In the last few months, the medical device community has
found itself amidst a political fallout that threatens any forthcoming economic
improvements. To fund the healthcare reforms set forth by Congress, medical
device manufacturers will soon be charged a 2.3 percent excise tax on the sale
of most medical devices.
The manufacturers that have survived the recession have done
so because they have been able to balance the economic pressures and corporate
mandates with the need to push innovation. They’ve understood that removing
innovation from the equation is not a survival strategy – it’s a death
sentence.
Just as many sectors of industry are improving, like the
automotive sector, many medical device companies are facing a targeted threat
on their survival. With narrow profit margins, many of these manufacturers and
their suppliers will be forced to decrease innovation and/or staff to
accommodate the medical device tax increase.
If the medical device excise tax were applied to the 2009
U.S. revenues of the largest 10 medical device manufacturers, it would have
cost them $1.87 billion had the law gone into effect in last year. While the
largest manufacturers will bear the lion’s share of the tax, the cost impact on
mid-sized and small manufacturers is not to be ignored. This impact will be
heavy against their small profit margins.
The voice of discontent is loud. Executives in the industry
have shared their concerns not only with industry influences but also with the
general public through interviews and op-ed pieces with major broadcast and
print media. Unfortunately, how manufacturers can offset this tax increase has
not been in the discussion. A pushback on the healthcare reforms that have
taken years to pass won’t provide a speedy solution. If manufacturers in the
medical device industry want to neutralize the effects of a tax increase, they
must act today.
The first thing that companies must do is identify areas of
wasteful spending in their operations. Many will claim they’ve already done
this – numerous times – and there’s nothing left to cut. However, they may be
surprised to learn that even the leanest manufacturers overpay their key
vendors billions of dollars every year. This is especially true in the
categories of transportation/logistics, technology, telecommunications and
energy. On average, manufacturers overpay 10-20 percent of their overall spend
with these vendors.
The problem is that even the most sophisticated procurement
teams don’t have access to real-time vendor pricing data. Most IT, logistics
and procurement teams go through a major software or shipping contract
negotiation once every year or two. They have no idea how much their
competitors are paying for the same product or service with the same vendor.
For that reason, vendor pricing can vary as much as 30 percent translating into
mass overspending. Removing the 30 percent worth of overspending can help fully
or partially offset the negative impact of the medical device tax increase.
Benchmark
Companies should benchmark their annual spend in complex
spend categories like transportation, technology, telecommunications and
energy. It’s impossible to manage spending if you don’t fully understand where
your dollars are going. To ensure you are getting fair market pricing from your
vendors, you must acquire the necessary industry specific data and
cost-to-serve insight to gauge fair market value.
Justify
Vendors widen their profit margins through subtle tactics
like annual price increases which are built into your contract. These include
fuel surcharges, accessorial charges and maintenance rates. Over time, these
year over year increases can become the most significant part of your spend. If
your small parcel carrier implemented a 4.9 percent net rate increase, will you
have to absorb these costs or pass them onto your customer? Is a five percent
increase in maintenance fees from SAP justifiable if your level of service and
solution remains the same? These are just two examples of why vendors must
justify any price increase.
Renegotiate
If you think you have to wait until the terms of your
contract expire, think again. Contracts can be renegotiated any time. In the
spirit of partnership, let your vendor know that you want to keep a positive
relationship but need to come back to the table to negotiate fairer pricing and
terms.
Bid
If you feel you’re not receiving the fairest terms and
pricing from your vendor, it’s time to invite other vendors to the table and
start over with the RFP process. Not only will it put your current vendors on
high alert, you will have access to current and competitive pricing, rate
structures and terms. Furthermore, this forces you to re-evaluate the services
and products you actually need. For example, do you really need premium
software support? You may be surprised at the savings to be had since your last
RFP process. What about your incumbent transportation carriers? If you’ve used
an incumbent carrier(s) for a significant period of time, chances are your
relationship and contract are fraught with complacency. It may be time to bring
in a competitor to take a fresh look at your operation and contract pricing.
The threats to and opportunities for the medical device
industry over the next several years will be equally substantial. Reducing
rampant vendor overspending is one way to tip the scales in favor of
manufacturers. By offsetting the recent tax increase, medical device companies
can commit more spend to R&D, protect jobs and innovate. And it’s faster
than waiting for a political solution.
Paul Steiner is director of logistics for NPI’s
transportation division. NPI is a spend management consultancy serving supply
chain organizations across the globe, including many in the medical device
industry.