Transcript Med-Surg Distribution

Med-Surg
Distribution
Is it the ugly stepsister or
Is it Cinderella or
Is it one and the same?
WSHMMA
April 28, 2006
Medical-Surgical Distribution
Overview
About 25% of the
dollars purchased
by Materials
Management
flows through
Medical-Surgical
Distribution
Medical-Surgical Distribution
Economics
• Purchasing costs related to supply
channel
• Hospitals typically buy med-surg
•
products from one or two distributors –
average cost $1.31/line
Hospitals typically buy direct from 442
med-surg manufacturers – average
cost $5.43/line
Source: HIDA Hospital Procurement Study, April 2005
Medical-Surgical Distribution
Economics
• Distributors need to
generate a minimum
gross margin of 10.5 –
11%
• Distributors average
about 7–10% for SGA
• Distributors operating
margin is about 1-3%
• Distributors net after
tax profit is about 1–
3%
Medical-Surgical Distribution
Economics…
Source of gross margin
• 65% sell side (provider)
• cost/plus
• activity based
• private label
• self-manufactured
• non-contracted
Medical-Surgical Distribution
Economics…
Source of gross margin…
• 35% buy side (manufacturer)
•
•
•
•
•
payment terms (e.g., 2% if pay within 15 days)
tracing fees (e.g., 1%)
forward buys
buying through secondary sources
annual growth/efficiency rebates (3.5% small mfg; 1%
large mfg)
– EDI, full truck loads
• distributor/manufacturer relationship products
– selling cost (upwards of 15-20%)
– BVP, Focus, Max Impact
Medical-Surgical Distribution
Economics…
• 80% of the volume a distributor sells is
driven by 20 product categories
Product Category
% of
Total Sales
Product Category
% of
Total Sales
Wound Staples & Endosurgery
10.0%
Kits, Packs & Trays Standard
2.4%
Kits, Packs & Trays-Custom
9.4%
Solutions
2.3%
Parenteral
9.3%
Urological
2.1%
Woven & Nonwoven Goods
6.2%
Wound Care
1.6%
Wound Sutures
5.7%
Patient Restraints & Supports
1.3%
Respiratory
4.5%
Metal/Plastic/Paper Products
1.3%
Needles & Syringes
4.3%
Enteral Feeding & Medical Nutritionals
1.3%
Gloves
4.1%
Hazardous Waste Control
1.3%
Adhesives, Bandages, Dressings, & Sponges
3.5%
Incontinence Products
1.3%
Electromedical
2.8%
Antimicrobials, Disinfectants, & Scrubs
1.3%
Surgical Instruments & Devices
2.6%
Catheters, Diagnostic & Therapeutic
1.2%
Sterilization Supplies & Products
2.6%
Soaps/Shampoos/Powders
1.0%
Source: HPISA Data 2005
Medical-Surgical Distribution
Economics…
• Only approximately 10 manufacturers
provide funding to the distributors for
these 20 product categories.
