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Return Goods Management
-Management------------------~J Return Goods Management By BRUCE R. SIECKER
urrent economic conditions and the recent drug poisoning tragedies have added to pharmacist concern with the already confusing-and sometimes frustratingproblem of managing return goods inventory. A number of developments are prompting pharmacist uncertainty on just where they stand when it comes to return goods. • With more manufacturers opting for a wholesaler-only marketing strategy, sales representatives have less incentive to visit the pharmacy-causing problems if representatives are required to approve returns. • Pharmacists using so-called "generic" houses are often surprised to learn these less traditional suppliers have no provision for returning goods once purchased. • As more companies add an expiration date to their products, interest focuses on how a pharmacy goes about getting products returned for credit or exchange. • An estimated 87% of the hospital pharmacies in this country have some arrangement with suppliers for volume or bid purchasing. In some cases, however, the price quoted under a bid contract has no provision for returns of stock purchased under the contract. • The increasing costs of new pharmaceutical entities make it critical that these products turn as quickly as possible or are credited quickly
C
Bruce R. Siecker, PhD, is professor of pharmacy administration at the School of Pharmacy, Northeast Louisiana University, Monroe, LA 71209. 30
'A major problem pharmacists have with return goods is that no two suppliers seem to have the same policy for handling them.'
should their dating expire. Two dozen outdated products on the shelf with an acquisition cost of $5.85 per 100 is an entirely different proposition from the same amount of product valued at $80 to $149 per 100 doses.
Why Return Goods? There are a variety of reasons for returning a product to the supplier. The most obvious is that the product becomes outdated. Because potency guarantees lapse upon expiration of the dating, a pharmacist cannot afford to dispense such products. There is little dispute over such requests. Shipping errors precipitate return requests. The supplier may have sent the wrong size of package, too many units, the wrong strength or product form, or even the wrong product. A pharmacy may also receive a product it did not order. Returns as a result of a shipping error are pro forma and cause little concern on anyone's part. A product may be returned be-
cause a manufacturer discontinues it or the pharmacist decides not to carry the product any longer, either because of reduced demand or a decision to dispense an alternate source product. Drug recalls also fall into this category in that they are essentially a discontinued product. These returns are noncontroversial. A product may be returned because the package or contents have been damaged in shipment. Production errors, resulting in malformed or broken dosage forms, are another reason for returning stock to the supplier. These, too, are routine. Some pharmacists ask for drug returns in order to reduce excess stock levels or even to help offset current purchases when short of cash. Anticipation purchases" may also result in requests to return an item. Anticipation purchasing occurs when a pharmacist orders from both a direct and wholesale source at the same time, effectively hedging the possibility of delayed shipment against the higher cost from the wholesaler. In these cases there is considerable cost to the suppliers and often controversy over granting return credit. The question is sometimes clouded further because it is difficult to tell with any certainly where the product was purchased and at what cost. A final situation occurs only rarely, but can be considered a return, at least in effect. When a product drops in cost, some manufacturers will give a credit to the pharmacy for stock purchased within a limited period prior to the price drop. In this case, /I
American Pharmacy Vol. NS23 , No . 2, February 1983/86
-there is no product being returned, but the pharmacy's account is adjusted in some manner to reflect the difference in product costs resulting fro m the drop in price.
