Step 3 on the path to global sourcing for self-distributing hospitals

Unbundle your purchasing program from top-line rebates that hurt your bottom line

Are you so tied to your rebate checks that are detrimental to your bottom line? In step three on your path to global sourcing for self-distributing hospitals and IDNs, here's how global sourcing helps you untie the knot and unlock significant available savings.

Distributors and manufacturers of common, commoditized hospital products go to great lengths to get their customers to increase the numbers and categories of products to which those customers are tied to for as long as possible. Often described as "bundled" purchasing agreements, some manufacturers and distributors will offer meaningful enough discounts (and the associated rebate checks) if a hospital agrees to increase the number of products purchased for multiple years.

The problem is, many of those agreements require the addition of a new category of products which come at higher prices than could be accessed through the bid process or global sourcing. The net effect of most bundled purchasing agreements is often detrimental to hospitals' bottom lines. For some reason, purchasing managers just love their rebate checks tied to bundled agreements. But a 1.5% rebate tied to a 3% increase in prices on required new product categories within the agreement leads to higher overall program costs. Here's how hospitals and health networks with self-distribution programs can break the bundling cycle and start picking off items one-by-one to get deep into savings while maintaining or improving clinical quality.

First - Always put your available items out to bid. Products or categories at high enough volume bid out individually will almost always result in annual bottom line gains of 15 - 30 percent. In some cases, 50 percent savings on particular product categories are attainable.

Second - Build in room to move. When your next purchasing contract comes up, if you must stick with a bundled package, build in some room to move. While not common practice yet, large hospitals still have the leverage when it comes to negotiating with manufacturers or distributors. Don't commit to tiered incentives by a particular percentage point or range. Instead create a range of dollar volume within the bundle to leave yourself room to move. We know of several deals that enabled hospitals to pick-off 15% of a product category and shop for the very best price including moving those items into their global sourcing program realizing 20-50% savings while maintaining or improving the quality and clinical utility of those products.

Third - Go for the products YOU chose, not ones chosen for you. Distributors will often add loss leaders to the additional product categories required to achieve the bundled package discount. If you are self-distributing, there is no need for you to accept an inferior product at an inflated price for 3% savings when you could get precisely the product you and your clinicians want at 20% savings or greater. Personal protection equipment (PPE) is often an excellent product category in which you can start unbundling yourself from contracts that inhibit available savings and quality improvements.

Fourth - If you are self-distributing, end bundled purchasing agreements as a practice entirely.
If your distributor requires a certain level of spend to get to the 1.5% rebate carrot on the end of the stick, you're probably paying 3% more on other products to get there. In some circumstances, 3% "off the top" savings on a broad category list is significant. But you lose the opportunity to take 20% or more "off the bottom." Individual savings through RFPs or items globally sourced blow away those 3% savings. Our global sourcing partners regularly achieve 20% savings on the low end.

The balance sheet doesn't care if financial gains arrive via a check or simply lower product costs. Stop chasing the rebate check and broad "discounts" on bundling. Go for the deeper dive on each product or category. If you have already moved successfully through step 1 and step 2 of global sourcing in your hospital self-distribution program, you are certain to find dozens of opportunities to expand the program and grab 20-50% savings by adding new items and categories to your global sourcing program.

About the author:
Lorne Tritt is Founder and CEO of ASP Global. With headquarters in Atlanta and operations in the Pacific Rim, ASP is a leader in global sourcing strategies and programs that enable IDNs, hospitals and large group practices to take advantage of lower costs and improved quality in hospital medical supplies available through direct sourcing, an efficient supply chain model and the global marketplace.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.​

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