MODERN HEALTHCARE certainly caused a stir in the medical products industry with Harvey Rickles' piece "Big Deals are a big deal," in "Commentary" (April 19, p. 52).
Many people were surprised or disappointed that a publication of your stature would run a commentary that they perceived as blatantly self-serving. Number me among your supporters. I thought the piece was provocative, and it raised several points of interest and importance. Among Rickles' most significant observations were:
* Integrated delivery networks should be, and are, re-examining longstanding relationships with group purchasing organizations and distributors.
* Supply chain improvements remain among the most fertile savings and profit opportunities for integrated and acute-care providers.
Rickles hits hard on the case that relationships with distributors and group purchasing organizations are largely parasitic and that the resulting medical supply chain is severely broken. It comes as no surprise that he concludes that third-party logistics firms such as his can provide a solution. He may well be right.
To play fair, though, we should scrutinize Rickles' facts. Having participated in some of the work that makes up our industry's "Efficient Healthcare Consumer Response" initiative (a 1996 study done by El Segundo, Calif.-based CSC Consulting, which Rickles cited), I would take exception to his comparison of healthcare supply chain costs with such costs in other industries.
Healthcare is unique in that we measure supply chain costs right up to the bedside or point of product use. In other industries, the supply chain ends when the consumer takes the product off the shelf. We all know that end-users incur other considerable costs related to distribution, storage and ownership before they actually use many products. Rickles' flawed logic undermines his point that the healthcare chain is "20 years behind" other industries in having a best-practice model.
He is equally off the mark in his assessment of the industry's service quality. Quoting his own company's research, he sets industry service levels at a remarkably dismal 84%-results any distributor knows are woefully inaccurate. Many competent medical/surgical product distributors consistently provide customer fill rates in the high 90s. Most distribution contracts for national group purchasing organizations impose financial penalties for anything less than stellar initial fill performance.
As a distributor, I welcome third-party logistics firms like Rickles'. By definition, they aren't trying to compete directly with distributors, as they won't take title to inventory. Frankly, I don't blame them; virtually all the risks lie in inventory ownership and management. The third-party logistics providers just want to teach our customers how to improve on what we do. The reward would be the net margin distribution that companies earn.
Rickles didn't seem to have any research on this, but it is certainly available. Interested integrated delivery networks would be wise to check the gross and net margins of the largest healthcare distributors to gauge the prospects for success. The annual "HIDA (Health Industry Distributors Association, Alexandria, Va.) Survey of Financial Performance for Healthcare Distributors" is another valuable source of detailed information.
East Providence, R.I.