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A Shot in the Arm for Owens & Minor

The medical-supplies distributor is winning new business and cutting costs with the help of a customer-friendly data warehouse.

1Dec

Last May, Owens & Minor Inc. suffered the kind of setback that leaves even the strongest company reeling. The Richmond, Virginia, distributor of medical and surgical supplies unexpectedly lost its biggest customer, Columbia/HCA Healthcare Corp., to rival McKesson Corp. (which offered to throw in pharmaceuticals for the giant hospital chain). Canceled was an annual contract that generated $360 million in sales in 1997-- more than 10 percent of the $3.17 billion company's annual revenue. Overnight, Owens & Minor's stock plunged 23 percent. "This is a bump in the road," remarked senior vice president and CFO Ann Greer Rector, "but it's a 10 percent bump."

Fast forward to October. Owens & Minor received another piece of startling news--but this time, it was something to cheer about. Results for the third quarter were in, and although sales were down 2 percent from the same period a year earlier, profits had increased by 2 percent, and earnings per share had risen 25 percent. Just five months after losing Columbia/HCA, Owens & Minor seemed back on track, in profitability if not sales growth.

Chairman and CEO G. Gilmer Minor III attributed the remarkable showing in part to the company's ability to keep a lid on operating expenses. In particular, company managers point to a relatively new tool in the distributor's medical kit. Since 1997, Owens & Minor has been using a data warehouse to mine sales, inventory, and accounts receivable data for cost-saving opportunities. The warehouse has enabled the company to excise millions of dollars from its supply chain, reports Jim Grigg, senior vice president of supply chain management.

But the data warehouse's benefits accrue to the top line, too. Owens & Minor uses the warehouse to help it improve the operations of its trading partners, and it recently began giving some partners direct Internet access to the warehouse. Such information sharing is winning the hearts and wallets of customers. This year, for example, one hospital customer cited the data warehouse as the primary reason for giving Owens & Minor an additional $44 million in business, says Jack Clark, senior vice president of sales.

As of mid-October, Owens & Minor had garnered about $120 million in new business, according to Clark, and the data warehouse was instrumental to that success. "I can't say it was the most important thing," he says. "It's very hard to quantify exactly." But, he adds, "the more precise and specific the reports [we can give customers], the better."

Scalpel-Thin Margins

To understand Owens & Minor's business is to understand how a data warehouse can provide a competitive boost. The distributor buys about 130,000 different products from some 1,400 suppliers--everything from Band-Aids to needles and syringes to surgical gowns--and sells them to more than 4,000 hospitals and alternate health-care providers. Supplies are distributed from 43 facilities nationwide. The company also takes title to inventories, relieving customers of carrying costs and delivering supplies to them on an as-needed, where-needed basis.

Operating margins are scalpel thin--about 2.3 percent, says CFO Rector, who adds that gross margins for 1998 are a comfortable 10.3 percent--but Owens & Minor has become a Fortune 500 company on the strength of those margins and a steady flow of new business. "We survive on the high turnover rate of our assets, receivables, and inventory," observes Dick Bozard, vice president and treasurer. The company keeps a relentless focus on lean operations and customer service. Owens & Minor provides labeling and bar coding to help hospitals capture usage data, assists them in analyzing their inventory and logistics requirements, and offers continuous replenishment programs.

The common denominator in all these efforts is information: the more detailed and timely it is, the bigger the potential savings from suppliers and the better the service for customers. Trouble was, the information on Owens & Minor's mainframe transactional systems was devilishly difficult to access and analyze. If, say, accounts receivable wanted to determine the company's exposure for a large customer with hundreds of locations around the country, an IT staffer had to write a program to pull that data together. But before that could happen, a formal request had to be submitted for review by a committee to make sure it was a proper priority. It could take anywhere from two weeks to two months for a request to be fulfilled.

The desire to unlock critical data from the mainframe drove the decision by top management to build a data warehouse, in late 1995. The goal was "to turn information into knowledge into profit," recalls Don Stoller, director of decision services. The warehouse would provide a single view of the supply chain, a single point of contact for decision support. Stoller was hired in September 1996 to oversee its development, working closely with top managers representing the warehouse's major internal customers.

Stoller knew the company's initial decisions about the warehouse's design would be the most important ones. A data warehouse is a complicated, risky undertaking. An enterprise warehouse is almost by definition a multimillion-dollar project with no end in sight. It's no surprise that deadlines are frequently missed, budgets exceeded, and goals changed. Data marts, stand-alone warehouses that service particular subject areas or business units, have been touted as cheaper, faster, and more effective ways to provide decision support (see "Going Down to the Data Mart," CFO, December 1997). But data marts have also come in for criticism--for re- creating silos of information with inconsistent data, for their vulnerability to business change, for high maintenance needs.