A Confusion of Policies A major problem pharmacists have with return goods is that no two suppliers seem to have the same policy for handling them. Several manufacturers take back virtually anything a pharmacist wants to return, for whatever reason, and at whatever time. Others maintain a fairly restrictive return goods policy, limiting what may be returned, who may authorize the return, how much can be returned, and for how long. The liberal return goods policy does not seem to produce the degree of abuse that might be expected. Because pharmacists know they can return virtually anything, there is a tendency to forego minor returns. In addition, there is no adversarial relationship created with the supplier-either manufacturer's representative or drug wholesalerthereby eliminating one source of friction between different segments of the industry and any reason for subterfuge on anyone's part. In such cases, the liberal return goods policy is used as a marketing tool, as may be seen in several recent drug advertisements in the trade press. One company even goes as far as using a preprinted form allowing pharmacists simply to check off the product and estimated quantity they are returning. There is no need to get a salesman's authorization or signature, there is no limit on what may be returned, no age limit on the stock, and the company pays all shipping. The pharmacist may elect to take sellable stock in exchange, have the account credited, or be paid for the return. Open packages are accepted without question. The confusion inherent in current industry practices seems almost overwhelming. Some returns have to be authorized; others do not. Some companies require that the salesman deliver the return goods form, but American Pharmacy Vol. NS23, No. 2, February 1983/87
not that the form be signed by the salesman. Some representatives are very reluctant to cooperate in returning goods; others encourage it. Some companies issue payment or credit against existing monies owed; while others will only give other stock in exchange. A few companies allow the pharmacist to choose which form of reconcilation is preferred. Most companies do not pay freight and insurance charges to ship return goods back. Some have expiration deadlines; others do not. Few will take back packages that are opened; very few will take back open packages if the product is still in date. A frustrating problem occurs with several companies that do not accept open packages, but do not return any opened packages that are mistakenly sent to them by pharmacists.
Wholesaler Returns Wholesaler returns present other problems. Most require the salesman to authorize returns, but there
'With proper attention and a little creative problem solving, return goods can be managed ... satisfactorily. '
Improving Your Future APhA '83
Professional Investment
has been a significant decline in the number of calls that wholesaler salesmen make on pharmacists in the last few years. There are cases where the manufacturer's representative must authorize a return to the wholesaler, even though the company only sells through the wholesale channel of distribution. Pharmacists complain that wholesaler return credit is sometimes very slow. A recent case in the Midwest required 364 days before the wholesaler issued a credit. The reasonat least, the explanation-was that it took that long to get credit from the manufacturer. There also seems to be an unspoken practice of taking care of returns from the trunk of the sales representative's car. This "instant credit" is attractive to the pharmacist and probably helps the salesman because there is no record of the return to offset sales figures. The frustration pharmacists feel about return goods stems mostly from the diversity of policies and difficulty in getting proper authorizations and timely adjustments. Just keeping up with all the possibilities is difficult; locating the salesman to authorize a return can be an extreme test of patience.
The Salesman's Viewpoint Pharmacists sometimes have difficulty understanding the reluctance of some manufacturers' representatives in authorizing and processing returns. The problem is one of perspective and failure to appreciate how the system works. With less emphasis on direct selling, the detail representative may see 31
..... less value in visiting the pharmacy. Valuable daytime hours will tend to be spent, therefore, where it will do the most good-in physicians' offices. Central purchasing is also a problem for some sales people. A detail representative's livelihood is based on meeting sales quotas. If a central office in another territory purchases for all pharmacies in an organization, the salesman may or may not get credit for the sale. The problem is made much worse, however, if an individual pharmacy-this time in the salesman's territory-elects to return products through that pharmacy. Thus, the sales representative not only gets no credit for the sales, but the returned products are charged against his territory's sales figures. There may also be a problem when all sales flow through a wholesaler. In some cases product sales are divided among representatives in a given wholesaler's marketing area for purposes of arriving at sales figures for each sales representative. The problem occurs when a pharmacist returns goods. In this case, 100% of the return is charged against the salesman's figures, whereas only a proportion of the original sale was credited in the first place.
Establishing Procedures With proper attention and a little creative problem solving, return goods can be managed quite satisfactorily. The first step is to define stocking policies for the pharmacy so your staff and salesmen will know what you expect. Specific attention should be directed at maximum order quantities, how long stock should remain on the shelf, and the frequency of inventory review. A preferred source of supply for multiple source prescription products should be discussed. The problem of duplicate inventory, which adds to a pharmacy's carrying costs and worsens the return goods problem, will be reduc__ J gre atly by achieving agreement among all pharmacists on what product source to stock.
32
'Don't duck the return goods issue. Actively manage the problem .... '
No pharmacy can or should stock every item available, yet many attempt to do so by having no firm policy on ordering prescribed items not commonly in stock. The manager should establish a policy which describes in detail when, and under what conditions, a special order will be placed or if any special orders will be made at all. Assuming some special orders will be tolerated, order the smallest possible package even though the unit cost will be higher. The product cost can be recovered in most cases and there will be less carry-over stock to support or return later. Assign someone specific responsibility for managing returns. In a large pharmacy one person can be given primary responsibility, with others involved to handle specific company -lines. The manager should hold everyone accountable for following the pharmacy's buying, stocking, and return goods policies. Special attention, especially spot checks, should be directed at assuring that the return goods review schedule is followed.
