AmeriSource Renovates Distribution Network To Handle Novation Contract

AmeriSource is beginning a program to upgrade its network of 21 drug distribution centers.

The drug wholesaler has "completed a comprehensive review of our distribution center network and finalized plans for a multi-year investment program to expand, upgrade and in some cases relocate existing distribution facilities," Chief Operating Officer Kurt Hilzinger told a Nov. 2 conference call.

In fiscal 2000 (ended Sept. 30), AmeriSource completed converting all of its facilities to a single information technology platform. The company had seven separate IT platforms two years ago.

The company has also centralized procurement, "which has improved our supply-side margin contribution, reduced replenishment inventory days on hand, and positioned us to provide value-added solutions to our customers and suppliers," AmeriSource said.

The upgrade initiative will focus on having facilities "in the right places and having our facilities the right size for those market opportunities," Hilzinger said. AmeriSource still has "some consolidation opportunities within our network" as well as "some relocation opportunities" and "straight upgrade opportunities to get production efficiencies."

AmeriSource estimates that by implementing a company-wide warehouse management system, it can save $35 mil. based on $10 bil. in sales. Changes will include "enabling our facilities to operate in a paperless environment with radio frequency technology, eliminating redundant steps, reducing error rates on pick and ship items, and putting in production efficiency standards," Hilzinger said.

Bergen Brunswig also discussed changes to its distribution network during its Nov. 3 conference call. Four distribution facilities will be consolidated into larger facilities by April. The Albuquerque facility was consolidated into Phoenix as of Oct. 1. In addition, facilities in Portland; South Bend, Ind.; and Raleigh, N.C. will be consolidated into nearby operations. The company will have 27 distribution centers after the consolidation.

AmeriSource cited new Novation contracts as a factor in its facility upgrades. The company was named one of the hospital group purchasing organization's three national wholesalers in the spring, resulting in hospital contracts that will add "over $500 mil. in incremental annual revenue beginning during this first quarter of 2001," CEO David Yost said.

In the fourth quarter, "we committed to opening a new distribution center in Atlanta to serve a significant new Georgia-based hospital business awarded to AmeriSource as part of the Novation rollout," Hilzinger said.

Two facilities acquired through the acquisition of C.D. Smith have already been upgraded with the goal of serving health systems clients.

The former C.D. Smith facility in St. Joseph, Mo. was expanded "so that for the first time, it could begin servicing the health system customer segment," Hilzinger explained, "and we completed a renovation and modernization program at C.D. Smith's Boston facility, both in time for the Novation rollout."

AmeriSource apparently passed on one expansion possibility near its mid-Atlantic base. New Jersey-based Neuman Distributors, which filed for bankruptcy in April, represents a potential acquisition near AmeriSource.

Neuman's bankruptcy can be traced back to a recent construction and expansion program involving a new distribution center, which ended up costing more than expected. During the 1998 Federal Trade Commission wholesaler merger trial, Neuman said it would spend $20 mil. to equip the new facility. The defendants in the trial touted Neuman and C.D. Smith as two regional wholesalers that could easily expand to become national competitors.

Regarding the drug reimport legislation signed into law Oct. 28, Yost echoed the sentiments expressed recently by McKesson and Bindley Western (¹ (Also see "McKesson, Bindley Cautious On Rx Imports; Larger Opportunity Is Medicare" - Pink Sheet, 30 Oct, 2000.)). The legislation "will not be impacting our industry anytime soon," he said.

Yost added that AmeriSource would be in a "great position" if reimportation develops into a viable source of products. AmeriSource would be ready to take advantage of reimporting because it "recently nearly doubled the capacity" of its repackaging operation, American Health Packaging.