Distributors take care of business when not taken for granted
by Rick Dana Barlow

Remember the days when all a distributor did was transport product from point A to point B – typically from the distributor’s warehouse to the hospital dock or warehouse? And maybe the sales representative provided some extra market intelligence, product development news or gossip about the hospital across town?

Today, most distributors have morphed into full-service suppliers, offering a menu of options from which to choose, just like at a fast food restaurant, for a set fee per service. Clearly, distributor services have come a long way, baby. These aren’t your father’s distributors. Insert any similar pop culture commercial cliché here.

Naturally, each one of these service options cost money. Back in the go-go 1990s, however, distributors stumbled over one another offering a plethora of services to win the business of the dominant investor-owned hospital chains, of the growing number of integrated delivery networks and the emerging "mega" group purchasing organizations. Unfortunately, many struggled fiscally as they touted "cost-minus" deals in lieu of "cost-plus" deals to lock in contracts amid market consolidation.

"People get into margin trouble when they don’t have a clear balance on what they’re telling customers they’re going to provide and what they’re clearly capable of doing," said Eric Timm, vice president of marketing for distribution at Cardinal Health Inc.’s medical products and services division. "That takes discipline and being really honest with customers. When you understand your customer and your business you should be able to drive innovation to make it happen."

But distributors weren’t satisfied with their roles anymore as GPOs expanded their service offerings and manufacturers opted to go direct to selected customers (IDNs primarily), bypassing traditional distribution channels.

"Distributors recognized that they couldn’t just be box movers anymore," said Joe Colonna, president of Strategic Initiatives in Healthcare LLC an expense management consulting firm. "Historically, distributors did a lot for customers, particularly when margins really didn’t matter. They were installing computer systems, local reps would personally truck supplies down to a customer. These services would come at no additional charge because distributors were making enough money to offer them."

As healthcare facilities evaluate the ongoing performance of their distributors, what they really need to determine is why they’re using distributors in the first place and how much they’re saving by paying to outsource a growing number of functions?

"It’s beholden to hospitals to do their homework," Colonna said. "There is no absolute solution for anything. We realize now that it’s not about a template that fits everybody. Early on, that was the strategy. Now it’s all about customization at a reasonable fee."

Some facilities may rely on their distributors to perform supply chain miracles and save the day for them – or at least their budgets. Others may use them to bale out otherwise ineffective materials managers. Still others may work with distributors to augment or supplement the efforts of a top-notch materials manager. Anyway you look at it, it’s "different strokes for different folks," Timm quipped.

Perhaps the best and simplest barometer in determining when to use distributors and for what is "when it makes fiscal sense in terms of effort, energy and time," Colonna noted. "Of course, what goes into that formula is different for each facility. Ultimately, it’s when it makes less sense for the hospital to do something itself." Determining factors may include staffing, space requirements, liability, he added. "It was never as simple as ‘cost-plus,’ which was just a lazy way of looking at it and an easy way to justify it."

Colonna found particular amusement at the "cost-plus-zero" and "cost-minus" deals that proliferated in the 1990s. "You just have to ask yourself what is cost, how is it defined and what does that formula apply to?"

Jorge de Cespedes, co-founder, president and chief operating officer of distributor Pharmed Group Corp., indicated that various components of supply chain management – inventory, handling, receiving, space, labor, etc. – may add upwards of 30 percent to 40 percent to even 50 percent to the total cost of a product over and above the distributor price if the hospital handles those responsibilities internally. "We can do it for 6.25 percent," de Cespedes said, matter-of-factly. "Of course, you’ll need to make some concessions and financial commitments, such as allowing us to do night deliveries when there’s less traffic, paying us on a timely basis, which is within 30 days."

Flex time
Some hospitals focus on improving supply chain management activities so that they can become more efficient, according to Timm. "These facilities ask, ‘how can I partner with my distributor to understand costs and the process to reduce them where touch points are similar?’" he said. They look for help in bringing materials management expertise and discipline into clinical departments. Others focus on price alone, relying on the distributor to supply a market basket of goods. For the price shoppers, accurate pricing and delivery may be enough, he added. Still others look for the right basket of products to satisfy clinicians’ needs and preferences while also providing the right clinical outcomes.

