Outsourcing as a Flexible Business Model Strategy
Choosing an outsourcing partner that helps your laboratory meet its goals
By Chris Brown, BSEE
Outsourcing, in is simplest form, is the basic act of one company sending work to another for select products or services. In the dental technology industry, many laboratories are already outsourcing and may not even realize it. For example, the accountant doing the tax returns, if not an employee of the company, is an outsource partner. Payroll Services is another. Most businesses are quick to send administrative and accounting work to outside organizations that specialize in these tasks, as they already have professional staff, customized software, and computer programs specially tailored for that type of work. Some businesses enlist the services of professional employer organizations to handle all of their human resources responsibilities. Another example of a very convenient, helpful, outsourced service is automatic bill payment. Choosing to use these forms of outsourcing is often a very easy decision for a laboratory owner, as the outsourced services serve to aid the owner in running the business, and are not intrinsic to the products or services the laboratory provides. Plus, they are usually tasks owners would prefer not to do themselves.
The decision to outsource becomes more complex when the product or service in question is one that the laboratory may also be capable of manufacturing or performing in-house. Dental laboratories are accustomed to doing all of the work necessary to produce quality restorations. It is often difficult for laboratory owners to relinquish control of certain tasks within the laboratory to their own employees, let alone outsource tasks to an outside company.
However, the survival instinct is a funny thing—it can bring moments of clarity or desperation. Many domestic dental laboratory owners are now in survival mode. An increasingly competitive market is forcing owners to re-think the products they offer, and sometimes even how they are produced. Learning when to outsource and when to keep the work in-house can be the difference between survival and extinction.
Why outsource? Ultimately, there are three primary reasons a laboratory may consider to outsource:
1. To reduce costs
2. To minimize, defer, or avoid major capital investment
3. The absence of experienced/qualified staff
Every company struggles with keeping costs as low as possible. Payroll is typically a laboratory’s highest operating expense, as most products produced in a dental laboratory are done in labor-intensive, manual processes. High wage labor-rate countries like the United States, combined with higher labor-content products, translates into expensive restorations. Since we cannot always change the amount of labor that goes into making certain products, the only way to reduce cost is to find lower labor-rate suppliers. This is why China and other low-labor rate countries are now producing one third or more of dental restorations placed in the United States.
Consider the case of a non-precious PFM restoration. Table 1 demonstrates rough estimates of labor and material costs for a domestically fabricated restoration versus one that is outsourced overseas. Shipping costs are only outbound to the outsourcing lab, and do not include shipping to or from the dentist.
While most dental technicians are not happy about it, this is today’s reality. The completely outsourced restoration costs less because of lower labor rates. However, while the cost is less for the case, much of the control and influence of how the case is processed is also lost, as materials, margins, anatomy, and contacts are now determined by the outsourcing laboratory. This loss of control leaves many laboratory owners uncomfortable because putting their personal touch on a case is part of their identity and a source of pride.
Limiting Capital Investment
How many times has a dental laboratory rushed out to buy the latest porcelain or staining system to find only a year later that it has been replaced by a new one or phased out completely? Remember when there were only two or three zirconia materials available for milling substructures? Now there are nearly a dozen, varying from opaque to highly translucent. Some are pre-shaded, and others require dipping or painting to achieve a desired shade. Primary restorative materials and their support materials are changing and evolving faster than ever. While it is one thing to invest a thousand dollars in porcelains and stains that may become outdated in 12 months, it is another entirely to invest potentially $60,000-$250,000 in a complete CAD/CAM system that could become obsolete just as quickly.
Suppose a laboratory was in a financial position to invest $60,000. How long will it take to pay off that investment? Five years? What if the materials change? Will that mill be able to accommodate the new materials or will it be relegated to what was available when it was released? This type of purchase is a big dollar risk, and is why many laboratories choose to outsource that work to an outside business that has already made that investment.
Laboratories can outsource the scanning, design, and milling of zirconia-based restorations and hold off on making a big capital investment in production equipment. They pay more per outsourced unit, but do not have to worry about the monthly payment on the equipment, the ongoing maintenance expenses, and training staff on how to operate new equipment. Remember, an outsourcing bill is proportional to the amount of work being outsourced. A loan or lease payment does not go down during slow months or if the equipment is moth-balled in favor of new materials or equipment.
