The price is wrong: The cost of a discrepant order

April 21, 2022

In 1992, Harvard Business Review published an article entitled: “Staple Yourself to an Order.” It spoke to the importance, as well as the complexity, of the order management process, and particularly the negative consequences for both buyer and seller when things go wrong.  Over the past 30 years, a lot of progress has been made toward automating the procure-to-pay process, especially from purchase order to invoice.  With greater synchronization of data between buyers and sellers, there has been an increase in the percentage of orders that can be processed in a touchless manner.  When there are discrepancies that require manual intervention, the culprit is most often around price.  That costs everyone both time and money, according to Terry Skinner, Regional Director, Supply Chain Customer Solutions for Johnson & Johnson MedTech.  That’s particularly important for hospitals facing critical staffing shortages and financial constraints in the wake of the pandemic. 

It all starts when the invoice does not match the purchase order.  Orders can fail if the part number, order quantity, or units of measure do not match, but based on data from the GHX exchange, pricing errors are 3 to 10 times more common and can take much longer to resolve than other discrepancies.   When a price discrepancy does occur, the hospital Accounts Payable (AP) department typically notifies procurement, which initiated the purchase order.  If the buyer in procurement stands by the price, he or she will contact the manufacturer, which initiates inquiries within its contracts and dispute management teams.  If, after checking the contract terms, the manufacturer determines that it still stands by the price on the invoice, Accounts Receivable will issue a denial letter to the hospital.  Even if the hospital’s price turns out to be correct, the discrepancy has already added rework and delays for both parties.  Conservatively, Skinner says he can identify at least eight different individuals on the provider and supplier side that touch a price discrepant order.  Assuming a fully loaded salary of $50/hour and each person spending just 15 minutes working the issue, that would equate to $100 per discrepant order just in labor costs.  And that’s not taking into account the financial impacts of an increase in Days Sales Outstanding (DSOs) for suppliers and the downside implications of late payments for hospitals, including potential credit holds.  Based on earlier research conducted by GHX, fewer invoice exceptions and use of electronic invoices can reduce the time it takes to pay suppliers from an average of 15 to 60 days to just 2 to 5 days.

At a recent Health Industry Distributors Association (HIDA) meeting, Skinner presented how Johnson & Johnson MedTech is working with provider customers to reduce the incidence of price discrepancies and the challenges they create for both parties.  The key, he says, is keeping a price discrepancy from happening in the first place.  Ideally, providers and suppliers have adopted strategies and tools to help ensure ongoing contract price synchronization.  But the reality is, today’s contracts have become highly complex, and the pandemic has only made it more challenging.  As a result, despite the most valiant of efforts, there will still be mismatches.  As Skinner pointed out, if providers and suppliers can work proactively together, they can still make necessary adjustments before the matching process begins. 

Johnson & Johnson MedTech is proactively addressing discrepancies in real time when it receives an order from a provider via EDI.  If the price on the purchase order does not align with the price held in the contracting system, Johnson & Johnson MedTech flags it on the 855 EDI transaction (the purchase order acknowledgement), which notifies the provider to make the change on its end.  That way, when the invoice is issued, the price will align to that on the purchase order.  Skinner says this process has been successfully deployed in the retail industry for years.  For example, Skinner took a similar approach when he was on the consumer side of J&J’s business, resulting in some of the lowest DSOs in the industry.  The GHX study referenced above also found that hospitals that correct purchase order discrepancies (of any kind) in real time can reduce invoice exceptions by 33 to 50 percent, significantly reducing the labor associated costs required to process.  Validating contract pricing during the purchasing process has also yielded savings of 1 to 3 percent of the amount a hospital spends on contracted items. 

Beyond real time exception management, Johnson & Johnson MedTech has also begun offering providers with the option of receiving an 832 price catalog file to further reduce price discrepancies.  Deployed successfully in other industries, an 832 provides both prices and product information in an electronic format, including:

  • Terms of sale information, including discounts available
  • Item identification and description
  • Item physical details, including type of packaging
  • Item pricing information, including quantity and unit of measure

Depending on a customers’ technological capabilities, Johnson & Johnson MedTech can send the 832 via EDI or as a .csv file that can be incorporated into a spreadsheet. Customers that have started accepting the 832 say they can update pricing in real time. According to Dawn Watkins, director of Strategic Sourcing from UF Health Shands: “Now more than ever, we need to harness all available resources and automation opportunities. J&J’s focus on advancing these efforts, such as the 832, provides much needed bandwidth to our team, which in turn, allows us to better serve our customers and ultimately our patients’ needs.”

The original “Staple Yourself to an Order” articles speak to how poor order management leads to lost sales, wasted labor and an unsatisfactory customer experience, adding that most companies at the time simply added bodies to handle the extra work.  In today’s environment, with staff shortages and a need to minimize administrative costs in healthcare, a more collaborative approach is a better option for all involved.