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McKesson_ Order Entry and Fulfillment

VIEWS: 15 PAGES: 20

									                        McKesson: Order Entry and
                               Fulfillment




                         •   Background
                         •   Business Process Redesign:
                             Process, IT
                         •   Key Performance Indicators
                         •   Implications
cmpm AOO267ppmmJun93D                                     -1-
MCKESSON: BACKGROUND

McKesson Is the World’s Largest Distributor of
Pharmaceuticals and Health Care Products

  • McKesson’s core division, Distribution Services, is composed of three
    business units:
     - McKesson Drug Co.—leading U.S. distributor of pharmaceuticals and health care products
     - Medis Health and Pharmaceutical Services—largest Canadian distributor of pharmaceuticals
     - McKesson Service Merchandising—largest independent distributor of health care products

  • McKesson has formed other successful businesses using the technology
    and the distribution systems developed in its core business:
     - PCS—third largest claims processor in U.S.
     - Water Products—second largest bottled water company in the U.S.
     - Armor All—leader in the U.S. automotive appearance market




Source:   1992 annual report.
cmpm AOO267ppmmJun93D                                                                             -2-
MCKESSON: BACKGROUND



95% of McKesson’s Revenues Come from Distribution

                      1992 Revenues                                                  1992 Operating Profit
                     Total $10.3 Billion                                              Total $253.9 Million
                   Armor All           PCS                                          Armor All
                       1.4%            1.0%                                            8.4%
                 Water                                                           Water
                  2.3%                                                            9.5%



                                                                              PCS
                                                                             12.2%
                               Distribution                                                     Distribution
                                  95.3%                                                            69.9%




  • Distribution Services has a 27% share of the $36.2 billion pharmaceutical distribution market

  • Between 1987 and 1992, Distribution Services’ revenues increased at a 12% CAGR



                         Operating margins have fallen from 2.3% in 1991 to 1.8% in 1992
                         reflecting mounting industry pressures.
Source: 1992 annual report.
Note: Operating profits exclude restructuring and other non-recurring charges.
cmpm AOO267ppmmJun93D                                                                                          -3-
MCKESSON: BACKGROUND

McKesson’s Operating Margins Are Being Squeezed More
and More

 Pharmacies/Hospitals:                           Government:
 • Increased power due to                        • Reducing rate of
   consolidation                                   pharmaceuticals’ price
 • Increased emphasis on price                     increases through managed
                                                   care strategies
 • Threat of failure of
   independent stores has                        • New Federal health care
   capped price increases                          plans
                                    McKesson’s
                                     Margins




 Manufacturers:                                  Competitors:
 • Increased power due to                        • Intense cost and service
   consolidation                                   competition from Bergen-
 • Threat of vertical integration                  Brunswig

 • Capped forward inventory                      • Formation of regional
   purchases in anticipation of                    competitors into buying
   price increases                                 groups to match purchasing
                                                   power of major players




cmpm AOO267ppmmJun93D                                                           -4-
MCKESSON: BACKGROUND

The Distribution Services Division Seeks Highest
Economies of Scale

  • Consolidated three business units in Distribution Services

  • Reduced the number of distribution centers from more than 100 in 1970 to 40
    by end of 1993

  • Strengthened order fulfillment through fully-automated “Megacenters”:
     - Cover an average area of 600,000 S.F., double that of the old distribution centers
     - Serve large geographic areas
     - Uses automated order fulfillment systems




                        By providing best-in-class supply chain management through intensive
                        use of technology, McKesson plans to be the strategic intermediary for the
                        health care industry.
Source:   1992 annual report.
cmpm AOO267ppmmJun93D                                                                                -5-
MCKESSON: BUSINESS PROCESS

McKesson’s Order Entry and Fulfillment Process Is Cost
Effective and Accurate

         Key Design
        Characteristics                        Specific Examples
       • High capacity       • System manages inventory of over 25,000 SKUs

