Cash Flow and Your Customer’s Lab

Financial concerns are not going away. What reps can do to solve customer concerns and keep their business growing.

If 2020 and 2022 were to be infamous for both the COVID-19 pandemic and supply chain issues, it’s very clear that 2023 is going to be the year of financial challenges and considerations. This is true of the entire U.S. economy, but several financial issues are rippling through our customer base, and these issues impact our overall business as well as our lab business.

To a certain extent, we should not be surprised, but we do need to be prepared to face these challenges head on and be the very best consultants to our customers that we can.

At the moment, there is no doubt that inflation and the cost of money are high on the list and top of mind for customers. In this column I plan to look at both factors and their trends over time. I will also provide some ideas I hope are useful to the savvy account manager looking to consider some options to know, understand and help their customers to navigate these challenging financial times.

Let’s start by looking at inflation. Inflation is certainly on everyone’s mind and impacts us personally and professionally every day. First,

By Jim Poggi

for a little perspective, let’s all be grateful we are not planning our Christmas shopping in late 1980. Why? In addition to some questionable hair and fashion trends,

Dec. 19, 1980, was the highest inflation rate on record – 21.5%. Not exactly a formula for a merry Christmas if you were last-minute shopping that year.

How does this contrast to the present day? From 2013 to 2020, we were blessed with very low inflation rates. In 2013, the rate was 1.5%, and reached a low of 0.7% in 2014. It never exceeded 2.3% during that entire time. While we all benefitted from the stable costs and pricing we enjoyed then, the sharp upward trend in pricing becomes even more surprising when it follows such a prolonged period of stable pricing. Inflation has taken off sharply since 2020 with a high of 7% in 2020. Between then and now, it has moderated slowly, with the rate at 6.5% in 2021 and the current rate standing at 4.9%.

While the current rate is an improvement, it does not appear likely to drop back to the rate of inflation we saw 10 years ago, so now is the time to address customer concerns. Before we get to options to effectively consult with our customers, what is driving inflation down and how do those factors impact us and our customers? From an anecdotal basis, really high levels of demand for lab, PPE and blood collection products have dropped significantly from their high levels during the pandemic. This is a two-edged sword: while we enjoyed the lift that COVID brought, NO ONE enjoyed the pain brought on by back orders related to critically needed product.

For the most part, it seems supply and demand are back in sync again. While revenue has dropped to more normal levels, the pressure on the supply chain has abated substantially, freeing up more time for selling as opposed to managing back orders and looking for creative substitutes for needed products. Other than supply and demand, changes in the prime lending rate by the Federal Reserve, and the ripples caused through every lending entity have also brought customer concerns with it. Customers looking to rent larger space, purchase substantial lab or other capital equipment or obtain any other highcost capital items are looking at rates much higher than before.

While our customers do not buy at prime, the largest banks do, and the increase in the prime rate filters down to even relatively small capital expenditures. In March 2020, the prime rate ranged from 3.25 to 4.25%. As of this writing, it sits at 8.25% and the likelihood is that it probably will not increase much if at all through the rest of 2023. The net result of increases in inflation coupled with rising costs of money is an increase in focus and pressure on our customers’ cost of doing business across the board. We have a “cost to serve” and so do our customers and wages, costs of borrowing, some consumable costs and benefit costs are all headed in the wrong direction. I know I am not telling you anything you do not experience every day here, as I receive questions and comments frequently regarding how to properly address these customer issues. Some, like the cost of money and overall inflation are well beyond our control, but others DO provide us the opportunity to showcase our knowledge and skills to add a little relief to our customers’ challenges.

Now let’s look at some of the options and solutions we can offer.

In my experience, one of the first places customers ask for help is regarding reducing our costs of reagents and supplies. This may be one of the most difficult questions and customer perceptions to manage since they pay the bills related to these costs on an ongoing basis. But facts first: If the customer looks at their overall cost to serve, unless they are grossly out of line with the average customer, they SHOULD find reagent and consumable costs in the 3% to 5% range of their total costs. Personnel averages more than 60% (as much as 65%) and rent and other fixed costs easily exceed the cost of supplies, lab or otherwise.

While it is useful to thoughtfully and respectfully ask the customer to consider the “big picture,” in my experience that never makes the question go away. They are hurting and they expect you to do your share to help.

There are two relatively painless ways to provide help without creating major issues with your customer margins. First, look for private label opportunities, not just for lab products but for the entire range of customer spend. Properly positioned, this can be a “win/win” solution with the customer seeing cost reduction and the account manager seeing stable or improved margins.

At the same time, you need to look at test mix and ordering patterns. Are they buying reagents and consumables in the right package size? This should be an easy one if there are more economical sizes to consider. Are there low volume/low value tests they should stop performing? Are there useful tests that they need to consider implementing? These ideas can make the customer more efficient and position you as an effective and concerned consultant.

To a large extent, making sure they are performing the most needed tests and offloading the low volume/low value tests is the basis of creating an efficient lab. But there are other considerations. For instance, are they using their

EMR/LIS connectivity effectively to make sure all lab tests are being billed? In my experience, many manual tests, especially urinalysis, get missed. And missing these tests can be impactful. It is worth discussing with your key lab manufacturer and consulting on site to understand the situation and applying solutions to help.

Training of lab personnel is also an overlooked approach to efficiency. Is the staff confident and well trained? Is their workflow smooth and well organized? You and your key manufacturers can save staff frustration and potentially reduce staff time by carefully evaluating lab workflow. From a longer-term perspective, is their lab equipment scaled to their daily testing needs?

Not too big, not too small, just right is clearly the goal.

While we lease lab and other equipment on an ongoing basis, most of us, me included, tend to wait longer than we should to get renewals going and to also rely heavily on our manufacturer partner or leasing company to drive the proposal. In the current environment, while I do not expect any of us to suddenly become leasing experts, it’s time to pay attention to the details. For example, should we recommend a longer lease term or higher down payment to reduce monthly payments? It’s up to us to understand the customer’s perspective balancing current cash outlays compared to the stream of monthly lease payments. Does our preferred lender offer deferred payments? If so, what is the trade off in rate? There are a relatively small number of variables to consider implementing a new or renewal lease, but it all starts with a customer interview asking the right questions. If you understand their tolerance for longer terms, higher down payments and monthly payments, you will be in the best position to develop this lease and future ones to comfortably match the customer’s expectations.

Financial concerns are not going away any time soon and the best distributor account managers stay informed, stay up to date with new approaches to solving customer concerns and keep their business growing. Tough times bring out the best in all of us. Be informed, creative and bring your problem-solving skills to bear related to your customers’ financial concerns and reap the rewards. Both you and they will be glad you did.