Table 2 demonstrates a situation where selective investment in new equipment at the right time can be worth the risk if the payback or return on investment is quick enough. The top row reflects a laboratory’s cost for scanning and designing a case in house and only outsourcing the milling of the zirconia. Their internal cost for the scan and design is about $10 based on the time required. Quality model/impression scanners and CAD software are available for under $20,000. With a $37 savings per unit, a scanner/CAD package can pay for itself after producing about 500 units.
The investment cost of scanners alone is significantly lower than that of milling systems. Open-architecture STL scanners and CAD software are not restorative material dependent, so the risk of obsolescence is much lower than it is with milling equipment.
A sensible outsourcing strategy for laboratories is to first outsource the scanning, design, and milling of the restoration to validate the material and the process. Avoid capital equipment investment until the materials are proven. Once production volumes have increased to a sufficient level, investment in a scanner and CAD software makes sense. It increases the laboratory’s ownership in terms of case design, and reduces the outsourcing bill. If volumes eventually grow to a significantly higher level, then investing in milling equipment may be a worthwhile consideration. This is the ultimate try-before-you-buy scenario.
Absence of Experienced/Qualified Staff
It is a well-known fact that the number of dental laboratory technicians is shrinking. Blame it on retirement, competition, or the lack of available dental technology programs or educational facilities across the country. In the end, the reason does not matter, and laboratories must learn to increase their output with fewer available technicians.
Outsourcing allows the laboratory to delegate certain production tasks to an outsourcing partner while it internally focuses on tasks consistent with its core strengths and expertise. If, for example, a laboratory has a skilled ceramist who can create extraordinary PFM restorations but is struggling to find the right porcelain system, technique, or the time to do the same for porcelain fused to zirconia (PFZ) restorations, then outsourcing that porcelain work may be the solution. Once the volume of zirconia cases becomes sufficient, then the laboratory can justify hiring another technician or taking time to conduct further testing and cross-train in-house staff.
Another wise use of an outsourcing partner is when production demand temporarily exceeds the capacity of the laboratory. Say a laboratory technician is capable of producing a maximum of 10 pressed ceramic restorations a day. Typical production is five units a day along with other products. It is the end of the year and demand is high. Doctors are sending 15 units a day and every one of them is a priority. There are only so many hours in the day and only so many available technicians. Outsourcing the overflow cases to a manufacturing partner could save the day. Yes, the restorations may cost a bit more than the laboratory is used to, but the owner does not have to deal with searching out and hiring a short-term technician or burning out existing technicians from too much overtime. Outsourcing can be a lifesaver during vacation times for the same reasons.
Milling or Production Center pricing is definitely important, but it should not be the only consideration when evaluating a business partner. Outsourcing really is a partnership between the sending and receiving laboratories. Both organizations need to be on the same page when it comes to expectations and performance. Just as successful laboratories take the time to learn their client’s preferences, the good milling centers or receiving laboratories try to do the same. Consistency in design, shade, and delivery is every bit as important to the receiving laboratory as it is to a clinician. Extra work in correcting shades or excessive delays in delivery can completely derail the perceived benefits of a low-cost solution provider.
Communication is also imperative. Laboratories often complain about incomplete or vague prescriptions from their clinician clients. Ironically, many sending laboratories are just as guilty with their own prescriptions to their production partners. Milling and production centers often operate with next-day or two-day turnaround. Taking the time to complete the prescription, including any special instructions, often can make the difference between on-time deliveries and costly delays or remakes.
Outsourcing is a strategic business decision. A laboratory owner should take the time to assess what makes his or her laboratory unique among its competitors and where it is best to invest its money, resources, and staff for the long-term growth and survival of the business. Often that decision leads to outsourcing certain tasks, and leaving the big capital investments to other companies. As the laboratory becomes more familiar with the new materials and as equipment costs come down, it may make sense to make a limited or even large-scale capital investment to reduce outsourcing expenses, but that is a decision that needs to be based on economics, production volume, and the risk tolerance of the laboratory owner.
Each business is unique and operates in its own competitive environment. What is best for one laboratory may not be best or even work for another. Technology, equipment, and materials are changing rapidly. Keeping up with those changes can be a challenge both intellectually and financially. Smart business owners recognize when it is wise to invest internally, and when it is best to just leave certain tasks up to the experts.
Chris Brown, BSEE is the business manager of Apex Dental Milling in Ann Arbor, MI.