What Business Are You In?

Edition: April 2000 - Vol 8 Number 04
Article#: 287
Author: Chris Kelly

Savvy business people have it figured out. Focus on your core competencies and outsource wherever possible. Jack Welch at General Electric, arguably one of the best business minds in the world, has preached this for years. And look at the value he has delivered for his customers, and shareholders, year in and year out. If a highly visible leader like Welch has it figured out, why do our customers insist on bringing more functions inside their organizations, rather than looking outside?

It seems like every time our industry faces a crisis, be it DRGs, managed care, PPS or the Balance Budget Act, the first place materials managers, office managers or purchasing agents go to recapture hard dollars is into the pockets of their distributors. Why is one of the first questions many a materials manager will ask of a supplier is, can I buy it on a direct basis and bypass the distributor? The thinking is that they will save their facility a great deal of money, even though it takes more manpower and logistical expertise to do so. Today, their silver bullet is e-commerce -- ‘It will lower the prices on the products we buy, right?’

In many cases, they take this to an extreme and go so far as opening their own distribution facilities. Our response is usually, why would anyone build out an infrastructure this complicated to get a net return of less than 2%? Especially when it is already available from a number of different sources for whom it is a core competency? Great question. We feel these people must be either misinformed, power hungry or simply ignorant. Or maybe a combination of the three.

They aren’t to blame though -- this is a monster of our own making. As Lynn Everard accurately points out (see page 8), many distributors have made the mistake of thinking they are in the product business, when in fact they are in the service business. And speaking from personal experience, I can tell you that you sell a product much differently than a service. As a result, we’ve directed the attention of the customer to the price of the product they buy, not the value of the services provided.

Don’t get me wrong. Many distribution companies do not fall into this trap (see the comments of Al Cook, chief resource officer, St. Francis Medical Center, page 12). The industry as a whole though, performs at a below average level in communicating what we are good at, and why it’s of value to the customer.

Look at the e-commerce buzz in the hospital market these days. What has many materials managers juiced? The money they will save on products. And although some of these savings may materialize, the true savings will be in process costs that e-commerce can eliminate. The e-commerce companies know this and understand they absolutely need distributors to make the whole thing work, but why take away a perceived advantage. These misconceptions will continue to exist though, as long as distributor organizations and their manufacturing partners are communicating the wrong message.

Everard has it nailed when he says, ‘The services provided by distributors have a quantifiable value to every customer and that value must be communicated effectively by every sales person. Everyone in a distributor organization must know what these services are and how to share [this message] with customers.’

Amen. Let the communication begin.