Frost & Sullivan, as part of it ongoing efforts to identify supply-chain optimisation opportunities in the medical-devices and supplies space, organised a Select Panel Discussion on the 23rd of Feb 2005, bringing together medical device manufacturers, industry specialists and technology solution providers. In a candid discussion, thought leaders in the industry agreed that the returns management could well emerge as the next area that could drive efficiencies. Industry participants agreed that there was value to be gained and the time was ripe to pilot a project and document the value of savings by managing the returns process better.

Select Panel Discussion members included Dan Eckert, President and COO of Neoforma; Mike Zagger, Vice President Corporate Accounts, St.Jude Medical; Rupa Basu, Sr. Director, Corporate Accounts, St.Jude Medical; Laurie Weismiller, Director National Account, Hill-Rom; Sath Rao, Industry Manager, Automation and Process Control, Frost & Sullivan, was the moderator for the panel. Also representing Frost & Sullivan was Beth Roach, Sr. Consulting Analyst, Charlie Whelan, Consulting Manager-Healthcare, and Norma Clavel, Research Analyst.


Sath Rao (Frost & Sullivan): We hope today's discussion will help create the necessary impetus within the industry by generating ideas for optimising the healthcare supply-chain. By getting a team of medical device manufacturers represented by the St. Jude team, the durable medical equipment-manufacturing group represented by Hill-Rom, the general healthcare devices and supplies represented by Beth Roach and Charlie, together with technology enablers like Neoforma, we hope to explore areas that could be optimised in the supply-chain. Frost & Sullivan has been monitoring developments in the supply-chain industry and we believe that an emerging area that can be further optimized is the returns management space. We had a discussion earlier with some of the panel members and I would start straight away and ask the panel members to introduce themselves.


Mike Zagger (St.Jude): I am the Vice President of Corporate Accounts for St. Jude Medical, a primary manufacturer of cardiac rhythm management devices such as pacemakers, ICD's and cardiac resynchronization devices. We have developed a new sales division focuses on atrial fibrillation which will encompass new technologies specific to three dimensional cardiac mapping and curative AF therapies which can be used by both the electro-physiologist and the cardiac surgeon. Our baseline business was built upon mechanical heart valves for implantation. And we are also a key contributor in the diagnostic cardiology space as well. So I am responsible for overall national contracting efforts with group purchasing organisations and the larger delivery networks, multi-hospital health systems and the like. I am responsible for the entire product line. My colleague, Rupa Basu is also with me and she is a Senior Director Corporate Accounts, and has responsibility for the eastern part of US and oversees our local efforts among roughly 10 field-based employees who manage those processes for us.


Dan Eckert (Neoforma): I am the President, COO of Neoforma. We exist primarily to improve efficiencies within the healthcare supply chain. We are more focused on the provider, or hospital side, in terms of providing solutions that enable them to improve efficiencies in their day-to-day processes as well as capture information relating to their consumption of supplies so that they can improve overall supply cost management by optimising contracts. In doing so, another big part of our emphasis is on identifying opportunities to improve the efficiencies of the hospital's supply partners. So the discussion today is particularly interesting to us in terms of how we might help do that.


Laurie Weismiller (Hill-Rom): I'm Laurie Weismiller with Hill-Rom. I'm a National Accounts Director. I've several accounts that I manage, but I think the reason I was asked to be on the call is because I typically handle for Hill-Rom, anything related to e-commerce or information technology in general. That's kind of my background. We make hospital beds, stretchers, architectural products, and patient room furniture.



Beth Roach (Frost & Sullivan): I am of course with Frost & Sullivan and have earlier I basically worked for Medtronic and Smith and Nephew. I've 15 years of work experience in the healthcare space.


Charlie Whelan (Frost & Sullivan): I'm the Consulting Manager in the healthcare group in Frost & Sullivan. I've been working in Frost & Sullivan for about 5 years, working on consulting projects primarily with medical devices companies.


Norma Clavel (Frost & Sullivan): I'm a Research Analyst at Frost & Sullivan. I am currently working on supply chain management for the medical device industry.