       • Cost effective      • On-line order entry and automated order fulfillment have
                               dramatically reduced labor

       • Quick               • Orders are delivered to customer the same or next day

       • Reliable            • Data center has power and computer redundancy to
                               ensure zero downtime

       • Accurate            • Orders are fulfilled with over 99.5% accuracy

       • High value-added    • Products are packed according to customers’ aisle
                               layouts, reducing customer stocking time and efforts




cmpm AOO267ppmmJun93D                                                                     -6-
MCKESSON: BUSINESS PROCESS

Distribution and Quality Directors Continue to Improve and Propagate
Best Practices

  Responsibilities include:

    • Optimize order entry and
      fulfillment practices, working
      with employees to develop
      new processes

    • Ensure quick implementation
      of best practices:
       - Update and distribute operations
         manuals
       - Check warehouses’ use of proper
         procedures
       - Train employees on new processes   • Highest Quality Service

    • Design layouts for new                • Most Efficient Operations
      warehouses and configure
      old ones


cmpm AOO267ppmmJun93D                                                     -7-
MCKESSON: BUSINESS PROCESS



McKesson’s Redesign Process Starts with the Customer

   Step 1               Step 2           Step 3              Step 4             Step 5             Step 6               Step 7

                                                           Re-
Identify                              Evaluate                                                   Test
                    Design                                 evaluate
customer                              development                            Identify            process on          Full scale
                    process                                process
need or                               and                                    problems            limited             implemen-
                    to meet                                against
service                               implemen-                              with new            basis and           tation of new
                    new                                    original
improve-                              tation costs                           process             evaluate            process
                    needs                                  customer
ment                                  and benefits                                               benefits
                                                           needs




                                           Do                Does                                              Yes
                      Are IT     No                  Yes               Yes     Are there    No
                                        benefits            solution                                 Is it
                     systems            outweigh                              significant
                    required?                                meet                                  worth it?
                                         costs?             needs?            problems?



                           Yes               No                  No                 Yes                  No




                   Define
                   specifi-
                   cations
                   system to
                   meet
                   customer
                   needs



cmpm AOO267ppmmJun93D                                                                                                            -8-
MCKESSON: BUSINESS PROCESS

The Order Entry and Fulfillment Process Is Heavily
Supported By State-of-the-Art Technology
                   Customer                   Data Center                             Distribution Center


                                                                             • Sort orders by           • Print and insert price
Retailer enters                                                                truck loading              tags
product IDs                                   • Confirm order                  in route/stop
and                                             through voice                  sequence
order quantities                                synthesizer                  • Insert tote on
through                   Automatically
                          transmit order      • Update prices                  conveyor
handheld                                                                       system
electronic order          via McKesson’s        and inventories
                                                                                                        • Route to appropriate
entry devices             800 watts line      • Sort orders                                               loading dock
                          to data center in     geographically
                          California                                                                    • Load truck
                                              • Transmit orders          •    Transport tote to
                                                to distribution               appropriate
                                                centers via VSAT              picking station
                                                satellite                •    Track tote with
 POS terminal or                                communications
                                                system
                                                                              barcode                       • Deliver to customer
 other inventory                                                              scanners
 tracking system                                                                                            • Acknowledge
 orders product                                                                                               delivery with
                                                                                                              portable data glove

                                                                        • Place products in tote
                                                                        • Update inventory and
                                                                          order
                                                                                                        • Send invoice
                                                                                                        • Adjust accounts
                                                                                                          receivable
                                                                   No            Order          Yes
                                                                               Complete?




cmpm AOO267ppmmJun93D                                                                                                         -9-
MCKESSON: BUSINESS PROCESS

The Order Entry and Fulfillment Process Is Heavily
Supported By State-of-the-Art Technology (cont.)

