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Wholesalers: Adversaries or Agents?
Wholesalers: Adversaries or Agents? By JOHN T. FAY Jr.
1
Traditionally, the relationship between buyer and seller has had a certain adversarial quality-more conflict than cooperation. That timeworn salutation-"Have I got a deal for you!"-is enough to put any buyer on guard. Immediately, a defensive posture is assumed. But what happens when the invitation to buy comes from a machine? With increasing frequency, pharmacists and wholesalers are using computers to communicate; several articles in this issue of American Pharmacy illustrate that point. Speed, ease of transmission, more efficient service levels, improved turnover rates, reduced cash investment, and balanced delivery schedules are among the more obvious benefits. Equally important, however, is the replacement of some of the human frailties of ordertakers with the relative accuracy and remarkable memories of the machines. Computers cannot think, as the saying goes, but they remember an awful lot. Unless programmed to do so, they won't argue with you either. The fact is, however, that because of technology, drug wholesalers and pharmacists now enjoy a buyer/seller relationship on a different level from that of the past. Wholesalers are more agents than adversaries-if, in fact, they ever were adversaries. Still, a basic problem persists; as middlemen, should wholesalers be sales agents for manufacturers or purchasing agents for their
John T. Fay Jr., PhD, has just left the position of director of public affairs for the National Wholesaler Druggists' Association to become vice president of retail services, McKesson Drug Co., 1 Post St., San Francisco, CA 94104. 18
customers? To some degree, wholesalers must perform both functions, and the two forms of agency are not mutually exclusive. Current business experience clearly supports movement toward expansion of the wholesaler's role as purchasing agent. It is a strategy described by management consultants as "forward integration." Pharmacists and wholesalers are working together more closely, more often and more effectively to their mutual benefit. This "change for the better" comes during a period of unusual dynamism in the distribution industry. It is an important, integral part of the structural change now gener-
Year
1964 1965 1966 1967 1968 1969 1970 197i 1972 1973 1974 1975 1976 1977~
1978 1979
ally recognized by industry observers. James C. McKeon, for example, makes this distinction: The stability at the macrowholesale level is misleading. At the micro-level, wholesaling is very dynamic. The channel structure depends upon the time-space-quantityvariety gap between the assortments of sellers and buyers. To the extent that this gap changes, the wholesaling task changes. In simpler language, the closer you get to the action in wholesaling, the more interesting and innovative it is. The trend line for wholesalers' market share of prescription sales clearly indicates a turnaround since
U.S. PrescriJ!tion Sales 1 ($ miUions)
Wholesale Share 2 (o/o)
NWDA Total Wholesale Sales 3 ($ millions)
2,497 2,779 3,011 3,266 3,655 4,008 4,322 4,667 5,018 5,507 6,083 6,895 7,669 8,233 9,155 10,044
f48.7 48.4 47.5 47.8 47.5 47.6 46.9 46.4 45.6 44.9 45.2 46.9 48.5 49.1 51.4 53.0
1615 1836 1944 2101 2118 2297 2397 2503 2671 2889 3230 3760 4115 4482 4910 5470
1. Pharmaceutical Manufacturers Association-Direct Human Use Dosage Form Sales. Reported as billed (befor.e deducting cash discounts on sales and other marketing expenses), less returns and allowances. Includes sales value of products bought and resold without further processing or repack.aging as well as the dollar value of products made from own materials for other manufacturers' resale. Excluded are all royalty payments, interest and other income. 2. Pharmaceutical Manufacturers Association-from class of customer analysis. 3. National Wholesale Druggists' Association-estimates of active member sales based on Operating Surveys.
American Pharmacy Vol. NS21, No. 11, November 1981/634
••• Scenes from the Wholesale Process Using an inventory control device (right), the pharmacist can record current stock needs, and then transmit the information directly to the wholesaler's computer via telephone (far right).
1973, after a period of decline (see chart) . Computerization and application of other technologies are major factors in this growth. Other factors that are involved in distribution dynamics include: competitive intensity, a changing product/services mix, consolidation of · the customer base, new efforts in managerial and marketing continuity, improved productivity, and innovation in pricing strategy. The latter point can be illustrated by the current shift to cost-plus pricing that follows by several years the pharma1 cist's shift from markup to professional fee methods. A process of natural selection has been occurring as more pharmacists recognize the value of concentrating their purchases with a single whole) saler-the primary supplier concept. Similarly, wholesalers are seeking out the best-managed pharl macies in a given market to concentrate and improve their customer base. , Some attrition has been un. avoidable during periods of growth. Improperly managed, underfinanced businesses at both the wholesale and retail levels leave the market-to the strongest competitors. One obvious result of this change is ' a measurable increase in the effec1 tiveness of competition, sharpened and focused by market forces. I The relative numbers of pharmacies and drug wholesalers should be 1
considered here. If we assume approximately 50,000 pharmacies and 500 wholesale houses in the United States, maximum efficiency in the sense of classical economics should be achieved with a ratio of one wholesale house serving 100 pharmacies. For many years, however, the operative ratio has been more like 1:300, with many pharmacies dividing their purchases among two or three wholesalers.