Sath Rao (Frost & Sullivan): So without much ado, my first question would be directed to Mike and his group. Could you walk us through the typical returns management situation at St. Jude?


Mike Zagger (St.Jude): I don't want to do all the speaking myself. I have Rupa here to give some input as well. As I mentioned to you when we spoke the other day, we have two disparate businesses at St. Jude in terms of product delivery. Our implantable products, primarily, pacemakers and ICD's are provided at the point of implant by the representatives. They carry the stock with them. Typically we have very little consigned or owned inventory that's out in the field. So, it's provided at the time of the implant because of the need that we have to provide a specific technology to a specific patient. We cannot ask our customers to carry the entire stock of product needed to cover all the patient population. That would not be efficient. So we provide the product at the point of implant. When you move over to our cardiac surgery division, our valves and in some accounts with our cardiology and electro-physiology products, we do have products that are on the shelf, typically owned or consigned at the customers' point of business. As related to product returns, those business lines are the ones that I think we may have more of an issue with respect to product returns, exchanges and credit-rebills. Rarely does that happen with our implantable devices. So my contribution to this discussion will really be relegated to those product lines that we may have an issue with returns and credit on a fairly regular basis.


Sath Rao (Frost & Sullivan): Primarily, how frequent are the returns and is there some value that you place on advance visibility into the returns process?


Rupa Basu (St.Jude): We don't really have a huge amount of product that is returned. Our representatives actually visit the centers on a regular basis, so they keep the inventory updated. So if you had any expired products, for example, they would actually do an inventory reshuffle to make sure that we've got the most current product on the shelves. There are occasions when we have to return the products because it expired or because we had an issue with lot numbers or the batch. Those are the only situations, in which we would actually have returned products, come back to us.


Sath Rao (Frost & Sullivan): That's actually a good lead in for us to talk about some research findings that came to light over the last few weeks. The cardiology business as a whole, (you did talk specifically about the limited nature of returns in specific areas for St. Jude's), but if you look at the cardiology business in the US, revenues are close to about US $14 billion. However, when we talk of unit shipments, it is kind of tricky. Especially because there are several components inside a box that either a representative carries or the distributor delivers, but the US$ 14 billion revenues roughly translates to about 8 million units (which are boxes shipped) and this is the kind of volumes the logistics company typically see. Out of this, in our interviews with several manufacturers, (out of 8 million units across cardiology devices, that would be pacemakers, cardiac rhythm management equipment's, heart valves, surgical instruments, so on) manufacturers see a return volume of approximately 1 million units. That is close to around 12.5 percent return rates for various reasons.

Stents is a bad example, which over the last few years has seen larger recall volumes, but in our discussions with device manufacturers, the feedback has been that the surgeon's has the privilege of picking the right size of the stents from an inventory at the hospital, more so because at the time of surgery he or she might decide which size of a particular stent should be used and then some of it either remains at the hospital or gets shipped back to the manufacturer. Of course, returns are of various natures, some of it could be due to product expiry and so on.

An interesting observation is that the rates differ from segment-to-segment. As opposed to the cardiology segment, in the orthopedic implants segment the return rate is of the order of 2.5 percent of the units shipped. Beth, do you want to comment.


Beth Roach (Frost & Sullivan): In orthopedics, we have a couple of things going on, the same type of return characteristics with the inventory reserve maintained for the surgeon as well. There are several ways of getting the product and one large trend that we have been seeing is that the hospital calls the manufacturer, followed by the shipment and an invoice is sent. A lot of consignments of products do get returned. A lot of dynamics go into it. And there are reasons as to why products are returned, and different segment of orthopedics will have different returns. Pharma products are typically large volumes of products, and you never know what kind of accidents take place, so you need all the different kinds of pharma products on your shelf, however when you can have your surgery scheduled, you call the manufacturer and ask for smaller range of products.


Sath Rao (Frost & Sullivan): Sure. In the orthopedic segment, we have been seeing a ballpark of around 2.5 percent rate of returns. In terms of return volumes, we are seeing 1.2 million units being returned, and Beth, you had pointed out in our earlier discussions the various reasons for returns: a competitor could buy out the existing stock stored at the hospital, and perhaps replenish them with his own brand, or there could be possibilities where the company might recall its old product line and restock them with the newer products.

