into a standardized format. We suggest leaving all original by order detail and then total your purchases by month as well as year.

    Quick tip #2: When setting up your format, remember you’ll want to be able to see totals by the number of units and by dollar value, by the supplier, by item, by month, as well as by year. You may also want to count the number of transactions to allow for easier and deeper analysis.

    Step 3: Analyze Your Data for Potential Improvements

    Although this could easily become your kickoff formulary, we suggest you take some time to look for some low-hanging fruit.

    Take advantage of your newly found visibility to look for purchasing trends and poor practices. Look for the obvious. There may be some outliers or easily identifiable bad habits you can quickly nip in the bud and cut from the list.

    Remember to rely on your “go-to” team members, prod around and ask questions on the reasons, or the people, behind purchasing decisions.

    Quick tip #3: Focus on item reduction, and don’t be afraid to ask your suppliers for their input. There may be some items that are like enough to others that you can consolidate without too many complaints or issues. Your suppliers should know their products and your purchasing habits best. Don’t be shy in asking for ideas or recommendations. This is a good chance for them to show you the value they can bring.

    Step 4: Finalize Your Starter Formulary and Establish an Action Plan

    The problem with putting out a “starter” anything is that more often than not, you never quite make it to the next stage. Before you publish and implement your formulary, we suggest you:

    • Consider a secondary formulary for alternative sources of supply in case of emergency. If the preferred item is not available or has a long lead time to deliver, giving your employees an approved alternative mitigates your risk and keeps spend under management.
    • Establish an action plan and assign project owners for improvements, i.e., further standardization of the dental supplies purchased or sourcing of lower-cost alternatives by scheduling clinical trials and digging into root causes.
    • Set a procurement policy and formulary compliance control procedures.

    Lastly, to ensure you reach your objectives, implement a systematic process for monitoring and increasing compliance (hint, Method can help with that!)