SEPTEMBER,Edition # 34, 2001

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Reports are beginning to filter through that gross profit percentages are not what they used to be, with some dipping as much as five to six percent within a twelve month period.
Reasons given are the increasing numbers of prescription medicines being sold at discount prices (Zyban, Viagra etc). Others point to their association with the Arrow Pharmaceuticals scheme, and still others complain that medical funds are beginning to exert pressure on their posted prescription prices.

Certainly, at the front end of the pharmacy, pressure from major retailers such as Woolworths and Coles is relentless, and the transfer of products, thought of as being pharmacy exclusive, still continue to appear on these retailer's shelves at an alarming pace.

The problem, of course, is that community pharmacists are attempting to compete in markets with an "old economy" expense base, against competitors who have already embraced the "new economy" and who are experiencing economic benefit as a result.
Mail order/Internet pharmacies can already testify to their "new economy" success, utlising a lower cost structure to develop a new extension to their existing business.
You had better get used to it, for low gross margins are here to stay, at all levels of business endeavour.
For some time, this newsletter has been warning about the forces being ranged against pharmacy, and it appears that now some "hip pocket" nerves are being activated, corrective action may now be organised.
The pace had better be stepped up sharply, because the real threat will come early next year when wholesalers have their margins reduced, and attempt to pass on their problem to community pharmacy.

For some time, pharmacy wholesalers and manufacturers have been organising an electronic interface with each other, to streamline ordering and payments.
The system was designed to utilise a universal product code system (EAN numbers), which in turn was to flow through into community pharmacy, in a seamless fashion.
Woolworths and Coles have been actively utilising this code system and have streamlined their entire supply chain process, drastically reducing stock holdings, but more importantly, reducing materials handling processes.
The savings in interest on capital, and on labour costs has been enormous.
The major retailers are approximately ten years ahead of pharmacy in the development of their supply chain economies.
The Pharmacy Guild and the major Pharmacy wholesalers were supposed to have developed a similar process as a part of the PECC system.
The Guild seemed to take an initial interest in the project, and then drifted off.
The wholesalers have been jealously guarding their own individual product numbering system and hanging on to outdated technology, because there was no pressure to change.
The cost of new IT investment is mounting for wholesalers, and it is now a major problem. How is it to be funded?
The end result of all this complacency is that community pharmacy does not have a competitive supply chain, is still rooted in "old economy" thinking and cannot hope to meet future competition and retain market share.

Pharmacists themselves have to bear a large proportion of blame.
While the major retailers have been forming alliances to purchase overhead items at discounted prices, pharmacy has been blissfully dreaming on.
The majors buy items such as computer hardware and software, electricity, petrol, stationery, and many other overhead items, through electronic gateway systems, in alliance with other businesses, that guarantee best price.
The savings made can be turned back into reduced retail prices, or increased net profits, whatever is the best mix, according to competitive pressures at the time.
They already utilise similar gateways and alliances to purchase products for resale on a global basis, assuring maximum discounts and lowest cost prices.

Because pharmacy wholesalers are already reaping the benefit of economies with their manufacturer interfaces, there is already a saving being generated. Part of this saving is being taken by the federal government, hence the reason for the pressure to reduce wholesaler margins.
There is no real justification for passing on this cost to community pharmacy, and for this reason, pharmacists should resist the pressure to absorb any new wholesaler cost. Pressure will eventually be mounted by the federal government, on community pharmacy, to similarly reduce their already slim margins.
Capacity to absorb these punishing costs can only occur if there is an attempt to embrace the "new economy" and generate supply chain reforms as rapidly as possible.

To build an economic power base, individual pharmacies need to grow in size and reduce in numbers. Strategically, those pharmacies in a given region should be looking at each other now to decide who has the best "fit".
Amalgamation should then occur, so that an adequate pharmacist workforce is available to develop new pharmacy services, and market share is concentrated among fewer outlets. Alliances of these newer, stronger entities should then be formed to concentrate buying capacity of goods and services, and form "virtual" buying groups to increase leverage.
"Old economy" forms of association available to pharmacists (such as partnerships) have been inefficient and not tax or management effective.
Newer forms, such as incorporation, have been recommended, but we still seem to be blissfully sleeping on.
They are simply not available and they are needed now!
Also remember that integrated medical centres will begin to proliferate in the near future, and a strong economic unit, in association with other health professionals, is needed sooner, rather than later.
But it all requires good and careful planning.

