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Distributor CEO extends reach from hospital bedside to the home

Owens & Minor’s Craig Smith looks to the future with the past in sight

When Craig R. Smith joined Owens & Minor Inc. in 1989 as the Los Angeles division vice president, courtesy of an acquisition, little did he know that he would be on track for the CEO’s office during the next 16 years.

Working his way up through the executive ranks of one of the nation’s largest medical/surgical supply distributors, Smith finally earned his spot behind the president and CEO’s desk in July 2005 as Gil Minor III relinquished the reins retiring as company chairman. Minor can be credited for helping guide the company’s transformation from a drug wholesaler into a powerhouse med/surg box mover, consistently ranked within the top five, typically No. 2.

With Owens & Minor’s recent acquisition of McKesson Corp.’s acute care med/surg distribution business, which was constructed around that company’s acquisition of No. 3 General Medical Corp., Smith is positioning the company to make a legitimate and potentially successful run at being No. 1 (over market leader Cardinal Health Inc.)

Certainly, Owens & Minor’s successful forays into supply chain consulting and software make it a serious competitive threat to the big red bird at the top of the roost. But Smith is content merely to usher in the next generation of Owens & Minor – one that reaches from the hospital to the home.

Healthcare Purchasing News Senior Editor Rick Dana Barlow managed to catch a few moments with Smith between seemingly endless boardroom meetings and business travel.

HPN: Up until the recent McKesson deal, Owens & Minor (OMI) had been rather unobtrusively building a solid supply distribution business, as well as a formidable information technology operation (WISDOM and QSight) and a respectable supply chain management consulting group (OMSolutions). Why is each important to OMI’s success?

SMITH: We have grown our acute-care distribution business – our bread and butter – in recent years by building strong relationships with our customers, offering innovative supply chain management products and services, and by creating innovative technology solutions. In recent years, we’ve been successful in adding new customers and increasing our business with existing customers.

Our technology solutions, such as WISDOM (now in its third generation), QSight and Cyrus Medical, give our customers an advantage and help them lower the overall cost of healthcare and improve the efficiency of the supply chain. Our OMSolutions group has also provided the healthcare market a new source of supply chain management expertise, offering consulting and outsourcing solutions that help hospitals improve results. Our OMSolutions team has also been successful in cross-selling to our core distribution business. Acquisition of the McKesson acute-care business will give us the opportunity to grow our business and help a new generation of customers lower the cost and improve the performance of the healthcare supply chain.

Where do you see OMI’s future success emerging?

At Owens & Minor, we see opportunity in serving the healthcare supply chain from the patient bedside to the healthcare consumer at home. That’s why we expanded our reach from the acute-care setting to the direct-to-consumer market with our 2005 acquisition of a diabetes-supply company that sells directly to consumers. We have also reached out to our suppliers and are successfully providing third-party-logistics services to them. As we tell our supplier partners, we can efficiently provide a host of supply chain services to help them improve the efficiency of the supply chain.

A small but growing number of IDNs have eliminated their need for distributors and/or GPOs by doing their own group purchasing and distribution via a centrally located warehouse. Do organizations like these really threaten the long-term viability of distributors in the healthcare supply chain – even if they do not represent the majority? Why?

Our goal at Owens & Minor is to support our acute-care customers in whatever way we can. Our core competency is medical and surgical supply distribution, but we also provide outsourcing and supply chain management consulting for our customers. We have launched several Integrated Service Center projects where we operate the warehouse and provide distribution services for an acute-care facility in its own warehouse facility. This ISC model is proving to be attractive to a variety of hospitals, including those who prefer self-distribution.

At the turn of the millennium you foresaw OMI delving more deeply into the physician business, third-party logistics for manufacturers and outsourced logistics for hospital customers. How is each strategy progressing? What changed and why?

We continue to serve physician practices that are connected with large hospital systems. These practices are a viable customer for us. We typically don’t pursue the individual physician market, since distributing to so many small, individual offices is not our core competency. We do offer third-party-logistics services to certain manufacturers, which have proven to be fruitful partnerships for both parties. And we also are offering our Integrated Service Center model to customers who might wish a different distribution model from traditional distribution. These business models are working well for our customers and suppliers and offer growth potential for Owens & Minor.

OMI has made some serious investments in information technology, including its popular WISDOM system and QSight. What does software contribute to OMI, and what does it offer customers who can access such products from software manufacturers?

At Owens & Minor, our ongoing investment in technology has helped to differentiate us in the market and has been a key element in our success. We continue to invest in creating innovative technology solutions that help our acute-care customers improve the supply chain. For example, our WISDOM service is in its third generation and we offer it to customers on a subscription basis. There is no real equivalent to WISDOM on the market. Another example is QSight, which came to Owens & Minor in an acquisition. This innovative inventory management program allows hospital professionals to manage clinical inventory with an easy-to-use Web-based platform. Services such as these are unique to Owens & Minor and allow us to focus on improving supply chain management and lowering overall cost for customers.

