Distributor Execs Assess 2003

Edition: December 2003 - Vol 11 Number 12
Article#: 1721
Author: Repertoire

How do distribution executives regard the past year? Repertoire spoke with two of them: Craig Smith, president of Owens & Minor, and Gary Muensterman, president of McKesson Medical-Surgical.

Repertoire: How did Owens & Minor fare in 2003?

Craig Smith: Through October, we had strong sales growth in the 5 percent to 7 percent range. And most of that is same-store sales. Even with that sales growth, we’ve managed our expenses very well. Several indicators – lines per hour, sales per FTE, sales per square feet – are all strong. So our core business is strong. We’ve also seen good growth in our Owens Solutions group.

We have refocused our third party logistics business away from a supplier model to a provider-direct model. [Previously], we had been trying to mainstream manufacturers into a new distribution model. But our larger distribution customers are looking for a direct manufacturer/distribution model, or a consolidated service center. They’re saying, ‘Why don’t you come in and manage our receiving, distribution and freight?’ So we’ve moved from trying to get manufacturers to go through a new distribution model, toward working with our larger IDNs to handle distribution in a new way.

We’ve taught an unbelievable number of courses through Owens & Minor University. So it’s been a very busy year. We’ve stayed focused on our core business.

We had thought we would be further along with our private label program [MediChoice] than we are. There are a lot of things to take into consideration when you get into this business. But we absolutely believe in it. A lot of customers are asking for it. And we have some training initiatives for the sales force, which will help.

Repertoire: Did your customers change in 2003?

Smith: We’re seeing a bigger focus on the bottom line and operating margins, at least in the larger systems. More CFOs are serving as the executive sponsor for the supply chain in their hospital systems. So the supply chain has been elevated in the past year, and it will continue to be elevated.

With the nursing shortage, we’re seeing an emphasis on process improvement, on getting nurses out of the supply chain and relying more on technology solutions, such as radio frequency to track inventory and equipment.

Repertoire: Have you seen changes among the distribution community at large in the past year?

Smith: Distributors are trying to make sure that customers understand the differences between them. The three players [Owens & Minor, Cardinal Health and McKesson Medical-Surgical] are trying to differentiate themselves to get the customer to make a decision. For example, we’re working hard on advanced logistics and supply chain management and process improvement. Offering low prices and great service gets you to the dance. Now, customers are asking, ‘Where are you going to take us next?’ So you need differentiation in the marketplace to attract new customers and maintain the ones you have.

Healthcare providers are still under stress. The pressure is tremendous. And that flows backward to the manufacturers and distributors. So you can’t wait for the hospital to come to you. You have to go to them and ask, ‘How can we help you?’ ‘Here’s a new program.’ ‘Here’s a new way to benchmark your performance.’ You can’t take things for granted. And that’s good for the market.

Repertoire: How did McKesson Medical Surgical fare in 2003?

Gary Muensterman: We completed our distribution center consolidation program and continue on schedule with conversions to our new enterprise-wide operating system. We continue to invest in our customer-facing technology solutions, as well as our sales force automation tools. These internal initiatives have increased our customer satisfaction rates, improved our financial performance and positioned us to pursue additional growth opportunities in the future. I believe a hint of our progress was shown recently when McKesson Medical-Surgical announced a second quarter operating profit increase of 70 percent, so I’m pleased with our progress at this point in time.

Repertoire: What were the bright spots? What left you disappointed?

Muensterman: As we all know, the healthcare industry continues to face significant pressure to reduce overall medical expenses and eliminate the variability in care across the healthcare continuum. These pressures, I be-lieve, will require the U.S. healthcare system to continue to seek partners in its ongoing reengineering effort. Our customers’ interest in our “One McKesson” integrated approach, across all points of care, continues to be robust and has exceeded my expectations. “One McKesson” is the combination of McKesson’s information technology assets, combined with our automation and product distribution businesses, which allows us to deliver a more seamless set of customer solutions.

I’m encouraged [when I speak with] customers who are using our software, scanning technology, robotics and distribution services to improve both operations and patient safety. I believe this combination of assets is a differentiated value proposition and provides us with competitive advantage in the marketplace.

In regards to your question of disappointments, as a distribution industry we should be much further ahead in areas such as universal product identification, enhanced bar coding and product lot tracking capabilities, which impact our ability to improve quality and drive additional costs out of the system. I’m confident we’ll continue making progress in these areas – to the benefit of distributors, suppliers and, of course, customers.

Repertoire: How did your customers change in 2003?

Muensterman: While merger activity will always be an issue in the fragmented healthcare industry, we’ve seen customer consolidation subside compared to previous years. Our customers have been more focused on gaining greater financial return on the assets they currently have deployed, whether it’s through increased labor productivity, better space utilization or improved working capital.

To achieve this greater financial yield on assets, our customers are requiring more robust and creative solutions from their distribution business partner. There is a greater willingness by our customers to allow us to participate more deeply in their day-to-day problem solving activities. This ongoing dialogue with our customers is at all levels of their organization, which allows us to provide more customized and pragmatic solutions to meet their changing business needs.

We continue to see significant growth in the outpatient surgery center segment, as well as an increasing demand from these customers for consultative assistance – from the planning stages to building and through operation. In addition, we continue to see physicians adding to their practice areas. Physicians are expanding into boutique healthcare areas, such as cosmetic lasers. They’re also adding in-office diagnostic testing and pharmaceutical products for the added convenience of their patients.

Repertoire: How about changes among the distribution community at large?

Muensterman: Our manufacturing partners are more willing to work collaboratively with us in order to reduce the overall administrative costs within the healthcare supply chain. We’re also working closely with them to better manage customer demand, improve inventory turns and minimize inventory obsolescence. We’re integrating more from an e-commerce perspective, whether it’s utilizing EDI transaction formats or creating a Web portal to exchange sales tracing data.