So while the rest of the world stands still, what can you do now to try and stem the haemorrhage of gross profit percentage rate?
Well, you can undergo micro reform to your supply chain as it exists now under your personal control.
Firstly, review your entire inventory range and classify each product into a section and a department. This is market positioning and may require looking at how you think and view each market (department).
Departments may need renaming.
Review your inventory management system to ensure that it gives adequate reportage. For example, does it give you the unit sale and the dollar value sale for each individual product. If not, you are running blind and this is a reform that you must instigate.
Identify the unit sales for each product, each section and each department, and determine what percentage of unit sales each product is contributing to the total for each section/department. This will help you determine whether a product is pulling its weight.
Before you do the unit review, determine what is the lowest unit sale you will accept in a given time (say 3 months) and what is the lowest level of contribution to a section's unit sales you will accept.
Be ruthless, and go through your entire range, culling the products that are not really contributing to your bottom line.
Unit sales are the starting point because unless a product is turning over and actually sells, you do not make a profit. The quicker each product turns over, the more profit is made collectively at the lowest cost.
After the unit review is completed, delete all stock items that do not measure up.
The next step in the evaluation is to determine the dollar value profit contributed from each product in a given time (say three months).
Before doing this review, assess what would be the minimum return you would accept per product. This should be assessed separately for each department, and will vary from department to department.
Be ruthless and go through the second cull of your stock.
You will be surprised how the remaining stock will sell at a higher unit and profit rate, now given the extra shelf space it deserved.

In reviewing your inventory system, endeavour to bring your ordering into a strict cycle i.e every product should be ordered on a fixed time basis, such as once in fourteen days. While it is workflow effective to divide the inventory up into say, ten working days, ordering each segment on a fourteen day cycle, real economies of scale begin to emerge if you are able to concentrate your ordering into one or two days within the cycle. This gives you more economic bargaining power per order and a better ability to bargain with suppliers.

The next micro reform would be to look at your layout.
If you are able to calculate the unit sales for each department, you have an ideal system for structuring your layout. Simply divide the total unit sales by the number of products held to get a comparative index.
Identify the strongest departments (high indexes), and alternately splice them with the weaker departments. This will tend to have your entire shop trafficked evenly by customers, thus utilising your total environment more effectively.
It is an exercise that can be done on paper to determine the best mix and balance of departments, and it does work.

The next reform would be to look at your displays, furniture and fittings.
These can look tired very quickly if not regularly updated. This need not be a major refit, more a refurbishment, sufficient to lift your total presentation.
However, if you need a major refit, then just do it!

Finally, a look at new opportunities in the form of new markets or new services.
Take time out to look at competitors and see what they are doing.
Look for opportunities to do your own private labels, and maybe even some old fashioned counter prescribing and compounding.
For example, herbal dispensing represents a new opportunity to be patient specific with a good mark-up, and some pharmacists are doing very well with this type of service.
There is always opportunity, but you must stand back from what you are currently doing to gain some sort of perspective.
While you are doing this, have a look at some of the businesses that have embraced the Internet within their business structure as a management tool and as a marketing tool, and determine what your future investment priorities ought to be.

While I was writing this article, I was absorbing the contents of a TV interview with Dick Smith and the demise of Ansett Airlines.
I have great admiration for Dick Smith, as I believe that he is one of the very few decision makers in Australia with a clear vision. He is unashamedly Australian and does not hesitate to put his money where his mouth is.
He places the Ansett problems squarely with management of the past 15 years, and the incompetence of the New Zealand and Australian governments, in not introducing recommended reforms.
Bloated management structures and excessive government charges that returned nothing to airlines have forced the Ansett bankruptcy, and a predicted similar situation for Qantas, if reforms are not implemented.
The danger is that the entire airline system in Australia will fall into leaner and meaner foreign hands.
It struck me that many other institutions are in similar danger, pharmacy being one of them.

Nero fiddled while Rome burned!
Pharmacy is so archaic in its business and management approach as to have lost most of its power base due to lack of operational scale. Power has devolved to major organisations, such as the Pharmacy Guild, who, with bloated expense accounts and well-meaning associations with government, have drifted along in a complacency that leaves the soft underbelly of pharmacy exposed, similar to Ansett. Traditional power brokers, such as wholesalers, have also become complacent, and are fast losing their ability to provide commercial support to community pharmacy.
Leaner and meaner operators are waiting in the wings.
We are part of a global community whether we like it or not, and I believe it is already too late for pharmacy, as we know it, to survive the next five years.
Urgent reforms will salvage some of the local market, but with restrictions on approval numbers; the lack of incorporated structures; a reticence to embrace the Internet; an archaic supply chain; heavy regulation and unrealistic expectations at community level that sre bogging down pharmacy enterprise (generating stress and burnout); the new services that are being introduced that are not correctly costed and heavily dependent on medical practitioner manipulation; a leadership that lacks a shared vision.....all this is causing angst!
The writers associated with this newsletter have a shared frustration that important issues are not being dealt with and are simply being swept under the carpet.
Do you want to be like the 16,000 Ansett employees who woke up one morning and found their livelihood had disappeared, many having given 25+ years of service?
Dick Smith voiced the frustration that when he was in a position (in CASA) to explain to government and airlines management some years ago, the problems they were facing, both management and politicians did not even understand what he was talking about!
I along with other writers in this newsletter share an identical feeling.

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