The Hunt is on for Medline

Edition: December 2003 - Vol 11 Number 12
Article#: 1722
Author: Repertoire

At $1.45 billion in sales, the company that made consignment famous is on the radar screen of many.

Over the last 20 years, Medline Industries has evolved, just as the industry at large. For example, Mundelein, Ill.-based Medline used to be a niche player. Today, its annual sales are $1.45 billion. It has a sales force of 700 reps. Once the hunter, now as often as not, Medline is the hunted.

Its offerings have evolved, too. Twenty years ago, the company was touting its consignment program, running ads showing a materials manager holding an oversized check representing the money her hospital had received from Medline for buying back its inventory. Twenty years later, Medline still offers consignment. But it has added a portfolio of broad-based supply chain management solutions. What hasn’t changed in those 20 years is the company’s promise to save its customers money. Guaranteed.

Part manufacturer and part distributor, Medline was founded in 1966, but its roots date back 90 years, when it started as a garment manufacturer. Today, the company manufactures and distributes more than 100,000 medical products.

Recently, Repertoire spoke with Tim Jacobson, senior vice president of corporate sales, about how Medline has adjusted to growth. (The conversation took place just prior to Medline’s announcement on Oct. 30 of its intention to acquire Maxxim Medical’s surgical products [custom procedural trays and Boundary drapes and gowns] and medical products [examination and surgical gloves] businesses. The acquisition was expected to generate $150 million in additional annual revenues.)

Jacobson has been with the company 22 years, having started as a sales rep in Mil-waukee in 1982. In 1985, he became regional manager, and in 1988, he was promoted to senior vice president of sales for the Midwest. He came to Mundelein in 1997 to run corporate sales. As such, he is responsible for managing and marketing supply chain programs for IDNs, stand-alone hospitals, physicians’ offices and surgery centers.

Repertoire: How have your customers changed over the past five years?

Jacobson: Our customers – especially those at the administrative level – are more focused on supply chain initiatives as a strategy to enhance their operating margins than ever before. In fact, I would call supply chain improvements a key strategy of the “C level” in IDNs.

Repertoire: Why do you think this has happened?

Jacobson: An IDN that wants to improve its operating margin has several strategies available. It can focus on increasing net revenues; but the reality is, if anything, they have to shed some of their operations because they were unprofitable. Its second option is to reduce FTEs, but in many cases the system has already made extensive workforce cuts. The third is growing investment income, but that’s been a challenge with the poor returns in the financial markets. The fourth option is supply chain initiatives. And aministrators recognize this is an opportunity that has lacked the attention that revenue has received.

Repertoire: Whom are they looking to for help?

Jacobson: The consulting community is fairly active today. But [administrators] are also looking to their own materials management department to get educated and to step it up.

Administrators are also more open to vendor solicitations. Before, the CFO or CEO would respond to our phone calls with, “Why don’t you see the materials manager?” Now, they’re taking that call.

But that doesn’t mean the director of materials management isn’t engaged in supply chain programs.

Repertoire: From a sales point of view, who in Medline is responsible for IDNs?

Jacobson: Our senior management team – senior account managers, division managers and senior vice presidents – is, in effect, our corporate sales/IDN sales force. This group has a dotted-line relationship with my area – corporate sales. In corporate sales, we’re in charge of developing cost management programs, marketing them to the marketplace, training the sales force, generating proposals and tracking results.

Repertoire: What’s the role of the sales rep?

Jacobson: The reps are more focused on implementing agreements that have been negotiated and closed by Medline senior management and the account.

Repertoire:. What are IDNs looking for?

Jacobson: Hard-dollar, quantifiable savings. Not-for-profit healthcare is an evolving business, which is beginning to behave more like the private sector. It’s developing a more bottom-line, business-oriented approach to purchasing and acquisition.

Repertoire: That’s been a long time coming.

Jacobson: DRGs got people thinking back in 1983. But still, some hospitals made more money under that system than they did before. The Balanced Budget Amendment of 1997 was the real kick in the pants. I didn’t see a big behavioral change in the people we called on until then.

And the BBA was the single biggest event in our growth. If it hadn’t occurred, and providers were experiencing operating margins of 6 or 7 percent, we wouldn’t have experienced the skyrocketing growth that we have.

Repertoire: What can Medline offer IDNs that are serious about taking cost out of their supply budgets?