Primary Relationships Increasing recognition of the primary supplier concept changes this service ratio. From the former average of 300 pharmacies in a typical wholesaler's customer base, movement toward a smaller base is apparent. Much the same pattern can be observed in the United Kingdom and other countries where computerization and consolidation have accelerated the survival of the fittest in drug marketing. Information collected annually by the National Wholesale Druggists' Association (NWDA) supports these trends with statistical detail. NWDA member firms operate 313 distribution centers that generated $6.55 billion in sales for 1980. This group of businesses accounts for some 85% of the total drug wholesale volume. Accordingly, the entire market approaches $7.5 billion from something less than 500 wholesale
houses employing about 22,000 people. This is a relatively small portion of the trillion-dollar market for wholesaling in general-some 300,000 firms employing 5 million people in all classes of trade. However, most analysts agree that drug wholesalers lead the field in terms of sophisticated automation and in consolidation of facilities for cost control and efficiency. A significant part of this success can be traced to the fewer than 100 pharmacists who are executives of wholesale drug firms. Commonly, they are chief executives and policy makers, as indicated by representative profiles that follow. Their influence is distributed throughout the industry in small and large organizations.
Perceptions of Value An important change in the perception of value added by the wholesale function has been described by J. J. Fenstermaker:
Price, so long as it is fair, is no longer the basis of the pharmacistwholesaler relationship. Business systems and management skills are now appreciated by the customer who is willing to pay for them, not at the lowest price alone, but at a fair price based on the quality of information delivered. There is much support for this argument. In November 1978, Ameri-
I
~erican Ph::~rm::~cv
Vol. NS21. No. 11, November 1981/635
iO
Computers at the wholesale site perform varied tasks-processing orders, checking inventory and billing-but not all the tasks at the warehouse. (Photos /1y Mark Farris , caurtesy of Smith Drug Co., Sparla11l
can Druggist reported on replies from 997 pharmacies to a questionnaire designed to determine "how retailers feel about drug wholesalers." Based on these data, most pharmacists feel good about therelationship and one third indicated that it had become "increasingly close". in the past few years. Between 1972 and 1977, wholesale purchases of pharmaceuticals for this sample of pharmacies increased from 61.8% to 67.4%. When asked to compare 1978 and 1977, 52% of the respondents said that they were "buying more merchandise from wholesalers today." Wholesaler salesmen were characterized as "helpful" by 76.9%. Interest in the newer computer-based services was indicated with nearly 60% of the respondents recognizing a benefit. · Two years later, the October American Druggist reported the results of a similar survey based on 1,144 replies from a randomly selected group of 4,000 pharmacies. This response, a relatively high level for a mail study, was seen as a reflection of "the strong interest that exists in the entire subject of wholesaler-retailer relations.'' The 1980 summary demonstrated increased application of wholesalerprovided services for pharmacists and indicated a general level of satisfaction-64.5% noted that they were "happy with their primary 20
wholesaler." The magazine underscored a trend line with the observation that "five years ago, the average respondent did business with 3 wholesalers; today, 2 wholesalers." Although 90.7% of the respondents admitted that "they could not get along without the service of a wholesaler," about one third reported some degree of discontent. Among the complaints: shorts and omits; return goods policies; delivery schedules; out-ofstock items; errors in order filling; poor communications.
Drug wholesalers lead the field in terms of sophisticated automation. The January 1981 issue of the NARD Journal reported on 800 replies to a mail survey of readers in an article entitled "How Independents Perceive Wholesalers." Again, some negatives and a few apparent misunderstandings were expressed, but 75% of the respondents were using full-service wholesalers and felt that they were "getting their money's worth." Satisfaction with wholesalers that had computer-based services was indicated by 67% of the pharmacists reporting.
