Opportunity Inflation

Edition: April 2003 - Vol 11 Number 04
Article#: 1497
Author: Repertoire

In February 2000, the last time Repertoire interviewed Mike Racioppi, he had been president of Henry Schein’s Medical Group for only a few months. At that time, the Medical Group’s sales were $700 million and Racioppi was eager to help them grow. Three years later, the Medical Group reports that its 2002 sales were approximately $1.1 billion. So far, a job well done.

With a background in sales, marketing and pharmacy, Racioppi was well-suited to the job. He joined Henry Schein in 1992 as senior director of corporate merchandising, and then moved into the Medical Group, first as vice president of marketing and merchandising, then as vice president and general manager of the Medical Telesales Division. He was appointed president of the Medical Group in late 1999.

Today, Racioppi is responsible for the company’s physician and veterinarian group, which includes:

• Caligor (field sales consultants)

• Veterinary business (primarily telesales, though the veterinary business is expanding into field sales under the Henry Schein name)

• General Injectables and Vaccines (the company’s specialty pharmaceutical injectable and vaccine business, which is expanding into medical/surgical supplies and equipment through telesales)

• Henry Schein Physician Medical Telesales

• Henry Schein Dialysis (both telesales and field sales)

• Henry Schein Special Markets (telesales targeting niche markets, such as occupational health).

Recently, Repertoire spoke with Racioppi about his first three years at the helm of Schein’s Medical Group. Here’s an excerpt from that conversation.

Repertoire: At last summer’s sales meeting, you said that the Medical Group achieved 33 percent growth without any acquisitions over the prior two years. You pointed out that while the market grew at a rate somewhere between 5 percent and 7 percent, your business grew 18 percent in 2001. And you attributed that growth to a number of factors, including the quality of your sales consultants, the addition of new Caligor field sales territories and excellent distribution capabilities. Can you comment on each?

Racioppi: Our physician business continues to grow at about three times the rate of the industry. Our growth in 2002 was in the 13- to 14-percent range, compared with an industry average around 3 percent to 5 percent. What are the drivers?

First, the sales consultants, whether they’re in the field or on the phone. We believe we have the best in the industry. We do not put caps on their income, so that attracts certain people to us. And we tend not to hire rookies. There are exceptions, but we tend to hire experienced professionals.

We added close to 50 sales consultants in our Caligor business in 2002, bringing us to about 270 field consultants in 34 states. Those who have joined us – with one or two exceptions – have stayed with us. And those who were already with us – with one or two exceptions – are still with us as well.

Likewise, on the telesales platform, we have experienced very low turnover. And all of our businesses – Caligor, Henry Schein and GIV – are growing at similar rates. We’re very proud of our people.

Our distribution capabilities are second to none. We now operate out of six distribution centers serving 80 percent of our customers with next-day delivery, 99 percent fill rates and over 80,000 SKUs in inventory.

Repertoire: Where did you add Caligor field sales territories?

Racioppi: We put 17 people on the West Coast, where a year ago we had none. We placed 20 in Texas, where again, we had none a year ago. And we added close to 13 field sales consultants in the Midwest and Southeast.

Repertoire: In 2000, acute care sales accounted for approximately $120 million in revenues, or 23 percent of the Medical Group’s revenues. How significant are sales into the acute care market today?

Racioppi: Our hospital business represents about $160 million in sales. We are committed to this business and to growing the acute care side of this business in the New York tri-state region, and expanding our long-term care business nationwide.

Repertoire: Can you explain Henry Schein’s distribution capabilities?

Racioppi: We service our physician customers through five warehouses: Denver, Pa.; Indianapolis, Ind.; Jacksonville, Fla.; Grapevine, Texas; and Reno, Nev., and a specialty warehouse in Bastian, Va. These six centers allow us to provide next-day delivery to 80 percent of the physician offices in the United States.

Repertoire: Did you open up Grapevine and Reno to service the new accounts in Texas and the West Coast?

Racioppi: No, we already had facilities in both places for years. However, we expanded them. The facility in Grapevine had been 135,000 square feet, but we expanded it to over 185,000 square feet. We expanded the Sparks, Nev., facility from 115,000 square feet to close to 175,000 square feet. This was done to help serve our expanding physician customer medical business and our expanding dental business as well.

