Dental Group Broadens NDC's Focus

Edition: September 1999 - Vol 7 Number 09
Article#: 477
Author: Repertoire

Earlier this year, National Distribution & Contracting Inc. -- parent company of ABCO, Starline and CIDA -- ventured into new territory by acquiring the American Dental Cooperative Inc. ADC comprises 19 dental distributors in the United States and Canada with a collective $470 million in sales and over 600 sales reps.

ADC gains access to NDC's marketing programs, electronic catalog and central warehouse in Nashville, and NDC gains clout and gets to take advantage of crossover (med/surg and dental) products.

‘It definitely broadens our base,’ says NDC President Jim Stover. Last month, ADC Managing Director Lori Paulson and staff moved into NDC's Nashville offices. A Chicago native whose family owns a dry cleaning business, she went to work for Midwest Dental in Des Plaines, IL, in the early 1980s. Midwest Dental was a division of American Hospital Supply (now Allegiance Healthcare) and manufacturer of dental handpieces (drills). Paulson began as a business analyst for new business, then went to the marketing department.

Several years later, she and her family moved to Charlotte, NC, where she took a job as product manager for Pelton and Crane, then a division of Siemens Medical. Ultimately, she became the company's director of marketing. Then, in 1997, she moved to St. Louis to take the job of vice president of marketing for ADC.

Recently, Repertoire visited with Paulson at her new office to talk about the dental market, about ADC and about ADC's new relationship with NDC.

Repertoire: How did ADC get started?

Lori Paulson: ADC was started in 1976 by a group of independent dental dealers including Harty Goetze of Goetze Neimer (now Goetze Corp.), a dental and medical distributor based in Kansas City, Missouri. Ironically, he had also been involved in establishing ABCO in 1953.

At the time ADC was formed, its primary purpose was to do third party billing for its members. In other words, after the distributors purchased manufacturers' goods, ADC (then located in Delaware) paid the bills, then billed the members. ADC headquarters verified the bills for accuracy and worked off the cash discounts. Manufacturers, on the other hand, had the advantage of dealing with just one invoice. Their receivables were guaranteed.

ADC did no warehousing and very little group buying, though the organization negotiated some rebate and special pricing programs. The members received the proceeds of those programs based on their participation. These programs tended to be short-term. So, ADC might have had a two-month program with one vendor, then turn around and have one with another, perhaps even a competitor, for the next two months.

Repertoire: ADC looks quite different today. What happened?

Lori Paulson: In 1995, John Boresi came on as president and, with the Board of Directors established what came to be known as Vision 2000.

Its purpose was to involve headquarters in negotiating contracts to ensure pricing parity among all the members. It also was an attempt to build partnerships with vendors -- an idea that had come of age. We established a goal of driving 80% of our members' purchases through selected manufacturers of merchandise [disposables] and equipment. Instead of short-term relationships, we pursued longer-term relationships with our vendor partners. We also discontinued the central billing program.

Let me stress two things: First, we never targeted 100% compliance, because we recognized that there are always regional favorites and dentists with unique product desires. Secondly, the product is king. We choose partners based on their products. The company philosophy and program is secondary to the product attributes. Sometimes we run into conflicts with manufacturers because of our stance. While we try to incorporate into our program as many products from individual manufacturers as possible, we don't necessarily ‘rate’ every product that a manufacturer carries.

Repertoire: How does ADC select its vendor partners and products?

Lori Paulson: Every year, we invite manufacturers to send us information describing their product(s), distinguishable features and benefits, terms, conditions and pricing. Every manufacturer answers the same questions. We review the responses, then call in our merchandise and equipment committees (each comprising five members) to review them. We assign ‘A’ ratings to selected products and focus our selling efforts for the upcoming year with these products.

The manufacturers send us purchasing data on each member every month. That way, each member can track his performance on rated product purchases vs. the co-op at large.

We established the rating programs with this thought in mind: If we focus on a limited number of products, we will work to switch our members to those products and help the manufacturer grow its business.

We now have national programs with 80 vendors, which includes private-label vendors. Since we began the rating program four years ago, we've probably added seven vendors and de-rated four. So, we've made significant progress toward our goal of creating long-term partnerships with vendors.

Repertoire: Describe the dental market.

Lori Paulson: Many dentists are still in one- or two-practitioner offices representing a lot of small businesses. For the distributor, that means selling is still based largely on relationships. In fact, the typical ADC member rep has approximately 200 active accounts.

