When manufacturers, distributors and providers fail to nail down supply chain issues prior to implementation of a new product, everyone loses, says Jack Anderson, President of Material Resources Inc
Most medical centers are constantly seeking ways to improve clinical outcomes and reduce costs. These initiatives are time-consuming and costly for both buyers and sellers, sometimes taking several months from the introduction of a new or alternate product through evaluation and finally adoption of the change. When these products are purchased through a distributor, the best plans can run amuck.
Recently, one hospital lost $80,000 in annual savings due to what I call our fractured supply chain. The combined efforts of one manufacturer’s representative and hospital personnel to introduce a new money-saving product failed. What’s more, our distributor lost similar amounts in time, product samples and lost opportunities elsewhere.
The change process begins
The change process begins with a manufacturer sales rep trying to locate persons interested in his or her product, that is, someone or some group willing to consider an alternative. Change can also be instigated by a buyer seeking a solution to a problem, a cost-saving opportunity, or an opportunity to acquire a product contracted by the GPO. Much like casting for an elusive trout, change often occurs only after many unsuccessful tries. The “bait” is usually some financial incentive — a lower price or reduced usage.
I am not privy to the efforts and processes that sales representatives employ to produce an offer, but they must be time-consuming and they must involve multiple layers of company management. I have analyzed thousands of offers of varying complexity, and the time and effort expended by seller and buyer are not insignificant.
The processes for considering new products vary in each hospital. In fact, a single health system can employ several different processes, depending on the product and department. That’s why reps need to understand the unique processes and decision pathways of each hospital and hospital system. Are decisions made by a value analysis committee? Do department managers, physicians and clinicians make these decisions? What involvement does the C-suite have in these changes?
The product trial can be a huge expense for both seller and buyer. Often, products are provided at no charge. Sales reps spend many days in the hospital to demonstrate the product, educate staff, and attend surgical cases to answer questions. Hospital staff is involved in scheduling, learning, coordinating and planning for the next step. Cha-ching, cha-ching.
If all of the previous steps are successful (maybe the batting average is .300 or less), the conversion process begins. The supplier marshals staff to in-service the hospital’s personnel, often flying their clinical resources to the hospital. At the same time, hospital personnel are coordinating the change, attending training sessions, revising item and vendor files, exchanging inventories, modifying surgical preference cards and more. The purchasing department communicates product and usage information to its distributor so the new products are available when needed.
Often the hospital is unable to use up its inventory of the existing product before purchasing its replacement, and some products can’t be returned for credit or exchange. This adds up to further cost for the hospital. Cha-ching, cha-ching, cha-ching.
The cost of miscommunication
Three to four weeks before the first order is placed, the hospital’s buyer notifies the distributor of the pending change and supplies usage information. He or she expects the product to be available in the local distribution center and shipped with the hospital’s regular orders. But that doesn’t always occur.
One reason is, the distributor may be reluctant to add the inventory item, stating that the hospital is the only one that wishes to purchase the item. Or the distributor may offer to ship the product from another distribution center, adding freight charges and requesting that the hospital tolerate a longer lead time. Meanwhile, the hospital suspects that the distributor would rather sell its private label product than provide a competitor’s brand.
Let’s say the items is drop-shipped, with delivery times ranging from two to six weeks. Because of these unexpected delays, the hospital experiences stock-outs. Orders are placed directly from the manufacturer, and are often shipped using more expensive priority shipping modes. Or, the hospital temporarily reverts to the old product until the cost-saving item is available.
In some cases, the distributor stocks the popular sizes of a range of products, but the smallest and largest sizes continue to be drop-shipped. (Endotracheal tubes are an example.) Lead times remain inconsistent and stock-outs continue.
Bottom line: A lost opportunity
In the case of the potential $80,000 cost savings, the hospital finally gave up trying to convert, and reverted to its original products. They simply couldn’t tolerate this fractured supply chain. It is likely that the manufacturer and the hospital expended an equal amount of money in the evaluation and transition phases. Of the 750 items that the hospital purchased from its primary distributor last year, 200 are not inventoried by the distributor; most of the remaining 550 items are common and found in every hospital.
What are the lessons to be learned?
- First, the manufacturer’s representative should arrange for a reliable supply chain before presenting products for the hospital’s consideration. It was surprising to learn that many manufacturer reps don’t know the distributor salesperson, who may be able to facilitate this.
- Second, manufacturers should contractually bind their authorized distributors to stock the full range of product sizes at every location, or they should find an alternate distributor. Likewise, hospitals should include stocking requirements in their distribution contracts.
- Third, distributors should recognize that their inventory policies may reduce their inventory investment, but that restrictive and customer-unfriendly policies will cause buyers to find secondary suppliers. The savings from limiting inventory items will be more than offset by losses in sales to others.
Jack Anderson is President of Material Resources Inc., a supply chain consulting firm, and is on assignment at The William W. Backus Hospital in Norwich, Conn. He welcomes Repertoire readers’ comments at firstname.lastname@example.org.