Owens & Minor Fixed on Logistics

Edition: February 2002 - Vol 10 Number 02
Article#: 1151
Author: Repertoire

Owens & Minor is entering the new year with its stock rising steadily and its sights focused firmly on its core competency - providing logistics management services to its hospital customers. Speaking with Repertoire at HIDA 2001 in San Diego, President Craig Smith reported that Richmond, VA-based Owens & Minor experienced double-digit sales growth in 2001 and is looking forward to another strong year ahead.

Smith pointed out that the distributor remains pleased with its agreement with Irving, TX-based Novation (the purchasing program for VHA and University HealthSystem Consortium). He added that the company received a boost when Broadlane, with whom Owens & Minor has a distribution services agreement, took on contracting services for Oakland, CA-based Kaiser Permanente in February 2001. ''It strengthened our position in California,'' said Smith, referring to the Kaiser agreement. The distributor is servicing Kaiser's acute care facilities as well as affiliated clinics, physicians' offices and surgery centers.

A Handle on Costs
Owens & Minor's CostTrack- (activity-based-management) program has been extremely successful, accounting for more than $1 billion in sales in 2001, added Smith. The program fits well into the company's strategy of becoming the expert in supply chain logistics for itself and its customers. Simply put, CostTrack- replaces cost-plus pricing with pricing based on services provided, such as low-unit-of-measure or daily delivery.

''We started [activity-based management] following our acquisition of Stuart Medical in 1994,'' said Smith. ''At the time, we struggled with bringing the two organizations together. We had a real challenge with costs.''

To get the costs of the newly merged companies (Owens & Minor and Stuart) in line, management tracked companywide performance using 250 financial indicators. The exercise was an eye-opener for Owens & Minor, and led to improvements in internal processes. But it wasn't enough, said Smith. ''If you don't get your customers involved in this, you can only become so efficient,'' he said.

Advanced Logistics
Some hospitals had already begun to realize that while price cuts were always welcome, they were not enough to significantly improve their financial positions, said Smith. At the same time, distributors had realized that they could ill afford to keep handing out price breaks. What was called for was a deeper, broader view of cost reduction, he said.

So, Owens & Minor developed a logistics team to give to its hospital customers all the knowledge about supply chain efficiencies it had gained through its internal work.

The company was in a great spot to do so, says Tim Gill, who heads up the advanced logistics program, called OM Solutions. For one thing, it had the technology. Secondly, it had a track record and the trust of its customers. And third, it had some relatively low-cost solutions to its customers' logistics problems.

Perhaps most important, hospitals really needed them. ''[Providers] have to change the way they do things,'' said Smith. ''You need the whole organization working on process efficiency and productivity.'' But that's difficult for a hospital or IDN to do if its materials management department has been downsized, as many have, he added.

''They have good people, but they're busy putting out fires,'' says Gill, referring to hospitals.

The Team
Gill himself has a background in manufacturing. He joined Owens & Minor seven years ago to focus on cost management, a process he describes as ''understanding our costs and those of our customers, then putting them together in a business plan and reducing them.'' Later, he moved to logistics. ''I was one of many who realized that our customers had these needs, but nobody was offering solutions,'' he said. ''We saw that Owens & Minor had many solutions that we had never pulled together as a comprehensive program.''

To harness all that expertise, the company formed a logistics team in Richmond. Then it appointed nine area managers in logistics solutions, several of whom are former hospital materials managers. Each has a team of project managers and analysts, to work more closely with the hospital customers. Gill's group in Richmond handles pricing, contracting, mentoring, hiring and generally orchestrating the how-to's of the program.

Typically, a job starts when a hospital or hospital system requests assistance in reducing its overall supply chain costs, says Gill. Owens & Minor sends in a team to assess where the hospital or IDN currently stands. ''During this phase, we assess their needs, baseline their costs, show them some potential implementation plans, provide benchmarking services and conduct customer satisfaction surveys,'' he says. ''This way, we understand their needs, show them where their costs are, show them where they have room for improvement, and [through the surveys] make sure that the clinicians and other customers are happy.''

Some solutions brought forth to customers in the OM Solutions program are standardization, contract compliance, direct manufacturer consolidation, improved internal transportation models, better utilization and storage space, storeroom redesign and OR redesign, says Gill. It all depends on what the customer's needs are, he adds.

And once again, all of these are initiatives that Owens & Minor has implemented in its own shop to improve its performance, says Gill. For example, the company has cut the number of manufacturers it deals with by 30 percent, eliminating about 35 percent of its SKUs. It has re-examined its transportation models; rethought its usage of storage space and other assets; and implemented activity-based costing and management principles, says Gill.

''To a smaller scale, almost every one of these things applies to our customers,'' he says. ''So, we take what we know best and apply them to the customer's needs.''

Owens & Minor used to conduct its logistics assessments to customers for free, but has since changed its approach, says Gill. ''We got a good response, but those assessments would often end up sitting on a shelf.'' That's when the company recognized it needed to get its people closer to the customer, to help implement the logistics plans that had been drawn up. Ultimately, the company began to station its people in hospitals and IDNs, to help them implement, maintain and improve the advanced logistics programs that Owens & Minor offered them.

''Customers are closing their warehouses and moving them into our distribution centers,'' says Gill. ''We're starting to do par replenishment for some providers. We have two people actually working in ORs, working on supply chain processes, inventory reduction and direct manufacturer consolidation.''

To date, approximately 30 hospital customers take advantage of Owens & Minors advanced logistics solutions. Owens & Minor can institute dramatic changes at a hospital at a cost far less than most consulting firms, says Gill. Overworked materials managers, unable to lift their heads above the daily fires, will probably welcome the company into their facilities.

Working at the Customer's Pace
Smith admits that some hospitals still just want reduced prices, so they cling to their cost-plus pricing. But once they get involved with broader logistics issues, they often begin to re-examine things such as product flow, product handling, combining orders, picking more efficient suppliers, etc., he adds.

And Owens & Minor's sales force is up to the task to help them do just that, he said. ''It's been a long process,'' said Smith. ''As our customers' needs have changed, our sales force has naturally migrated toward doing other functions. This [emphasis on logistics solutions] wasn't some kind of predestined backroom decision. As our customer continues to evolve, so does our sales force.''

Reps are compensated based on the nature of their accounts. Those with traditional customers (looking for price breaks) are compensated differently than those whose customers are looking to drive down their operating costs, and to whom the rep brings solutions, such as OM Solutions.

''If you went out and talked to 20 reps, you'd get 20 different answers about what they do every day,'' he said. ''But with the technology we've invested in, the majority - especially with our larger hospital customers - are sitting down with their customers and building business plans for the year, setting goals, then working toward that plan.''