3m Health Care

...

and Channel

To evaluate the costs of current distribution system and a direct-to-hospital supply chain, it is estimated that the monthly inventories need to be increased by 25%, which increases the storage cost to $8437.50. From the case, the estimated transportation would increase from $24,648.90 to $31,398.90. The sub-carton picking required with new model would cost $60,000. The manual order placement cost and electronic order placement cost would be $33,150 ($8.5*3,900) and $3547.50 ($2.15*1,650) respectively. And, the VAR commission of $390,000 will be a cost saved. The cost savings are calculated as in Exhibit 2.

Exhibit 2 : Cost Analysis

As seen above, there are cost savings of $2.85 million for 3M and there are also perceived cost savings for hospitals with the direct-selling model. However, there are unaccounted costs such as additional infrastructure costs, recruiting and training costs for additional resources required to manage the supply chain activities, costs that might incur if customers are lost along with VARs. With the bandwidth that 3M has now, it cannot provide value-added services as the distribution Center has the capability of handling only full case shipments.

An additional factor to consider is that 3M Canada has become a vital component in the North American market due to the internal synergies. Moving to the new model means changing path from traditional logistics services that other businesses of 3M have been following. Also, 3M’s competitor Johnson & Johnson has an established direct distribution supply chain model and if 3M Health care division moves to a direct distribution model with no expertise and capabilities, there is a possibility of 3M health care failing to meet customer expectations and losing the competitive advantage.

Weighing the options, my recommendation to Kevin at this point of time would be to not move to a full direct-selling model. Instead, I propose that 3M Healthcare build its capabilities towards a direct-selling model by increasing the sales through direct-to-hospital model from the current level of 10%, reducing the dependency on VARs. Also, following the Pareto’s 80-20 rule for channel marketing, I recommend that 3M health care identifies the 20% of its VARs that give 80% of sales and skillfully manage that 20% of its VAR channel. In addition, as the processing cost for manual order is about 4 times the cost for electronic order, I suggest that 3M Health Care encourage electronic order placement.