Why Bundling is Undermining Logistics Cost Savings

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For years, the healthcare industry has been buzzing about rising costs that are plaguing the market. Inefficiencies in the supply chain are readily identified as part of the problem and their remedies as part of the solution. According to the latest UPS® Pain in the (Supply) Chain Survey from 2014, 78% of healthcare companies used logistics and distribution partnerships to manage supply chain costs, up from 56% in 2013. While this strategy can go a long way in streamlining operations and expenses, business practices that are common among many third-party logistics (3PL) providers – namely product and price bundling – often severely undermine its potential.

More times than not in the logistics world, there is no business reason to bundle. This is especially true when it comes to unlike services, that is, logistics services and non-logistics services. There are absolutely no economies of scale or synergies to be realized when a warehouse provides freight management services, or when med-surge products are bundled with logistics, for example.

The simplicity and so-called “deals” are usually quite enticing, but they end up not being deals at all. In fact, I would estimate that many healthcare organizations pay at least 10% more on average with bundled pricing than not. How does this happen? When sales professionals uncover what is important to their customers (say, providing transportation at a certain cost per mile), it is all too easy to manipulate the numbers to meet specific requirements in one area and then inflate costs to recoup profit margins in others.

The issue of bundling is hardly unique to healthcare or logistics. And, when structured appropriately, it can offer financial benefits. But the problem in this case is exacerbated by technology limitations in many healthcare supply chains. It is challenging for health systems to get an enterprise-wide view of their organization and adopting tools like Enterprise Resource Planning (ERP) systems could help, but can be costly.

Generally speaking, most professionals do not have the ability to look at the total cost across the network, much less across budgets. It is hard enough to separately allocate bundled charges, and complex cost centers and management structures across various departments make it virtually impossible to track if an organization is getting the value it was promised. In the scenario above where med-surge products and logistics services are bundled, the two expenses will fall under different budgets with different managers overseeing them. The picture only gets fuzzier when more product types are bundled together. 

Without sophisticated, centralized reporting, there is no way to measure and demonstrate that the value promised is in fact being delivered – and when costs are clouded with bundling, it is usually not. Unfortunately, this is one of the easiest ways for providers to hide extra charges. With expenses typically viewed in silos, most buyers assume the “other” department is getting the deal and no one – except for the third party – wins. 

If you have bundled pricing currently, or are confronted with the proposition in the future, keep these five tips in mind:

  1. Understand which products and services you need (and which ones you don’t).
    If it serves no functional purpose, getting something for free doesn’t do any good. By having a solid understanding of the components you actually need, you can bypass the unnecessary extras and hone in on a cost-effective arrangement that makes sense for your organization.
  1. Break the bundle apart.
    Ask the provider to itemize costs for various components so you can see how each stands alone. For example, a provider should be able to break down fees to show the product cost, as well as the separate shipping and handling fees, so you can see the anatomy of each charge.
  1. Do your homework.
    Armed with the cost for each constituent component, you can compare apples to apples prices among providers to determine who is really giving you the best deal. Getting estimates from multiple providers will give you a sense for what fair and appropriate market prices look like. 
  1. Remember nothing is “free.”
    It may not be readily apparent, but chances are you are paying for it somewhere. I’ve met hundreds of sales people that love to offer up some kind of freebie, but as the saying goes, there is no such thing as a proverbial free lunch.
  1. Insist on transparency.
    All of this boils down to knowing exactly what you are paying for each product and service. When it comes to logistics, we refer to this as “total landed cost.” I’ve seen too many organizations be taken advantage of and too many supply chain managers experience buyer’s remorse when contracts and relationships are built on murky math.

 What experience do you have with bundled pricing? Share your thoughts by commenting below.