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9/19/2003
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Top Of The List: Owens & Minor Takes Supply Chain Deeper

Next step for hospital-supplies distributor: third-party logistics

Owens & Minor Inc. might one day look back on 1998 as a banner year, though not for the reasons one might imagine. That was the year its largest customer, HCA Inc., the nation's largest health-care provider, chose to look for another distributor of hospital supplies, taking 11% of Owens & Minor's revenue with it.

David Guzman, CIO of Owens & Minor

Owens & Minor's goal is to offer "automated replenishment," taking the act of ordering supplies out of the equation, CIO Guzmán says

Photo by Ken Schles
For many companies, such a devastating blow would lead to a wild scramble to replace the old big customer with a new big customer. But Owens & Minor CEO Gil Minor took it as an opportunity for the company to do some soul-searching. "Gil's reaction was that we needed to re-examine ourselves and determine how we could go about winning that business back," says CIO David Guzmán, who arrived at the company in December 2000 with the task of building on the technology-driven transformation that was taking place. The year after Guzmán's arrival, Owens & Minor topped the InformationWeek 500 ranking, and after dropping to No. 11 last year, the company is back on top again this year. And it has that self-examination process to thank.

After assessing the implications of HCA's departure, Owens & Minor executives reasoned that the company's relationship with hospitals, which essentially ended at the receiving dock, needed to go deeper. They estimated that for every dollar hospitals spend on supplies, they spend another 40 cents on supply-chain logistics--or how products are ordered, tracked, used, discarded, and restocked. If it could reach further into hospital processes and combine real-time supply-chain visibility with logistics services to optimize the ordering, tracking, and restocking of supplies, Owens & Minor could tap into a far-larger market. "There's only so much blood you can squeeze from a turnip in terms of the product price," Guzmán says. "But there's a lot you can do with the logistics costs."

As a result, Owens & Minor is extending itself further and deeper into the supply chain, at both the hospital and manufacturer levels. So much so that the company foresees itself delivering supplies from competing distributors such as Cardinal Health or McKesson Corp., both of which offer Web-based supply-chain optimization and logistics applications but haven't delved into third-party logistics services. At that point, Owens & Minor will find itself competing with the likes of United Parcel Service Inc. and FedEx Corp. "The advantage we offer over logistics providers is our experience in dealing with the contents of those medical-supply boxes, sensitive supplies that have expirations or recalls," Guzmán says.

Owens & Minor made an organizational commitment to its supply-chain and logistics initiatives last year by creating two new business units that will provide the next-generation services. OMSolutions combines the company's Web-based business-intelligence tools with its strategic expertise to help hospitals get a handle on how they order supplies and manage them once they arrive on the loading dock. An as-yet-unnamed third-party logistics unit aims to improve the flow of products between manufacturers and hospitals, acting as an outsourced warehouse for hospital customers. The goal of the logistics unit is to simplify the handling of supplies once they arrive at hospitals by combining orders beforehand and grouping supplies according to where they need to go and what they'll be used for. Owens & Minor is in the process of updating its order-management and inventory-management systems to support these efforts.

There's plenty of room for improvement when it comes to hospital supply chains. For example, Guzmán says that of the $25 billion worth of medical and surgical supplies hospitals buy each year, half come directly from manufacturers, meaning that the prepackaged surgical kits Owens & Minor ships are only completed after nurses add the items shipped by manufacturers. This means less time devoted to patient care and more chances for errors.

Owens & Minor is trying to solve that problem by getting customers to have their direct-from-manufacturer supplies shipped to Owens & Minor. That would mean more complete data on hospitals' supply-chain needs, and it would also allow Owens & Minor to ship those preassembled surgical kits completed.

The potential benefits to hospitals from supply-chain and logistics offerings are huge, says Mark Anderson, health-care IT futurist and CEO of medical consulting firm AC Group. The average hospital has up to $2 million worth of supplies sitting around, he says, meaning Owens & Minor could save hospitals millions of dollars if it does what it promises.

Anderson says that when he was CIO of a 10-hospital network in the mid-1990s, he searched in vain for a vendor that could step in and help him better manage the flow of supplies once they arrived at hospital loading docks. So while Owens & Minor's efforts to improve hospital supply-chain logistics may not be a new concept, the execution is. "The idea isn't innovative, but if they're getting it done, then that's innovative," Anderson says.

A linchpin in Owens & Minor's efforts to help its customers effectively manage their ordering, inventory, and supply chains has been Wisdom2, its Web-based decision-support tool that beefs up customers' ability to customize supply-chain data. The new tool expands the capabilities of the original Wisdom application by crunching data on supplies the company doesn't distribute.

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