Trade Practices need to be updated to reflect the reality of today's environment: Cash Discount vs. Managing A/R
Manufacturers need to change the dynamics of their downstream relationships, especially as it relates to Best Price Calculations--a crucial component for setting the price for your government contracts. The crux that causes manufacturers the most issues is the inclusion of Wholesaler Cash Discount in the Best Price Calculations, which results in a 2% reduction in your AMP.
Linear B Exchange firmly believes this situation can be corrected. Cash Discounts/Prompt Pay Discounts are given to customers, but when an entity is paid to provide a service, that means they are a service provider, and should be paid a service fee—not a cash discount. Also, rebates and pricing discounts should be given based on volume purchases.
Wholesalers--are they a true customer or a service provider? It is hard to classify this relationship because it has migrated over the years. Pharmaceutical Wholesalers in the past acted like traditional wholesalers and truly were customers, but with the advent of Fee-for-Service, the wholesaler relationship evolved. Pharmaceutical Wholesalers became your service provider. This relationship became convoluted because of Prompt Pay Discounts. Manufacturers have traditionally paid 2% 30 Net 35 to have a predictable revenue stream, but is this really a Prompt Pay Discount? In other industries, a prompt pay discounts might be 2% 10 Net 30.
All you have to do is look within your four walls and ask one of your Supply Chain colleagues what their definition of Prompt Pay means.
It is time to evolve your relationships downstream with your wholesaler partners. Financial pressure will ultimately lead you, as a manufacturer, to create viable alternatives. While this is an option for some products, the majority of your products designed for primary care would see a cost increase for normal distribution. You have to demand changes in your current trade practices if both you and the wholesalers want to sustain the current distribution network. While Linear B Exchange advocates that the current model is not sustainable because of the changing dynamics of Generics vs. Brand Rx distribution, we do believe it can be stabilized for a while longer.
If you are not already a client of Linear B Exchange, talk to us and let us help you evolve your relationship with your wholesaler partner.
- Wholesalers are not customers. They are service providers.
- Prompt Pay Discounts are designed to incent customers to pay their obligations earlier. Your relationship with wholesalers is about managing receivable risk. 2% 30 Net 35 is not prompt pay. It is the cost of managing receivables risk. Make your agreements reflect such.
- Cash Discounts vs. Managing Receivables are exclusive of each other. Let us help you evolve your relationships to reflect that.
- Stop being penalized in your Best Price Calculations because your Trade Practices need to evolve. Linear B Exchange is your solution.