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Digg It - Margin Management - Using the Supplier Profitability Ratio to Hold Your Vendors Accountable
Margin management is not rocket science. Improving gross margin is simple. You must either raise prices or reduce cost of goods sold. But, there is a little more to it than that when you consider net profit. Consider doing an activity based costing analysis on your entire account base. There are plenty of instruction manuals published on how to do this. I guarantee you that you will find some surpri
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
ses. You should also consider implementing a Margin Hold system that forces management approval on orders entered below a minimum established threshold for gross margin percentage.
On the Sales Side
Ultimately to create margin improvement, your entire sales team must have good judgment of market potential as it relates to margin improvement. They must be self disciplined and make intelligent dec
On the Sales Side
Ultimately to create margin improvement, your entire sales team must have good judgment of market potential as it relates to margin improvement. They must be self disciplined and make intelligent dec
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
isions based on fact. Each territory manager must develop his own plan for profit improvement and be flexible on the implementation of that plan. They must be action oriented and customer driven and yet be extremely conscious of profitability objectives.
Results must be measured against the plan. Trend lines need to be established both on revenue and profit growth. They must be able to see the rewa
Results must be measured against the plan. Trend lines need to be established both on revenue and profit growth. They must be able to see the rewa
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
rds for their efforts. They must accept responsibility and accountability for improved profitability and achievement of established objectives. They need to understand activity based costing.
On the Buy Side
The buy side of the equation also offers numerous opportunities for margin improvements. Approach all of your vendors. Dont be afraid to demand cost reductions. Your customers certainly aren
On the Buy Side
The buy side of the equation also offers numerous opportunities for margin improvements. Approach all of your vendors. Dont be afraid to demand cost reductions. Your customers certainly aren
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
t embarrassed to ask you. Review your entire purchasing organization. Do you have true buyers or are they simply order schedulers.
Establish specific inventory reduction goals, turn-rate increase and fill rate improvement. Incenticize the critical success factors on the buy side, factors such as, margin improvement, inventory reduction and inventory turn rates. Include any others specific to your i
Establish specific inventory reduction goals, turn-rate increase and fill rate improvement. Incenticize the critical success factors on the buy side, factors such as, margin improvement, inventory reduction and inventory turn rates. Include any others specific to your i
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
itiatives for profitability.
Try to take advantage of any "itchy-scratchy" opportunities. (A new term I learned from some friends in Detroit.) These are opportunities where you are buying a product from someone that uses the types of products you distribute. The academic term is "reciprocity". The following is a checklist to review when considering margin improvement objectives.
Do you have an
Try to take advantage of any "itchy-scratchy" opportunities. (A new term I learned from some friends in Detroit.) These are opportunities where you are buying a product from someone that uses the types of products you distribute. The academic term is "reciprocity". The following is a checklist to review when considering margin improvement objectives.
Do you have an
ucts have become life saving products for the pharmaceutical companies who doesnt have many innovative molecules in their product pipeline and have been inc
established pricing policy?
Do your pricing policies consider market segmentation, risk, service levels and value added?
Is your counter sales/will call priced according to margin objectives?
Do you have well trained buyers and do they negotiate?
Is your purchasing/inventory control department managing the inventory well? Are they using the correct volume discount and item analysis?
Do your pricing policies consider market segmentation, risk, service levels and value added?
Is your counter sales/will call priced according to margin objectives?
Do you have well trained buyers and do they negotiate?
Is your purchasing/inventory control department managing the inventory well? Are they using the correct volume discount and item analysis?
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
How do you measure your fill rate? Do you bench mark it to your competition?
Do you have a system to review and evaluate your RGAs? (Return Goods Authorization)
Do you charge for restocking?
Are you getting the optimum discounts from your supplier and are you keeping the discounts as profit?
Have you done a supplier profitability analysis?
Are your customers profitable?
Do you hav
Do you have a system to review and evaluate your RGAs? (Return Goods Authorization)
Do you charge for restocking?
Are you getting the optimum discounts from your supplier and are you keeping the discounts as profit?
Have you done a supplier profitability analysis?
Are your customers profitable?
Do you hav
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
e significant supplier error?
Do you have a vendor returns program and do you manage it well?
Do you track your own and your suppliers on time delivery? Are you selling the right products to the right customers?
Do you have an outcall program?
Does your inside sales force understand the concept of up selling?
Is your warehouse operating efficiently?
Do you have a freight recover
Do you have a vendor returns program and do you manage it well?
Do you track your own and your suppliers on time delivery? Are you selling the right products to the right customers?
Do you have an outcall program?
Does your inside sales force understand the concept of up selling?
Is your warehouse operating efficiently?
Do you have a freight recover
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
y program or do you fold under pressure and give it all away?