We opened up our Jacksonville facility last summer with 140,000 square feet, and have already added another 75,000 square feet to it. Our Denver, Pa., facility is 400,000 square feet with 40,000 SKUs, with the option to add another 200,000 square feet, though we don’t see a need to do that yet. And we just opened up a new facility in Indianapolis last summer, after we outgrew the old one. It’s 300,000 square feet.

Repertoire: As you penetrate new geographies, do you target specific types of physician accounts?

Racioppi: We don’t have a target per se. As we expand into new territories, we often hire field sales consultants with prior experience. Our customer base is heavily weighted toward family practitioners, general practitioners, internal medicine, pediatricians, OB/GYNs, dermatologists, plastic surgeons, oncology and surgery centers. But we also service all the specialties.

Repertoire: Have you been expanding your telesales operation, as you have your field sales?

Racioppi: Yes we have. We now employ over 200 telesales representatives. We have just rolled out a data warehouse initiative and are in the process of implementing new CRM software. We send out more than 13 million marketing pieces a year for all our combined brands. These pieces are catalogs, flyers, formularies, faxes and e-mails. We send out 100,000 faxes a week. We’re using our Henry Schein marketing expertise and leveraging that on the Caligor side as well.

Repertoire: When an experienced rep joins Caligor, what kind of adjustment will he or she have to make to fit into the new culture?

Racioppi: Short term, the biggest transition is the platform they use to enter orders. We have tools for the Caligor field sales consultants to make that transition as painless as possible.

In addition, we offer our customers two, three or even four times the number of SKUs as many of our competitors. That’s because we service both the vet and dental markets and we have a lot of healthcare products to choose from. That’s good and challenging. It’s good because it means greater choice for our customers and the reps, but it also means that reps have many more products to learn.

Finally, our reps have an hour or more extra selling time each day. That’s because we have more SKUs to choose from, fewer special orders and higher fill rates (from 93 percent to 99 percent). Our field sales consultants have fewer special orders to follow up on, fewer back orders to chase down and fewer errors to correct. That’s why they have more time to sell. So they have to change their approach to work. Overall, they view it as an incredible opportunity.

My job, and that of the senior management team and sales/marketing team, is to remove obstacles for the sales consultants. We think the No. 1 obstacle is the order that gets shipped incorrectly or incomplete. We’ve done a lot to take away that obstacle, with an over 99 percent accuracy rate.

One reason for our success in attracting and retaining reps in both the field sales and telesales platforms is that our distribution capabilities are second to none. That stems from our core belief that the customer is king.

There are a million reasons why a customer will leave you. Any time you’re out of an item, you give your customer a reason to call your competitor. We try to address those reasons that we can control.

That’s why we measure the things we do. We know how long it takes for us to answer the phone when a customer calls. We know the percentage of times the customer hangs up, and for how long we keep them on hold. We do all of this to give our customers one less reason to leave us.

One last thought – at Henry Schein, we call our employees Team Schein Members. Our chairman, Stanley Bergman, has consistently said that our Team Schein Members are our greatest asset. We work very hard to foster an entrepreneurial environment where each person is valued according to their contribution, with respect and with a belief that they are an important part of the team. Accordingly, we have found that people who join our Team generally perceive their work as more rewarding and ultimately, more profitable.

Repertoire: With what kind of electronic tools have you equipped the Caligor field sales consultant?

Racioppi: We’re introducing a new product called Caligor FSC (for “field sales consultant”). We took the best features of the Caligor laptop system and the Henry Schein dental division’s system, and rolled them into one. With a wireless modem, Caligor FSC will allow our reps to place orders faster than they could before. The system also comes pre-loaded with data warehousing tools [called “CAT,” for “Caligor Analytical Tool”]. For example, our reps see the top 50 items a particular account is buying from them vs. what that particular specialty as a group’s top 50 items are. This points out opportunities to expand our share of the customer’s business.

We hope Caligor FSC will be a tool to help our reps earn more commission dollars. We think it will allow them to penetrate their accounts more deeply.

Repertoire: Operating margins are eroding in distribution. Besides increasing your gross profit margin, what are other ways you can increase operating margins?

Racioppi: We’re committed to expanding our operating margins through two initiatives. First, making sure that our selling margins are not eroding, but instead expanding. Second, because we share warehouses with Henry Schein’s other divisions (not just medical), we gain efficiencies. The cost to ship orders doesn’t grow nearly as much as the overall growth of the business.

Repertoire: Are there any other areas of the country where you want to place Caligor field sales consultants?

