Distributors wrestle with serving new integrated systems

Health Industry Today, August, 1995 by Curt Werner

Distributors must control product inflow

To serve integrated systems, the distributor of the future will be in prime position to truly control the supply chain and create efficiencies, says Charles Smith, until recently president of the Southern California Materials Management Alliance in San Diego and now with NCI, Rancho Santa Margarita, Calif. "You can't have 20 different distribution points that serve a system. The distributor must control the inflow of products," he says.

Smith feels that distributors are still perceived as "only the distributor" and as outsiders by the hospital industry. "It's difficult to make hospitals believe and trust their distributors. As long as they're paying on a margin basis, that distrust will remain."

Smith would replace cost-plus with a system in which one distributor becomes a partner with a set goal of cost reduction. That distributor would sit on the standards committee of a hospital and work with the hospital on all strategic processes.

That arrangement could present different problems, however. "If a distributor becomes part of the decision-making team at a system or a hospital, that distributor will have partner relationships with many manufacturers. That could allow the distributor to make product decisions that might not completely benefit their IDS or hospital partner. In other words, a distributor will have agreements with competing manufacturers. Whose products will that distributor recommend as the lowest priced to its IDS/hospital partner on the standards committee as it fulfills its commitment to provide the lowest-cost products? There's no way to have traditional distribution relationships based on cost-plus and achieve what you want in cost reduction and in capitated supply agreements. The agreement with the IDS or hospital must come before relationships a distributor might have with manufacturers."

General Medical Corp., Richmond, Va., closed a deal in June to supply Graduate Health System in Philadelphia, an IDS that has seven hospitals, 14 primary care facilities and an HMO.

"The easiest part is getting an audience with the system administrators," says G.M. president Steve Nielsen. "They're all looking for partnerships that can reduce total costs."

Multiple IDS decision makers

At the same time, he says the most difficult part is bringing a system's distribution decisions to closure. He blames this shortcoming mostly on the personalities involved within systems, multiple decision makers, and the fact that needs of alternate site facilities are different than hospitals' needs. These factors combine to make lead time to close these deals fairly lengthy, he says.

As for margin differences, Nielsen says that unless a system buys and distributes through a hospital, most systems are receptive to allowing different margins because they understand the different levels of service required to serve their different facilities.

"Our highest of high goals is the ability to serve integrated systems," he said. "We'll continue to fine-tune this ability and pursue all viable systems in the country."