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RETURNED GOODS COST WHOLESALERS 3.7% OF GROSS SALES, UPJOHN- NWDA RESEARCH STUDY CONCLUDES; ASSOCIATION UNVEILS MSDS COMPUTER SYSTEM AT ANNUAL MEETING

Executive Summary

Returned goods cost drug wholesales approximately 3.7% of gross sales, a study sponsored by the National Wholesale Druggists Association Foundation-Upjohn Research Residency Program concludes. Each line of returned goods processed represents an average loss of $4.70, the report states. The study notes that, given the industry average net profit margin of 1.28%, "the typical drug wholesaler must sell an additional $370 of merchandise to break even for each line returned." The study was released during the NWDA annual meeting in Honolulu Nov. 14. Outgoing NWDA Chairman Dwight Steffensen (Bergen Brunswig) told the association that "the study...confirmed our worst fears. While we were automating up front, trying to build customer bases and shaving our gross margins to the minimum to remain competitive, our profits were going out the returned goods window." The report points out that 85% of returned goods were found by wholesalers to be in salable condition and returned to inventory, suggesting that the majority of returns were due to errors or overstock rather than damage or recalls. Compounding the problem, the report states, is the lack of systems to reconcile returns directly to manufacturers with credit vouchers. "Returned goods handling historically has been given a low priority in the wholesale drug industry," the report states, noting that wholesalers generally believe returned goods cost them only 1%-2% of gross sales. "Returned goods are viewed as a necessity of doing business -- something customers expect and would be unwilling to forgo. Yet the wholesale drug industry must examine the returned goods issue; it is just too costly to ignore," the report urges. To reduce the volume of returned goods, the report recommends that the wholesaler "develop computer software to screen orders for frequently encountered problems, such as unusually high quantities." Software could also "identify when a selection of similar products is ordered and 'flag' the order for review." Wholesalers are also advised to "reduce the number of selections available on multi-source products." The report suggests identifying "the top 10 customers generating the most returned goods as a percentage of sales for specific targeted efforts." Wholesalers should "consider the use of a third-party processor to handle returned goods" and "establish a returned goods committee" as well as set up "the returned goods department as a separate accounting entity with its own inventory," the report adds. Steffensen cited returned goods as an area where wholesalers can find savings as cost pressures continue to increase. "We have accomplished a great deal in driving costs out of the system, with substantial savings passed through to our customers and the health care system," he said. "There's still a lot of work ahead. Every aspect of our business must be scrutinized for improvement." During the Honolulu meeting, NWDA unveiled a program to achieve savings in another area through a computerized "global material safety data sheets (MSDS) repository system" developed in conjunction with AT&T EasyLink. Manufacturers are required to create MSDSes for hazardous materials. While drugs in tablet or capsule form are exempted, NWDA President Ron Streck said that "several thousand products" do have MSDSes that need to be created, updated and distributed. The NWDA/AT&T system should "provide tremendous time and cost savings to wholesalers and manufacturers," Streck said. The service is being launched at a price of $3,000 per year to wholesalers and $5,000 per year for manufacturers. NWDA board member companies such as Bergen Brunswig, Alco, Bindley Western, FoxMeyer and Whitmire have signed on to support the project, Streck reported.
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