The feedback that we got from the hospital networks was that credit management was an issue, equipment could be returned for warranty reasons, or they could want credit for returned items, especially given the current operating margins in the hospitals, no one wanted to keep unused items in their stock for long. The point-of-pain for the hospitals is credit management and in general is a bottleneck. They usually call up the company and ask for return material authorization number, generate a label and then ship it through third party logistics, and then wait for weeks before the manufacturer receives the equipment and the credit flows through the system. From the supply chain management perspective, do you see this as a major issue from the point-of-view of the hospitals?


Beth Roach (Frost & Sullivan): We definitely see it as a major issue. I think from the suppliers' side it varies with the product type, and the product segment as has already been discussed. But the primary focus that we have from working on behalf of the hospitals is to capture errors and discrepancies very early on in the process, as close as we can at the time of order entry- whether they may be price discrepancies, or item errors, or issues related to incorrect product. These are captured from the time of confirmation to the time that the product has already been shipped, and of course when you do that, you do mention the credit at the front-end before it gets to the back-end in the financial systems, so that you have it on clean paper and do not hold-up credit, which is costly for the hospital as well as the supplier.


Sath Rao (Frost & Sullivan): Laurie, in our earlier discussions you about hospital infrastructure equipment and small motor parts being exchanged in the hospitals. Do you want to talk about that?


Laurie Weismiller (Hill-Rom): I was talking about the communication devices and other infrastructure requirements that go into the hospitals. The return rate here is low. It is pretty low on the bed-stretcher and furniture side too. So the returns are basically because of wrong products being delivered. We deliver these in our own fleet of trucks, so we have checks there too. But on the spare parts side of the business, we do have an exchange program on some parts where they need a new motor or device in exchange for the one that they have, we will give a break in the price, provided they return the one that they have back to us. And we ensure that we get the motor or device back so that we can give the price break that was promised up-front. Typically, if we send the return label or a box along with the new motor, that doesn't mean that, we will get the motor back.


Sath Rao (Frost & Sullivan): So typically, a hospital would still seek some credit for the motor returned or excess stock ordered, how long does it typically take for you to return the credit back to the hospital?


Laurie Weismiller (Hill-Rom): We send the credit as soon as we receive the items that they are sending to us.


Sath Rao (Frost & Sullivan): Laurie, earlier in the discussion, you were talking about small respirators and other equipment used in homecare settings, do you have problems here on returns from customers?


Laurie Weismiller (Hill-Rom): Not so much. Normally, we use our own fleet of trucks for delivery and pick-up of such items. So its not like we are not dependent on something that is sent at a scheduled time of our customers for pick-up or something like that.


Sath Rao (Frost & Sullivan): Rupa, and Mike please feel free to pitch in. You were talking about some of the high value components manufactured by St. Jude, your field representative's hand carrying some of the consignments to a local storage or home-office setup. How do they return those equipment back to St. Jude provided they were in a reusable condition? Do they store it locally or what is done?


Mike Zaggar (St.Jude): Yes, they store it locally either at their homes or outside office where they keep inventory stocked. Representatives are primarily responsible for the product rotation from the expiration date standpoint. They incur penalties if they let products out date from a sterility expiry date standpoint. But they get shipments every day from our organization. Sometimes products may have priority overnight delivery the next day if there is an acute clinical need. If not, we normally use ground delivery through a commercial carrier to replenish stock. We have an automatic system, where a representative can log on and note that he or she has used model x for the day and needs it to be replenished. We also have established user settings based on the implantation history for that representative. But if they need to send something back, there are specific guidelines for acceptability of the products, as to expiration. Sometimes if the products are outside of an acceptable window for return to our plant, the representative must take responsibility for getting the device implanted before it reaches its UBD or use before date. If they do return the product, they have to send it through some commercial carrier. No return number is required since it is not the customer sending to us but one of our own employees. And the replacement device is provided once the product is returned.