Maintaining Contacts It is important that the pharmacy maintain a current, complete list of manufacturer sales representatives, with addresses, telephone numbers, and answering services where applicable. The next step is to obtain a current, complete description of each supplier's return goods policy and procedure. Ask for a simplified de-
scription-no more than one page long-and keep pressing until you get one. Once each representative is identified and understands the importance of maintaining frequent contact with the pharmacy, it is a good idea to agree on a visit schedule-at least every six mon ths-to process return goods. An excellent time to schedule a visit by sales representatives who must authorize returns is approximately one week after your staff review of existing lines for returns. Someone should also be assigned to watch inventory levels on guaranteed sale items that have extended dating. Any remaining stock (in excess of normal supplies) left within ten days of dating should be pulled, packed, and shipped for credit. Payments should reflect the returned goods, so you are not waiting for a credit. This process can be expedited by having the sales representative leave a signed, dated (on the pull date) return authorization form at the time the order is placed. This alerts the salesman of your intention to maintain strict control over inventory levels and also eliminates tracking down the rep, when it is time to return leftover inventory. When a product is not selling and cannot be returned because it is still "in date," the pharmacy incurs very heavy carrying costs. Short of waiting until the product dating expires, try arranging to barter it with neighboring pharmacies that may be moving it. Obviously, reciprocal courtesy is expected, but the idea is only to accept stock that is in demand in your pharmacy in exchange for stock you cannot move. Finally, don't duck the return goods issue. Actively manage the problem and do not be reticent about pressing the issue with company sales people. Contact district and regional supervisors-even home office managers-if you fail to get satisfaction. The policy in effect should be readily available to all, and there is little purpose served in simply tolerating a bad situation. D
American Pharmacy Vol. NS23, No _2, February 1983/88
urrent economic conditions and the recent drug poisoning tragedies have added to pharmacist concern with the already confusing-and sometimes frustratingproblem of managing return goods inventory. A number of developments are prompting pharmacist uncertainty on just where they stand when it comes to return goods. • With more manufacturers opting for a wholesaler-only marketing strategy, sales representatives have less incentive to visit the pharmacy-causing problems if representatives are required to approve returns. • Pharmacists using so-called "generic" houses are often surprised to learn these less traditional suppliers have no provision for returning goods once purchased. • As more companies add an expiration date to their products, interest focuses on how a pharmacy goes about getting products returned for credit or exchange. • An estimated 87% of the hospital pharmacies in this country have some arrangement with suppliers for volume or bid purchasing. In some cases, however, the price quoted under a bid contract has no provision for returns of stock purchased under the contract. • The increasing costs of new pharmaceutical entities make it critical that these products turn as quickly as possible or are credited quickly
C
Bruce R. Siecker, PhD, is professor of pharmacy administration at the School of Pharmacy, Northeast Louisiana University, Monroe, LA 71209. 30
'A major problem pharmacists have with return goods is that no two suppliers seem to have the same policy for handling them.'
should their dating expire. Two dozen outdated products on the shelf with an acquisition cost of $5.85 per 100 is an entirely different proposition from the same amount of product valued at $80 to $149 per 100 doses.