Owens & Minor decided to square the circle by building an enterprise warehouse essentially one data mart at a time, using a consistent, unified architecture. The plan was to prioritize and roll out individual subject areas one by one, beginning with sales and marketing, and eventually put the entire supply chain in the warehouse.

"We'd pick our subject area and look at it as a separate data mart," says Stoller, but each subsequent subject area would be integrated with the previous one, sharing the same product and supplier tables, the same data definitions and dimensions. Stoller and the company's data warehouse consultant, Talus Inc., would work closely with business teams to ensure that the warehouse would deliver information of real value and be easy to use. With this approach, the rewards would be immediate, and the risks would be minimized.

"Show Some Value"

The project began in late 1996. Stoller was given a budget of about $750,000 and a mandate to "show some value" from the data warehouse by the end of Q1 1997. About $250,000 went toward a Hewlett-Packard server; another $220,000 was spent on a 300-user license for Business Objects S.A. OLAP (online analytic processing) software, which employees would eventually use to extract and analyze warehouse data. Software tools were needed to manage the movement and transformation of transactional data from the flat and sequential files used by Owens & Minor's IBM mainframe into the relational, "star schema" format of an Oracle database; Stoller paid $75,000 for Informatica's Powermart suite. (Since the company was already an Oracle user and had plenty of room left on its license, the database software was essentially paid for.) Most of the rest of Stoller's budget went to Talus.

Spending money was the easy part. The hard part, each time a subject area was rolled out, was to make sure all the data in the warehouse was clean and consistent, and that definitions were consistent across all reporting systems. Names of trading partners would have a single, agreed-on form; product categories would be uniform; and financial and performance measures would be calculated the same way.

"We set up quality teams," says treasurer Bozard, who insists that "people enjoyed sitting down and resolving these things. For example, take receivables. What's the DSO [days sales outstanding]? There are about five or six commonly used formulas. How do you calculate the base in inventory, or inventory turns?" It took time to hash out these issues, but in the end it was worth it, says Bozard, giving finance "more of a quality, standardized product going forward."

The importance of data integrity can't be overstated, comments Rector. "You have to make sure that transactional systems and the warehouse are in sync," she warns. "You don't want the fiasco of reconciling the two."

Work on the sales prototype began in November 1996 and was finished by the end of December. "We used tools to build quick tables, put Business Objects on top, and got it out to users," says Stoller. "Then we refined the design, and by the end of January, we finished the design." By April, sales had 20 users on the data warehouse. Today, about half of Owens & Minor's 300 sales staffers are trained on the warehouse, and can tap into it from their laptops in the field via the Internet. Sales data dating back to January 1996 is warehoused; at a minimum, three years' worth of data will probably be stored going forward, according to Stoller.

The warehouse grinds data fine; every line item on every invoice is captured. Each sales transaction includes a string of dimensions-- the customer, purchasing group, supplier, product, price, number of lines, number of units, whether the order was filled, and so on. This makes it easy to "pull customer- specific reports, sliced and diced just about any way the customer wants them," says Jack Clark. "We can pull them directly to the hospital, or any other facility, right down to the floor level. We analyze what's being used, and how it may or may not comply with contracts. You can look at what they buy, how they buy it, how often they buy it, and recommend a more effective way to do it."

A typical Owens & Minor customer buys about 30 to 40 percent of its supplies off-contract, says Clark, which results in higher prices than contract purchases. But with the information gathered in the data warehouse, "we can help them organize [off- contract purchases], consolidating vendors and getting better prices, or getting cheaper supplies from fewer vendors."

Lowering The SKU Count

The next subject area rolled out was inventory, in mid-1997. For years, Owens & Minor has helped its trading partners streamline their order- and inventory- management processes, offering continuous replenishment programs and stockless distribution (delivering supplies directly to the places where they are used in a hospital). The company's supply-chain consulting has been supported by a mainframe-based distribution system and client/server-based forecasting and warehousing software. None of these systems, however, is specifically designed for data analysis.

The warehouse is a "surgical blade" for analysis, says Grigg, and thus enables Owens & Minor to take even more costs out of the supply chain. "We've established cross- functional teams with our suppliers and used the data warehouse to pull together all the information to make us operationally more efficient," he says. Coupled with the company's Manugistics forecasting system, the warehouse has increased the level of customer service while reducing safety stock. In the field, the percentage of filled versus nonfilled product lines can now be quickly identified.