"Regardless of customer, there is a basic expectation for the right product in the right place at the right time in the right configuration and at the right price," Timm said. "Every customer wants that. In reality, we have a complex supply chain we’re trying to manage. We’re dealing with professionals who are flying at high-speed and low-drag and are just concerned about patient care. These clinical directors are now saddled with management and budget responsibilities that extend well beyond their patient care training."

de Cespedes approaches it from a cash value perspective. "Why should hospitals take up expensive real estate just to store supplies when they could be using that space to provide patient care and generate revenue?" he asked. "No matter how the hospital runs the warehouse it won’t be able to generate income from it. It might be able to control expenses but I don’t know that the hospital can run it as well as a distributor does." In fact, Pharmed is establishing what it terms "flexible warehouses" around the country that are customized according to a particular IDN’s or hospital system’s needs. Right now the company has one in place and another in development as part of their goal to launch one a year for the next eight years.

These days it may not be enough for a distributor only to drop boxes off at a hospital. Distributor reps can place products directly on storeroom shelves or nursing floor exchange carts and PAR level locations. They can come in and clean up inventory problems in the clinical areas by setting up PAR levels. They also can move products directly into the surgical suite right when they’re needed for a procedure. "In these cases, there’s no requirement for anyone in the hospital to touch product until they actually use it," Timm said. "It takes a lot of people, a lot of technology and a lot of know-how to pull that off to the degree that we can show high fill rates and accuracy."

But sometimes, reliable box moving is all that’s needed, particularly during a natural disaster. When Hurricane Charley slammed into the west coast of Florida last month [physically shutting down Healthcare Purchasing News’ office for about 24 hours – Editor’s Note.] Pharmed simply had to deliver as expected. "We have six hospitals down here that depend on us on days like today [Friday, August 13]," de Cespedes said. "In fact, we started preparing for this about three months ago.

"We just have to listen to the customer and be flexible enough to do what they need," he continued.

Happy or many returns?
Specifically how a hospital determines a return on investment for a particular distributor service varies by facility and depends on the institution. "There are some organizations that have a great handle on where their costs are through internal technology systems and metrics," Timm noted. "And then there’s the other end of the spectrum. We work with them to help develop metrics on various services. We literally get down to such basics as how many days in inventory are on hand because that affects cash flow. You don’t need a sophisticated inventory system to do that. We have folks who are well-trained to help hospitals make those calculations."

But Colonna questions whether it’s in the best interests of the hospital and the distributor for the distributor to help the hospital learn how to budget and track purchases. "This shouldn’t be something demanded of a distributor," he said. "Buyers should be capable of knowing what they bought. The distributor is just trying to provide good customer service in terms of what the customer asks for. But there’s always a cost for that and who really pays can affect the process. In most cases, the hospital pays and just doesn’t know it."

de Cespedes noted that hospitals should ask themselves a bottom-line question to determine ROI: "Am I doing this for less than I could be paying someone else? Why get into the distribution business when you may not be as good at it? Why not convert that space to house an MRI?"

Timm also recognized that distributors can’t – and shouldn’t – foist programs and services on facilities that may not want or even need them. "There are circumstances where we jointly agree that a particular program isn’t the right fit," he said. "It doesn’t do either of us any good in the long run to have a service embedded in an organization that doesn’t benefit the both of us. And it wouldn’t be too long before someone figured that out anyway."

Besides continual complaining and griping to peers or simply changing distributors is there one sure-fire recourse for unsatisfactory service, such as delivery delays and pricing discrepancies? "When there’s a lot of dialogue between the customer and the distributor’s service team a lot of this goes away," Timm said. "It really comes down to open and ongoing communication between the two."

de Cespedes agreed. "The relationship should have been built long before there ever was a problem," he said, "and that probably would have prevented the problem from happening in the first place."

Hospitals should approach distributors using Henry Ford’s philosophy, according to Timm. Although Ford is renowned for creating the assembly line that’s not what he originally set out to do. "Henry Ford wanted to sell a car for $199 and built the assembly line to do it," Timm said. Hospitals should be able to pull a lesson from that. HPN