Yet, there was clear indication of doubt with reference to pricing and delivery schedules. Some of therespondents questioned the integrity of the wholesaler's pricing structure and failed to make the connection between increased discounts and reduced delivery frequencies. Innovation in pricing by wholesalers is a logical response to competitive intensity in a growing market. Some 25% of wholesalers now offer cost-plus pricing (percent or fee). Acceptance of this strategy has been facilitated by computerized order entry with invoices in pick sequence, shortened payment terms for customers and more realistic delivery frequencies. Wholesalers include as important influences on their choice of pricing: • The method of order entry; • The frequency of delivery; • The amount of service involved. Daily delivery remains the norm, but the trend is toward a reduced schedule. Payment terms for most customers are twice monthly, with a few firms moving to weekly payment. Addressing the 1980 year-end sales conference of Bergen Brunswig Corporation, Chairman Emil P. Martini, a pharmacist himself, described the primary supplier commitment as "causing major changes in the entire economics of the business." Martini argued that "costAmerican Pharmacy Vol. NS21, No. 11, November 19811636 I
A monthly printout from the wholesaler's computer provides the pharmacist with a detailed index of sales (right).
plus selling and cost-plus-a-fee are quickly eliminating the traditional adversary buyer-seller relationship." As pharmacists learn about the value of contemporary, computerbased wholesale service, some direct-selling manufacturers lag behind. But the message is clear and the information on wholesale sales and market share points in one direction-up.
Agents of Change To clarify the trend further, NWDA has been collecting experience data from wholesalers on the use of retail computer systems. The report for August 1981 summarizes responses from 94 firms operating 258 distribution centers (82% of the 313 NWDA member houses); during the year, another 8,000 pharmacies were convinced of the benefits that ·accompany electronic order entry. The table on page 23 compares the results of the 1981 survey with similar data for 1979. As indicated, there was growth in all categories of service in terms of the numbers of pharmacies using the service. For example, the number of pharmacies using electronic order entry almost doubled in the two-year period to a total of nearly 32,000. Customized price stickers are used now by more than 35,000 pharmacies. Demonstrable growth in applica-
tions also is shown in shelf labels for inventory control, product movement reports, microfiche systems, and management information reports. Although the last service increased in use, the percentage of wholesalers offering the service decreased. There were also decreases in the percentage of wholesalers offering third-party processing and on-line terminals or in-pharmacy computers. NWDA estimates that whole-
Information on wholesale sales and market share points in one direction-up. salers spend some $32 million a year to provide these services to customers. Many wholesalers offer a package of services to the pharmacist for something less than $100 per month. The more obvious measurable benefits include sales increases on the order of $75-100 per square foot, an increase in turnover of stock generally several turns per year, and decreases in inventory costs of 20-25%. Public companies in drug wholesaling regularly report specific re-
'lllerican Pharmacy Vol. NS21 No. 11 November 1981/637 I
I
suits from computer-based services that illustrate the remarkable changes in progress. McKesson Drug Company is the largest of these (with a market share approaching 25%) and the only national firm. The company operated from 60 distribution centers during fiscal 1981, down from 92 houses in 1974. These larger, more efficient centers have posted operating records and extraordinary growth for the last four years. I McKesson's Economost system for order entry currently is in use by nearly 7,000 pharmacies, up 1,000 from fiscal year 1980. Another 8,400 pharmacies use Econotone, an order-entry system using the touchtone telephone. Orders through these two systems account for 77% of the firm's volume. In total, McKesson serves some 16,000 pharmacies and 2,000 hospitals. During the next two years, the company expects to complete the electronic linkages with virtually all its customers. Internally, McKesson computers track inventories, orders, costs, and the location of some 50,000 items. Five years ago, 140 buyers were employed to process manufacturer orders. No\A: 13 buyers, with the help of sophisticated technology, supervise the acquisition of an inventory that has increased by 50%. At Bergen Brunswig, with 27 distribution centers in 15 states, 95% of 21
the order volume from customers is received electronically. Additionally, the company is linked computer-to-computer with 41 suppliers that account for more than 50% of its total purchases. New sales records have been set in each of the last 12 years.
Living in the Future
Trends in Electronic Order Entry* %
100 90
Strategic planning is more than a process, tool or technique-it is a managerial philosophy. Ordinarily, the information available to the beginning planner is inadequate. A first step, then, is to improve the information base and describe with accuracy what is happening now. Edward S. McKay warns the novice to recall two truisms: • The one thing we know for sure about a sales forecast is that it is always wrong. • You are always vulnerable to a competitor who does sounder strategic planning. NWDA members have an edge in terms of the information base required for planning. Each year the association publishes an operating survey that is comprehensive, exact and reliable. An additional service offered is a statistical comparison of an individual firm's results against those for the industry as a whole. In the same manner, well-managed pharmacies make use of the Lilly Digest analysis. In 1981, NWDA President John Morson made a preliminary report on the industry's results for 1980 and looked back to 1974 when the current favorable trend began. In that six-year period, sales were up 103%. After adjusting for inflation, Morson estimated that at least half of the increase represented new
80 70
60 50 40 30 20 10 0
June 1979
June 1981
June 1980
June 1982 (projected)
~Weighted average of 258 whol.esalers.
