Transcript McKesson: Order Entry and Fulfillment

McKesson: Order Entry and
Fulfillment
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•
Background
•
Business Process Redesign:
Process, IT
•
Key Performance Indicators
•
Implications
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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.
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MCKESSON: BACKGROUND
95% of McKesson’s Revenues Come from Distribution
1992 Revenues
Total $10.3 Billion
Armor All
1.4%
Water
2.3%
1992 Operating Profit
Total $253.9 Million
PCS
1.0%
Armor All
8.4%
Water
9.5%
PCS
12.2%
Distribution
95.3%
Distribution
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.
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MCKESSON: BACKGROUND
McKesson’s Operating Margins Are Being Squeezed More
and More
Pharmacies/Hospitals:
Government:
• Increased power due to
consolidation
• Reducing rate of
pharmaceuticals’ price
increases through managed
care strategies
• Increased emphasis on price
• Threat of failure of
independent stores has
capped price increases
McKesson’s
Margins
• New Federal health care
plans
Manufacturers:
Competitors:
• Increased power due to
consolidation
• Intense cost and service
competition from BergenBrunswig
• Threat of vertical integration
• Capped forward inventory
purchases in anticipation of
price increases
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• Formation of regional
competitors into buying
groups to match purchasing
power of major players
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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.
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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
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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
• Design layouts for new
warehouses and configure
old ones
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• Highest Quality Service
• Most Efficient Operations
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MCKESSON: BUSINESS PROCESS
McKesson’s Redesign Process Starts with the Customer
Step 2
Step 1
Identify
customer
need or
service
improvement
Step 3
Evaluate
development
and
implementation costs
and benefits
Design
process
to meet
new
needs
Are IT
systems
required?
Yes
No
Do
benefits
outweigh
costs?
No
Yes
Step 4
Step 5
Reevaluate
process
against
original
customer
needs
Identify
problems
with new
process
Does
solution
meet
needs?
No
Yes
Are there
significant
problems?
Yes
No
Step 6
Step 7
Test
process on
limited
basis and
evaluate
benefits
Full scale
implementation of new
process
Yes
Is it
worth it?
No
Define
specifications
system to
meet
customer
needs
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MCKESSON: BUSINESS PROCESS
The Order Entry and Fulfillment Process Is Heavily
Supported By State-of-the-Art Technology
Customer
Retailer enters
product IDs
and
order quantities
through
handheld
electronic order
entry devices
POS terminal or
other inventory
tracking system
orders product
Automatically
transmit order
via McKesson’s
800 watts line
to data center in
California
Data Center
Distribution Center
• Print and insert price
tags
• Sort orders by
truck loading
in route/stop
sequence
• Insert tote on
conveyor
system
• Confirm order
through voice
synthesizer
• Update prices
and inventories
• Sort orders
geographically
• Transmit orders
to distribution
centers via VSAT
satellite
communications
system
•
•
• Route to appropriate
loading dock
• Load truck
Transport tote to
appropriate
picking station
Track tote with
barcode
scanners
• Place products in tote
• Update inventory and
order
No
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Order
Complete?
• Deliver to customer
• Acknowledge
delivery with
portable data glove
• Send invoice
• Adjust accounts
receivable
Yes
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MCKESSON: BUSINESS PROCESS
The Order Entry and Fulfillment Process Is Heavily
Supported By State-of-the-Art Technology (cont.)
Customized IT systems include:
Economost
• Electronic order
entry and fulfillment
system
- How to reduce
order entry
costs?
- How to enable
independent
pharmacies,
McKesson’s
principal
customers, to
compete better?
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FlexMaster
• Semiautomated
warehouse
management and
fulfillment system
- How to increase
stocking and
picking
efficiency?
- How to reduce
warehouse labor
costs?
AcuMax
• Portable computer
system for directing
manual order
fulfillment activities
MAPS
• High-speed
automated orderfilling system
- How to increase
picking
efficiency?
- How to increase
picking
efficiency?
- How to reduce
picking errors?
- How to reduce
warehouse labor
costs?
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MCKESSON: BUSINESS PROCESS
McKesson’s Order Entry Process Asks Customers, not
Staff, to Enter Orders
Key Characteristics
• Cost effective
Specific Examples
• 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
information
• System prints price tags and invoices to retailer
specifications
• Each customer receives monthly profitability reports
• Flexible
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• Order entry allows variety of formats (e.g., voice, electric
device, POS terminal, etc.…)
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MCKESSON: BUSINESS PROCESS
Automated Order Entry Benefits Both McKesson and Its
Customers
Benefits to McKesson
• 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
Benefits to Customers
• 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
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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
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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
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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
• Improved operating cost efficiency by 20%; increased capacity fourfold
a
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.
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MCKESSON: IMPLICATIONS
McKesson’s Process Improvements Have Heavily Impacted
the Number and Skills of Its Staff
Order Entry
• Transferred ordertaking activity to
customers
• Significantly
reduced staff
Sales
• Shifted from
taking orders to
consulting
retailers
Order Fulfillment
• Simplified and
accelerated
fulfillment
activities
Process
Redesign and IT
Investment
• Increased
dependence on IT
MIS
Customer
• Increased
responsibilities
• Eliminated
customer
management of
back-room
inventory
• Established as
innovators of
efficiency
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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
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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
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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.
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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
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