In the mid-1990s, as part of a re-engineering initiative aimed at squeezing savings from existing operations, the administration of Wausau (Wis.) Hospital asked each department to come up with ideas. Kent Demien, director of materials management for both 218-bed Wausau and Wisconsin Valley Health Network, a group of four affiliated hospitals in northern Wisconsin, saw the challenge as an opportunity to shake up the way his department bought supplies.
In the process, Demien seems to have shaken up the status quo at group purchasing giant Novation.
At the time, Demien was managing a 10,000-square-foot off-site warehouse, distributing the supplies in-house. Then as now, the network used Irving, Texas-based Novation as its primary group purchasing organization, and Health Services Corporation of America (now MedAssets) served as its secondary GPO. Realizing he was spending too much of his time managing inventory and supply distribution, Demien says he was looking for someone to take over those time-robbing tasks so he could concentrate on what he does best-negotiating contracts.
"It takes a materials manager who has guts enough to say, `I'm not a warehouse manager,' " Demien says. "I have to admit, I'm not an inventory expert. Some materials managers get threatened by this."
In his ensuing request for proposals, Demien found a distributor of medical-surgical supplies that likewise thought outside the box: Medline Industries, based in Mundelein, Ill. Implementing a "service center" idea, Medline proposed to assume control of the hospital's warehouse and its employees. The privately owned company could do this because it is really a hybrid-both a manufacturer of tens of thousands of Medline branded products as well as a distributor of more than 100,000 supply items manufactured by other companies.
The proposal came with a guarantee that Medline would save Wausau at least $500,000 during the first 18 months, while Wausau promised that it eventually would purchase as much as $3 million per year in Medline brand products. If the program proved successful, the agreement stipulated that the contact would be extended to the other three hospitals in the network.
It did, and it was. The deal exceeded Demien's expectations. He reports that as a result of the 5-year-old partnership, the Wisconsin Valley network already has saved $2.8 million. Meanwhile, Medline has boosted hundreds-fold what it sells to the network-from $10,000 in Medline brand products to Wausau back when the program started to $3 million for the network last year and an expected $4 million this year, Demien says. In addition, the warehouse space managed by Medline has been tripled.
In a nutshell, here's how it works:
Demien says between the staff of about 12 employees and running the operation, it cost the hospital as much a $350,000 a year to do its own warehousing and distribution. Medline proposed offsetting the warehouse cost by rebating a negotiated rate of 9.2% on all Medline brand sales. For example, in 1999 it cost $345,787 to run the service center while the hospital purchased $2.3 million in Medline products. That resulted in a $215,078 rebate, which was taken off Wausau's bill. So Wausau ended up paying Medline $130,709 to run the service center.
To date, Demien calculates that the network has saved nearly $1 million on warehouse operations alone. Other savings are gleaned from conversion to Medline brand products and reduction of obsolete products on the warehouse shelves and inventory holding costs, the latter made possible by the fact that Medline, not the hospital, now owns the inventory. Demien says if the freed-up money is put in the bank instead of the inventory, it reaps an 8% return.
Just in time
Distribution savings also have been considerable-$1.1 million to date-on Medline's so-called "pick 'n' pack" service in which the company breaks down packages of products into single-unit items at the service center, packs them into individual containers and ships them to more than 40 departments at the hospital. In effect, it's a "just-in-time" program similar to inventory-control measures retailers have successfully implemented.
How can Medline operate this way, considering the notoriously thin margins that dominate the distribution business? Tim Jacobson, senior vice president of corporate programs for Medline, makes no bones of the fact that it helps if you can distribute your own branded products, eliminating the middleman. The company can afford to shave even more from those wafer-thin margins because it can make it up on the other end by selling more Medline-manufactured products.
"We're upfront that in these relationships, we will require a commitment to our brand product," Jacobson says.
If a hospital were to purchase every Medline product available-including textiles, plastics, walkers and crutches, wound-care products and gloves-it would supply perhaps 40% of a hospital storeroom, Jacobson says. Total annual sales for the privately held company topped more than $1 billion in 2000, but he declines to break out how much of that business is generated by the manufacturing arm and how much by distribution. Certainly Medline is distributing more supplies than it did five years ago, but "we are not detouring from our focus of being a manufacturer that sells direct," Jacobson says.
Medline operates about a half-dozen service center contracts for hospital systems throughout the U.S. The company recently signed a contract with St. Louis-based Ascension Health, the nation's largest not-for-profit system with operations in 15 states, although it remains to be seen how many service centers develop out of that, Jacobson says.
For Demien, choosing Medline as a distributor was a no-brainer, considering the savings. So he wonders why it lost its bid to be one of eight medical-surgical distributors selected by Novation last February. As the purchaser at a Novation hospital with a vested interest in Medline, he says he followed the bidding closely and even was part of Novation's selection committee. He claims Medline ranked No. 1 or No. 2, but then Novation officials said they had found "discrepancies" in the process and needed to re-bid it.
After weeks of assurances that Medline would get an award, Demien admits he came unglued when Medline lost out, but Novation eventually agreed to make exceptions for hospitals that, like Wausau, had existing contracts with Medline.
But Demien says it still bothers him that Novation won't let other hospitals take advantage of such a good deal. He believes the distributor contracts eventually were awarded based on money in Novation's pocket.
"My feeling is that Medline is a manufacturer, and there are a lot of products in direct conflict with what Novation wants me to buy," Demien says. "Also, the way Novation stays in business is to get a percentage back from the distributors. If Medline is going to sell (to Wisconsin Valley at such a good rate), there is not a whole lot they can sell to Novation."
Jacobson is more philosophical than his loyal customer.
"We bid it to the best of our ability, and (Novation) made their selection, and we are respectful of the selection they made," he says.
Officials at Novation declined to comment directly, citing a policy to refrain from discussing details of contracts and the contractual process. However, in a written statement, they said: "As always, these contracts were awarded based on a public competitive bid process. Unfortunately, (Medline was) not one of the distributors chosen. Of course, participation in Novation contracts is purely voluntary, and member hospitals are free to use whomever they wish."