business. A major reduction in operating cost was achieved from 11.84% of sales in 1974 to 8.60% last year. Inventory turnover improved by 20% and productivity was up 46% in the office and 39% in the warehouse, even with increased wages, taxes and energy costs. At the same time, gross margin for the period dropped sharply from
13.67% of net sales to 11.22% reflecting, in Morson's terms, "a very ' substantial reduction in the prices we charge our customers." He noted that pharmacy operating costs as reported by the Lilly Digest decreased for the first time in many years and suggested that "whole- : salers have contributed to that improved performance through pricing and the systems that offer our I
NWDA-1980 Wholesale Sales .,.,
Product Mix Pharmaceuticals Proprietaries Toiletries Sundries Other
Percent 63.1 17.0 11.1 7.2 1.5
.'®
··~'·
'%
Percent
Customer Distribution
59.6 21.8 11.3 4.3 2.9
Independent pharmacies Chain drugstores Hospitals Chain warehouses Other
Sllurce: NWDA Operating Survey, 1980
22
8
American Pharmacy Vol. NS21 No. 11 November 1981/63 I
I
Computer-Based Services for Pharmacy, 1979-1981 Percent of Wholesalers Offering 1979* 1981**
Service Automated accounts receivable Customized pri~e stickers · Shelf labels/inventory control Electronic order entry Management information report Product movement report Third-party processing Microfiche system Retail pricing guide Scientific reorder controls On-line terminal or in-pharmacy computer Stock status/special buys • Separate report • Microfiche
Number of Pharmacies Using 1979* 1981**
79 97 88 91 78 76 50 88 31 42 63
76 96 97 91 57 76 22 75 47 36 39
S,576 24,300 21,778 16,685 8,035 9,869 2,862 17,150 6,729 6,657 1,229
6,041 35,357 31,297 31,796 13,705 13,865 4,342 25,190 9,283 7,956 1,504
-
55 61
10,761 9,576
18,327 19,218
-
Source: NWDA Special Surveys, 1979 and 1981, W. W. Fraser. •Estima tes from 95 organizations operating 273 houses (83'7r of membership) ••Estimates from 94 organizations operating 258 hou.~ es (82'7r of membership)
customers ways to become more efficient." To build on the information available and to develop "A Strategic Growth Plan for Health Care Distribution in the 1980s," NWDA retained the services of Booz, Allen & Hamilton. The management consulting firm has conducted a major inquiry during the last 18 months, identifying new opportunities for development in drug wholesaling. Booz Allen's initial report grouped wholesalers into four "levels" or ' business segments according to sophistication in computer systems, services and management skills: • Level A, about 10% of NWDA firms, includes primarily manual operations, with most orders still placed by telephone. • Level .B firms (33%) have begun the conversion to automation and offer some management services for pharmacists-price stickers and shelf labels, for example. • Level C wholesalers (19%) exhibit direct order entry systems for rnost accounts and a broader array of services . • For Level D (38% ), highly advanced systems are common, and 'illerican Pharmacy Vol. NS21 , No. 11, November 1981/639
services tailored to individual customers' needs are evolving. Each of the four segments represents a different level of resource investment with capital requirements increasing steadily from one level to the next. The analysts cautioned that a wholesaler's position in this classification "is not necessarily a function of size nor is it indicative of the level of success or profitability of the firm." Instead, the segmentation can be used "to help define the nature and extent of the strategic options available." Booz Allen contends that "size is not a critical factor in achieving competitive economics-efficient, wellmanaged wholesalers with sales under $20 million are capable of developing a strong market position." Although consolidation of wholesale facilities and economies of scale from centralizing certain activities were seen as key trends, the study concludes that "a drug wholesaler's profitability is primarily determined by his average account size and his operating efficiency." Voluntaries and franchise arrangements are expected to gain in importance as
structures for new value-added services. In general, Booz Allen predicts that growth in the 1980s "will be led by drug wholesalers employing an aggressive, service-based, forward integration strategy." A stronger partnership between pharmacists and wholesalers is seen as a necessity based on improvements in management, marketing and merchandising services, and appropriate changes in product mix. The model entitled "Building a Strategy" applies equally well to the pharmacist who recognizes the value of strategic planning. Four elements of a successful strategy are identified: • Target market; • Target customer; • Competitive offering; • Required resources. The last of these elements refers to an investment of funds, people, systems, and facilities to deliver a competitive mix of products and services in the interest of improved health care. This is an investment that pharmacists and wholesalers can-and should-make together.
