How Becton Dickinson Built a Supply Chain Business
By Nicholas J. LaHowchic -- Supply Chain Management Review, 6/1/1997
Like many other business sectors, the healthcare industry faces continuing pressures to reduce costs worldwide. Those pressures—coupled with major changes taking place in healthcare delivery systems—have placed a heightened emphasis on the value of supply chain activities done well. At the same time, they have highlighted the inefficiencies of rework, redundancy, and non—value-added costs that exist in the current healthcare supply chain from producer to patient. An industry study on Efficient Healthcare Consumer Response (EHCR), completed at the end of 1996, identified $11 billion in potential savings that could result from reengineered businesses processes and practices.
In response to this new environment, many healthcare providers and their channel partners have dramatically changed the way in which they do business. Becton Dickinson is no exception. In our case, the competitive response meant redefining our business around broader customer solutions that considered their total business. It meant redefining our strategy on developing products, information systems, and services that offered more value in the eyes of customers. And it meant changing the way we marketed our products and services to those customers. The supply chain was to be an integral part of carrying out our firm's broadest business strategies.
Becton Dickinson, a 100-year-old company, is a $2.8 billion worldwide leader in medical technologies. We're a highly decentralized organization with more than 10 broad product-line businesses that operate their product strategies independently. Seven of these businesses are global, and some 45 percent of our total sales take place outside of the United States. Worldwide, we employ more than 18,000 associates at 85 facilities in 70 countries.
Our overall business strategies are predicated on key product and service strategies. The product component focuses on going to market with physical products that have distinct features, specifications, pricing, and life cycles. The service component embodies service-related products that either directly support our physical products or, in the case of supply chain services, help the customer enhance or support the sale or after market with features, specifications, and guarantees. (Exhibit 1 depicts the two components of our strategy.)
In addressing these pivotal questions, Becton Dickinson identified the need for a service strategy that could effectively respond to new demands coming from end-user providers such as hospitals, labs, clinics, and physicians' offices as well as the distributors and wholesalers that are our medical-channel partners. We felt that a new service strategy could support these customers with better quality and efficiency while at the same time responding to a changing marketplace. Healthcare, in short, was experiencing a whole new way of doing business, affected by such dynamics as consolidations, mergers, and the move toward managed care.
Our response was to create a new organizational capability that would provide a focal point for all supply chain deliverables across all product businesses, across all customers, and across all channels. It would provide quality-fulfillment processes and service levels through new skills, tools, and technology. Through process reengineering and new service products like the Continuous Replenishment Program (CRP) and electronic commerce, it would streamline all internal and external interfaces to Becton Dickinson. And importantly, it would demonstrate the ease of doing business with us in a cost-efficient manner. To achieve those goals, we created a new operating division—really a new business—called Becton Dickinson Supply Chain Services.
The mission of this new business was to be a leader in marketing and providing supply chain integration and services with our channel partners and end-user customers. We would provide competitive advantage through high levels of service, new service products, and simplified customer interfaces that lowered costs and improved channel effectiveness.
With this new capability we needed to communicate, market, and promote supply chain integration. These activities would prove critical to get the total value for Becton Dickinson, the supporting channel partners, the end-use customers, and ultimately the consumer.
In essence, we created a new organizational capability dedicated to exceeding the four "Rs" of traditional marketing—right product, right place, right time, and right price. To tender the right product, we would fully support product packaging, handling, and utilization management at the customer's site. To ensure the product's arrival at the right place, we would maintain a responsive distribution network and specific delivery guarantees. And through major investments in skills and systems investments for key processes like account management, forecasting, DRP, manufacturing planning, transportation planning, and cycle-time reduction, we would deliver the product at the right time.
To the traditional marketing elements, we added another "R"—the right process. Streamlining the administrative processes for pricing, contracts, collection, and customer management would exert a dramatic, highly positive impact on the right price.
This new supply chain organization also would leverage our internal capabilities. We expected improvements in both the costs related to physical flow of product in warehousing and transportation, and the business costs of order fulfillment and information technology. With this new supply chain focus, which included consolidating our interface with customers, we expected improved accuracy, consistency, and reliability in such activities as ordering, shipping, and billing. We also anticipated reduced physical damage of product throughout the business process.
Through this new operating division, we looked to provide product-fulfillment services, consultative services, and improved information access and visibility for both external and internal customers. Finally, we expected improved speed in all of the cycle times associated with supply chain management—not only the product-fulfillment cycle, but also the business-process and service-creation cycles.
Our channel partners and customers showed great interest in our supply chain initiative and recognized the potential value. In fact, their response exceeded our expectations. Creation of the supply chain business was seen as a positive response by Becton Dickinson as a total product and service provider of choice. It was viewed as an "easy-to-do" and cost-effective way of doing business that would create economic value for all channel partners.
Our efforts made us realize that, in designing the full breadth of supply chain capabilities, we were creating a dual or parallel business model to support our total business strategy. It was a model no less complete than the business model for our physical products that had given us market leadership. As Exhibit 2 shows, our business model was designed to fully support and leverage Becton Dickinson's total offering.
Mirroring the business model for our physical products, Becton Dickinson's Supply Chain Services business model has "factories" that are operated with the same construct as a physical product factory. Each of our three factories—physical, computer, and administrative—has production lines designed to achieve greater throughput at higher quality and lower cost.