Jacobson: As an IDN’s prime vendor, our point of difference is that we are a manufacturer that also distributes, so we eliminate the middleman and offer manufacturer-direct pricing on Medline brand products. As a distributor of non-Medline brand products, we can offer distribution services at lower cost-plus margins, because we are not reliant solely on marking up the cost of goods for our survival.

The stand-out characteristic of our programs is that we offer guaranteed, quantifiable savings. Not savings opportunities, but actual guaranteed savings.

Repertoire: How complete a prime vendor can Medline be?

Jacobson: Medline is a full line distributor of medical and surgical products. We offer over 100,000 products. Again, our point of difference is that half of those products can be Medline brand products, delivered direct, with the balance of the products being from other manufacturers.

Repertoire: What else can you bring to your IDN customers?

Jacobson: Standardization and utilization programs in areas such as gloves, textiles, sterile procedure trays and instrumentation, among others. Our product managers, clinicians and field representatives can help our customers implement these kinds of programs. We also offer logistics consulting to help streamline and improve the efficiency of our customers’ supply chains.

In our service center program, we provide outsourcing of receiving and distribution functions, where we set up a distribution center specifically for an independent healthcare system. We can handle traditional and non-traditional distribution of medical/surgical and non-medical/surgical product categories. This program is not an outsourcing of purchasing and negotiating functions. So the customer maintains its own vendor relationships and pricing structure.

We can also provide our activity-based costing program, called TrueCost.

Repertoire: How popular are activity-based costing systems these days?

Jacobson: Customers are recognizing the pitfalls of cost-plus distribution. Today, as they face tightening margins, they find that their primary business partner – the distributor on a fixed cost-plus program – has a disincentive to offer economic alternatives, because every time the manufacturer raises its price, the distributor benefits.

The other flaw of cost-plus is this: If you audited most distribution relationships, you’d find that the stated markup is not always the same as the markup the healthcare system is actually receiving.

Activity-based costing, on the other hand, separates the distributor’s cost of the manufactured product from its distribution fee. Activity-based costing is also a useful vehicle for determining if the increase in the fee for an additional activity is worth outsourcing that activity to the distributor.

But there are problems with activity-based costing as well. It’s difficult for the healthcare system to analyze the quantitative value of implementing it. And there are challenges in pinpointing and quantifying distribution costs to one customer out of a distribution center that is servicing hundreds of customers.

Repertoire: Medline appears to be enjoying a higher profile than ever. Do you see any proof of this?

Jacobson: Ten years ago we weren’t on many hospital systems’ bid lists to receive their RFPs for prime vendor distribution services. Today, we’re not only receiving them – and many coming from the most high profile IDNs in the country – but we’re winning them.

Repertoire: Are more RFPs going out than ever before? If so, why?

Jacobson: Some of the more prestigious and financially successful IDNs traditionally did not look at the supply chain. But now, they’re feeling operating margin pressures, so they are focusing on supply chain initiatives as a core cost reduction strategy. Also, most providers have a prime vendor. I think they’re saying to themselves, “We’ve had the same prime vendor for years. Maybe we should look at alternatives.”

So there’s more bidding and shopping going on for what had been evergreen relationships. And this correlates with the increase in our abilities and awareness in the marketplace.

The market is looking for a single-source solution. The beauty of our model is that we’re a manufacturer as well as distributor. Many hospitals are taking a look at manufacturer-direct or self-distribution models. There’s a place for us.

If you questioned all the distributors about things like fill rates, e-commerce and connectivity capabilities, reporting capabilities, you’d find that all the competitors are worthy of one another. I think these are the necessary prerequisites to being on an RFP list. The question for the IDN then becomes, “Why make a change from one distributor to the next, if indeed the service and performance would be adequate from either?” There has to be a quantitative value in changing distributors, and that’s where we differ from our competition.

Repertoire: Medline has grown into one of the biggest companies in the business. What effect has that had on your sales force and the way you train them?

Jacobson: We’re a privately held company. We remember our roots. So we don’t get too excited about reading the press clippings. We appreciate what we’ve accomplished. But tomorrow is another day.

Sales reps have had to become more than product, price and service specialists. They must be able to promote a package of offerings above and beyond the stand-alone price of a product, assist the hospital with in-servicing, utilization and standardization, and train the hospital on Medline cost-savings programs. Even though we have specialists to back up our products and services, we expect the field reps to have an understanding of them – as well as the ability to promote them.