Oct 26, 2007

McKesson to Focus on Sourcing as Advantage

Just like their retail cousins, large business market distributors are moving to lock in power and marketplace negotiating advantage from their sourcing systems. Pharmaceutical distributors, such as McKesson Cardinal Health, and Amerisource-Bergen, are evaluating opportunities to change out their largest generic drug makers in favor of smaller contract manufacturers. The hope is that increased margins follow increased market power.

Exim-Pharm, an India-based provider of bulk pharmaceutical drugs and formulations, is one company hoping to benefit from the move to more aggressive drug sourcing by leading distributors. In fact, India is a popular destination for aggressive buyers seeking out and evaluating new low-cost generic drug supply opportunities.
Not surprisingly, internet-based portals and services such as "trade2gain.com" have emerged to help eager drug buyers link up with hungry players in the fragmented overseas drug manufacturing sector. Yet the parallel activity in the retailing sector offers the B2B marketplace and its distribution powerhouses some important lessons.
In fact, the largest U.S. retailers are in the midst of a major re-evaluation of what many are now calling an era of "rushing to the bottom" in prices and service levels. After years of obsessive strategic focus on private label and house brand sourcing from overseas contract manufacturers, these retail distribution powerhouses are increasingly calling it quites and returning to their critical roots as 'merchants'. Why? Because end-customers have become numbed into price-only shopping behavior. Not because that's all they care about (look at Apple's astounding retail store profitability!) but because that's all they're being presented with in most U.S. retail systems. And commoditization is an unattractive growth path for anyone involved, be it manufacturers or retailers. It's a treadmill with no upside.
So McKesson - and other B2B distributors - would be smart to balance their short-term drive for sourcing advantages against increased differentiation in service levels. But finding ways to create real 'distribution value' for pharmaceutical customers requires collaboration and more strategic manufacturing relationships. Commmoditization only requires an internet portal.

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