OMI has tried to venture into the non-acute care market, largely by online and telemarketing operations, with a key focus on IDNs. How’s that going so far?

I would say that our biggest and most successful effort outside the acute-care market today is in the direct-to-consumer area, where we are now serving more than 136,000 customers with supplies for diabetes testing and monitoring, along with some respiratory disease management products. This move fits with our long-term strategic goal of ‘following the patient,’ as the patient increasingly consumes healthcare products and services outside the acute-care setting. We know this is a growth market and our talented management team at Access Diabetic Supply has quickly built scale and is now working to maximize efficiency and leverage the platform into other disease states.

OMI, by and large, is considered a hospital distributor. How serious is the company about the non-hospital business? Why couldn’t or didn’t you include McKesson’s non-hospital distribution business as part of the acquisition?

Serving the hospital market is our core competency, and we are uniquely equipped to help these acute-care facilities improve efficiency and lower the overall cost of distribution. We are very excited about the McKesson business, as we believe we can serve these customers efficiently and can provide them with innovative supply chain management solutions. McKesson offered only the acute-care part of its medical/surgical supply business in this transaction.

What was OMI’s motivation behind the McKesson deal and what will it really do for the company and for customers?

For Owens & Minor, this was a unique opportunity in our market and a great strategic fit for us. We are well-positioned to take on this new business, as our core competency is serving the acute-care market. We have the capacity in our system to serve this business and by adding scale, we can maximize efficiency. We were planning to add sales territories this year and this acquisition will bring more than 100 experienced sales reps to Owens & Minor. For the McKesson customers, they will be gaining a distributor that is exclusively focused on serving the acute-care market. We will serve them with the same exceptional customer service that we offer every day to our existing customers. We will also offer our innovative supply chain management techniques, products and services to these customers. With our supply chain management ability, we expect to exceed the expectations of these customers.

You were once quoted as saying: "CEOs and COOs are really looking at the bigger picture and saying, ‘I need to take my total costs down.’ But they’re also telling the materials manager, ‘Continue to work on price.’ So there are two pressure points." Are the C-suite occupants giving materials managers a mixed message? Why?

There is always going to be a focus on price in purchasing departments, just as there will always be a bigger-picture focus on process in the C-Suites. We are equipped to help hospitals improve in both areas. Also, we have always worked with two kinds of customers – smaller hospitals that are focused on price and larger integrated systems that are focused on process improvement. For the price-focused hospital, we offer our private label, MediChoice, and supply-chain management techniques that drive cost down. For the process-focused customers, we offer our innovative technology solutions, OMSolutions consulting and outsourcing, CostTrack activity-based management, and other techniques designed to lower the total delivered cost of product to the facility.

Certainly, price is part of total costs, and in the short term price can matter to a facility’s bottom line and budget woes. How do you successfully convince customers that price, independent of total costs, shouldn’t matter? Or should it?

We have done a good job over the years of working with our customers to move them to activity-based pricing. Now nearly 40 percent of our revenue comes from customers who are using CostTrack, our activity-based-pricing management tool, to improve the overall total delivered cost of medical and surgical supplies for these customers. From this percentage, it’s clear that there are many hospital systems in the market that understand that they can achieve cost reduction by focusing on process cost vs. product cost.

OMI started in the late 1880s as a pharmaceutical distributor that switched to med/surg in the 1960s. Since then OMI has broadened its reach beyond distribution and into IT and consulting. What are a few of the holes you’d like to fill in years to come?

As we look to the future, we see opportunity in serving the entire healthcare supply chain from the patient’s bedside to the patient’s home. We are well-known for our expertise in serving the acute-care market with both traditional distribution and innovative supply-chain services. Also, we have already entered the direct-to-consumer market with our diabetes supply company. We continue to see great opportunity in healthcare, as it is a fast growing sector.

What’s wrong with simply being a box mover, let alone being called a box mover?

We are quite proud of being a good box mover and always will be. We take pride in our ability to serve the acute-care market with our excellent supply chain abilities. We move boxes every day, a lot of them, and we move them with the best techniques and people in the market. We also offer the innovative services and products that make box moving efficient and effective.

You succeeded Gil Minor (G. Gilmer Minor III) as head of the company. When you finally decide to try something else or retire how would you like to be remembered for your contributions?

I would hope to be remembered for always putting the customer first. Our absolute focus on customers has been the essential element in our success over the last 124 years. I hope that during my time at Owens & Minor, we helped our customers improve supply chain processes and lower cost. I would also like to be remembered for continuing to invest in our teammates, who are the backbone of Owens & Minor, and for continuing to make Owens & Minor a great place to work. HPN

September
2006