Published by Computachem Services

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I thought it was an opportune time to look outside pharmacy to try and benchmark specific skill areas in well managed retail businesses, compared to pharmacy.
The retailer I usually like to keep tabs on is Woolworths, because it traditionally has been regarded as having the best retail managerial skills in Australia, and this is reflected in current share prices.
Looking at such an enterprise is a valid exercise, for although there is a trend in pharmacy to concentrate on professional services, many concepts and systems that are developed by Woolworths, can be adapted and transferred to pharmacy, whether it be at the commercial or professional end of the pharmacy scale of activity. ELDP is a concept worth examining.

For example, the phrase began simply as a banner to cover a range of special prices for a limited group of products for a limited time. Most pharmacies have embraced this form of marketing since the early 1960's, when supermarkets first began their journey for permanent business expansion and dominance in all areas of retailing.
Consumers were initially delighted to be able to purchase goods at perceived lower prices and supported the process.
As the years rolled by and consumers became more savvy, they also became more mobile and tracked the products they wished to purchase to different outlets in differing areas, picking the eyes out of each retailer's offering.
As "specials" are generally marketed at very low or nonexistent margins, to continue this type of marketing strategy was obviously a recipe for a disastrous bottom line.
To counter the problem, Woolworths pioneered a system of shelf rentals, promotional allowances and special product rebates designed to stabilise the posted catalogue wholesale price, which then maintained an artificial retail price, when retailer margins were applied.
Thus EDLP had advanced one further philosophical step, because the concept could now be spread (albeit unevenly) across the entire inventory range at any given point in time.
As pharmacy had not developed a similar system of allowances and rebates to a comparative level, it meant that the entry point in the supply chain for most pharmacists was at the posted catalogue price. This price was then elevated by wholesaler margins, and until recently, sales tax was levied on this much higher price base.
Companies like Woolworths exploited this tax difference and fought to maintain the extra artificial margin, right up to the introduction of GST, which basically eliminated the unfair advantage that all small to medium enterprises had to endure. Governments from both sides, had simply refused to address this problem, with the result that small to medium enterprises (SME's) progressively lost the price war and have systematically been disenfranchised for market share.
The so called free trade espoused by economic rationalists, certainly does not mean fair trade.
It is estimated that the top 1000 corporates in Australia account for 87 percent of total profits, while the remainder, representing mostly SME's, account for the remaining 13 percent, and still declining.
Woolworths has emerged as the ultimate winner in the long battle for price supremacy and market share dominance, and continues to lead the way.

A new dimension to EDLP has emerged in recent years with the rise and rise of Internet technology, particularly as it applies to the supply chain. For nearly a decade, Woolworths has been investing in supply chain technology, for it realised that if it were to keep its EDLP strategy in place, it would have to develop another method of stabilising retail prices and margins. Thus began a strategy of forming alliances, sometimes with competitors, and using a combined purchasing power to reduce prices on the overhead items of their respective businesses (stationery, power, fuel, insurances etc.). The theory behind this process was that if savings on these items could occur, the monetary value could be passed back into product margin, thus sustaining a stable and low retail price.
The software that has been developed to keep track of these savings and the sophisticated budgets to back the EDLP strategy, is a hidden "edge" that is hard to compete with, because these systems are not visible, and are hard to copy or emulate.
The initial supply process via the Internet now spans all product purchases, with alliances becoming global in nature, and systems development along the supply chain actually reaching into the manufacturer's area, and to a large extent, dictating the level of manufacturer inventory and product development.
Woolworths and their suppliers experience major cost savings when they cooperate in this type of alliance, and because processes are becoming more automated, management time can be devoted to developing the process at a faster rate.

Recently, Woolworth's CEO, Roger Corbett, announced that by the year 2005, his company will have spent a half billion dollars on IT, and that the stated objective of this investment is to reduce total costs by 0.2 percent of sales each year up to that date.
The implication for pharmacy is enormous.
Not only are we a decade behind in the development of our IT processes, we have allowed our managerial capacity to dissipate, due to inefficient work practices. We have not developed systems and processes to deal with burgeoning PBS prescription numbers, and we are becoming less competitive in retailing because there is less time to develop competitive strategies. We seek solace and relief in new professional services as an "instead of" rather than an "add on" enhancement to our total package of offerings.
We have lost growth in traditional areas of retailing and have irregular and unmanaged growth in the prescription and professional services area.
Governments have been encouraging IT reforms in the health industry at large, and expect to see reductions in overheads approaching those of Woolworths and similar organisations, which are setting and publicising the level of savings that can be achieved.
Pharmacy risks, and is experiencing, the expectation of government, looking for a way to reduce the National Health costs to a sustainable level. Pharmacy must be a participant.
Therefore, government will eventually impose a reduction it knows can be achieved, to all levels of the pharmaceutical industry.

