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Supply Chain's Missing Link

Top innovator connects manufacturers, health-care providers
Breaking it down to basics, Owens & Minor Inc.'s business is about delivering boxes of medical supplies to customers via dozens of warehouses. Through its use of technology and its collaboration with customers, the 119-year-old distributor of medical and surgical supplies also has evolved into a facilitator of critical information by way of its data warehouse and the Web--information that Owens & Minor's customers use to improve their businesses.

Owens & Minor's use of IT to bolster the efficiencies of its business--and that of its customers--is what helped earn the Glen Allen, Va., company the top spot in this year's InformationWeek 500 ranking. Owens & Minor's customers include manufacturers of medical and surgical supplies that, in turn, are used by the company's biggest set of customers--health-care providers, including hospitals and health maintenance organizations, which face intense cost, competitive, and regulatory pressures.

The mettle of Owens & Minor's IT-driven services was tested last week as the company invoked emergency plans drawn up for Y2K to help New York deal with the terrorist attacks on the World Trade Center. As the tragedy unfolded, Owens & Minor automatically shipped supplies to New York-area hospitals based on predetermined estimates of what they'd need in a disaster. It also shipped supplies to an emergency staging area at the Meadowlands Sports Complex in East Rutherford, N.J. Although the operations ran smoothly, company chairman and CEO Gilmer Minor III says he wished he could do more. Minor, unable to leave Tucson, Ariz., where he was attending last week's InformationWeek Fall Conference, worked from a command center set up at the event. "Nothing would have pleased me more than to have been on the scene with my people," he says.

Owens & Minor's technology-driven information services help manufacturers better manage their inventories and logistics. At the same time, cash-squeezed health-care providers are using the company's IT to better manage time and costs related to their supply chains without having to make significant IT investments of their own.

"Our business has been built on supply-chain services and customer service," says Minor, the grandson of George Gilmer Minor Jr., who founded the company as a wholesale drug company in 1882. "We realized our difference would be based on providing information."

Photo by D.A. Peterson

Owens & Minor CIO Guzman (center) stands in the medical-supplies distributor's warehouse with members of his IT team. The company's information systems help clients better manage their inventories, he says.
Through its Web tools, Owens & Minor is playing the role of supply-chain "information intermediary" for health-care manufacturers and providers, which tend not to share much data on their own, says senior VP and CIO David Guzmán, who joined Owens & Minor in December after leaving his post as senior VP, systems development at Office Depot Inc. "There isn't a collaborative relationship among parts of the supply chain. That level of data sharing in health care doesn't exist," Guzmán says. "But we're providing it as a trusted partner to the health-care industry."

The crown jewel of Owens & Minor's IT is Wisdom, a Web-based decision-support tool it developed with Perot Systems that slices and dices customers' supply-chain information in a variety of "flavors," depending on customers' business needs, Guzmán says. Wisdom resides in the company's terabyte-sized Oracle data warehouse running on Hewlett-Packard servers and collects data on customers' purchasing activities with Owens & Minor. Because of the database's size--which doubled this year--the company plans to migrate the system to an NCR Teradata platform, Guzmán says. Health-care companies access Wisdom via the Web to analyze their supply-chain information.

Traditionally, the health-care industry has lagged behind IT trends. But now, companies are feeling the pressure from many directions, including cutbacks in reimbursements for patients covered under Medicare and Medicaid; compliance with federal Health Insurance Portability and Accountability Act of 1996 patient-privacy mandates; an industrywide nursing shortage; and pending patient-rights legislation. Mass consolidation within the industry has fueled the creation of health-care buying cooperatives and integrated health networks that bring companies together to boost their purchasing muscle.

As a result, much of these health-care providers' supply-chain information resides on multiple and disparate hardware and software platforms, and that prevents managers from accessing a consolidated view of their purchasing data. Enter Wisdom. The system gives material and purchasing managers, as well as health-care executives, a consolidated view of their information because it interfaces with health-care companies' diverse enterprise resource planning, material management, and clinical systems, Guzmán says.

"What these tools do for us is take out the day-to-day worry about supply issues, allowing us to focus on other things," says Gary Wagner, VP of systems at Inova Health Systems, an Owens & Minor customer and $1 billion operator of five hospitals, two nursing homes, and other health-care facilities in northern Virginia. "We can analyze our purchasing from facility to facility. We've streamlined our supply-chain process."

