Q&A: NED GERBER

Partnerships Are Key to Reducing Product's Total Delivered Cost

Judicious use of supply-chain management by device manufacturers often results in overall savings of 10 to 12%, according to Br. Ned Gerber, CPA, associate director in health-care and pharmaceutical consulting at Pricewaterhouse Coopers (Sydney, Australia). Gerber has performed consultancy work for such clients as Johnson & Johnson, Baxter, and Kodak, and more than 75 government entities and hospital systems in North America and Australasia. He explored innovative supply-chain management issues at the 1998 Global Medical Device Conference in Sydney. In this column, he clarifies what industry can gain from a partnership-based supply-chain relationship.

Q: You cited several supply-chain management models at the conference in Sydney. Which are the most advantageous to the manufacturer?

A: That depends on the product. In each case, the manufacturer should seek a model that accomplishes three things. The first is the traditional goal of delivering a specified product to the right place at the right time for the lowest total cost. Total cost is important, because it encompasses expenses that the customer sees but not always the manufacturer. The second goal is that a supply chain must deliver the highest possible quality assurance and the lowest possible risk. Finally—and this is the most difficult but very important—the supply chain should assist in completely satisfying the customer's actual need, of which the product itself may only be a part.

Q: This would seem to point in the direction of a partnership.

A: The word is bandied about and often misused. The best partnerships are those in which the manufacturer and hospital or physician go beyond the traditional roles of supplier and purchaser and share in the risks and rewards of completely satisfying customer needs.

Q: What does the supplier have to gain from a more-involved partnership with the customer?

A: There are three major advantages. First of all, effective partnerships give both parties a common interest in improving product effectiveness. Otherwise, the manufacturer's incentive is simply to sell the product at the highest possible margin, and the customer's incentive is to buy at the lowest possible cost. There is no convergence. The second advantage is that the manufacturer can share commercial expertise in production planning, logistics, and so forth, which reduces forecasting errors and uncertainty. The third is that the manufacturer can share technical knowledge and assist in introducing new products. This is critical when we remember that 20 to 25% of inventory in some hospital theatres will never be used because of technological obsolescence or inappropriate buying.

The sector purchasing medical devices has constrained budgets, growing costs, and increased demand, and it simply doesn't possess expertise in those areas. By sharing, manufacturers gain goodwill and long-term market share, and reduce total per-procedure costs for the customer at the same time. This is truly a win-win relationship and represents the ultimate in customer service.

Q: Could you give us an example of the type of cost savings a manufacturer can expect to achieve by implementing effective supply-chain partnerships?

A: A company that uses reasonable practices already often can save an additional 10 to 12% overall, net of implementation. That may not sound like a lot, but remember it is net of implementation costs, which may include a considerable systems investment. Also, on a global basis 10 to 12% represents many hundreds of millions of dollars each year. Further, if all parties in the supply chain undergo substantial reengineering and cultural change, savings have been documented of up to 20–23%. However, this usually does not happen unless there is a powerful external incentive, such as dramatically reduced government funding or intense market competition.

Of course, if the device manufacturer assists customers in achieving these savings, there can and should be scope for sharing the benefits. That's the ultimate output of effective partnerships—a true increase in the overall efficiency of health care in society, not just cost shifting.

Br. Ned Gerber, CPA and a Benedictine Brother in the Anglican church, can be reached at Pricewaterhouse Coopers, 580 George St., Sydney NSW 1171, Australia; phone: +61 2 82662406; fax: +61 2 92614953; E-mail: ned.gerber@au.pwcglobal.com.