Medline Industries to Improve Medical Gloves Profit

Case Type: improve profitability.
Consulting Firm: Bain & Company 2nd round full time job interview.
Industry Coverage: healthcare: hospital & medical.

Case Interview Question #00824: Your client is Medline Industries Inc. Based in Mundelein, Illinois, United States, Medline Industries is a leading manufacturer and distributor of health care supplies such as medical gloves. Their customers include hospitals, surgery centers, physicians’ offices, extended care facilities, and dialysis centers.

The client Medline Industries Inc. sells its medical glove products directly to hospitals and medical centers in two segments. The first product segment is “exam gloves”, which are single gloves that come in Kleenex boxes. They are disposable and made of latex. The second segment is surgeon gloves, which are used in operating rooms. They come in pairs and they must be of high quality and sterile.

The client has come to you because their medical gloves profit and revenue growth has been slower than that of the competition. They want to know how they can fix this, and in general, how they can improve shareholder value. How would you go about this case?

Additional Information: to be provided to candidate after relevant questions

1. Client’s growth rate: 2% per year

2. Product Segments

3. Exam glove segment:

* 15-20 competitors
* Client is market leader with 30% market share
* Company A has 20% market share
* Company B has 10% market share
* 15 smaller players, most of them new entrants, control the rest of the market.
* Price has been falling somewhat, margins are being squeezed 7-8% growth.

Important: growth comes from new customer segments (police department, fire department, etc. who have a need for such gloves given increased fears of HIV and other diseases, new safety standards).

4. Surgical glove segment:

* 3 major players
* Client is market leader with 50% market share
* Company B has 30% market share (same company B as above)
* Company C has 20% market share (they do not sell exam gloves)
* 2% growth
* stable prices
* Both company B and C are growing faster than us.

Important (do not give this piece of information away unless specifically asked): not all surgeons have the same needs when it comes to gloves. For example, some need thicker gloves (e.g. bone surgeons) than what is currently available, so they use 3-4 pairs of gloves, one in the other.

5. Client’s Cost Structure:

Variable costs
* Raw materials is 60% of variable cost. This is mostly the cost of latex, which is a commodity. The client has maximized any purchasing economies of scale due to its size.
* Labor is 20% of variable cost.
* Overhead is 20%.

Fixed costs
* We have a plant in Malaysia, where we produce the gloves, similarly to competitors.

6. Manufacturing issues:

* Surgical gloves are more difficult to produce because they need two molds instead of one, the fingertips need to be bent, sterilization is a bigger issue and thickness is higher.

7. Sales issues:

* We sell to all major hospitals in the US and we have reasonably far-reaching operations abroad.
* We have good relationships with the hospitals we sell to.
* Hospitals have need for many different accessories, not just gloves: gowns, tablecloths, masks, needles, scissors, etc.

Possible Solution:

First, state how (by what measure) you will maximize shareholder value and list the factors impacting that measure that you will have to look at.

Important (many people miss this): Prioritize which product segment to look at first by calculating the current profit made in the exam glove segment ($4.5 M) and the surgical glove segment ($25 M):

* Surgical glove segment: 200 M * $0.50 * 50% * 50% = $25M
* Exam glove segment: 1 B * $0.05 * 30% * 30% = $4.5M

Identify the key issues that need to be addressed in each segment (with a greater focus on the surgical glove segment):

* Surgical glove segment: we are not leveraging our dominant position and good relationships in this market. Growth is lagging behind our competitors.
* Exam glove segment: our margins are being squeezed and we are not serving the new growth segment that is outside hospitals.

Recommendations:

Surgical glove segment:

* Innovate with existing products. E.g. do a survey of surgeons and assess their needs. Introduce product modifications, e.g. a thicker gloves for bone surgeons.
* Cross-sell new products (e.g. masks, tablecloths, gowns) with high profit potential by forming alliance with or acquiring manufacturers of these items. Talk about trade-offs of such a diversification strategy (management time, organizational issues, cost-accounting with SKU proliferation).

Exam glove segment:

* Sell to the new growth segment of police and fire departments through established distribution channels.
* Consider out-sourcing manufacturing of exam gloves to increase management attention on profit-making business and perhaps even cut manufacturing costs.