The Other Side Of The Desk

Edition: July 2001 - Vol 9 Number 07
Article#: 1007
Author: Lynn James Everard, C.P.M., A.P.P.

Let's face it. Just being a distributor these days isn't going to create income in perpetuity. Given threats of disintermediation by third party logistics companies and their own customers, distributors have to do more to create value for their customers. Outsourcing programs may be a way to do so.

An outsourcing program is one in which the distributor assumes control of a service currently provided internally, usually by the provider's materials management department. It can range from performing a single function all the way to eliminating the customer's warehouse and taking over all internal distribution activities, maybe even purchasing.

If the distributor is more efficient and can perform the function less expensively than the provider (as it should be able to do, in most cases), outsourcing would seem to make a great deal of sense.

But how can a distributor effectively sell such a program to a customer who is concerned about losing control over a function that, in his or her eyes, calls for their touch to make it right? And how does the distributor address the fears of a customer who is more concerned about losing his or her own job than they are about improving their hospital's bottom line? And how does the distributor convince a skeptical customer to at least take a look at outsourcing?

Dealing with Skeptics

First, every hospital is looking for ways to reduce its cost of doing business. The deadly combination of reimbursement cuts, increased regulation, HIPAA implementation costs and a critical staffing shortage has put many hospitals on the brink of financial ruin. In fact, there may never be a better time to present an outsourcing program to a customer than right now.

Secondly, hospitals are leery of programs that threaten their control. They believe that they should own a process because they care more about doing it right than anyone else. What they really want and need is the reassurance that the distributor is as committed to the success of the program or service as the provider was when they performed it themselves.

Finally, most hospitals know that the decision to move to an outsourcing program often comes down to a comparison of the distributor's cost of labor plus some productivity factor vs. their cost of labor plus their current level of productivity. They need to see some numbers.

In an initial discussion, the distributor should share such productivity standards as product lines picked per hour, and ask the provider to do the same. If the distributor's standards are lower or the provider lacks a standard, the conversation will move forward rapidly.

(Note: In this column, we often talk about the importance of sharing the results of the distributor's cost and productivity initiatives, such as Activity Based Costing. This is another important opportunity to help the customer understand how a distributor can be more efficient.)
It is critical that the distributor's representative encourages the customer to provide the results of its own analysis.

The fourth way a distributor can convince a skeptical customer to consider outsourcing is to encourage the customer to analyze its potential effects on the financial challenges the customer is facing. How can a director of materials know that he or she is providing the proper oversight of their department if they have not fully evaluated an option that would reduce the hospital's overall cost of doing business?

The bottom line for the distributor is this: If you can deliver an outsourced service but have failed to inform your customer of the program's existence, you may be derelict in your duties to the customer. At some point or another, every hospital that is acting responsibly will need to explore how an outsourcing program could benefit them.

Making the First Move

The director of materials management should be the distributor's first point of contact for discussing outsourcing services. It is likely that only this person (not a buyer) will fully appreciate such a program. Buyers are typically more concerned with pricing issues, although some astute ones may make a good initial contact for the program.

In that first discussion, the distributor rep should share some success stories of demonstrated value to the customer. He or she should be prepared to share customer references and some dollar impact numbers.

Distributors should remember to share success stories from customers that most closely resemble the specific customer's profile, i.e., number of beds, specialties, locations, etc. The discussions should also include information about the different kinds of automated materials management and enterprise resource planning systems, as well as automated supply cabinets, with which the distributor has successfully interfaced.

Again, numbers are important; so are implementation timeframes.

Finally, the distributor should let the customer know exactly what information the distributor will need in order to provide a realistic assessment of the situation and, of course, what the price will be for performing the specific services. Will the distributor need to send a team of people onsite? Who will they need to talk to and how long will they need with each person or department head?

When the analysis is done, the distributor should present the results in a straightforward manner. It's important that the customer fully understands the numbers.

Not a Fit?

It may be that, when all is said and done, the customer simply will not benefit from a full-blown outsourcing program. There are many reasons why this could be the case. Maybe even though the customer's productivity cannot match that of the distributor, the customer may enjoy lower labor costs. Perhaps the distributor's price is simply too high for the service. In that case, the distributor must rethink its profitability requirements.

But if a customer is not right for outsourcing, should the distributor walk away? The answer is no. If the supplier retains a distribution agreement with the customer and wants to hold on to the business, it is in his or her best interest to assist the customer in making changes to his operation that will maximize his efficiency without consuming too many of the distributor's resources in the process.

Outsourcing and its many forms can make a considerable difference in a distributor's customer retention capabilities. And as for new customers, it may be just what the doctor ordered.

Distributors should be heartened to know that they have a program that meets all of the value challenges and moves them one more step away from traditional distribution and one step closer to being the value-based service provider they were always meant to be.