Helping health-care companies improve supply-chain processes is just one benefit of Owens & Minor's IT tools. The technology also improves the quality of care for patients, Guzmán says. For instance, any administrative task that can be made easier for nurses, such as taking inventory and placing orders for dressings and latex gloves, potentially means more time for patient care--a major concern for health-care companies as they tackle the nursing shortage.

For Owens & Minor's customers that are manufacturers, Wisdom provides analysis of product penetration, contract compliance, drop-ship activity, inventories at specific distribution centers, and historical use of products. Suppliers have real-time access to purchase-order information for collaborative inventory management and the most efficient transportation of goods.

"Wisdom provides us with up-to-date information that helps us be more efficient," says Pam Moore, national distribution account director for Kimberly-Clark Corp.'s health-care products. "Owens & Minor really raises the bar on services that other distributors should have."

This year, about a third of Owens & Minor's projected $3.8 billion sales will flow through Wisdom. About 100 customers buy a yearly subscription to use the system.

Owens & Minor's next incarnation of Wisdom is Wisdom2, which is being tested. Wisdom2 will provide decision-support data and purchase history for all supplies bought by a health-care company. That includes products that Owens & Minor doesn't distribute, such as pharmaceuticals, patient food, and linens and scrubs, Guzmán says. Also coming soon is a mobile version of Wisdom that will let Owens & Minor customers and field representatives access Wisdom reports and information through wireless handheld devices.

While Owens & Minor's IT tools help its customers run more efficiently, the technology is improving the distributor's own productivity and efficiency. The deployment of Wisdom, as well as a new warehouse-management system and the hundreds of wireless handheld devices used by workers at more than 40 distribution centers, has increased employee productivity by 20%, representing about $10 million in annualized cost savings, Guzmán says.

Owens & Minor's IT innovation doesn't stop with Wisdom. The distributor also offers a Web-based order-entry tracking and customer-service system. OMDirect is tightly integrated with back-end fulfillment systems to give customers real-time access to suppliers' pricing information, product availability, and order tracking. About 92% of Owens & Minor's sales go through OMDirect. Customers use it to place and track orders over the Web or through electronic data interchange instead of by fax, phone, or regular mail.

Owens & Minor also offers CostTrack, a service that provides "what if" scenarios to identify cost savings in a health-care company's supply chain. The process helps health-care providers track costs involved with the actual ordering, receiving, and delivery of supplies, rather than just the traditional cost-accounting method that breaks down supply-related costs into labor, supplies, depreciation, and space.

Lawrence Marsh, a research analyst who follows Owens & Minor at brokerage firm Lehman Bros., says the CostTrack and Wisdom services are important tools for the company's customers and for Owens & Minor's own business. "The culture at many hospitals is to order something as they need it. But if they're getting deliveries at midnight five times a week, it's costing everyone more," Marsh says.

Owens & Minor is careful to complement its IT offerings with a healthy dose of customer service. Guzmán, Minor, and other executives spend a lot of time with customers to understand their businesses. Company executives get involved with health-care providers' medical committees, which is often needed to get support for supply-chain process changes from physicians and other clinicians. Owens also established a customer advisory council that includes CIOs who meet quarterly with Guzmán and Minor.

Owens & Minor also has an internal advisory council that includes the distributor's truck drivers and employees from sales, customer service, and warehouses. Shortly after Guzmán joined the company, he says, "Gil insisted that I get out with our truck drivers" on deliveries to hospitals. Not only did the truck runs give Guzmán insight about Owens & Minor's business, they spoke to the type of company he'd joined. "During a midnight run in Portland, Ore., the driver had to replenish inventory at a hospital. The driver got into the hospital using his own key that the hospital had given him," he says.

Technology will continue to be a vital tool at Owens & Minor as the health-care distribution industry evolves, Minor says. He envisions the company becoming more of a third-party logistics services provider in which it takes over warehousing of products for supply manufacturers. Owens & Minor has already signed one such deal.

With its eye on development and IT costs, the company aims to make its services and tools simple to use, without a lot of extras. "We haven't spent a lot of money on fancy Web screens," Guzmán says. The company this year will spend about 1.1% of revenue, projected at $3.8 billion for 2001, on IT operating costs. That excludes IT capital investments. "You don't have to spend a lot of money" to achieve a lot with IT, Guzmán says.

In the distribution business, the name of the game is delivering the right boxes to the right place at the right time. But Owens & Minor's competitive advantage is delivering custom-cut packages of supply-chain information to customers that need it, when they need it.

Photo by D.A. Peterson