Distributors, Sometimes Controversial, but Nearly always a Necessity for Manufacturers


Other than their relationships with their bankers and their shareholders, the ties between medical device, supply and equipment manufacturers and their distributors are probably the closest. Even those manufacturers able to employ a direct sales force rely on their distributors for crucial logistical and sales help that can make or break a customer link. Although large manufacturers commonly lean heavily on their distributors, smaller manufacturers in particular need distributors to perform several important functions. Whether manufacturers like it or not, hospital customers often view the performance of a manufacturer in conjunction with the work of its chosen distributor. It does not appear to matter to hospital customers whether the distributor is an independent “mom and pop” specialty distributor or a giant, national, publicly traded full line med/surg and pharmaceutical distribution operation. The stakes for distributor performance are as high as can be. Although the nature of the industry generally makes exact statistics nearly impossible to pin down, estimates are that U.S. med/surg distributors handle as much as 75% of all med/surg products pushed through the supply channel. That translates to about $28 billion through distributors out of approximately $35 billion in total volume, says Chris McFadden, an analyst with Wheat First Securities (Richmond, Virginia). Distributors Help Kimberly-Clark Forge Place among IDNs It isn’t only the smaller manufacturers that enlist the support of distributors. Because several large IDNs are beginning to delegate purchasing decisions for non-clinical products to their distributors, Kimberly-Clark Professional Health Care (Roswell, Georgia) utilizes its close relations with distributors like Owens & Minor Inc. (Richmond) to capitalize on that trend. “It helps us get into an IDN with our clinical products if a distributor has a strong relationship with that IDN for non-clinical products,” says Eric Leichty, Kimberly-Clark’s national sales manager, channel development. Leichty points out a relatively hidden, but critical issue involving manufacturers, distributors and hospitals: Namely, who controls the decision-making process in a hospital. In most cases, GPOs have held their power base and influence over these decisions. But Leichty and others suggest that power and influence is beginning to wane, though many question why this shift has taken so long to develop. “I would have thought that by now distributors would have more to say regarding product decisions,” says Leichty. “Distributors have not done the best job selling their services to IDNs — services that improve efficiencies in ordering, stocking and distributing product to a hospital. Distributors should put together programs for IDNs that show that distributors have more clout and can take more cost out of the system, and try to get out of the cost-plus area. The pressure on distributors’ margins is tremendous, but the majority of contracts are still written on a cost-plus basis, so distributors are scrambling for margin anywhere they can get it.” Leichty says that at the same time, the mad dash for margin creates a drawback in working with distributors: “Our biggest challenge,” he says, “is listening to requests from distributors to help them improve their margin.” So Kimberly-Clark and distributors like Owens & Minor work closely together with their IDN customers. As one example, the two companies combine to develop programs at Partners HealthCare System (Boston) that deviate from pure product sales and focus on product cost and use, standardization and vendor consolidation. Quarterly meetings are held with Partners officials to discuss how to take costs out of the supply chain. Leichty says his company feels that decisions come down to end-use customers making end-use decisions. Following up on that, Kimberly-Clark reps work hard both on their own and in conjunction with distributor reps. It is in IDNs, in fact, where Leichty believes distributor relationships prove most valuable to Kimberly-Clark. Because distributor reps are inside the hospital more often than Kimberly-Clark reps, distributor reps have more frequent contact with materials managers, who often relay product requests from department heads. If Kimberly-Clark follows that strategy, says Leichty, “We’ll be the ones who get the phone call.” Bemis Health Care: “We Want Our Distributors to Call Us” Small manufacturers, even those with their own sales forces, are dependent on their distribution partners for many things. Bemis Health Care Inc. (Sheboygan Falls, Wisconsin), a manufacturer of surgical accessories and a range of other hospital products, is typical of this breed. “Everything we offer is sold through distributors,” says Gene McKeown, the company’s national sales manager. Bemis sells through the ABCO/Starline Dealers Association and several specialty distributors, a mix characteristic of many smaller manufacturers. McKeown says that Bemis depends on its distributor network for chores such as maintaining a locally situated product inventory and more. “Our distributors are an extension of our sales force,” he says. “They have a special rapport at the hospital level.” For example, Bemis’ rep