D 23
1
Traditionally, the relationship between buyer and seller has had a certain adversarial quality-more conflict than cooperation. That timeworn salutation-"Have I got a deal for you!"-is enough to put any buyer on guard. Immediately, a defensive posture is assumed. But what happens when the invitation to buy comes from a machine? With increasing frequency, pharmacists and wholesalers are using computers to communicate; several articles in this issue of American Pharmacy illustrate that point. Speed, ease of transmission, more efficient service levels, improved turnover rates, reduced cash investment, and balanced delivery schedules are among the more obvious benefits. Equally important, however, is the replacement of some of the human frailties of ordertakers with the relative accuracy and remarkable memories of the machines. Computers cannot think, as the saying goes, but they remember an awful lot. Unless programmed to do so, they won't argue with you either. The fact is, however, that because of technology, drug wholesalers and pharmacists now enjoy a buyer/seller relationship on a different level from that of the past. Wholesalers are more agents than adversaries-if, in fact, they ever were adversaries. Still, a basic problem persists; as middlemen, should wholesalers be sales agents for manufacturers or purchasing agents for their
John T. Fay Jr., PhD, has just left the position of director of public affairs for the National Wholesaler Druggists' Association to become vice president of retail services, McKesson Drug Co., 1 Post St., San Francisco, CA 94104. 18
customers? To some degree, wholesalers must perform both functions, and the two forms of agency are not mutually exclusive. Current business experience clearly supports movement toward expansion of the wholesaler's role as purchasing agent. It is a strategy described by management consultants as "forward integration." Pharmacists and wholesalers are working together more closely, more often and more effectively to their mutual benefit. This "change for the better" comes during a period of unusual dynamism in the distribution industry. It is an important, integral part of the structural change now gener-
Year
1964 1965 1966 1967 1968 1969 1970 197i 1972 1973 1974 1975 1976 1977~
1978 1979
ally recognized by industry observers. James C. McKeon, for example, makes this distinction: The stability at the macrowholesale level is misleading. At the micro-level, wholesaling is very dynamic. The channel structure depends upon the time-space-quantityvariety gap between the assortments of sellers and buyers. To the extent that this gap changes, the wholesaling task changes. In simpler language, the closer you get to the action in wholesaling, the more interesting and innovative it is. The trend line for wholesalers' market share of prescription sales clearly indicates a turnaround since
U.S. PrescriJ!tion Sales 1 ($ miUions)
Wholesale Share 2 (o/o)
NWDA Total Wholesale Sales 3 ($ millions)
2,497 2,779 3,011 3,266 3,655 4,008 4,322 4,667 5,018 5,507 6,083 6,895 7,669 8,233 9,155 10,044
f48.7 48.4 47.5 47.8 47.5 47.6 46.9 46.4 45.6 44.9 45.2 46.9 48.5 49.1 51.4 53.0
1615 1836 1944 2101 2118 2297 2397 2503 2671 2889 3230 3760 4115 4482 4910 5470
1. Pharmaceutical Manufacturers Association-Direct Human Use Dosage Form Sales. Reported as billed (befor.e deducting cash discounts on sales and other marketing expenses), less returns and allowances. Includes sales value of products bought and resold without further processing or repack.aging as well as the dollar value of products made from own materials for other manufacturers' resale. Excluded are all royalty payments, interest and other income. 2. Pharmaceutical Manufacturers Association-from class of customer analysis. 3. National Wholesale Druggists' Association-estimates of active member sales based on Operating Surveys.
American Pharmacy Vol. NS21, No. 11, November 1981/634
••• Scenes from the Wholesale Process Using an inventory control device (right), the pharmacist can record current stock needs, and then transmit the information directly to the wholesaler's computer via telephone (far right).
1973, after a period of decline (see chart) . Computerization and application of other technologies are major factors in this growth. Other factors that are involved in distribution dynamics include: competitive intensity, a changing product/services mix, consolidation of · the customer base, new efforts in managerial and marketing continuity, improved productivity, and innovation in pricing strategy. The latter point can be illustrated by the current shift to cost-plus pricing that follows by several years the pharma1 cist's shift from markup to professional fee methods. A process of natural selection has been occurring as more pharmacists recognize the value of concentrating their purchases with a single whole) saler-the primary supplier concept. Similarly, wholesalers are seeking out the best-managed pharl macies in a given market to concentrate and improve their customer base. , Some attrition has been un. avoidable during periods of growth. Improperly managed, underfinanced businesses at both the wholesale and retail levels leave the market-to the strongest competitors. One obvious result of this change is ' a measurable increase in the effec1 tiveness of competition, sharpened and focused by market forces. I The relative numbers of pharmacies and drug wholesalers should be 1
considered here. If we assume approximately 50,000 pharmacies and 500 wholesale houses in the United States, maximum efficiency in the sense of classical economics should be achieved with a ratio of one wholesale house serving 100 pharmacies. For many years, however, the operative ratio has been more like 1:300, with many pharmacies dividing their purchases among two or three wholesalers.