Sath Rao (Frost & Sullivan): Dan, in one of our earlier discussions, we talked about the feedback from distributors and some hospitals. The representatives are heavily charged with penalties if they cannot send the equipment before the prescribed date, and there are issues when the equipment have to move in a loop locally before they reach the consignee. There have been situations where a hospital might not need that equipment but a sister hospital in a nearby network needs that, and the equipment have traveled all the way back to the distributors warehouse, go through formalities before they are redirected to the sister hospital network which is in a nearby locality. There is a credit related issue with returns under some category. Most of the medical device manufacturers value advance visibility in terms of what is coming back, and where does it need to get redirected. Distributors would see an immense value in terms of the ability to cut out wasteful equipment movement, rather than directing the equipment to the proper place the first time. Do you see any particular solution to address this issue, essentially as the technology provider?


Dan Eckert (Neoforma): Yes, there is a lot of potential. As I said in my earlier discussion with you, at one point in our company's evolution, we were involved in the used and excess equipment liquidation business. We called the solution that we provided an internal asset exchange, which essentially said that if there was a piece of equipment that had completed its useful life or was no longer used in that particular hospital in an integrated delivery network, then we would create visibility of that piece of equipment across all of the hospital in that system, so that the person responsible for resource management there could determine if there was a need or use for that product somewhere else in the system before going on to liquidate it. And I think, at least in concept, at the level of providing advanced visibility across a system, both on the buyer and the supplier side, if either an incorrect product was shipped or an excess amount of the product was ordered, but that system had the need for that product in another hospital within the system, as opposed to sending the product back to the original point of shipment at the distributor or the manufacturer, the hospital as well as the distributor would save time, energy and costs if you could capture that visibility at the hospital location before a return was initiated, and essentially allow the buyer to redistribute that product to another location, where its needed. And I think in that case, we believe that there would be a pretty strong benefit for all involved. I generally think that we have the ability to capture most of the information required to do that at the hospital level, and we can enable the hospitals and the suppliers to communicate efficiently about that. So , if the hospital has its own internal distribution system or if the product is shipped through a distributor, the hospital would notify their supply partner that they didn't have the need for it here in hospital A but in hospital B that is 50 miles away. So they would have the ability to distribute it to that hospital and avoid the return process. So, I mean it's certainly a concept at this point, but it is something that could be achieved.


Sath Rao (Frost & Sullivan): Dan, you also mentioned in our earlier discussion about Neoforma's unique ability to document value, and therefore, if at the end of the given cycle, would your system be in a position to capture the savings, perhaps from an efficient returns perspective?


Dan Eckert (Neoforma): I think we could certainly enable that. We have developed very effective value documentation tools, which our collective hospital customers use. We have an online tool called Neoforma Success Tracker™, which enables the hospital to document baseline costs for certain supply chain processes and also documents savings over time. The savings are generated by process automation, connectivity, access to enhanced information and the elimination of rework, such as a reduction of credits and rebills. So it shouldn't be too much of a stretch to establish the base line costs and track the cost impact to all of the players related to returns over a period of time.


Sath Rao (Frost & Sullivan): Would there be some potential roadblocks in the sense that the third party logistics solutions providers also need to be part of the equation? Is there a value proposition for them as well?


Dan Eckert (Neoforma): Well, I think there would be benefits to the 3rd party logistics provider. Again it depends. There are so many distribution methods, it can be direct from the manufacturer or from the largest wholesalers or can be from a combination of them, whereby you will have shipments from one of those channels and the returns are actually handled by a third party logistics providers, but the supplier will know who those folks are. I would suspect that, based on their contract with the third party players, they would understand the cost incurred to handle those returns in this manner. Who knows, maybe in some cases it may be efficient enough to eliminate the cost of the third party player.


Sath Rao (Frost & Sullivan): Clearly, there is a technological solution, the underlying data is already there and it is just presenting it in the right form and fashion and perhaps, tying it up seamlessly to the enterprise systems of medical device manufactures. Mike, I know you did mention earlier, that you don't have that kind of volumes, but when we look across the cardiology segment the returns are as high as 10-12 percent. Speaking on behalf of the cardiology device manufacturers, do you think there would be a value for device manufacturers in such a solution?


