Data-Driven Insights

Best Practices for Next-Generation Distribution Contract Automation

April 8, 2015   |   Dave Weiss

Whether you are a small, medium, or large company, the amount you invest in the channel is significant. Regardless of your size, however, there are ways to equalize the distribution battlefield. A key is to get access to your channel data and put it to use to drive business value.

In a recent survey of pharmaceutical suppliers, more than half have implement pay-for-performance contracts, which place all or some of the trade partner payment at risk. These complex agreements are typically designed so that payment is tied to four or more metrics. Nearly all of those surveyed have or are implementing an automated solution.

While most pay-for-performance contracts vary, let’s review six primary metrics and their value.

  • Demand visibility (or order stability) measures period change in orders or withdrawals and is used to control supply chain costs and spec buying.
  • Inventory level can be measured as average, final, or interval-based DOH and ensures inventory efficiency and sales predictability.
  • Service level measures the percentage of downstream orders filled on an adjusted or raw basis and is used to ensure trade partner accountability for timely product access.
  • Data timeliness measures the percentage of files on time and the turnaround time to fix issues and is used to incent trade partners to resolve report delays and transmission issues.
  • Completeness measures the percentage of lines with missing data or that match between 852 and 867 transactions.
  • Restrictiveness measures the percentage of 867 locations expected and the percentage of blind or blocked data and is used to incent transparency and communications.

Increasingly, pay-for-performance contracts are more complex: there is vast variation in the six metrics with different patterns, more tiers, and more thresholds in play. When developing these contracts, careful consideration should be given to these key questions.

  • At what product level is the payment earned? Using the portfolio level leaves slow moving NDCs exposed, but weighted portfolio, brand, and SKU offer increasing visibility to the true performance.
  • What periodicity for calculation and payment? While quarterly is less stringent, daily measurement offers the highest level of accountability although weekly or monthly will likely be more manageable.
  • How do we address situations beyond the trade partner’s control? It is important to define how exclusions, overrides, and adjustments are handled.

Due to the complexity of these metrics, automation and analytics are key to controlling the risk in these contracts and in communicating with trade partners to resolve issues and improve performance. Automation and analytics are considered best practice, both internally and externally, to manage pay-for-performance contracts. These automated solutions typically cover three key areas.

First, suppliers utilize a scorecard, an external report that explains payment in summary and in detail. Best practice employs a scorecard before the contract is negotiated, monthly for interim communication of performance and possible payment, and a final scorecard at period end.

Next, performance analysis offers key analytics. Typically, performance analysis offers you a contract snapshot or the current view of the performance metrics and a quick visual of the trend. It also offers you contract trend, a detailed monthly view of performance metrics by brand or SKU. And lastly, trade partner comparison allows you to view performance across your channel to determine which kinds of wholesalers and distributors are performing best.

Third, government-pricing reports offer visibility to granular components of the DSA payment down to the NDC or invoice, including order, invoice, metric, financial, and adjustments.

Automation and analytics do not complete best practice. Communication and collaboration with trade partners are essential to successful relations and service agreements. Too often, suppliers communicate key performance indicators to trade partners well after the quarter close, when it is too late to improve performance and resolve issues. Best practice for channel performance is to maintain daily communication for issue resolution, weekly communication of core metrics, and quarterly (ideally within 10 days of the quarter end) to review performance tiers and payment earned.

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