1. 1983 – BDVS resisted negotiation. Why? In 1983, APG demanded substantial price reductions from BDVS. BDVS was not willing to these price reductions owing to its superior quality, range and service and resisted negotiation with APG HQ. Following are some of the main reasons why BDVS resisted negotiations. a. BDVS was a pioneer in converting the market of Blood Collection Products Market from Needle & Syringe method to Evacuated-Tube Blood collection method.
BDVS had the widest range of blood collection products and this was crucial for the Hospitals, which depended on this to run various diagnostic tests for chemistry, hematology, coagulation studies, special procedures and blood banking. Product assortment / colour coding schemes offered by BDVS were preferred by the customers. b. Blood collection products formed only 5% of the total supplies purchased by hospitals and the BDVS products were preferred by the “bench people” in the lab (medical technicians in the lab) for its range/ quality. c.
It was not binding on the APG member hospitals to buy only from the negotiated manufacturer for the product. Based on the preferences of the “bench people”, they could buy from an alternate vendor also. Taking advantage of this route, BDVS continued selling directly to Individual hospitals through its well-developed field sales force that maintained good contacts with their existing clients and was able to sustain the market share. Wherever price was an issue it retained most of its business with individual hospitals (that were affiliated with APG) through lower prices, on a case-to-case basis.
So they did not have a compelling need to approach the negotiation table. d. For the past few years, BDVS had put in place the “Z Contract” with its large and key Accounts after negotiation for price and quantities and supplied to them through its authorized distributors. 2. 1985 – BDVS ready for negotiation. Why? BDVS was ready for negotiation with APG due to the following reasons:- Changing Market Trends: 1. In the US, 1800 largest hospitals accounted for 50% of the market for medical equipment and supplies. Also 70% of all the blood tests were done in the Hospitals in the US. 2.
In 1983, the US government brought in new legislation for the re-imbursement of costs for Medicare patients based on diagnosis–related Groups (DRG) and not on hospital costs. The hospitals had no choice but to resort to control costs and look at things differently and hence the hospitals encouraged people to opt for day care facilities rather than compl This had a dramatic impact in terms of reduction in the hospital admissions by 4%, duration of days fell by 5% and the number of hospital beds also was forecast to fall in the 1990 by 35%. This meant that the market was shrinking and that there is a need to protect this shrinking market.
BDVS need to maintain its share in this market, considering this future trend and APG was emerging as one of the powerful purchasing groups to reckon with. BDVS decided to negotiate with APG. 3. Due to the above DRG based re-imbursements, there was increasing cost containment pressure on the hospitals to bring down the cost of its purchases, maintenance and administration. This is another reason for the individual hospitals –small or large – to get affiliated to purchasing groups like APG to get a cost advantage for centralized buying of products. Changing Buying Behavior:
1. The buyer has changed from being the Lab personnel, who knew the product and company representative to the Purchasing Personnel who came from different backgrounds. These people demanded regular service but with lower costs. 2. Purchasing has started from Corporate Purchasing from Hospital purchasing for large national multi hospital chains. These either negotiated directly with Manufacturers like BDVS or affiliated themselves to Purchasing Groups like APG, which had better purchasing power due to high volumes. Emergence of APG as a strong Purchasing Entity: 1.
More and more hospitals were getting affiliated to APG . From 20 hospitals in 1972 , the current affiliation stood at 500 hospitals . Many large and prestigious hospitals affiliated with medical schools were now APG members. 2. APG’s strength was growing and consequently its purchasing power. It had national purchasing agreements with about 100 medical equipment suppliers and the number of such agreements were steadily increasing in the recent years. 3. In 1983 , as BDVS had not relented to APG for price reductions, APG had entered into a national purchasing agreement with Terumo, its competitor.
4. APG, when BDVS resisted negotiations in 1983, put in place a group of field personnel who went to its member hospitals for implementation of the contracts and they had resorted to negative marketing which resulted in spoiling of relation-ship of BDVS with its customers. After BDVS meeting with APG HQ members after this incident , the relation-ship improved at certain hospitals .