Customized IT systems include:


  Economost                   FlexMaster              AcuMax                      MAPS
    • Electronic order         • Semiautomated         • Portable computer         • High-speed
      entry and fulfillment      warehouse               system for directing        automated order-
      system                     management and          manual order                filling system
                                 fulfillment system      fulfillment activities

        - How to reduce           - How to increase       - How to increase           - How to increase
          order entry               stocking and            picking                     picking
          costs?                    picking                 efficiency?                 efficiency?
                                    efficiency?
        - How to enable                                   - How to reduce             - How to reduce
          independent             - How to reduce           picking errors?             warehouse labor
          pharmacies,               warehouse labor                                     costs?
          McKesson’s                costs?
          principal
          customers, to
          compete better?




cmpm AOO267ppmmJun93D                                                                                   - 10 -
MCKESSON: BUSINESS PROCESS

McKesson’s Order Entry Process Asks Customers, not
Staff, to Enter Orders

      Key Characteristics                           Specific Examples

        • Cost effective        • Order entry costs reduced, since customers enter data
                                • Reduces time customers spend on ordering and stocking




        • User friendly         • Barcode scanners allow customers to easily enter
                                  product codes
                                • Voice synthesizers confirm customer data entries


        • High value-added of   • System prints price tags and invoices to retailer
          information             specifications
                                • Each customer receives monthly profitability reports


        • Flexible              • Order entry allows variety of formats (e.g., voice, electric
                                  device, POS terminal, etc.…)

cmpm AOO267ppmmJun93D                                                                            - 11 -
MCKESSON: BUSINESS PROCESS

Automated Order Entry Benefits Both McKesson and Its
Customers

               Benefits to McKesson                     Benefits to Customers

       • Reduced order entry staff from 700 to    • Lower transaction costs:
         15, despite sixfold increase in orders     - Labor required to enter and stock order
                                                      reduced by 80%
       • Reduced sales people by 50%, while
                                                    - Rationalization of operations resulted in
         sales increased more than 400%               larger, less frequent orders with minimal
                                                      errors
       • Translated into a larger share of
         customers’ business, increasing sales    • Reduced product costs through
         and operating margins                      McKesson’s lower operating costs

                                                  • Reduced inventory holding costs
                                                    through more efficient ordering from
                                                    McKesson

                                                  • Increased satisfaction through reliable
                                                    systems and quality sales support




cmpm AOO267ppmmJun93D                                                                             - 12 -
MCKESSON: BUSINESS PROCESS

McKesson Also Targeted Increased Order Fulfillment
Productivity

                             Order fulfillment and warehouse systems include:

                             • MAPS:
                                – An automated picking system which loads totes
                                  according to customers’ orders
                                – Handles popular, conveyable SKUs (80% of volume, 20%
                                  of SKUs)


                             • FlexMaster:
                                – An automated materials storage and retrieval system
                                – Brings inventory to pickers on computer-controlled
                                  carousel
                                – Handles less popular, conveyable products


                             • AcuMax:
                                – A portable radio-linked PC that is worn like a glove over
                                  picker’s hand
                                – Allows picker to scan product barcodes by pointing
                                – Provides order filling instructions to pickers
                                – Handles nonconveyable SKUs

cmpm AOO267ppmmJun93D                                                                         - 13 -
MCKESSON: BUSINESS PROCESS

McKesson Also Targeted Increased Order Fulfillment
Productivity (cont.)

      Key Characteristics                       Specific Examples

       • Highly automated    • Fulfills and delivers orders to shipping stock without human
                               intervention
                             • System directs and tracks every worker, container,
                               component, and item

       • High capacity       • Filling system handles over 10,000 items per hour

       • Quick               • Order is delivered within 12-18 hours at speeds 15 times
                               higher than traditional methods

       • Accurate            • Systems eliminate product processing and shipping errors

       • Paperless           • Pickers receive instructions on computer screen on forearm
                             • Billing is electronic




cmpm AOO267ppmmJun93D                                                                     - 14 -
MCKESSON: BUSINESS PROCESS