Why Return Goods? There are a variety of reasons for returning a product to the supplier. The most obvious is that the product becomes outdated. Because potency guarantees lapse upon expiration of the dating, a pharmacist cannot afford to dispense such products. There is little dispute over such requests. Shipping errors precipitate return requests. The supplier may have sent the wrong size of package, too many units, the wrong strength or product form, or even the wrong product. A pharmacy may also receive a product it did not order. Returns as a result of a shipping error are pro forma and cause little concern on anyone's part. A product may be returned be-
cause a manufacturer discontinues it or the pharmacist decides not to carry the product any longer, either because of reduced demand or a decision to dispense an alternate source product. Drug recalls also fall into this category in that they are essentially a discontinued product. These returns are noncontroversial. A product may be returned because the package or contents have been damaged in shipment. Production errors, resulting in malformed or broken dosage forms, are another reason for returning stock to the supplier. These, too, are routine. Some pharmacists ask for drug returns in order to reduce excess stock levels or even to help offset current purchases when short of cash. Anticipation purchases" may also result in requests to return an item. Anticipation purchasing occurs when a pharmacist orders from both a direct and wholesale source at the same time, effectively hedging the possibility of delayed shipment against the higher cost from the wholesaler. In these cases there is considerable cost to the suppliers and often controversy over granting return credit. The question is sometimes clouded further because it is difficult to tell with any certainly where the product was purchased and at what cost. A final situation occurs only rarely, but can be considered a return, at least in effect. When a product drops in cost, some manufacturers will give a credit to the pharmacy for stock purchased within a limited period prior to the price drop. In this case, /I
American Pharmacy Vol. NS23 , No . 2, February 1983/86
-there is no product being returned, but the pharmacy's account is adjusted in some manner to reflect the difference in product costs resulting fro m the drop in price.
A Confusion of Policies A major problem pharmacists have with return goods is that no two suppliers seem to have the same policy for handling them. Several manufacturers take back virtually anything a pharmacist wants to return, for whatever reason, and at whatever time. Others maintain a fairly restrictive return goods policy, limiting what may be returned, who may authorize the return, how much can be returned, and for how long. The liberal return goods policy does not seem to produce the degree of abuse that might be expected. Because pharmacists know they can return virtually anything, there is a tendency to forego minor returns. In addition, there is no adversarial relationship created with the supplier-either manufacturer's representative or drug wholesalerthereby eliminating one source of friction between different segments of the industry and any reason for subterfuge on anyone's part. In such cases, the liberal return goods policy is used as a marketing tool, as may be seen in several recent drug advertisements in the trade press. One company even goes as far as using a preprinted form allowing pharmacists simply to check off the product and estimated quantity they are returning. There is no need to get a salesman's authorization or signature, there is no limit on what may be returned, no age limit on the stock, and the company pays all shipping. The pharmacist may elect to take sellable stock in exchange, have the account credited, or be paid for the return. Open packages are accepted without question. The confusion inherent in current industry practices seems almost overwhelming. Some returns have to be authorized; others do not. Some companies require that the salesman deliver the return goods form, but American Pharmacy Vol. NS23, No. 2, February 1983/87
not that the form be signed by the salesman. Some representatives are very reluctant to cooperate in returning goods; others encourage it. Some companies issue payment or credit against existing monies owed; while others will only give other stock in exchange. A few companies allow the pharmacist to choose which form of reconcilation is preferred. Most companies do not pay freight and insurance charges to ship return goods back. Some have expiration deadlines; others do not. Few will take back packages that are opened; very few will take back open packages if the product is still in date. A frustrating problem occurs with several companies that do not accept open packages, but do not return any opened packages that are mistakenly sent to them by pharmacists.
Wholesaler Returns Wholesaler returns present other problems. Most require the salesman to authorize returns, but there
'With proper attention and a little creative problem solving, return goods can be managed ... satisfactorily. '
Improving Your Future APhA '83
Professional Investment
has been a significant decline in the number of calls that wholesaler salesmen make on pharmacists in the last few years. There are cases where the manufacturer's representative must authorize a return to the wholesaler, even though the company only sells through the wholesale channel of distribution. Pharmacists complain that wholesaler return credit is sometimes very slow. A recent case in the Midwest required 364 days before the wholesaler issued a credit. The reasonat least, the explanation-was that it took that long to get credit from the manufacturer. There also seems to be an unspoken practice of taking care of returns from the trunk of the sales representative's car. This "instant credit" is attractive to the pharmacist and probably helps the salesman because there is no record of the return to offset sales figures. The frustration pharmacists feel about return goods stems mostly from the diversity of policies and difficulty in getting proper authorizations and timely adjustments. Just keeping up with all the possibilities is difficult; locating the salesman to authorize a return can be an extreme test of patience.