5. In 1985 , APG had announced its decision to start its own distribution network and during the year it had brought in its fold many small and regional distributors that were into medical products distribution to warehouse and trucking/billing operations to APG-affiliated Hospitals. 6. APG was marketing to its member hospitals that through its program hospital costs could be brought down by 3% to 12% on most supply items.
7. APG’s Material Management was aggressively marketing the private label and distribution programs . Those suppliers who did not participate in these programs were not awarded APG contracts . 8. In April 1985, Mr. Wilson , VP – MM at APG announced that they are going to establish a new national purchasing agreement for blood collection products.
The Supplier awarded this contract will receive 90% of the order for such items from APG affiliated hospitals. Though this was not true , as per the sales people field survey , but substantial portion of the business with these hospitals was at risk. 9. APG was serious about this purchasing agreement and was keen to make this a model program / contract , a success.
10. The stakes of BDVS were high as at the APG affiliated hospitals it had a share of 80% of their venous blood collection tubes and 40% share for the needles. This totaled to US$ 6 Mn in sales to these hospitals in 1984. 11.
APG was also negotiating with BDVS competitors. Going by the above , BDVS management felt it wise to not resist negotiation and decided to negotiate directly with APG HQ. 3. Aug 15, 1985 – What should BDVS propose ?
Why ? BDVS had a sales of $ 90Mn in 1984 and each of its product group accounted for 33% of its operating income . Out of this, as sales of $6Mn had come from APG affiliated hospitals last year and this is roughly 7% of its sales revenue. It’s closest competitor Terumo is at its heels and had been pricing aggressively to gain market share. Hence , BDVS should not ignore this requirement from APG .
It could offer the following revised proposal on 15. 8. 1985, to APG:- Pricing : APG is solely going by the lowest price of the product without considering its attributes which is not correct. BDVS offers a wide range of products in the blood collection product market and is a known market leader in its own right. Its quality is un-matched and hence it is not essential for it to match the prices offered by APG. Currently , as per given data , BDVS prices for evacuated tubes was higher than Terumo’s by 23% . BDVS had now offered 20% higher prices than its competitors meant that it had dropped its price by 3% or so.
BDVS also had integrated vertically over the years and hence could be accruing some cost advantage in the inputs and should use this strength to leverage this situation. It could pass on some price reduction in this case also considering APG as a large account instead of viewing the individual member hospitals separately. Also , generally the Z contract prices were less than its List Prices by 30-40% , BDVS should re-look at its pricing again and explore the possibility of reducing the prices in line with its other Z Contract prices depending on the volume assured by APG for its member hospitals requirement.
Volume : BDVS’s present share of business for the tubes is 80% and for the needles 40% with the APG member hospitals . As it is bringing down its prices , it could insist on the 90% volume of the business as initially proposed by APG for both the products . But need not insist on the time frame from APG and the price escalation clause can be done away with. Instead , it could closely work with APG so that the field sales force and APG’s field personnel can meet the individual hospitals administration with its distributors over a period of 90 days to ascertain the contract for the next two year period.
APG Private Label : As the contract is being awarded by APG , BDVS can agree to imprint the APG logo on its existing label mentioning that “manufactured by BDVS for APG Member hospitals ”. Distribution : As it is stated that BDVS distributors do a lot of business with APG member hospitals , BDVs should insist that the products be distributed through its authorized distributors only ( who had been with BDVS for the last more than 4 decades) .
APG can also agree to this condition as the blood collection product is only one of the many products that it is purchasing and distribution. In turn , the BDVS distributors can look at doing business at slightly reduced margins( which is better than losing substantial business if contract is not through) and also work with APG/BDVS for the better co-ordination with member hospitals to reduce the cost to the hospitals .
Alternative : In case the above proposal is not being accepted by APG and the contract is not received by BDVS , BDVS should go back to its present model of marketing its products by its Sales force and Distributors and plan more aggressively for maintaining its market share in these APG affiliated Hospitals through direct selling to its customers ,that it has been following till now.