2 Plus 2 Equals 5 and 5 Minus 2 Equals 1
If you’re reading this title, you are more than welcome to feel a bit dizzy. We actually recommend it, as a matter of fact. We like to think of this funky bit of math where things may not be quite what they seem, and the true cost of business can be measured strictly in your useful cash flow as “Wholesaler Math”. This word problem wasn’t on the NAPLEX back in 2007 when your friendly neighborhood pharmacist Dave took it, but it probably should have been.
You’re the owner and operator of ABC Pharmacy in your home town. You, like most pharmacies, have contracted with a wholesaler to handle the bulk of your inventory needs. You think of them as your “primary” wholesaler. Your patient, John Smith, presents at your practice with a prescription for a medication which you do not currently have in stock. After explaining to Mr. Smith that you will need to order this medication and it should be in after lunchtime tomorrow, you check your primary wholesale website and see that your cost is $100. As this is a generic medication, your wholesaler is also offering you a 25 percent rebate on generic purchases.
Additionally, you have a two “secondary” wholesale distributors who have called or faxed you today with specials. One secondary wholesaler has it on sale for 78 dollars, but you have to pay them at the time you order. Another secondary wholesaler has it on sale for 80 dollars, but you are invoiced and have 30 days to pay.
From which wholesaler should you order Mr. Smith’s drug, provided:
1) Your primary wholesale bill is due bimonthly (every 15 days, roughly)
2) On average, your primary wholesale rebates credit to your account 45 days after invoice date?
So, when we look at overall net cost, your primary wholesaler is offering you this medication at 75 dollars. One secondary wholesaler is offering it for 78, but while you don’t have to wait a month and a half for a rebate, your payment terms are even the most stringent, as payment must be made up front. The other secondary wholesaler is offering it for 80, but while this is, in theory, the most expensive option, you get a greater amount of time before payment is due.
The truth of the matter is that you do this calculation dozens of times every day if you work in a pharmacy, and if you don’t…it is absolutely in your best interests to start. So which is the right answer? There are likely situations where EVERY answer can be correct. A store with money in the bank and which has been consistently profitable? That store may very well be best off electing to order from their primary wholesaler in this instance. A store that wants the best deal today can be perfectly happy ordering the 78 dollar price from the first secondary wholesaler. Perhaps a store which is a fairly new business, or has had cash flow issues in the past might be best served to order from the second secondary wholesaler. Hey – I didn’t promise this would be easy, ladies and gentlemen.
What it boils down to is that higher level mathematics (and make no mistake, when factoring in all variables – how long does Mr. Smith’s insurance take to pay us?). What generic buy rate is contractually mandated with our primary wholesaler to be eligible for the rebate they offer? This higher level mathematics you’re doing can be just as much an art form as a science. Only you can truly figure out what works for you.
I can even think of a situation where if a secondary wholesaler offers a product with good terms for BELOW your primary’s net that you should still buy from primary, such as if your cash flow is healthy but your generic buy rate is slipping. Loyalty also matters. I’d rather cultivate a few strong bonds with select secondary wholesalers even at an occasionally slightly higher price point.
Here at PharmacyProud, we consider all our wholesalers our business partners. We are very likely to stay with our primary wholesaler, who has been very good to us for many years, for a very long time. However, we try to keep some of our secondary wholesalers, chiefly Redmond and Greer, very near and dear to our hearts because their track record for supplying us with profitable and timely orders is unparalleled in my 20 years in the industry. Occasionally, I will buy something from Nick that I know I can find elsewhere for 5 dollars cheaper simply because I know Nick is going to think of us whenever a positive opportunity comes across his desk. Make no mistake, the relationship you have with these secondary wholesalers in the market ABSOLUTELY should be another variable you consider.
As always, thanks for reading and please reach out to me if you have any questions. And if you REALLY want to learn more about Wholesaler Math, Nick Sanchez at Redmond and Greer has a Masters in Sensible Cash Flow Management and a Doctorate in Profitability. He’d be honored if you gave him a call as well.
Redmond and Greer
Be PharmacyProud and Be Blessed,