Now when the question of pharmacy ownership comes back on the agenda and the simple question is asked, "Which form of enterprise can run the PBS at the safest, most efficient and lowest cost?", will you be able to put your hand up and say, "Me!"

Let us just look at one area of Woolworths' cost structure.
The direct suppliers to Woolworths number a rationalised 1800 vendors which supply merchandise backing 15 percent of the company's annual sales. At the beginning of Woolworths supply chain reform, they were collectively generating 5 million invoices, which needed 800,000 labour hours to process. Today, the time taken to process those orders amounts to 40,000 labour hours and represents the most significant cost saving achieved in the company's history.
There is more to come, and there is a strong similarity between pharmacy PBS claiming and Woolworths invoicing.
The Better Medication Management System will embrace reforms of this type as the Heath Insurance Commission develops its systems capability. Pharmacists will have to invest in a parallel systems capability, or face the risk of having to opt out of the PBS system completely. This would not happen overnight, but it could and would happen quite abruptly, after a short notice.

So the Woolworths visible "front end" marketing strategy is being fueled from an engine room "back end" systems development, built around system efficiencies, cost savings, automated or partly automated procedures.
As a marketing strategy, it is built around the following elements:

* an optimum range of products and services
* averaging of prices
* tendering for non-branded merchandise
* low cost purchasing
* store price allocation
* net cost invoicing

Pharmacy is inhibited in most of the above because of:
* Generally small scale of operation. There is an urgent need for incorporation, and a range of subsequent mergers required, to build an environment that has an economical scale of operations, spread over a wide range of territory (chain or alliance), and be staffed with skilled and experienced pharmacists.
This will only occur when individual pharmacists decide to form alliances and depart from their strategy of independence and splendid isolation. They also need legislative changes, already recommended, but slow in the delivery.
* Supply chain reform has to occur rapidly between manufacturer, wholesaler and community pharmacy. Some work has been done here, but we are still waiting for a uniform adoption of EAN coding throughout the industry (see links to developments on the front page), and an upgrade of IT software and hardware. This is beginning to occur, but is light years behind Woolworths.
* Marketing groups have been rendered virtually obsolete, except in the area of providing a visible "brand". They are not capable of embracing obvious aspects of e-commerce (e-tailing) because of the potential of setting one member against the other within the same group. This market paralysis can only be circumvented by pharmacists taking control of this area themselves, so there is a need for a different type of market support group to emerge.
This creates an inherent danger to wholesalers, because of the potential for virtual Internet buying groups to divert large segments of their purchasing power direct to manufacturers.
Coupled with a Woolworths style supply chain through a fulfillment operator, the introduction of large scale virtual buying groups would lead to the ultimate demise of wholesalers in their current format. This would result because of the buying group potential to rapidly form alliances, one with the other, plus the ability to combine within segments of purchasing, rather than be a "full line" operator.
* EDLP competitive strategies by pharmacists cannot evolve in pharmacy until the above reforms are in place, or at the very least, understood.
* The Pharmacy Guild needs to be at the centre of the above strategies acting as a coordinator, and taking ideas from the bottom up (not top down as we have noted in previous editions). There is some evidence that this process may have commenced, after some shaky startups, but the Pharmacy Guild would be hesitant, in that the above reforms would result in a lower membership number, because of reduced pharmacy numbers.
New members can only come from new forms of pharmacy business e.g. consultancy practices independent of pharmacies, but these new forms are not actively encouraged (because of the political structure of the consultant's association and the fact that they would be more philosophically aligned with the Pharmaceutical Society).
Hence, part of the reforms for the new order in pharmacy points to a master umbrella organisation for all pharmacists, populated with various divisions of interest (still retaining the important industrial relations activities of the Pharmacy Guild).
The Pharmacy Guild has a long history of successful service for its members, but it cannot speak for all pharmacists.
The reality is that its decisions and strategies do impact on all pharmacists, and the time has come for a more appropriate division of power, and where necessary, a concentration of power.
It will also help the pockets of individual pharmacists trying to fund subscriptions to the numerous and various organisations, competing and sometime overlapping, in service provision.

The bottom line to all the above is that without a coordinated approach to national marketing and infrastructure issues, pharmacy will remain vulnerable to market forces, and predators (non-pharmacists) will forever circle pharmacy, waiting for a killing.

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