cmpm aoo267ppmmjun93d- 1 - mckesson: order entry and fulfillment background business process...

cmpm AOO267ppmmJun93D - 1 -

McKesson: Order Entry and Fulfillment

• Background

• Business Process Redesign: Process, IT

• Key Performance Indicators

• Implications


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

MCKESSON: BACKGROUND

Source: 1992 annual report.


95% of McKesson’s Revenues Come from Distribution

• 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


Source: 1992 annual report.Note: Operating profits exclude restructuring and other non-recurring charges.

Operating margins have fallen from 2.3% in 1991 to 1.8% in 1992 reflecting mounting industry pressures.

Operating margins have fallen from 2.3% in 1991 to 1.8% in 1992 reflecting mounting industry pressures.

1992 Operating ProfitTotal $253.9 Million

1992 RevenuesTotal $10.3 Billion

Distribution95.3%

Water2.3%

PCS1.0%

Armor All1.4%

Distribution69.9%

PCS12.2%

Water9.5%

Armor All8.4%


McKesson’s Operating Margins Are Being Squeezed More and More


Competitors:

• Intense cost and service competition from Bergen-Brunswig

• Formation of regional competitors into buying groups to match purchasing power of major players

Government:

• Reducing rate of pharmaceuticals’ price increases through managed care strategies

• New Federal health care plans

Manufacturers:

• Increased power due to consolidation

• Threat of vertical integration

• Capped forward inventory purchases in anticipation of price increases

Pharmacies/Hospitals:

• Increased power due to consolidation

• Increased emphasis on price

• Threat of failure of independent stores has capped price increases McKesson’s

Margins


The Distribution Services Division Seeks Highest Economies of Scale


Source: 1992 annual report.

• 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.

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.


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

• System manages inventory of over 25,000 SKUs

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

• Orders are delivered to customer the same or next day

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

• Orders are fulfilled with over 99.5% accuracy

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

• High capacity

• Cost effective

• Quick

• Reliable

• Accurate

• High value-added

MCKESSON: BUSINESS PROCESS

Key DesignCharacteristics Specific Examples


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

• Design layouts for new warehouses and configure old ones

• Highest Quality Service

• Most Efficient Operations



McKesson’s Redesign Process Starts with the Customer


Define specifi-cations system to meet customer needs

Define specifi-cations system to meet customer needs

Full scale implemen-tation of new process

Full scale implemen-tation of new process

Evaluate development and implemen-tation costs and benefits

Evaluate development and implemen-tation costs and benefits

Step 7Step 3Step 2Step 1 Step 4

Re-evaluate process against original customer needs

Re-evaluate process against original customer needs

Design process to meet new needs

Design process to meet new needs

Is it worth it?

No

Yes

Yes

No Do benefits

outweigh costs?

No

Does solution

meet needs?

No

Are there significant problems?

No

Test process on limited basis and evaluate benefits

Test process on limited basis and evaluate benefits

Identify problems with new process

Identify problems with new process

Yes

Yes

Yes

Step 5 Step 6

Identify customer need or service improve-ment

Identify customer need or service improve-ment

Are IT systems

required?


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

Retailer entersproduct IDs andorder quantities through handheld electronic order entry devices

Automatically transmit ordervia McKesson’s800 watts lineto data center inCalifornia

• Print and insert price tags

• Confirm order through voice synthesizer

• Update prices and inventories

• Sort orders geographically

• Transmit orders to distribution centers via VSAT satellite communications system

• Transport tote to appropriate picking station

• Track tote with barcode scanners

OrderComplete?

• Send invoice• Adjust accounts

receivable

• Deliver to customer• Acknowledge

delivery with portable data glove

• Route to appropriate loading dock

• Load truck

POS terminal orother inventorytracking systemorders product

• Place products in tote• Update inventory and

order

Distribution CenterCustomer Data Center

YesNo


• Sort orders by truck loading in route/stop sequence

• Insert tote on conveyor system


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


Customized IT systems include:

AcuMax

• Portable computer system for directing manual order fulfillment activities

AcuMax

• Portable computer system for directing manual order fulfillment activities

MAPS

• High-speed automated order-filling system

MAPS

• High-speed automated order-filling system

Economost

• Electronic order entry and fulfillment system

Economost

• Electronic order entry and fulfillment system

FlexMaster

• Semiautomated warehouse management and fulfillment system

FlexMaster

• Semiautomated warehouse management and fulfillment system

- How to reduce order entry costs?

- How to enable independent pharmacies, McKesson’s principal customers, to compete better?

- How to increase stocking and picking efficiency?

- How to reduce warehouse labor costs?

- How to increase picking efficiency?

- How to reduce picking errors?

- How to increase picking efficiency?

- How to reduce warehouse labor costs?


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

• Order entry costs reduced, since customers enter data

• Reduces time customers spend on ordering and stocking

• Barcode scanners allow customers to easily enter product codes

• Voice synthesizers confirm customer data entries

• System prints price tags and invoices to retailer specifications

• Each customer receives monthly profitability reports

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

• Cost effective

• User friendly

• High value-added of information

• Flexible

Key Characteristics Specific Examples



Automated Order Entry Benefits Both McKesson and Its Customers

• Reduced order entry staff from 700 to 15, despite sixfold increase in orders

• Reduced sales people by 50%, while sales increased more than 400%

• Translated into a larger share of customers’ business, increasing sales and operating margins

• Lower transaction costs:

- Labor required to enter and stock order reduced by 80%

- Rationalization of operations resulted in larger, less frequent orders with minimal errors

• Reduced product costs through McKesson’s lower operating costs

• Reduced inventory holding costs through more efficient ordering from McKesson

• Increased satisfaction through reliable systems and quality sales support

Benefits to McKesson Benefits to Customers



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



McKesson Also Targeted Increased Order Fulfillment Productivity (cont.)

• Fulfills and delivers orders to shipping stock without human intervention

• System directs and tracks every worker, container, component, and item

• Filling system handles over 10,000 items per hour

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

• Systems eliminate product processing and shipping errors

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

• Highly automated

• High capacity

• Quick

• Accurate

• Paperless

Key Characteristics Specific Examples



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

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

• 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.


a

b


McKesson’s Process Improvements Have Heavily Impacted the Number and Skills of Its Staff

Order Fulfillment

• Simplified and accelerated fulfillment activities

• Increased dependence on IT

Sales

• Shifted from taking orders to consulting retailers

Customer

• Eliminated customer management of back-room inventory

Process Redesign and IT

Investment

Process Redesign and IT

Investment

MIS

• Increased responsibilities

• Established as innovators of efficiency

MCKESSON: IMPLICATIONS

Order Entry

• Transferred order-taking activity to customers

• Significantly reduced staff


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

MCKESSON: KEY PERFORMANCE INDICATORS


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



… 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.



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- 1 - mckesson: order entry and fulfillment background business process...

Documents