The number of suppliers has been reduced, from 3,300 in 1996 to 1,400, lowering product and procurement costs; 100 suppliers account for 98 percent of the distributor's business. Similarly, the warehouse has allowed Owens & Minor to simplify its supply offerings, lowering the SKU count from 330,000 to about 130,000. This has not only reduced product, inventory, and distribution costs, but IT expenses as well--since operation of the mainframe is outsourced, the company knows exactly what it costs per SKU to manage its inventory. "We use a sequential file for the inventory," notes Grigg, "so instead of clicking through 330,000 items, we now click through only 130,000."

Aspirin and Sales Tax

The third subject area added to the data warehouse, accounts receivable, helps the company analyze and develop its customer base and manage risk. A customer that currently has a $2 million exposure may have room for a $10 million line of credit. "Likewise, the reverse," says treasurer Bozard; "we could be planning a marketing program with someone that has no future." Managing risk is crucial in the rapidly shifting health-care landscape, as nonprofit hospitals convert to for-profit businesses, insurers and HMOs step up cost- containment efforts, and regulators stiffen claims enforcement. When a for-profit hospital goes bankrupt, distributors like Owens & Minor are saddled with the exposure.

Another thorny concern is sales taxes, which vary from state to state, county to county. To illustrate the complexity involved, a doctor may prescribe an aspirin and no sales tax is incurred; but if a patient asks a nurse for aspirin, that may be a taxable transaction. The warehouse segregates transactions involving sales taxes from those that don't, enabling analysts to deliver extremely accurate reports and settle differences with hospitals.

Still another use of the A/R data mart is to make sure that customers pay what they agreed to pay--not always easy, given the distributor's multitiered pricing structure and the participation of many customers in purchasing groups. "Margin management is one of our profit areas," says Bozard.

The Value of Wisdom

Three more subject areas have since been added to the warehouse--purchase order and receivings (data from suppliers), sales budget information, and customer account fees--making six in all. Next in line is contracts and pricing; after that, subject areas will be added according to demand and need. "Don [Stoller] has created a monster--everybody wants more and more and more," says Ann Greer Rector. An executive information system feeding off the warehouse is in development. There is talk about rolling the general ledger into the warehouse in 1999--and even, sometime down the road, populating the GL with data from the warehouse. "To an accountant, that's blasphemy," says Rector. "If you had told me when I was head of general accounting [at Owens & Minor] that we'd do that, I wouldn't have believed you. But we've learned that the warehouse data can be even lower-level [than the GL]."

Meanwhile, the company is opening up the warehouse to internal customers via intranet and to trading partners via extranet, using Web Intelligence software from Business Objects. A felicitous acronym was coined: WISDOM, for Web Intelligence Supporting Decisions from Owens & Minor. "We're in a pilot mode, with eight customers and five suppliers interactively running queries against the warehouse," says Stoller. "We feel that's going to give us a competitive advantage, cement our relationships." Customers will use warehouse data to better understand and take costs out of their end of the supply chain--analyzing how they use supplies, defining efficient versus nonefficient suppliers. "We'll be able to influence purchase decisions with the supplier," says Grigg. "We intend to help people change the way they do business."

For its accomplishments, Owens & Minor was given a best practices award by the Data Warehousing Institute, a professional organization, and an excellence award by Business Objects. But more remunerative recognition is coming in. On October 28, Owens & Minor announced it had signed an eight-year distribution agreement with Tenet Healthcare Corp.--brand-new business, estimated at $250 million annually and $2 billion over the life of the agreement. Among other things, Tenet wants to manage its noncontract purchasing more efficiently, says Rector, and the data warehouse will help it do that.

At Owens & Minor, the blemish on the income statement left by Columbia/HCA is beginning to fade. New business, after all, is the best medicine.

----------------------------------------------- --------------------------------- Vital Stats

Owens & Minor's Data Warehouse

Subject Areas

1. Sales
2. Inventory
3. Accounts receivable
4. Purchase order and receivings
5. Sales budget
6. Customer account fees

Configuration

Database: Oracle 8.0.4
Size: 100GB
Server: HP T520 (4 CPUs, 2GB RAM)
Storage: EMC 3430 (300GB capacity)
Source Data: IBM Mainframe (DB2, VSAM, IMS)
Query Tool: Business Objects, B.O.
WebIntelligence
Users:300
End-User Platform:Windows NT (desktops & laptops)
Web Server: Microsoft IIS
Y2K Issues: None

Annual Maintenance Costs*
Salaries: $350,000 (6 FTEs)
Software Maintenance: $75,000

*For 6 subject areas and 300 users

Source: Owens & Minor Inc.

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