with Owens & Minor helps keep Bemis informed about changes in use patterns at hospitals — key information that cannot be underestimated. “We want our distributors to pick up the phone and call us,” McKeown says. McKeown also turns to his distributor network to help develop a hierarchy of products that can be converted in a hospital. Of course, some products are easily changed out, while others present a greater challenge. “It’s up to our distributor to ensure the right product mix because they are heavily invested in taking cost out of the system,” says McKeown. The greatest benefit in using distributors, he says, is logistics — namely, getting the right product into the market where it is used. As for inventory, McKeown says that dealers’ inventories are more closely managed than they were just a few years ago. Where a distributor previously carried 60 days inventory, he says, 30 days is now the norm. Bemis is currently using a popular approach among manufacturers to better penetrate the IDN market by targeting IDNs that appear to be less heavily committed to their GPO contracts. The Cold War for Product Decisions Kris Heiser, national accounts manager for The Clinipad Corp. (Rocky Hill, Connecticut), a manufacturer of a variety of kits and medical products, describes his company’s relationship with distributors as “critical to our success.” Distributors, he says, “move boxes, ship product, pay on time and influence product decisions.” But even so, some companies are less enthusiastic about some of the strategies and tactics employed by distributor Allegiance Corp. (McGaw Park). The flap centers around crucial information that tracks exactly where a manufacturer’s own products are shipped, and to which customer. Manufacturers use this information to determine how to properly compensate their sales reps. Several months ago, Allegiance began adding a 3% “marketing fee” to manufacturers for this data — a fee that a number of manufacturers are unwilling to pay. Already squeezed on price by the negotiating power of a big GPO, not to mention the additional administrative fees, several manufacturers are balking at paying an additional 3%. As a result, prices extended to GPOs these days are often cloaked in administrative fees as well as the marketing fees imposed by distributors. Some manufacturers also argue that distributors are beginning to move into the territory held by GPOs. Certain distributors, they insist, influence product decisions by substituting product lines, even for those requested by hospitals, in favor of self-manufactured or other favored lines. Some feel that distributors will eventually win this product decision-making Cold War between distributors, GPOs and hospitals. Heiser feels that while GPOs won’t disappear completely, IDNs will increasingly make their own purchasing decisions. Clinipad uses a distinct tactic to penetrate the IDN market. It completes an audit on products used by the IDN, then shows the IDN how it can help consolidate vendors to one manufacturer (Clinipad, of course), and commits to a discount on product. Heiser reports “mixed success” with this strategy, mostly because the majority of IDNs are still unable to standardize on product, even when standardization will benefit their bottom line at a time when many IDNs are struggling financially. Distributors Save Kerma Medical from Ruin Ed Reubel, general manager of Kerma Medical (Portsmouth, Virginia), says he owes nearly everything the company has to distributors, in particular Owens & Minor. The initial plan for Kerma, a small manufacturer of items such as bandages, bonnets, electrodes, and other med/surg items, seemed perfect. Grow the business year-by-year with the help of his wife and partner Joyce Kershaw-Reubel, and by virtue of contracts with the federal government, build sales to about the $2 million mark, then turn it over their children. At first, business did increase: to about $1.7 million in just the first two years. Everything was going well until a report on $100 million in excess or dead inventory held by the federal government aired one Sunday night on “60 Minutes.” That episode led to the cancellation of many contracts, among them Kerma’s, as the government turned to its prime vendor program. Seeking partners, Kerma went to major distributors, and neighboring Owens & Minor picked up Kerma’s lines, literally raising Kerma from the ashes. Using Owens & Minor’s contracts and contacts with GPOs like Novation (Irving, Texas) and Premier, Kerma benefited greatly from this relationship. In 1995, revenues from its Owens & Minor trade soared to $200,000 from zero in 1994. Now, Owens & Minor generates nearly half of Kerma’s estimated $2.6 million annual revenues. Reubel says that thanks to contracts with Novation, Premier, Columbia/HCA (Nashville), Consorta (Rolling Meadows, Illinois) and Tenet (Dallas), he believes Kerma, a minority-owned operation, is in a “$13 million position.” The issue now is finding time to sell. Earl and his son have handled sales calls until now, but the time has come to bring in independent reps to help. “Distributors like Owens & Minor are box movers,” Reubel says. “But they have better contacts than anyone else. By using a soft approach and aligning with many sales reps, you can have easier access than you can on your own.”