The Salesman's Viewpoint Pharmacists sometimes have difficulty understanding the reluctance of some manufacturers' representatives in authorizing and processing returns. The problem is one of perspective and failure to appreciate how the system works. With less emphasis on direct selling, the detail representative may see 31
..... less value in visiting the pharmacy. Valuable daytime hours will tend to be spent, therefore, where it will do the most good-in physicians' offices. Central purchasing is also a problem for some sales people. A detail representative's livelihood is based on meeting sales quotas. If a central office in another territory purchases for all pharmacies in an organization, the salesman may or may not get credit for the sale. The problem is made much worse, however, if an individual pharmacy-this time in the salesman's territory-elects to return products through that pharmacy. Thus, the sales representative not only gets no credit for the sales, but the returned products are charged against his territory's sales figures. There may also be a problem when all sales flow through a wholesaler. In some cases product sales are divided among representatives in a given wholesaler's marketing area for purposes of arriving at sales figures for each sales representative. The problem occurs when a pharmacist returns goods. In this case, 100% of the return is charged against the salesman's figures, whereas only a proportion of the original sale was credited in the first place.
Establishing Procedures With proper attention and a little creative problem solving, return goods can be managed quite satisfactorily. The first step is to define stocking policies for the pharmacy so your staff and salesmen will know what you expect. Specific attention should be directed at maximum order quantities, how long stock should remain on the shelf, and the frequency of inventory review. A preferred source of supply for multiple source prescription products should be discussed. The problem of duplicate inventory, which adds to a pharmacy's carrying costs and worsens the return goods problem, will be reduc__ J gre atly by achieving agreement among all pharmacists on what product source to stock.
32
'Don't duck the return goods issue. Actively manage the problem .... '
No pharmacy can or should stock every item available, yet many attempt to do so by having no firm policy on ordering prescribed items not commonly in stock. The manager should establish a policy which describes in detail when, and under what conditions, a special order will be placed or if any special orders will be made at all. Assuming some special orders will be tolerated, order the smallest possible package even though the unit cost will be higher. The product cost can be recovered in most cases and there will be less carry-over stock to support or return later. Assign someone specific responsibility for managing returns. In a large pharmacy one person can be given primary responsibility, with others involved to handle specific company -lines. The manager should hold everyone accountable for following the pharmacy's buying, stocking, and return goods policies. Special attention, especially spot checks, should be directed at assuring that the return goods review schedule is followed.
Maintaining Contacts It is important that the pharmacy maintain a current, complete list of manufacturer sales representatives, with addresses, telephone numbers, and answering services where applicable. The next step is to obtain a current, complete description of each supplier's return goods policy and procedure. Ask for a simplified de-
scription-no more than one page long-and keep pressing until you get one. Once each representative is identified and understands the importance of maintaining frequent contact with the pharmacy, it is a good idea to agree on a visit schedule-at least every six mon ths-to process return goods. An excellent time to schedule a visit by sales representatives who must authorize returns is approximately one week after your staff review of existing lines for returns. Someone should also be assigned to watch inventory levels on guaranteed sale items that have extended dating. Any remaining stock (in excess of normal supplies) left within ten days of dating should be pulled, packed, and shipped for credit. Payments should reflect the returned goods, so you are not waiting for a credit. This process can be expedited by having the sales representative leave a signed, dated (on the pull date) return authorization form at the time the order is placed. This alerts the salesman of your intention to maintain strict control over inventory levels and also eliminates tracking down the rep, when it is time to return leftover inventory. When a product is not selling and cannot be returned because it is still "in date," the pharmacy incurs very heavy carrying costs. Short of waiting until the product dating expires, try arranging to barter it with neighboring pharmacies that may be moving it. Obviously, reciprocal courtesy is expected, but the idea is only to accept stock that is in demand in your pharmacy in exchange for stock you cannot move. Finally, don't duck the return goods issue. Actively manage the problem and do not be reticent about pressing the issue with company sales people. Contact district and regional supervisors-even home office managers-if you fail to get satisfaction. The policy in effect should be readily available to all, and there is little purpose served in simply tolerating a bad situation. D
American Pharmacy Vol. NS23, No _2, February 1983/88