Unclogging the Distributor Drain

Medical Device & Diagnostic Industry Magazine | MDDI Article Index

Originally published May 1996

Christopher Bale

Director of Communications, Independent Medical Distributors Association Mission, KS

If your medical device business revolves around product development and manufacturing, you may have begun to suspect that something is clogging the other end of the supply channel where traditionally products have flowed smoothly into the nation's hospitals and doctors' offices.

And don't expect any resolution to this turmoil soon. Health-care institutions and managed-care companies are at the final stage of market-share battles. These marketing battles are forcing the clinicians in hospitals, long-term care, and home health care to universally lament: "We've got to do more with less."

Some argue that the financial squeeze is precariously close to becoming a threat to patient care. It has already had a dramatic impact on the way general-line and specialty product distributors introduce and sell medical devices.

DISTRIBUTORS: TWO DIRECTIONS

Part of the squeeze is caused by a revolution in hospital purchasing that has pushed general-line and specialty distributors down increasingly divergent paths. As recently as 10 years ago, dozens of healthy regional general-line distributors serviced the acute-care market. Today, that market segment is dominated by four: Baxter, Owens & Minor (O&M), General Medical (GM), and Durr-Bergen Brunswig. The consolidation accelerated quickly in recent months. O&M, GM, and Durr spent much of the last two years acquiring regional general-line companies to become national powers capable of going toe-to-toe with Baxter.

As the general-line players have become bigger and fewer, they've also reversed their missions. Previously, general-line distributors expended 80% of their effort as sales and marketing organizations for manufacturers and 20% as logistics providers. Today those percentages are flip-flopped--and then some. For example, O&M now clearly states that it does no selling. Similarly, hospital executives will tell you that Baxter is repositioning itself as a (supply) cost-management company. And some would say that in the hospital market GM and Durr are probably not even devoting 20% of their efforts to direct sales and marketing functions.

These distributors now leave selling to the manufacturers because much of the buying responsibility for commodity-type products and supplies has continued to shift. First it moved from clinicians and clinical departments to materials managers. Then it rose up to the CFOs, and finally out of the facilities altogether to corporate headquarters (at investor-owned systems) or to group purchasing organization (GPO) offices. Contracts are now cut at a group or system level, and then products are moved into the system--presumably most efficiently--by the general-line distributors.

For the most part, general-line distributors handle products perceived--rightly or wrongly--as commodity items, including devices and supplies that have an acceptable quality level and plenty of competitors. But as cost pressures drive purchasing decisions and guidelines away from clinicians and into business offices, the definition of commodity has become broader.

SPECIALTY DISTRIBUTORS

Specialty distributors, meanwhile, have stayed the course that has distinguished their role over the years. They are still regional players with expertise in introducing innovative, cost-effective medical technology to clinical departments. Their salespeople have extensive product knowledge and longstanding relationships with the institutions they call on. Integral to their operations are the value-added elements of in-servicing, product education, 24-hour logistical support, just-in-time (JIT) programs, and serving as a direct link between the customer and the manufacturer on product-related issues.

For specialty distributors, the mission hasn't changed, but it has expanded. Specialty distributors have started to address the new realities of health-care purchasing. As more and more specialty products fall under the purview of the economic buyer, specialty distributors are supporting their features and benefits presentations with data on cost-effectiveness and improved outcomes.

Specialty distributors are also changing collectively to respond to new purchasing demands. The Independent Medical Distributors Association, which represents the nation's specialty distributors, will start a centralized purchasing network this spring. Through this network, a health system will be able to conduct all transactions using a single 800 number for a product line marketed and serviced by specialty distributors.

WHERE DISTRIBUTORS INTERSECT

On the surface, it might appear that specialty distributors (average annual sales of $7 million) and their far larger, general-line cousins operate in separate spheres. However, their businesses overlap in a relatively small area of sophisticated medical technology.

In some cases, a specialty distributor's new technology competes to displace an existing technology that is part of the general-line distributor's mix. In other cases, a specialty distributor may market products that compete with similar products carried by general-line distributors. Such products are new technologies that may be too technical to be considered a clear-cut commodity.

The friction occurs when hospitals try to curtail costs by using a large national distributor as a sole source or JIT provider of all its products. In these cases, the hospitals may stick with a general-line dis- tributor's products regardless of the price, cost-effectiveness, or value-added services offered by a specialty distributor. The hospital's allegiance is to the volume commitment or, in the case of JIT, the process that in theory reduces inventory and transaction costs.

ECONOMIC BUYER: PRICE AND PROCESS

The economic buyers, who have wrested most of the purchasing accountability and responsibility from the clinicians over the last 10 years, have typically negotiated aggressively on price. However, today most would agree that they have driven prices to the floor of manufacturer tolerance.

So, more recently, economic buyers have shifted their strategy to ardently attacking process costs by emphasizing product standardization and JIT programs that reduce both inventories and the number of vendors. The bottom line is that large purchasing organizations are looking to sign larger, longer (evergreen) contracts with the largest manufacturers and general-line distributors. Unfortunately, this strategy produces some other ramifications, including:

*Lengthy contracts leave smaller manufacturers--traditionally the industry's product innovators--finding it tougher to get their products introduced.

*Negotiating the costs and product port- folios for large contracts is so time- and resource-intensive for the health-care systems and GPOs that small manufacturers have trouble getting on the docket.

*General-line distributors are usually brand-neutral. Some would say they lack any brand loyalty and will find and recommend less-expensive brands.

*The large, general-line distributors' profit margins are pressured in the competition for the large blocks of business. This compounds their lack of interest in providing end-user value-added services, particularly concerning product knowledge, training, and education.

*The economic buyers are more distant than ever from the clinical staff and seem even less interested in drawing distinctions between a commodity and a product that deserves clinical attention and support.

THE PLAYOUT?

It has been said that every hospital shares the dream of cutting a single purchase or-der, which is sent to a single vendor, who in turn sends a single invoice. The buyers who dream that way are focused on the process rather than on the needs of clinicians. To clinicians, that vision is instead a nightmare of new technology denied, discouragingly lower service levels, and a frustrating lack of regular contact with company representatives. The staff who use the products, especially specialty products, rely on the product experts to train them on proper product use and to serve as a link to manufacturers on product problems and design improvements.

The one-stop concept should also be a cause for concern for CEOs of health-care organizations. Are they sacrificing cost savings because new technologies couldn't get in the door? And if a cost-effective technology does get in, but without sufficient support and education on proper use, will patient care and satisfaction suffer? Clinicians in downsized institutions are concerned.

Unquestionably, reducing the number of transactions and vendors with which a hospital or health system deals makes sense. One recent study discusses a 250-bed hospital that has more than 2000 drug and device vendors. That's a target for cost savings by anyone's standards. But although 2000 are far too many suppliers, two or three are too few.

Small but growing signs indicate that the movement toward "bigger is better" in distribution will be tempered. Recently, hos-pital purchasing executives have begun to question the long-term value of the JIT programs that were the rage of the early '90s. And instead of using national distributors, several major GPOs have suggested they will revisit the idea of regional general-line distributors--or open their own warehouses.

Moreover, some economic buyers at health and hospital systems are beginning to sense that they are not best served by classifying, in effect, all products as commodities to be delivered by a single megadis- tributor. Perhaps these buyers will see that they can best achieve overall efficiency and cost-effectiveness by distinguishing between those products that need service and attention and those that do not. An efficient network of specialty distributors should handle the former, whereas general-line distributors can provide the latter.

If the health industry settles down to this distribution model, the blockage at the user end of the supply channel will be loosened considerably.