Racioppi: We’re in 34 states. We’d like to expand that. Some states lack population density, so we won’t be in all 50. But we’d like to expand further on the West Coast. We’ll go where the opportunities exist, either by hiring more reps or through acquisitions.

Repertoire: What can we expect in terms of acquisitions?

Racioppi: Henry Schein has not made a significant acquisition in any of our businesses over the last couple of years. That was purposeful. We wanted to make sure our distribution capabilities were second to none, and we wanted to digest the acquisitions we made in field sales and the dental business. We have a strong balance sheet, we’ve generated significant cash flow, and now we’re looking for opportunities in acquisitions and joint ventures to expand our reach.

When we acquire a business, we want the entrepreneur to stay with us. It’s easy to acquire distribution capabilities and geographic expansion if we have the capital and desire, but the secret to success is etaining the owner, the management team and the sales reps who own the relationship with the customer.

Repertoire: Our understanding is that the telesales group and the Caligor field sales group overlap in about 14 percent or 15 percent of your accounts. Is that true? How do you manage this overlap?

Racioppi: The overlap is still about 15 percent, despite our geographic expansion. We truly think it’s our customers’ choice whether they want to conduct business with a telesales consultant on the phone or whether they want a field sales consultant to help them manage their business.

In fact, the overlap between the two is very, very small. And when it occurs, one is a primary supplier, the other secondary.

Repertoire: Schein is considered to have a high end, aggressive sales force. What kind of training do you provide, or access, on an ongoing basis to keep your reps ahead?

Racioppi: We’ve always had – and continue to have – programs to train our telesales people on selling skills and product knowledge. It’s a big part of our culture. Our vendor business partners come in to our telesales departments in Reno, New York and Virginia (where GIV is located) and conduct in-service training.

On the Caligor side of the business, we encourage and ask our vendor partners to work closely with our reps, ride along with them and help them focus on product knowledge. We view [Education OnLine, a division of MDSI, publisher of Repertoire] as an excellent opportunity for product training and perhaps for sales skills training in the future.

Repertoire: Are GPOs demanding acute-care pricing for their non-acute-care members? If so, is this affecting your business?

Racioppi: We view GPOs as customers who are representing other customers. We do business with the majority of them on the physician side of the business. We’ve seen an increase in that business over the last couple of years. It’s not the majority of our business. But we think there’s a segment of our customers who want to participate in GPO contracts, and we will continue to meet our customers’ needs.

Repertoire: Medicare and Medicaid cuts appear imminent. Any thoughts on how this might affect you and your customers?

Racioppi: We were prepared to roll out a program on March 1, given a pending 4.4 percent cut in physicians’ reimbursement. Now those cuts look like they’ve been delayed until at least September. But we’ll still be communicating to our physician customers that these cuts may be inevitable and that they should prepare for them.

How will they do that? By either seeing more patients or managing their practices differently. We see these cuts as an opportunity to educate our physicians to use different tools. They offer an opportunity for our field sales and telesales consultants to talk about equipment and business opportunities, such as physician office lab testing. We want our reps to get doctors to think differently about their practices, to be more productive and to see if they can make more money through better processes and products.

About six months ago, we started offering a credit card for all three Henry Schein brands, which gives customers a 2 percent rebate. It’s another opportunity for our customers to save money, and it helps us because we get paid quicker.

Repertoire: What is your view of third-party-logistics strategies?

Racioppi:We’ve been a third-party-logistics provider of vaccines for the federally funded Vaccines for Children (VFC)program for several years. States can distribute these vaccines on their own or they can contract with someone else to do it. We are the largest distributor for the VFC program and probably ship 30 percent of all the vaccines. We don’t make a lot of profit; we view it as something that’s good for the nation and for children.

Repertoire: What will the Medical Group look like in two to five years?

Racioppi: I think we’ll continue to show double-digit sales growth. We will increase our Caligor field sales organization. I could see our field sales grow to 400 reps in the next couple of years.

Depending on acquisition opportunities, we want to enter specific markets we haven’t been in before. And we’re looking to build a portfolio of products and services for doctors’ offices that are available only through Henry Schein.

We’ll definitely be expanding our veterinarian business by adding field sales consultants, similar to Caligor.

Opportunities are all around us. We call it “opportunity inflation.” We have more opportunities than we can get our hands around. With proper focus and management, we think we can take advantage of them. We’re really excited about it.