Primary Relationships Increasing recognition of the primary supplier concept changes this service ratio. From the former average of 300 pharmacies in a typical wholesaler's customer base, movement toward a smaller base is apparent. Much the same pattern can be observed in the United Kingdom and other countries where computerization and consolidation have accelerated the survival of the fittest in drug marketing. Information collected annually by the National Wholesale Druggists' Association (NWDA) supports these trends with statistical detail. NWDA member firms operate 313 distribution centers that generated $6.55 billion in sales for 1980. This group of businesses accounts for some 85% of the total drug wholesale volume. Accordingly, the entire market approaches $7.5 billion from something less than 500 wholesale
houses employing about 22,000 people. This is a relatively small portion of the trillion-dollar market for wholesaling in general-some 300,000 firms employing 5 million people in all classes of trade. However, most analysts agree that drug wholesalers lead the field in terms of sophisticated automation and in consolidation of facilities for cost control and efficiency. A significant part of this success can be traced to the fewer than 100 pharmacists who are executives of wholesale drug firms. Commonly, they are chief executives and policy makers, as indicated by representative profiles that follow. Their influence is distributed throughout the industry in small and large organizations.
Perceptions of Value An important change in the perception of value added by the wholesale function has been described by J. J. Fenstermaker:
Price, so long as it is fair, is no longer the basis of the pharmacistwholesaler relationship. Business systems and management skills are now appreciated by the customer who is willing to pay for them, not at the lowest price alone, but at a fair price based on the quality of information delivered. There is much support for this argument. In November 1978, Ameri-
I
~erican Ph::~rm::~cv
Vol. NS21. No. 11, November 1981/635
iO
Computers at the wholesale site perform varied tasks-processing orders, checking inventory and billing-but not all the tasks at the warehouse. (Photos /1y Mark Farris , caurtesy of Smith Drug Co., Sparla11l
can Druggist reported on replies from 997 pharmacies to a questionnaire designed to determine "how retailers feel about drug wholesalers." Based on these data, most pharmacists feel good about therelationship and one third indicated that it had become "increasingly close". in the past few years. Between 1972 and 1977, wholesale purchases of pharmaceuticals for this sample of pharmacies increased from 61.8% to 67.4%. When asked to compare 1978 and 1977, 52% of the respondents said that they were "buying more merchandise from wholesalers today." Wholesaler salesmen were characterized as "helpful" by 76.9%. Interest in the newer computer-based services was indicated with nearly 60% of the respondents recognizing a benefit. · Two years later, the October American Druggist reported the results of a similar survey based on 1,144 replies from a randomly selected group of 4,000 pharmacies. This response, a relatively high level for a mail study, was seen as a reflection of "the strong interest that exists in the entire subject of wholesaler-retailer relations.'' The 1980 summary demonstrated increased application of wholesalerprovided services for pharmacists and indicated a general level of satisfaction-64.5% noted that they were "happy with their primary 20
wholesaler." The magazine underscored a trend line with the observation that "five years ago, the average respondent did business with 3 wholesalers; today, 2 wholesalers." Although 90.7% of the respondents admitted that "they could not get along without the service of a wholesaler," about one third reported some degree of discontent. Among the complaints: shorts and omits; return goods policies; delivery schedules; out-ofstock items; errors in order filling; poor communications.
Drug wholesalers lead the field in terms of sophisticated automation. The January 1981 issue of the NARD Journal reported on 800 replies to a mail survey of readers in an article entitled "How Independents Perceive Wholesalers." Again, some negatives and a few apparent misunderstandings were expressed, but 75% of the respondents were using full-service wholesalers and felt that they were "getting their money's worth." Satisfaction with wholesalers that had computer-based services was indicated by 67% of the pharmacists reporting.
