Do yourself and your suppliers a favor: Be the low-cost customer.
By Larry Dooley
The healthcare supply chain is complex, and it will remain that way. We are challenged to reduce the cost of the products we purchase. One way to do so is by helping reduce our suppliers’ cost of sales.
Granted, we are not the retail industry. But if one looks at the top suppliers to chains such as Walmart, one can see that their SG&A (Selling, General and Administrative Expenses) is approximately half that of the top 10 suppliers with whom healthcare providers typically do business. We as providers have an opportunity to be part of the solution and not part of the problem.
A key component of the cost of all the products and services we purchase is the supplier’s cost of sales, a key element of which is SG&A. On a supplier’s income statement, this line item combines salaries, commissions and travel expenses for executives and salespeople; advertising costs and payroll expenses.
Compensating for complexity
As we look back over the past 20-plus years, we will see an interesting trend: Suppliers have had to add resources to deal with a more complex provider purchasing process. Back in the “good old days,” most suppliers had a very simple sales team model. These teams comprised of a sales rep, who had responsibility for a geographic territory, who reported to a district or regional manager, who then reported to a national sales manager.
During the 1990s, providers merged and formed IDNs, and the “super GPOs” emerged, such as Premier, Novation, MedAssets, Broadlane, HPG, Amerinet, etc. In response, suppliers began adding resources to deal with the added selling complexity brought on by the growth of GPOs and IDNs.
In addition to the resources mentioned above, suppliers now employ corporate sales executives, national account managers, clinical support, product specialists, strategic account executives, and OEM and/or distribution managers, and in some instances, complete IDN teams. As the contracting process grew and continues to grow, back-end resources – in particular, contract administration resources – are proliferating as well.
GPO contracting
As GPOs have grown in size, their ability to effectively produce a contract that meets the needs of each of their members has become more and more difficult. The government scrutiny of GPOs in the earlier part of this decade has led to the rapid rise of self-contracting by large IDNs and a substantial increase in regional purchasing coalitions. The Journal of Healthcare Contracting is tracking 123 RPCs.
The bottom line is that today, approximately 70 percent of all GPO contracts are renegotiated. Most of these contracts are getting renegotiated at least twice, and in many cases, five times or more. The growth and complexity of the provider purchasing process is adding cost to the products we purchase.
The dilemma we face as providers is to continue to focus on reducing supply costs. To do so, we have to overcome the following challenges:
- The rising cost of sales caused by the increasingly complex provider purchasing process.
- The rising cost of raw goods (as the economy improves), which will cause product prices to rise.
- Two healthcare-reform-related challenges facing suppliers: 1) the fact that their own healthcare costs will rise; and 2) the medical device tax, which will certainly be added to the cost of products and passed on to providers.
Providers cannot control the challenges presented by an improving economy, the potential rising cost of healthcare benefits and the medical device tax. However, providers can help reduce costs by helping reduce complex purchasing processes.
What suppliers want
We know suppliers want two things – predictable sales volume and a high level of commitment. Both will reduce their costs. However, achieving predictable volume and commitment today involves multiple contract renegotiations.
We providers need to think and act differently. We need to strategize with our key suppliers to help them reduce their – and ultimately, our – costs. For example, delivering predictable volume and high levels of commitment should signal to the supplier that they now have secured the business with a specific provider(s) for a specific length of time. With this security in place, the provider should challenge the supplier to reduce the resources (especially manpower) needed to support the business in that particular provider’s facility. In very few cases today does a supplier reduce such resources even after getting predictable volume and high-level commitment. Therefore, the cost of sales remains the same, and we have to ask ourselves, “What have we accomplished?”
The provider community is facing extremely difficult times today, and the difficulty is not going to decrease anytime soon. We in the supply chain can become a force for change by changing the model as it is today. But this can only be accomplished by doing the following:
- Living up to the predictable volume and high level commitment for the contracted time frame.
- Challenging suppliers to reduce their resources when the volume and commitment is delivered and sustained.
- Challenging suppliers to run a profit-and-loss on your account. Each provider should want to be their suppliers’ lowest-cost customer.
- Examining the cost drivers in your processes and looking at the ones that you can impact to lower the suppliers’ costs.
- Challenging your suppliers to pass on lower costs if you are a low-cost customer. Don’t pay for someone else’s inefficiencies.
We as providers need to continue to strive to be a part of the solution and not part of the problem.
Larry Dooley is vice president of ROi, St. Louis, Mo.