The older I get, the more surprised I am by the major changes happening in the world around me. This year has definitely been one of rapid change.
The demise of National Linen from the leading commercial provider of healthcare textiles to a footnote in history represents a classic case study of management mistakes. I’m hopeful that someone with first-hand knowledge will write the definitive case study on what happened. My fear is that if this isn’t done, then we’ll see other companies make the same mistakes.
From a distance, I’ve noticed several factors that may help explain why such a proud company no longer exists. The first is the very nature of the textile rental business. It’s not a high-profit-margin business and never has been. It requires careful attention to all the details in order to make a profit.
Bill Webb once pointed out that a worker in a commercial laundry works 54 minutes out of every hour just to cover their salary expense. The last six minutes represent the company’s profit. It’s management’s responsibility to make sure that the company gets the most out of its six minutes every hour.
The hospital healthcare market is particularly difficult to handle because of the large number of line items needed to service the facility. This represents a major investment in linen and increases production costs.
Making money in this market segment requires knowledgeable management and customer service staffs. Effectively handling hospital linen is more about developing a partnership with a hospital than it is with any other type of customer.
Hospitals are constantly evolving and changing to meet new governmental regulations or technology. Advancements in medical technology and reusable barrier surgical linen have created new opportunities for business. A laundry must be willing to change with the times in order to properly service this market on an ongoing basis.
The constant need for capital to keep up with new textile items or to bring on new customers has often caused management to make short-term decisions with unexpected long-term consequences.
First is to lessen the quality of the linen purchased for the hospitals. This temporarily expands purchasing power and temporarily removes financial stress. But once a laundry goes down this path, it’s almost impossible to reverse this action. Within a year and a half, replacement costs will escalate to the same level or higher than they were previously. The lower-quality item won’t last as long as the higher-quality item, thus requiring larger purchases.
Their choice is to either go back to purchasing the higher-quality item at greater cost or further reduce the linen quality to increase purchasing power. Too often, this becomes a never-ending downward spiral. As the cost crunch becomes more severe, management tries to cut back on total purchases and stretch the existing inventory.
The next effect of lowering quality will be unhappy customers. Some will choose to go with a different company, thus lowering revenues. Lower revenues drive more short-term economic decisions that lead to more quality problems and more lost customers.
In an attempt to turn things around, top management often resorts to reducing costs by cutting a number of key management positions. The expertise that built the business and, if unleashed, could most likely turn it around is sent packing. A company is clearly in significant trouble when it resorts to this step.
The National Linen story represents just one change in the marketplace this year. Angelica reduced its management staff and altered its sales approach. JohnsonDiversey left the U.S. laundry market. Kimberly-Clark announced a potential shortfall in certain personal protective items and made plans to ration its supplies.
Rapid change also presents additional business opportunities, which I’ll address in the future.