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RETURNED GOODS COST DRUG WHOLESALERS APPROXIMATELY 3.7% OF GROSS SALES

This article was originally published in The Tan Sheet

Executive Summary

RETURNED GOODS COST DRUG WHOLESALERS APPROXIMATELY 3.7% OF GROSS SALES, according to a study sponsored by the National Wholesale Druggists Association Foundation-Upjohn Research Residency Program. Released during the NWDA annual meeting in Honolulu Nov. 14-17, the report states that each line of returned goods processed represents an average loss of $ 4.70. 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 report notes. 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 saleable condition and returned to inventory, suggesting that the majority of returns were due to errors or overstock rather than damage or recalls. NWDA's report maintains that the lack of systems to reconcile returns directly to manufacturers with credit vouchers compounds the problem. "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% to 2% of gross sales. "Returned goods are viewed as a necessity of doing business -- something customers expect and would be unwilling to forego. 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 NWDA 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," according to the report. 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." In addition, 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 says. 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." In his Nov. 17 inaugural address, incoming NWDA Chairman John McNamara (Alco Health Services) told the association that wholesalers must seek "greater levels of partnership with our suppliers." The need for alliances among wholesalers and manufacturers was also a theme of outgoing chairman Steffensen during his Nov. 14 address to the meeting. McNamara and Steffensen both cited NWDA's HealthCom electronic data interchange network as crucial to wholesaler/supplier relations. The service is up and running at 35 companies in its third month of operation, NWDA Associate Member Board Chairman Andy Anderson (Searle) told the meeting Nov. 15. Another 20 firms are trying out the system, Anderson reported. While a total of 143 manufacturers and wholesalers are signed up to support development of the system, "88 companies are sitting on the sidelines," he said. Steffensen declared that "all the glorious promise of this still infant system has fallen short of the mark. Now that we've moved beyond the launch stage but not into the full-blown success stage, too many of us are waiting for the other guy -- waiting for the solution to be handed to us." NWDA President Ronald Streck took a more optimistic view of the HealthCom roll-out, saying: "90% of our drug wholesalers are using, testing or getting ready to use EDI Healthcom services." The association expects that the launch of HealthCom Catalog Services early next year will boost subscription levels to approximately 100 manufacturers and 40 wholesalers by the end of the first quarter. Currently, the system offers "11 different types of live transactions," Streck said. These include purchasing, charge-back bid process handling, invoicing, payment and sales reporting. HealthCom Catalog Services will add a database of drug price information provided by manufacturers. NWDA believes that the instant access to such information, which could include price changes and special offers, will spur wholesalers to sign up for the EDI network. Manufacturers will not be able to receive competitors' price information, but will be able to specify which wholesalers can receive their price data. HealthCom Catalog Services began pilot testing Nov. 15; three wholesalers and three manufacturers are involved in the test. NWDA expects full roll-out in the first quarter of 1994. Also in testing is HealthCom Online, which will provide on-line access to NWDA publications and such other information as FDA's Enforcement Report, as well as electronic mail. HealthCom Online is targeted for a Jan. 15 general release, Streck said. Five members of the NWDA board were named during the annual meeting. Bindley Western CEO William Bindley was elected second vice chairman, and Behren's Inc. Chief Operating Officer James Clifton was named to finish the term of Bindley exec Michael McCormick. Remo Drug Corp. CEO David Reiter was elected to the board, as was Thomas Simone, president of McKesson Drug. Simone is leaving the company in March ("The Tan Sheet" Nov. 1, In Brief). Value Drug Co. Chairman John Letizia was also chosen for his first full term, following his earlier replacement of another board member mid-term.
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