3M
Bard
Baxter
BD
Cardinal
DeRoyal
Hospira
J&J
Kimberly Clark
Tyco/Kendall
Medical-Surgical Distribution
Economics…
• 2005 Distributor Financial Performance
Survey
• Tracks physician/alternate site; hospital;
•
long-term care
Median revenue growth
– 2003
10%
– 2004
7%
– 2005
projected to rise
Source: HIDA Educational Foundation
HIDA
The Distributor of the Future
• Industry thought leaders demanding
• integrated relationship
• focus on across-the-board cost
•
•
•
reductions with greater transparency
data sharing
assistance in product
standardization
general expertise in
procurement, products,
logistics
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Key conclusions
• Customers place high value on
•
distributor’s role
Shift from price-focus to cost-focus
– point of diminishing returns on price
concessions
– drive cost reduction in areas such as
standardization, clinical labor savings
– fee-for-service trend in its earliest stages
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Key conclusions…
• New distributor-customer relationship
evolving
– focus on problem solving not negotiating
– distributors need to define themselves in
terms of customers not the manufacturer
– new clinical services for customers
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Key conclusions…
• Role of acute care sales rep is
changing
– not about pushing product
– is about helping
• standardization
• overall cost reduction
• go-between for materials and clinical
• representing hospital with manufacturer
• bird dogging GPO contract compliance
– continued smooth functioning of daily
activity
– new compensation model required
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Key conclusions…
• IDN independence: driving change
– shift away from centralized decision
making is refragmenting the industry to its
local/regional roots
– new levels of scrutiny
– increased service demand
– look to distributor as supply chain
advocate both internal and external
– IDN participation providing benefits that
use to come from GPO
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Key conclusions…
• Customers view distributors as
essential to the standardization
process
– clinical preference items
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Strategies for Success
• Customer
•
segmentation
Embrace the IDN
power shift
Source: HIDA-The Distributor of the Future
HIDA
The Distributor of the Future…
• Strategies for Success…
• Manufacturer relationships
– manufacturers challenged to preserve or
rebuild their brand power
– manufacturers threatened by drive in
product standardization and distributor
private label
– manufacturers want a distributor
declaration for rules of engagement to
avoid unplanned competition
– distributors need to define the role and
importance of manufacturer alignment in
their businesses
Source: HIDA-The Distributor of the Future
Medical-Surgical Distribution
Is the landscape changing?
Does the landscape need to change?
Change will affect us.
We can impact change.
Potential Market Drivers…
WHAT
Potential Market Drivers
• Europe 10-15 years ago – new
warehousing
• no large pan distributor
• 3PL – broad statement
• would warehouse anything, selling service
• would not own inventory but would manage it
• would market, collect the money, report
• brought forward with the advance of
computer systems and bar codes
• popping up all over/extremely efficient
Potential Market Drivers…
By 2007, estimated that more than 75%
of commodity products distributed by
the medical-surgical distributor will
come from outside the United States.
Potential Market Drivers…
Wall Street Journal, July 5, 2005
• Omnibus facilities (outsourced warehouses) are
increasing as way stations in the global, just-intime economy
• cost cutting
• shifting of production offshore
• $89.4 billion third-party
logistics industry
• 16.3% increase in 2004 revenue
for the U.S. warehouse and
logistics sector
• distribution warehousing/the
next arena of corporate reengineering and cost-cutting
Source: Wall Street Journal, July 5, 2005
Potential Market Drivers…
• Key Players
• C.H. Robinson Worldwide, Inc.
• Penske Logistics LLC
• United Parcel Service, Inc.
• DHL
Source: Wall Street Journal, July 5, 2005
Potential Market Drivers…
• ODW Logistics, Inc.
• operates in Columbus, Ohio (third largest port
•
•
•
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of entry for textiles in U.S.)
warehouses in Dallas; Chicago; Urbana, IL;
Battle Creek, MI
515 employees
expects revenue to increase 38% in 2005 from
$35M
located along transportation corridors
Source: Wall Street Journal, July 5, 2005
Potential Market Drivers…
• ODW Logistics, Inc. …
• Ralston Foods will use ODW to meet Wal-
•
•
Mart’s demand for RFID/rather than Ralston
making the investment they and other ODW
customers will share the expense
Edwards Lifesciences Corp. chose ODW two
years ago – 90% of product shifted to ODW
Demanding customers (customer order in by
4pm Eastern for next day delivery – 3 hours
to pack/ship 400 items)
Source: Wall Street Journal, July 5, 2005
Potential Market Drivers…
• UPS Opens New Logistics Facility To
Serve Healthcare Industry
• press release, Louisville, Sept. 30, 2005
• 500,000 square-foot distribution center
• more accessibility to pharmaceutical, medical
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•
•
device, and equipment companies
located near company’s Worldport global air hub
25th UPS facility in North America dedicated to
healthcare
can deliver to mass market retailers,
pharmacies, healthcare facilities,
and consumers
Potential Market Drivers…
• Suppliers of physician preference
products are maintaining a limited
supply chain
• tend to only ship direct
• desire to maintain their
relationship with the end
user/decision maker
• desire to control their destiny
to profitability
• shifting of investor funds from
the pharma sector to devices
• medical devices have quick
product cycles but device
companies develop lasting
relationships with customers
Potential Market Drivers…
• Manufacturer models are changing
Johnson & Johnson
• December 2003 – Change in J&J’s distribution policy – would
sell only to U.S. wholesalers that buy its products only from
J&J. Aim to eliminate secondary market
• April 2005 – J&J products stocked in their new 400,000+
square foot warehouse in Memphis, TN, next to Federal
Express
Today, estimated they are shipping 20% of their Wound
Closure-Endomechanical direct from Memphis versus
virtually 0% over a year ago
Potential Market Drivers…
• E-Commerce
• Hey dot.com what’s your value
•
proposition?
