Healthcare Matters

I did the post (below) last January. And after covering this morning’s story on Novation’s continued success with its private label NOVAPLUS business, I thought a little more contextual light on the subject would make for some worthwhile afternoon reading. Enjoy!

At every level of the supply chain, private labeling strategies have been kicked around for years.  Branded manufacturers do it as a way to further leverage their manufacturing assets and grab some incremental share in mature product markets, but they’re very careful about it. And ironically, major distributors often do it as a way to establish and/or enhance their brand equity. Most everyone else does it to make more money or save a bunch, because as long as excess manufacturing capacity exists, the opportunities will be out there.

Although private label business strategies have always been big winners for distributors, Integrated Delivery Networks (IDNs) have now jumped on the private label bandwagon and are enjoying their own brand of success.  No, I’m not talking about buying their favorite distributor’s private label commodities. I’m talking about standardizing their commodity purchases under their own private label by entering into direct contracts with the same low cost country manufacturing sources their distributors may be using.  In some cases, they may be the same manufacturers used by the branded alternatives they’ve already replaced!  For the record, I have traveled extensively in China and visited several dozen medical product factories.  I am not speculating about the possibility of a major branded distributor, branded manufacturer and a large hospital system all using the same manufacturer –I’ve seen it.

Frankly, whether you’re just thinking about it or committed to exploring low cost country sourcing, a private label option will be hard to avoid. Even smaller and medium sized hospitals are forming ad hoc purchasing groups for the expressed purpose of aggregating enough demand to cut the right deals with private label manufacturers. And they’re not just doing it to save money; they’re doing it as part of a more comprehensive supplier rationalization and standardization strategy.

Bottom line: Container-level pricing out of China for most commodity items is easily 50%-80% off current US street prices, so if you’re set up to handle the delivery, warehousing and distribution logistics, it’s a fabulous opportunity. If you’re not, you should still be able to find a private label solution that saves 25%. Either way, you still need to execute a proper supplier qualification process, but the good news is that most major distributors now have a line of private labeled commodities, and the smaller, specialty distributors are dealing with easily checked-out low cost country sources. And if you are able to go direct, there are hundreds of well-qualified options in China that carry the correct ISO certifications, have excellent track records and are set-up to help first-timers structure a turn-key solution.

The Sisters of Mercy (Mercy), a major IDN with facilities in multiple states across the Midwest, has had a dream SCM situation in place for years.  ROi (Mercy’s GPO) not only jumped on the private label opportunity for Mercy years ago, but it has moved well beyond it.  It now leverages its clinical expertise and has developed its own custom pack manufacturing capability.  Although dedicated to Mercy as its anchor, ROi is a separate business entity and is taking on new provider clients. It continues to innovate the GPO model –and its private label and custom manufacturing business lines are integral to its value prop.

Novation sells under its own NOVAPLUS private label and has built close to a $2 billion dollar business. Amerinet established a subsidiary, Amerinet Choice LLC, as its private label entity, and it, too, has been hugely successful. Cardinal and Medline both built their businesses around this concept. Other GPOs – MedAssets and Consorta –have refused to get into private labeling, alleging that it heaps added costs on all supply chain members.

What? There are clearly other legitimate reasons, usually contractual, that have kept these “naturals” out of the mix. But GPOs are, in fact, perfectly situated to take best advantage of this business opportunity. And if done in a way that is true to their respective charters (the reason they all enjoy a safe harbor), they can quickly deliver a huge benefit to the industry. Simply put, there is no good excuse for hospitals to be paying $180 for a ortho drill bit.

Obviously, private-labeling often does put a strain on the relationships between manufacturers, GPOs, and distributors. But it’s the kind of disruptive tension that is tailor made for experienced, provider-side SCM professionals.  In fact, it’s an underused, if not untapped reservoir of negotiation leverage.

The anti competitive concerns expressed by manufacturers against GPOs (regarding private labeling) almost ten years ago during the Senate hearings have become close to irrelevant in today’s climate.  Manufacturers are optimizing their internal operations. GPOs continue to innovate and differentiate. Distributors are redefining the benefits of true collaboration and providers who let the sun shine in are discovering all kinds of meaningful cost saving opportunities.  What role do private labeled options play in your supply chain?

—Tom Finn