Automated Order Fulfillment Has Reduced Costs and
Increased Efficiency of McKesson’s Operations


 • Increased warehouse staff productivity from $270K/person to $728K/person
   over last 10 years

 • Reduced working capital per sales dollar by over 9% since 1987

                                                                                                        a
 • Improved operating cost efficiency by 20%; increased capacity fourfold

                                                                         b
 • Decreased rate of manual mispicks by 72%




a. Compustat database.
b. Daly, Jones, “What Happens When ‘Close Enough’ Isn’t Close Enough Anymore?” ComputerWorld, Jan. 4,
   1993.
cmpm AOO267ppmmJun93D                                                                                       - 15 -
MCKESSON: IMPLICATIONS

McKesson’s Process Improvements Have Heavily Impacted
the Number and Skills of Its Staff
                                         Order Entry
                                         • Transferred order-
                                           taking activity to
                                           customers
                                         • Significantly
                                           reduced staff            Order Fulfillment
         Sales                                                      • Simplified and
         • Shifted from                                               accelerated
           taking orders to                                           fulfillment
           consulting                                                 activities
           retailers                                                • Increased
                                            Process                   dependence on IT
                                         Redesign and IT
                                           Investment


                    MIS                                         Customer
                    • Increased                                 • Eliminated
                      responsibilities                            customer
                    • Established as                              management of
                      innovators of                               back-room
                      efficiency                                  inventory

cmpm AOO267ppmmJun93D                                                                    - 16 -
MCKESSON: KEY PERFORMANCE INDICATORS

McKesson Tracks the Performance of Its Order Entry and
Fulfillment Systems through Quantitative and Qualitative Metrics
Quantitative measures:

 • Line items processed per manhour

 • Line items filled ratio

 • % of stockouts

 • Number of times instock item is omitted in order

 • % mispicks

 • % returns and allowances

Qualitative measures:

 • Customer satisfaction

 • Employee satisfaction

 • Ease of use of system

cmpm AOO267ppmmJun93D                                         - 17 -
MCKESSON: IMPLICATIONS

McKesson’s Long-Term Commitment to Process
Optimization Has Revitalized the Company…

 • Transformed company:
     - In early 70s, McKesson was an unfocused portfolio of poorly managed businesses
     - Today, it is the market leader in health care product distribution


 • Increased McKesson’s profitability:
     - Since 1975 sales have increased elevenfold and operating expenses only threefold
     - Average profit growth of 20% after 1976, compared with 2% before




cmpm AOO267ppmmJun93D                                                                     - 18 -
MCKESSON: IMPLICATIONS

… And Dramatically Transformed the Drug Distribution
Industry
 • In time of rapid industry growth, McKesson has led the consolidation of the
   wholesale drug industry:
     - Market share of the two largest players (McKesson and Bergen-Brunswig) increased from 30% to 45%
     - Number of drug wholesalers fell from 180 in the early 1970s to 90 by 1986

 • McKesson’s productivity has discouraged direct distribution by manufacturers
 • McKesson has been key to the survival of independent drugstores




Source: Clemons, Eric K., “A Strategic Information System: McKesson Drug Company’s Economost,” Planning Review, Sept/Oct 1988.
cmpm AOO267ppmmJun93D                                                                                                            - 19 -
MCKESSON: IMPLICATIONS



Key Lessons Learned
Business Process Redesign:
 • Need to understand “true” areas of opportunity of existing processes
 • Getting customers to handle more activities (e.g., enter order data
   electronically) is most productive way to perform these activities
 • Need to market process changes internally
 • Need to prepare carefully for significant downsizing

IT:
 • Clear communication of requirements to system developers is critical:
      - Include IT representative on process design team
      - Continually check system against original requirements

 • Underestimated real operation and development costs:
      - Training, upgrading technology, and systems maintenance



cmpm AOO267ppmmJun93D                                                      - 20 -

								
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