The dollars and sense behind…

Bringing

Innovative

Medical

Technology to

Caregivers

 

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.

Cost of selling direct

Cost using Specialty distributors

Comments

                                                                                                                                       

Cost of sales

 

 

 

 

 

 

Distributor’s margin

(     %) X estimated sales) =

                         $___________

 

Specialty distributors receive higher margins for selling new technologies than mature products.

Sales reps’ salaries/benefits, commissions, bonuses, expenses, etc.

                         

             $_________

 

 

 

                      

       $__0___

 

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.

Sales managers’ salaries/benefits, commissions, bonuses, expenses, etc.

                               

         $________

 

 

 

 

                         

        $_______

 

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.

Administrative assistants’ salaries, benefits, etc.

                        

            $_______

 

 

 

                         

         $_______

 

With few or no field salespeople to support, the manufacturer incurs few administrative costs.

 

                        

Subtotal

 

   $_______

 

Subtotal

 

    $_______

 

         

 

Cost of marketing

 

 

 

 

Local trade shows (exhibit, expenses, time, etc.)

              $__________

 

 

 

                         

       $_____0___

 

Specialty distributors promote vendors’ products at trade shows..

Direct mail/advertising

 

           $__________

 

 

                          

       $__________

 

Advertising expenses may be shared with distributors.

Contributions to clinical providers

                        

               $__________

 

 

                           

        $___   0___

 

Specialty distributors financially support providers through sponsorship of local events.

:         

                   

Subtotal

 

$________

 

Subtotal

 

$________

 

                                                                                                                                     

Cost of A/R, inventory, distribution

 

 

 

 

 

 

Receivables ($       ) X days outstanding (       ) X daily interest rate  = cost of A/R

                $__________

 

 

 

 

                         

      $__________

 

Direct-selling manufacturers often wait 45 to 90 days for payment, but specialty distributors usually pay in 30 days.

Collection costs

 

                $__________

 

 

                         

      $__________

 

Using specialty distributors involves collections from just a handful of accounts..

Average inventory value ($      ) X interest expense = opportunity cost

                 $_________

 

 

 

 

                          

       $__________

 

Specialty distributors provide an additional reserve, so manufacturers can operate with less inventory.

Warehouse expenses (wages, rent/mortgage, forklifts, fixtures, etc.)

 

                  $_________

 

 

 

 

                           

      $__________

 

Manufacturers relying on distributors store less inventory, hence, they finance less space, less equipment, fewer people.

 Packing materials, freight, personnel, etc.

 

                  $_________

 

 

 

 

       $_________

 

With few ship-to locations and larger shipments, manufacturers using distributors reduce shipping expenses.

 

Subtotal

 

$________

 

Subtotal

 

$______

 

 

Transaction costs

 

 

 

 

Customer service reps (salaries/benefits, office expenses, etc.)

                            $__________

 

 

 

 

                          $___________

 

Using distributors, manufacturers have fewer customers, purchase orders, etc.

Cost of returned goods

 

             $__________

 

 

 

$___________

 

Fewer direct customers mean fewer returns and their associated costs.

 

Subtotal

 

$________

 

 

 

Subtotal

 

$________

 

                                                                                                                                     

 
Total cost of selling direct

 

 

$________

 
Total cost using specialty distributors  

 $_______  

When you do the math, you’ll see that specialty distributors are the most cost-effective way of bringing innovative medical technologies to market.

     

Other IMDA Informational Pieces

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