Do you rank and evaluate your customers by gross margin dollars and gross margin percentages?
Do you have an incentive program that is tied to gross margin growth both in dollars and percentages?
On the buy side of the equation, you must be able to determine which of your suppliers enhance your margin opportunities and which suppli
Do you rank and evaluate your customers by gross margin dollars and gross margin percentages?
Do you have an incentive program that is tied to gross margin growth both in dollars and percentages?
On the buy side of the equation, you must be able to determine which of your suppliers enhance your margin opportunities and which suppli
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
rs detract from it. Add up all the things that each supplier does to help you increase profitability.
Supplier Margin Contribution Enhancement
What is your discount structure with your supplier and how does it rank in your competitive analysis? Are you getting the same discount or better than your competition? What are your total gross margin dollars earned by supplier? Rank your suppliers accordi
Supplier Margin Contribution Enhancement
What is your discount structure with your supplier and how does it rank in your competitive analysis? Are you getting the same discount or better than your competition? What are your total gross margin dollars earned by supplier? Rank your suppliers accordi
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
ngly to be used as a weight factor. Apply a 1 to the lowest ranking, a ten to the highest and an appropriate number for those in between.
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific ci
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific ci
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
rcumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifia
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
ble. Others may require an arbitrary assigned dollar figure based strictly on gut feeling. What is the real cost of a lost order, a late shipment etc.? Guesstimates are okay as long as you are consistent in your application. Total all those negative costs to determine Supplier Margin Detraction.
Common Margin Detractors
Short shipments/wrong counts
Missed promise date
Damaged goods
Pa
Common Margin Detractors
Short shipments/wrong counts
Missed promise date
Damaged goods
Pa
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
tial shipment
Lost back order
Incorrect technical advise
Pricing errors
Wrong or no part number
No packing slip
Illegible documents
No PO number
Duplicate shipments
Wrong PO number
Poor customer service/response
Faulty products
Difficult claim procedures
Shipment to wrong location
Non responsive to emergency requests
Supplier Profitability Ratio
We can now
Lost back order
Incorrect technical advise
Pricing errors
Wrong or no part number
No packing slip
Illegible documents
No PO number
Duplicate shipments
Wrong PO number
Poor customer service/response
Faulty products
Difficult claim procedures
Shipment to wrong location
Non responsive to emergency requests
Supplier Profitability Ratio
We can now
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
determine The Margin Enhancement Rating and The Margin Detraction Rating so we can create a Supplier Profitability Ratio using the following formula.
TGM= Total Gross Margin
ME= Margin Enhancement
MD= Margin Detraction
SR= Supplier Rating
SPR= Supplier Profitability Ratio
MC = Margin Contribution
SUPPLIER PROFITABILITY RATIO
1000 divided by ME-MD X SR X 100 = SPR
Example:
Margin Enha
TGM= Total Gross Margin
ME= Margin Enhancement
MD= Margin Detraction
SR= Supplier Rating
SPR= Supplier Profitability Ratio
MC = Margin Contribution
SUPPLIER PROFITABILITY RATIO
1000 divided by ME-MD X SR X 100 = SPR
Example:
Margin Enha
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
ncement = $230,000.00
Margin Detraction = $110,000.00
Supplier Rating = 8
1000 divided by $230m-$110m X 8 = .066 X 100 = 6.6
This formula is by no means scientifically accurate. In fact, it is an arbitrary conception designed specifically for the exercise and not the result. The rating itself is not of significance here. What is significant is the exercise itself. It
Margin Detraction = $110,000.00
Supplier Rating = 8
1000 divided by $230m-$110m X 8 = .066 X 100 = 6.6
This formula is by no means scientifically accurate. In fact, it is an arbitrary conception designed specifically for the exercise and not the result. The rating itself is not of significance here. What is significant is the exercise itself. It
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
forces you to take a serious look at true vendor performance. List your vendors by their profitability ratios. This should be an eye opening exercise. Take this information and use it in your discussions and negotiations with your vendors. Be careful not to reveal all the details of your rating as it can be easily challenged due to the intangible assignment of various factors. However, it can be inv
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
aluable in discussing many supplier issues contributing to margin detraction.
What does a "stock out" really cost? How are missed deliveries impacting your customers service and lost business opportunities? Offer your suppliers an option, improve the ratio performance or increase discounts. Lastly when looking at Margin Improvement and increasing sales revenue a supply chain analysis is beneficial
What does a "stock out" really cost? How are missed deliveries impacting your customers service and lost business opportunities? Offer your suppliers an option, improve the ratio performance or increase discounts. Lastly when looking at Margin Improvement and increasing sales revenue a supply chain analysis is beneficial
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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