Yet, there was clear indication of doubt with reference to pricing and delivery schedules. Some of therespondents questioned the integrity of the wholesaler's pricing structure and failed to make the connection between increased discounts and reduced delivery frequencies. Innovation in pricing by wholesalers is a logical response to competitive intensity in a growing market. Some 25% of wholesalers now offer cost-plus pricing (percent or fee). Acceptance of this strategy has been facilitated by computerized order entry with invoices in pick sequence, shortened payment terms for customers and more realistic delivery frequencies. Wholesalers include as important influences on their choice of pricing: • The method of order entry; • The frequency of delivery; • The amount of service involved. Daily delivery remains the norm, but the trend is toward a reduced schedule. Payment terms for most customers are twice monthly, with a few firms moving to weekly payment. Addressing the 1980 year-end sales conference of Bergen Brunswig Corporation, Chairman Emil P. Martini, a pharmacist himself, described the primary supplier commitment as "causing major changes in the entire economics of the business." Martini argued that "costAmerican Pharmacy Vol. NS21, No. 11, November 19811636 I
A monthly printout from the wholesaler's computer provides the pharmacist with a detailed index of sales (right).
plus selling and cost-plus-a-fee are quickly eliminating the traditional adversary buyer-seller relationship." As pharmacists learn about the value of contemporary, computerbased wholesale service, some direct-selling manufacturers lag behind. But the message is clear and the information on wholesale sales and market share points in one direction-up.
Agents of Change To clarify the trend further, NWDA has been collecting experience data from wholesalers on the use of retail computer systems. The report for August 1981 summarizes responses from 94 firms operating 258 distribution centers (82% of the 313 NWDA member houses); during the year, another 8,000 pharmacies were convinced of the benefits that ·accompany electronic order entry. The table on page 23 compares the results of the 1981 survey with similar data for 1979. As indicated, there was growth in all categories of service in terms of the numbers of pharmacies using the service. For example, the number of pharmacies using electronic order entry almost doubled in the two-year period to a total of nearly 32,000. Customized price stickers are used now by more than 35,000 pharmacies. Demonstrable growth in applica-
tions also is shown in shelf labels for inventory control, product movement reports, microfiche systems, and management information reports. Although the last service increased in use, the percentage of wholesalers offering the service decreased. There were also decreases in the percentage of wholesalers offering third-party processing and on-line terminals or in-pharmacy computers. NWDA estimates that whole-
Information on wholesale sales and market share points in one direction-up. salers spend some $32 million a year to provide these services to customers. Many wholesalers offer a package of services to the pharmacist for something less than $100 per month. The more obvious measurable benefits include sales increases on the order of $75-100 per square foot, an increase in turnover of stock generally several turns per year, and decreases in inventory costs of 20-25%. Public companies in drug wholesaling regularly report specific re-
'lllerican Pharmacy Vol. NS21 No. 11 November 1981/637 I
I
suits from computer-based services that illustrate the remarkable changes in progress. McKesson Drug Company is the largest of these (with a market share approaching 25%) and the only national firm. The company operated from 60 distribution centers during fiscal 1981, down from 92 houses in 1974. These larger, more efficient centers have posted operating records and extraordinary growth for the last four years. I McKesson's Economost system for order entry currently is in use by nearly 7,000 pharmacies, up 1,000 from fiscal year 1980. Another 8,400 pharmacies use Econotone, an order-entry system using the touchtone telephone. Orders through these two systems account for 77% of the firm's volume. In total, McKesson serves some 16,000 pharmacies and 2,000 hospitals. During the next two years, the company expects to complete the electronic linkages with virtually all its customers. Internally, McKesson computers track inventories, orders, costs, and the location of some 50,000 items. Five years ago, 140 buyers were employed to process manufacturer orders. No\A: 13 buyers, with the help of sophisticated technology, supervise the acquisition of an inventory that has increased by 50%. At Bergen Brunswig, with 27 distribution centers in 15 states, 95% of 21
the order volume from customers is received electronically. Additionally, the company is linked computer-to-computer with 41 suppliers that account for more than 50% of its total purchases. New sales records have been set in each of the last 12 years.
Living in the Future
Trends in Electronic Order Entry* %
100 90
Strategic planning is more than a process, tool or technique-it is a managerial philosophy. Ordinarily, the information available to the beginning planner is inadequate. A first step, then, is to improve the information base and describe with accuracy what is happening now. Edward S. McKay warns the novice to recall two truisms: • The one thing we know for sure about a sales forecast is that it is always wrong. • You are always vulnerable to a competitor who does sounder strategic planning. NWDA members have an edge in terms of the information base required for planning. Each year the association publishes an operating survey that is comprehensive, exact and reliable. An additional service offered is a statistical comparison of an individual firm's results against those for the industry as a whole. In the same manner, well-managed pharmacies make use of the Lilly Digest analysis. In 1981, NWDA President John Morson made a preliminary report on the industry's results for 1980 and looked back to 1974 when the current favorable trend began. In that six-year period, sales were up 103%. After adjusting for inflation, Morson estimated that at least half of the increase represented new
80 70
60 50 40 30 20 10 0
June 1979
June 1981
June 1980
June 1982 (projected)
~Weighted average of 258 whol.esalers.