GHX
– Purpose is an
–
affordable portal
In the product
business and
wanted to protect
the interests of the
manufacturer and
provider
Potential Market Drivers…
• IDN Maturation
• Focused on supply
expense management
• Deflation of product cost
• Looking at distribution
options
– shift of products from med–
–
–
–
surg to pharma
outsourcing to distributor
self-distribution
leveraging better deal with
existing partner
aggregating business on a
geographic basis
Profile: Sisters of Mercy Health System
Member Facilities
• 18 acute care hospitals
• 1 heart hospital
• 818 integrated physicians
• Managed care organization
Mercy Health Plans
• Community-based Outreach
Mercy Ministries of Laredo
In Arkansas:
St. Joseph’s Mercy Health Center, Hot Springs
St. Edward Mercy Health Network, Fort Smith
Mercy Health System of Northwest Arkansas, Rogers
In Kansas:
Co-workers
Physicians
Inpatient Discharges
Outpatient Visits
Mercy Health System of Kansas
In Missouri:
St. John’s Mercy Health Care, St. Louis
St. John’s Health System, Springfield
In Oklahoma:
Mercy Health System of Oklahoma
26,000 FTES
3,100 (818 employed)
Acute: 143,579
Total: 158,943
4,979,788
Emergency Room Visits
428,257
Charity Care,
Medicare Allowances
And Community Benefit
$144.1 million
Beds
4,119 total licensed beds
(3,232 acute)
Information current for Fiscal Year 2004, ending June 2004
Our Structure…
Group Purchasing
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Supply and Pharmaceutical Contracting
Capital Equipment Contracting
Contract Compliance Monitoring
Rebate Management
Pricing Administration
Member Services
Facilities
•Consolidated Services Center –
Springfield, MO
Supply Chain Management
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Consolidated Services Center
Inventory Management
Pharmaceutical Repackaging
Purchasing
Customer Service
Optimization Management
Transportation Management
Performance Consulting
 Clinical Resource Optimization
 Pharmacy Performance Improvement
 Process Performance Improvement
•Corporate Office – St. Louis
Co-workers
Net Revenue
142 FTEs from varied clinical and
business disciplines
$200 million
ROi helps Mercy with innovative
solutions that improve the costeffectiveness, quality and safety of
care through tactical and
intellectual resources fortified by
aggregation, teamwork, and
shared values.
The CSC Operation…
Springfield, MO
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101,000 Square Feet
Air conditioned
Refrigerated Storage
Frozen Storage
Controlled Substance Cage
and Vault
Suitable for all Healthcare
supply storage needs in one
facility
Pharmaceutical Repackaging
Operation
Customer Service on-site
Comparison of Distributors to ROi
Motivation
Traditional Distributor
Goals
Capital
Configure facility to support
their core service (med surg,
linen, pharmaceutical, etc…)
Configure facility to support
all system and affiliate
supply needs and goals
Stocking Logic
Only stock goods that move
frequently
Stock the goods needed to
support system and affiliate
needs
Service
Provide service equal to
competition or generally
accepted standards
Provide service that meets
the expectations of Mercy
and other affiliates
Financial
Maximize profit
Remain cash neutral
Representation
Consistently reducing staff.
