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The dollars and sense behind… |
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Bringing
Innovative
Medical
Technology to
Caregivers |
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In today’s tough health
care market, merely designing and manufacturing an innovative medical device
won’t ensure its acceptance in the market. The manufacturer has to identify
key customers, educate them on the technology and proper utilization, then
demonstrate its efficacy and cost-effectiveness.
The manufacturer can hire
its own sales force to do these things. But that’s an expensive proposition,
considering the cost of sales -- salaries, T&E, benefits, sales management
and the logistical costs of storing and shipping products. These costs have
to be passed on to providers.
The manufacturer has
another choice: It can outsource sales, marketing and distribution to a
specialty distributor.
In his groundbreaking book
Managing Channels of Distribution (American Management Association,
1998), Kenneth Rolnicki – president of the Channel Marketing
Institute and professor at Northwestern University’s Kellogg Graduate School
of Management, says that by using distribution channels, the manufacturer
can transfer some of the costs of doing business to distributors and
resellers. These costs include warehousing, sales and accounts receivable
headaches
But they do more than just
transfer costs. In fact, says Rolnicki, distributors can help
lower total supply chain costs. Because they sell multiple
product lines to the same customer group, they spread the cost of sales and
distribution over several product lines. The end user benefits from lower
costs, the convenience of one-stop shopping, excellent customer service and
technical support, logistical support, and greater channel efficiency and
ease of doing business.
Do the Math
Suppose that you are a manufacturer that has just
made an innovative device for hospitals. Do the math and see how specialty
distributors lower your costs.
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Cost of selling
direct |
Cost using
Specialty
distributors |
Comments |
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Cost of sales
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Distributor’s margin
( %) X estimated sales) =
$___________
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Specialty distributors receive higher
margins for selling new technologies than mature products. |
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Sales reps’
salaries/benefits, commissions, bonuses, expenses, etc.
$_________
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$__0___ |
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Specialty
distributors serve as the manufacturer’s sales force, helping the
manufacturer avoid the cost of fielding a direct rep -- $100,000 or more
per year.
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Sales managers’
salaries/benefits, commissions, bonuses, expenses, etc.
$________
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$_______ |
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Typically, the ratio of sales managers to
direct
sales reps is one to 10. With the cost of a sales manager approaching or
exceeding $150,000, the manufacturer using specialty distributors enjoys
substantial cost-savings.
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Administrative assistants’ salaries, benefits, etc.
$_______ |
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$_______ |
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With few or no field
salespeople to support, the manufacturer incurs few administrative
costs.
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Subtotal
$_______ |
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Subtotal
$_______
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Cost of marketing
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Local trade shows (exhibit,
expenses, time, etc.)
$__________
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$_____0___
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Specialty distributors promote vendors’
products at trade shows..
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Direct mail/advertising
$__________
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$__________
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Advertising expenses may be shared with
distributors.
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Contributions to clinical providers
$__________
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$___ 0___
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Specialty distributors financially support
providers through sponsorship of local events.
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:
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Subtotal
$________ |
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Subtotal
$________ |
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Cost of A/R, inventory, distribution
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Receivables ($ ) X days outstanding ( ) X daily interest
rate = cost of A/R
$__________
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$__________
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Direct-selling manufacturers often wait 45 to 90 days for payment, but
specialty distributors usually pay in 30 days.
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Collection costs
$__________
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$__________
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Using specialty distributors involves
collections from just a handful of accounts..
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Average inventory value ($ ) X
interest expense = opportunity cost
$_________
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$__________
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Specialty distributors provide an
additional reserve, so manufacturers can operate with less inventory.
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Warehouse expenses (wages, rent/mortgage,
forklifts, fixtures, etc.)
$_________
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$__________
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Manufacturers relying on distributors
store less inventory, hence, they finance less space, less equipment,
fewer people.
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Packing materials, freight, personnel, etc.
$_________ |
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$_________
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With few ship-to locations and larger shipments, manufacturers using
distributors reduce shipping expenses.
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Subtotal
$________
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Subtotal
$______
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Transaction costs
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Customer service reps (salaries/benefits,
office expenses, etc.)
$__________
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$___________
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Using distributors, manufacturers have
fewer customers, purchase orders, etc.
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Cost of returned goods
$__________
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$___________
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Fewer direct customers mean fewer returns
and their associated costs.
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Subtotal
$________
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Subtotal
$________
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Total cost of
selling direct
$________
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Total cost using
specialty
distributors
$_______
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When you do the
math, you’ll see that specialty distributors are the most cost-effective
way of bringing innovative medical technologies to market.
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Copyright ©1999 IMDA. |
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