business. A major reduction in operating cost was achieved from 11.84% of sales in 1974 to 8.60% last year. Inventory turnover improved by 20% and productivity was up 46% in the office and 39% in the warehouse, even with increased wages, taxes and energy costs. At the same time, gross margin for the period dropped sharply from
13.67% of net sales to 11.22% reflecting, in Morson's terms, "a very ' substantial reduction in the prices we charge our customers." He noted that pharmacy operating costs as reported by the Lilly Digest decreased for the first time in many years and suggested that "whole- : salers have contributed to that improved performance through pricing and the systems that offer our I
NWDA-1980 Wholesale Sales .,.,
Product Mix Pharmaceuticals Proprietaries Toiletries Sundries Other
Percent 63.1 17.0 11.1 7.2 1.5
.'®
··~'·
'%
Percent
Customer Distribution
59.6 21.8 11.3 4.3 2.9
Independent pharmacies Chain drugstores Hospitals Chain warehouses Other
Sllurce: NWDA Operating Survey, 1980
22
8
American Pharmacy Vol. NS21 No. 11 November 1981/63 I
I
Computer-Based Services for Pharmacy, 1979-1981 Percent of Wholesalers Offering 1979* 1981**
Service Automated accounts receivable Customized pri~e stickers · Shelf labels/inventory control Electronic order entry Management information report Product movement report Third-party processing Microfiche system Retail pricing guide Scientific reorder controls On-line terminal or in-pharmacy computer Stock status/special buys • Separate report • Microfiche
Number of Pharmacies Using 1979* 1981**
79 97 88 91 78 76 50 88 31 42 63
76 96 97 91 57 76 22 75 47 36 39
S,576 24,300 21,778 16,685 8,035 9,869 2,862 17,150 6,729 6,657 1,229
6,041 35,357 31,297 31,796 13,705 13,865 4,342 25,190 9,283 7,956 1,504
-
55 61
10,761 9,576
18,327 19,218
-
Source: NWDA Special Surveys, 1979 and 1981, W. W. Fraser. •Estima tes from 95 organizations operating 273 houses (83'7r of membership) ••Estimates from 94 organizations operating 258 hou.~ es (82'7r of membership)
customers ways to become more efficient." To build on the information available and to develop "A Strategic Growth Plan for Health Care Distribution in the 1980s," NWDA retained the services of Booz, Allen & Hamilton. The management consulting firm has conducted a major inquiry during the last 18 months, identifying new opportunities for development in drug wholesaling. Booz Allen's initial report grouped wholesalers into four "levels" or ' business segments according to sophistication in computer systems, services and management skills: • Level A, about 10% of NWDA firms, includes primarily manual operations, with most orders still placed by telephone. • Level .B firms (33%) have begun the conversion to automation and offer some management services for pharmacists-price stickers and shelf labels, for example. • Level C wholesalers (19%) exhibit direct order entry systems for rnost accounts and a broader array of services . • For Level D (38% ), highly advanced systems are common, and 'illerican Pharmacy Vol. NS21 , No. 11, November 1981/639
services tailored to individual customers' needs are evolving. Each of the four segments represents a different level of resource investment with capital requirements increasing steadily from one level to the next. The analysts cautioned that a wholesaler's position in this classification "is not necessarily a function of size nor is it indicative of the level of success or profitability of the firm." Instead, the segmentation can be used "to help define the nature and extent of the strategic options available." Booz Allen contends that "size is not a critical factor in achieving competitive economics-efficient, wellmanaged wholesalers with sales under $20 million are capable of developing a strong market position." Although consolidation of wholesale facilities and economies of scale from centralizing certain activities were seen as key trends, the study concludes that "a drug wholesaler's profitability is primarily determined by his average account size and his operating efficiency." Voluntaries and franchise arrangements are expected to gain in importance as
structures for new value-added services. In general, Booz Allen predicts that growth in the 1980s "will be led by drug wholesalers employing an aggressive, service-based, forward integration strategy." A stronger partnership between pharmacists and wholesalers is seen as a necessity based on improvements in management, marketing and merchandising services, and appropriate changes in product mix. The model entitled "Building a Strategy" applies equally well to the pharmacist who recognizes the value of strategic planning. Four elements of a successful strategy are identified: • Target market; • Target customer; • Competitive offering; • Required resources. The last of these elements refers to an investment of funds, people, systems, and facilities to deliver a competitive mix of products and services in the interest of improved health care. This is an investment that pharmacists and wholesalers can-and should-make together.
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