On-site representation with
deeper knowledge of
business and customer
needs - a service focus, not
sales
Decision making remotely
located
QUESTION: How large of a
distributor is ROi?
According to the Health
Industry Distribution
Association’s membership
of over 200 distributors, the
distributed volume through
the CSC ranks ROi in the
top 10 largest Healthcare
distribution companies in
the nation.
$180,000,000
Membership Listing
1.
2.
3.
4.
5.
6.
Cardinal Health (Allegiance)
Owens & Minor
Fisher Healthcare
MeKesson Medical-Surgical
Henry Schein, Inc
PSS/World Medical, Inc
+$1,000,000,000
+$1,000,000,000
+$1,000,000,000
+$1,000,000,000
+$1,000,000,000
+$1,000,000,000
7.
8.
9.
10.
11.
Burrows Company
Midwest Medical Supply
Resource Optimization
Professional Hospital Supply
Seneca Medical, Inc
12.
13.
14.
15.
Buffalo Hospital Supply Company $50,000,000 - $100,000,000
Medical Specialties Distributors $50,000,000 - $100,000,000
NeighborCare
$50,000,000 - $100,000,000
Pharmed Group Corporation
$50,000,000 - $100,000,000
$100,000,000 - $250,000,000
$100,000,000 - $250,000,000
$100,000,000 - $250,000,000
$100,000,000 - $250,000,000
$100,000,000 - $250,000,000
Potential Market Drivers…
• GPO
• deflation of product cost – impacts
•
•
•
•
distributors margins in the cost plus
model
move away from sole source – increases
contract administration for the distributor
government impact on administrative fees
– potential shift
pressure to drive increased value for
members
exploring non-traditional opportunities
Potential Market Drivers…
• Impact of boutique distributors (e.g.,
Suture Express)
• Reduction in secondary source buying
• U.S. fuel prices up from a year ago1
• Gasoline up 24.4%
• Diesel up 22.4%
Source: 1eia.doe.gov 4/17/06
Potential Market Drivers…
• U.S. Truck Driver Shortage
• long-haul, heavy-duty
• predict shortage of 111,000 by 2014
• wages, away from home, unpredictable
•
schedules
next decade
– supply will grow at 1.6% annual rate
– demand will grow at 2.2% annual rate
(320,000)
– retirement (219,000)
Source: American Trucking Association
Potential Market Drivers…
• Pharma distribution
• shift of products from med-surg
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•
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to pharma (e.g., contrast media;
hemostatis; IV solutions/sets)
move from forward buys to
drug manufacturers paying fees
for service
Medicare drug benefit
onslaught of new generics
anticipated that 20-30% of
vendor margin driven by price
inflation
YTD branded price inflation
solid, second half trends and
beyond less clear
Potential Market Drivers…
• Distributors moving to protect their
margins
• private label 2x the margins of standard
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•
•
•
•
distribution
self-manufactured 3-5x the margins of
standard distribution
buying small manufacturers
low unit of measure programs
pushing to migrate to activity based
exploring non-traditional opportunities
Cardinal Health Inc. (CAH)
• $74.9B in sales (2005)
• Cost reductions, restructuring to drive
earnings
• 50 plus past acquisitions have not been integrated
• working to consolidate/outsource IT to India
$20M annual savings estimated
• integrating financial functions
$25-35M annual savings estimated
• integrating HOUR functions and outsourcing
transactions
$10M annual savings estimated
• consolidation of customer call centers
$5-15M annual savings estimated
Source: Merrill Lynch, April 19, 2006
Cardinal Health Inc. (CAH)…
• Expansion opportunities
• CAH views as key driver of future growth
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–
–
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today 10% or so of EBIT is international
2010 20% of EBIT could be international
likely Canada and Europe
most immediate in CTS and med-surg distribution
• April 17, 2006 R. Kerry Clark succeeds
Robert D. Walter as chief executive
Medical-Surgical Distribution
Is the landscape changing?
Does the landscape need to change?
Thoughts…
Discussion…