Mike Zagger (St.Jude): It's a difficult question to answer. Intuitively, you can argue that the efficiencies could be obtained but trying to explain them at this point is difficult. However, I was a little taken aback by the statistics that you provided. It sounds to me like it's a combination of interviews, observations and maybe some hard data. I do not believe we have that level of product returns as a company. I would have to go back and ask our customer service groups whether or not we are having such a level of returns. Either way, I don't think it would be covered only by a solution that a technology provider can develop. Rather we have to see what are the economies of scale, what are the efficiencies that could be derived? What is the return-on-investment ? There are lots of things that need to be considered, but yes there is a potential.


Sath Rao (Frost & Sullivan): Laurie, what would be your take, we did talk about certain durable equipment's- there is not much volume, is there a value for you in terms of getting that advanced visibility in making sure that your customers are also happy?


Laurie Weismiller (Hill-Rom): I agree that it is valuable and I also agree that we need to understand the cost in its entirety, now, Dan, can I just ask you if have you thought about capital equipment?


Dan Eckert (Neoforma): Well, we have thought about the value around capital equipment and clinical preference products as part of the evolution of what we do and we certainly see an ROI here. However, the opportunity would certainly vary by the type of supplier and product category. Everybody would come to the table to determine their individual ROI, but if we all had an orientation toward working together to identify the value, we could find a willing customer who would be interested in this model, establish the baseline and then build on it from there.

In the capital equipment side, you have a lower frequency of orders, fewer line items and a much higher total order value. From my general understanding of the capital equipment business and from talking to my folks who work directly with manufacturers on that side of the business, it's probably more of a customer satisfaction issue and less of a cost issue in the capital equipment side. However, I would still suggest that there is some benefit on the cost side there as well.


Laurie Weismiller (Hill-Rom): I agree with that and probably that is what we experience, in the customer satisfaction perception there is cost reduction.


Dan Eckert (Neoforma): Right. My only suggestion is that instead of looking only at ROI, the customer satisfaction improvement opportunity also adds a lot of value.


Sath Rao (Frost & Sullivan): You made a good point here, Dan. The ROI equation has to take into account the cost savings in terms of reduced volumes at the call center and better customer experience. Savings therefore have the components of reduced cost at the call centers, better compliance with the FDA regulation, reduced inventory costs and value of advance visibility to an organization. Answering Mike's question that some of the returns were indeed startling (and that its not specific to a company), but broadly we have been adding return rates and after significant number of interviews across the board, the return rates are definitely startling. Especially so when you add up returns volumes at a company level, across several product categories. Not to mention return rates in product categories where there are one-to-many (company-customer) associations, like the diabetes-care sector.

Dan, as a technology enabler would you therefore be interested in creating or at least investigating the potential areas that could be worked on?


Dan Eckert (Neoforma): Absolutely, and I just have to re-emphasize in response to Mike's comment, clearly it's easy to talk about this in concept, but it's not easy to implement it. However, I would say that it is easier now than ever before, as we have new, more cost effective technology solutions in place that can do the basic things in terms of capturing the information in the primary order, providing the buyer with visibility to what's going on in the order-stream and giving them the ability to act, in collaboration with the supplier much earlier in the process. I have no idea whether it would come out with a significant ROI in the returns area, to every supplier in every segment, but I am sure that it would to most of the suppliers who are involved in higher volume transactions. Neoforma sure would be very interested in doing something along these lines and as I have mentioned earlier, many of the healthcare organizations that these suppliers are working with are now working with us and using our solutions in some way.


Sath Rao (Frost & Sullivan): Echoing some of the broad sentiments that we are gathering, the hospitals are looking for an easier way to manage returns as well. And of course, we do have to explore and see how much money is there for the hospitals to save. Charlie Whelan, you had a question?