Managed care has not become as significant in the dental market as it has in the medical market. In my opinion, this is for several reasons. First, more dentists are retiring than graduating from dental school, so the demand is beginning to exceed supply. Secondly, going to the dentist is, to a large degree, a more personal experience even than going to a medical practitioner. Where you may only spend about 10 minutes annually with your doctor, you can often count on spending an hour with your dentist. There's a great deal of trust built between dentist and patient, meaning that consumers tend to be very selective in their choice of dentists. Many procedures in dentistry are elective procedures. It's difficult for managed care to be successful in that kind of market.

There is a proliferation of new products and technologies -- intraoral cameras, digital radiography, air abrasion systems and new filling materials. The rep acts as the dentist's filter for information on these technologies. The rep should know enough about the practitioner's practice to predict which technologies will interest him or her, and which will not. That's the value of personal selling.

Repertoire: Describe the dental distribution business.

Lori Paulson: We estimate ADC members' market share to be 15%. The national companies have about 50% of the market, and other independents own the remaining 35%. This last group represents our potential members. All of our members have at least one stocking location. They are local dealerships who can provide immediate turnaround of products and services.

Servicing equipment is key for them and their customers. All of our current members have a service department. In fact, as a group, they average close to a one-to-one ratio (of service techs to sales reps). Why is service so important? Because if a dentist's chair isn't working, he's done.

We have experienced consolidation in our industry. And, as electronic commerce grows, we expect to see more merchandise-only dealerships arising (as opposed to those with merchandise as well as equipment servicing.) With our accessibility to the NDC warehouse, we probably will attract some merchandise-only dealers.

Repertoire: What about ADC's private label brand?

Lori Paulson: We created our brand -- Quala™ Dental Products in 1996, as part of Vision 2000. These products are comparable in quality to the national brands, but are available at a value price. We're in more than 14 product categories (primarily merchandise, though we have two small equipment products), and annual sales are close to $15 million.

For the most part, agreements with our private-label vendors are long-term, established through a bid process. Melissa Pearson is our Quala marketing manager with the merchandise committee providing input on product selection.

Being part of NDC gives us opportunities to grow the Quala line, particularly with cross-over products -- that is, those products sold by both medical and dental distributors. And the warehouse gives us access to foreign suppliers that we never had before. Another advantage of being part of NDC is that we will be able to work more closely with our dealers on the private-label program. We can provide selling programs, promotions, and professional flyers.

Repertoire: You've mentioned how NDC membership will help you grow the Quala private-label line. What are some other reasons you decided to join NDC?

Lori Paulson: Between 1995 and 1998, consolidation brought ADC membership down from 34 to 19 members. We saw consolidation on the manufacturing side as well, meaning that the small manufacturer you did business with yesterday suddenly became part of a large, publicly traded company, with different wants and needs. As a result, ADC began to research options to grow and provide services, adding value for our members.

We already had looked at producing an electronic database, and had actually started providing pricing on disk for our members. And we needed to improve the marketing services we offered to our members.

We also were interested in operating a centrally located warehouse. We recognized that between foreign-sourced products, promotional opportunities from manufacturers and volume purchases, we were missing a lot of opportunities for our members. We couldn't compete with the big distributors.

Although we could have tried to create all these services on our own, that would have been costly and time-consuming. So, when the opportunity arose for a merger or acquisition of ADC by NDC, we looked carefully at it.

Repertoire: How has the acquisition gone thus far?

Lori Paulson: Warehousing started [in mid-August]: We identified 14 companies currently in NDC's warehouse with cross-over products used by our members. We provided our members with a CD-ROM with that subset of products, and hired Tom Hanley to be our customer service expert. (He had 19 years experience in the dental market.)

Some products are cheaper for our members when purchased through the warehouse, some are the same price. But in no instance is the cost of a product from the warehouse more than if accessed directly from the manufacturer.

The advantage of the warehouse for our members is that it helps them meet freight requirements and minimum requirements. They will be able to order more products from the warehouse while keeping their inventory levels low and increasing their turns. And because we have the warehouse as a negotiating tool, we should be able to negotiate better pricing opportunities. It will evolve. We expect to bring in more products over the next year.

Because of NDC, we can now offer our members marketing support in the form of custom flyers, advertising support, etc. It allows our small members to have professional end-user marketing pieces with a professional image, and enable them to compete with the powerhouses. Our larger members benefit too, with simplified, pre-created advertising messages to incorporate into their catalogs. The acquisition of ADC by NDC provides a win-win relationship for all elements of the dental industry. It should stabilize the independent dealer as a long-term entity in this market.