Tools and Tips

• By Dale Beardsley, Elisha Bury
• Jun 01, 2004

It's the question everyone's asking throughout the HME industry: how will HME providers change the way they do business to adapt to competitive bidding and even deeper reimbursement cuts on the horizon? More specifically, how are providers going to be able to continue to offer top-quality patient care and service while reducing their costs to provide that service?

1. Know the top cost-cutting strategy.

Recent industry surveys have attempted to unearth the answers to these questions and have shown that vendor consolidation is often one of the top cost-cutting strategies that HME providers say they are implementing. It's a sign of the times when shopping for groceries, how many of us still go to the butcher for our meats, to the local bakery for bread, to the farmer's market for produce and have the milkman deliver our dairy products?

But what makes vendor consolidation an effective cost-cutting strategy for the HME provider? Is your company in a position to benefit from using fewer vendors, and how can you begin to implement such a change in your business?

There are a number of reasons why HME providers turn to vendor consolidation as a means to cut costs, such as to increase efficiency, take advantage of economies of scale and improve consistency of operations company-wide.

2. Increase efficiency.

Studies in a variety of industries have attempted to quantify the average cost to a company to create one purchase order, and have come up with figures ranging from $150 per P.O. to $10 per P.O. While there is no benchmark for average P.O. costs in the HME industry, there is clearly an opportunity to cut operational costs by reducing the number of purchase orders created.

These costs may include personnel time spent to enter the purchase order, negotiate pricing with vendors, take necessary approval steps, process the package receipt, inspect incoming packages and process the invoice, as well as the added freight expense from multiple shipments. It's important to note that these are all costs associated with the frequency of orders, not the quantities ordered.

3. Learn from example.

As an example, consider an HME respiratory provider that has four locations and allows each location to handle their own purchasing. Within each of these locations, the respiratory therapist handles orders of CPAP supplies, the warehouse manager oversees replacement part purchases and the purchasing manager takes care of other patient supplies. This one company could conceivably be using 12 or more vendors to acquire the same products that could be purchased from one distributor on one purchase order. Each of these 12 employees is spending time on the same tasks calling vendors, negotiating prices and placing orders while the warehouse staff spends extra time receiving in multiple shipments and the accounting department processes and pays multiple invoices. Consolidating vendors and streamlining purchasing operations could save this particular company significant amounts of time and money without any change to the actual products they are buying.

4. Where to begin.

When considering whether vendor consolidation would help to contain costs in your business, attempt to estimate the expense associated with each P.O. you create, including personnel time (purchasing, receiving, accounts payable and other staff) and shipping and handling costs.

Are you spending a disproportionate amount of purchasing effort on products that contribute little to your bottom line? Can you achieve meaningful cost savings by making fewer purchasing calls, processing fewer vendor invoices and receiving in fewer packages? If your answer is yes, vendor consolidation may be an effective cost-cutting strategy for your business.

5. Establish greater buying power.

Quite simply, consolidating your business with fewer vendors will give you greater buying power and force your vendors to put their best foot forward in order to keep your business. The benefits you will derive as a result include:

Better pricing. Depending on the size of your company and the volume of your purchases, consolidating your purchases with one vendor may qualify you for volume discounts that could save you even more than you are paying by shopping for the best list prices with multiple vendors.

Savings on freight. Not only will you be saving by reducing the number of packages received, but you may also save on handling fees and added freight costs associated with multiple shipments.

Added-value services. With many products used in the HME industry on the verge of becoming commodities, manufacturers and distributors must compete for your business on more than just price and selection. Look for a vendor who can provide added value through unique services or solutions that meet your needs. You may find that you'll get more value and ultimately more cost savings by consolidating with a vendor that doesn't always have the lowest price on each item.

6. Improve consistency.

With the vast array of products available to HME providers today and new ones being introduced regularly, the administrative burden of keeping up with so many vendors can become staggering. More vendors means more part numbers to keep track of, more inventory to stock and more policies and procedures to follow.

Particularly in companies with multiple locations or with different departments doing their own purchasing, there are likely inconsistencies in purchasing practices that affect overall efficiency and productivity.

With fewer vendors, you can achieve greater consistency in the type and quality of products you stock, in purchasing procedures used and in equipment servicing and maintenance practices company-wide. In turn, this means greater efficiency and savings of time and money for you.

7. Who should consolidate?

Although nearly any HME provider can see benefit from vendor consolidation, the companies that stand to gain the most include:

Small independent providers.

Small independent HME providers, like many small businesses, operate with a lean staff in which everyone wears many hats. Perhaps the owner of the company spends a few hours purchasing, then heads back to the warehouse to receive in the day's shipments, then hits the road to do some marketing to local referral sources. For the small provider, time spent on additional purchasing effort means less time spent elsewhere growing your business.

Providers that have multiple purchasing contacts.

As in the example discussed earlier, perhaps your respiratory therapist handles purchasing of your CPAP supplies, your warehouse manager oversees parts purchases and your purchasing manager takes care of your patient equipment and supplies. With each of those individuals investing the time and money required to make multiple purchases, you may be missing an opportunity to consolidate vendors and save in each of these product areas.

Providers that have multiple locations.

If each of your locations handles their own purchasing, you may not be taking maximum advantage of your buying power for the benefit of the entire company. Approach vendors as a unified company rather than as individual locations to unearth the greatest possible savings.

Providers that have made acquisitions.

If you have recently acquired another HME provider and kept original staff working in that location, they may have purchasing and inventory procedures in place that are radically different from your own. A close evaluation of their inventory and current vendor relationships as compared to your own may reveal areas with great potential for savings by consolidating vendors.

8. How to begin consolidation.

If you have determined through careful evaluation that you can see meaningful cost savings by consolidating your purchasing with fewer vendors, it's time to put the onus on your vendors to show you what they can do.

Approach your current or potential vendors with a request for proposal (RFP) on the products you currently use or anticipate using in the near future. Tell them that you would like to consolidate your purchasing with fewer vendors and ask them to include as many products as they can in their proposal.

In return, be prepared to provide as much information as you can about your current purchasing procedures, usage data for products you currently stock, forecasts of future growth that would affect purchasing, and any other details that will help potential vendors prepare a proposal that offers the best solution for your needs.

When evaluating the proposals you receive, consider everything that vendor has to offer price, customer service and value-added services to select the ones that will best help you achieve your goal of overall cost savings and increased efficiency.

9. Make changes now.

As the legendary GE chairman Jack Welch once said, "change before you have to." The coming years may bring big new challenges for your HME business, but the key to overcoming those challenges is to reevaluate every aspect of your operations and change now in preparation. Consider every tool available to you that will enable you to continue providing the top-quality service your patients rely on while reducing your costs.

10. Just one tool.

Vendor consolidation may be just one of those tools in your toolbox, but it could be a highly effective cost-cutting strategy that will help you face the challenges of the next several years.

This article originally appeared in the June 2004 issue of HME Business.