Charlie Whelan (Frost & Sullivan): Yeah, we were talking about cardiology and other segments. Dan, and other folks pointed out that there are specific characteristics and specific products that may be suited for investigation. We agreed that devices that have higher volumes and low technology inputs will not have the hi-tech sales approach, like that of say pacemakers. The type of products that have a) The high rate of return and b) might benefit a great deal from the enabling technologies, Dan what are your thoughts?


Dan Eckert (Neoforma): Well, generally and obviously, a lot of the high volume medical and surgical products, and anything that flows through distribution would be a classic target. However, I would go back and say that's I think it is wrong to assume (going in) that there would not be benefits from an ROI perspective and from a service experience perspective in the higher end equipment and devices. If you are dealing with a high dollar, highly critical clinical product, with a long, high touch sales process, and everything goes well except for the fact that something gets messed up in the order fulfillment cycle, there has to be cost and customer angst created by that. I'm talking about what happens at the ordering customer level, not the surgeon level. Increasingly, these people are talking to each other and evaluating the efficiency of the ordering and fulfillment process in addition to product quality and price.


Sath Rao (Frost & Sullivan): Broadly, one of the areas where we are seeing renewed interest on the point-of-view of the IT expenditures is the CRM integration with the supply chain management, and therefore the focus is on improving the quality of customer experiences. Thereby creating inherent cost for switching and maintaining the customer base. Broadly, we wanted to investigate whether there is any value in the B2B segment, i.e. hospitals procuring medical devices and supplies. As Dan mentioned, there definitely is a potential for better returns management. Surgical instruments, supplies and disposables where we see lot of volumes also have potential.

However, even when the volumes are low, the interesting perspective is that when we start analyzing the market at a company level, several of these products, (without naming the company), say a large medical device manufacturer with a portfolio of products- say in cardiology and orthopedics, the returns start adding up, and the value proposition starts to look better and better. We might be talking of annual returns in the range of 400,000 and above. Any incremental savings in the returns management really adds up and the ROI might be significant.


Mike Zagger (St.Jude): Yeah. We were just conversing among ourselves that we have the view and mindset, that the high volume and high inventory products seem to have a immediate application here, and we are not necessarily in that business. However, it prompted a question and it's for Dan, I wanted to know about your organization and the solutions you provide.

Do you see a greater interest on the returns side of the opportunity coming from accounts that have been fully connected, have been transacting through Neoforma and have kind of realized the efficiencies in the front-end of the exchange or does the entire portfolio of customers seem to have a desire for this area?


Dan Eckert (Neoforma): What I would say is that the interest is greater with those folks who have adopted the solutions like Marketplace@Innovation and connectivity to enhance their visibility. Generally, the interest is there with all hospitals around the issue of price, clearly it's an issue for everyone. However, for the folks who are using Neoforma's solutions and getting the right price on the right contract, they are looking beyond price at their other supply related costs. They are telling us that they have got X number of suppliers connected, that Y % of their total purchase are flowing through our solutions and that they have reduced their overall pricing discrepancies. But then they ask about other things that add cost like returns. I don't want to mislead anybody by saying that we have a solution today. We don't. But we have a lot of hospitals using our solutions and we have the ability to cost-effectively create the visibility they need, and to create the communication loop out to their suppliers to more efficiently resolve an issue like returns. There is a genuine interest on the part of a number of hospitals to get after these additional costs on their end, which they believe will also reduce some of the costs for their partners on the supply side.


Norma Clavel (Frost & Sullivan): Also, manufacturers and customers who would like to have something that would measure return rates in the sense of customer retention.


Sath Rao (Frost & Sullivan): Surely, and in discussion with the hospitals; though price is a primary focus, increasingly, customers are also valuing the quality of experience i.e. the ability to handle returns, and overall returns management does also seem to be a vital part of the buying equation.


Well gentlemen and ladies, thank you for your time. We believe there is immense value in further optimizing the return management process and hope to continue to do our part in acting as catalysts for change. We had an interesting discussion today and hope that industry will take it from here to develop successful implementation case studies. Good-bye and good luck!

For further information please contact:

Katja Feick
Corporate Communications
+44 (0) 207 915 7856
Katja.Feick@frost.com

www.medicaldevices.frost.com