As a parallel business model, the supply chain organization required resources similar to those used by the physical products divisions. Thus, the Supply Chain Services operation incorporates key functions that support the mission and integrate with their functional counterparts throughout the organization. Among those key areas are research and development, operations, marketing and sales, and support services (see Exhibit 3).
• Research and Development
The research and development activities supporting our supply chain business centered on two key areas. The first was the development of value-generating service offerings for marketing and distribution to our customer base. This included programs like CRP, which optimizes end-user service levels and significantly reduces inventory investment and infrastructure costs for both end users and channel partners. CRP also significantly improves their return on managed capital.
The second focus area centered on improving quality and productivity. Becton Dickinson Supply Chain Services made major investments in automated and semi-automated distribution centers (the physical factories). The aim was to enhance these facilities so they could effectively do more with less, just as in any traditional production facility. We also invested in computer hardware, application software, and communications software (the computer factories) to improve supply chain processing efficiency. And last, we upgraded administration support activities and people skills for call centers, planning, and execution (the administrative factories). This led to enhanced quality and productivity.
Collectively, the physical, computer, and administrative factories require ongoing research and development support to ensure competitiveness in both cost and service outcomes.
• The Operations Function
The operations function of our supply chain business model follows the management of the three "factories." The physical factories include transportation and the distribution centers, which also provide packaging, labeling, and relabeling. In each of these areas, Becton Dickinson now maintains the equivalent of a complete factory operation. Each requires the same disciplines of managing the site, the teams of associates, the cost, and the output. In addition, information technology is required to manage quality and reengineer processes within each area. Such technology, for example, can support process controllers that direct flows of goods through each of the physical factories with bar coding used to support the process.
Taken together, these operational activities create value in some way—whether it be finishing packaging, moving product through multiple channels with high quality and low handling cost, speeding up cycle time to improve customer satisfaction, or reducing investments in infrastructure and product.
As with any other factory, the goal in managing the computer factory is to ensure the optimal use of hardware and software that will improve quality and cost per unit produced each and every year. The computer factory also includes the applications and tools needed to receive, process, and send business transactions. This extends the factory to VAN (value-added network) processing and codification of EDI standards (X.12) as well as standards specific to the healthcare industry.
The computer factory also will embrace future electronic commerce activity such as electronic catalogs on the Internet. Proper management of computer factories adds value by reducing transaction costs for both the company and its customers. It can dramatically improve the accuracy of the information jointly shared, while streamlining those processes that improve the ease of doing business.
The administrative factories of Becton Dickinson's Supply Chain Services include such key activities as customer service, call centers, credit and collection, contract and rebate management, forecasting and inventory management, and production planning. In each of these areas, there is a well-defined output and a clear understanding of the specifications required to produce a desired outcome. There's also an expectation pertaining to the cost of each finished outcome.
Our call centers provide a good example. They normally are measured both by the number of successful first-call responses and by the time and cost per call. Today, we apply significant technology to electronically link the call with all computer-supported contact information, customer-related business information, product specifications and usage information, and prior correspondence in electronic form. This expedites the opening, solution, and closing of each call.
Each of the other areas of the administrative factory has an equally detailed and complex production process to produce the desired outcomes at higher quality and lower costs. Each attempts to significantly raise administrative efficiency and strive for the perfect transaction cycle. And each executes a high level of performance directly in its administration and indirectly in the physical flow of products and services it manages from producer to patient.
In all three of the equivalent factory settings within the new supply chain structure, we have the responsibility to upgrade the capabilities of our people. To be successful, they must develop higher skill levels and assume responsibility for managing processes in a team-based setting. In addition, they continually need to employ new and updated technology to reach the superior levels of productivity that result in higher quality products.
• Marketing and Sales
The marketing and selling of supply chain management is fundamental to successfully launching value-added service product offerings, to justifying the worth of the investment and payback to Becton Dickinson and its customers, and to sizing the market potential. Through market research, Becton Dickinson analyzes the direct supply chain service needs demanded by distributors and end-user customers. We also strive to determine emerging service needs that our customers would find valuable.
Supply chain service products require the same discipline of specification and management as do physical products. We use the same methodology to determine our point-of-use information to confirm expectations on outcomes. And importantly, through electronic interchange, we have electronically measured feedback on service performance to assess a service product's value and use.
Creating value-based service product offerings requires considerable analysis, both external and internal. We found that models needed to be created and maintained to more fully understand the supply chain costs of serving different customers and channels. This required the full implementation of activity-based management systems, decision-support systems, and user-friendly models that can demonstrate to customers the economic value of key service products. Some of the models we use cover product-standardization benefit, return on managed capital, continuous-replenishment program benefits, sales-activated settlement benefit, and overall return on managed capital.
With the growing acceptance of the business metric known as Economic Value Added (EVA) as the true measure of corporate success, firms are focusing their analysis of financial benefit to return on managed capital. Becton Dickinson is in the process of implementing an EVA program and it's expected that supply chain optimization will have a positive impact on the company's EVA.
Supply chain service products, like physical ones, must be promoted to foster ongoing customer demand. This activity must include specific information about each service product, how each helps the customer more effectively carry out its mission, how each fits into the Supply Chain Services' broader product line, and finally, how this product line supports and enhances Becton Dickinson's physical product offerings. All of these speak to our strategy of offering world-class products and services to our customers.
Communication of what we can offer to end users and partners can be generated through traditional forms of advertising. We started with brochures and sales sheets, for example, to inform our customers. More advanced media such as desktop publishing, the Internet, and e-mail now are being tapped to convey the message.
In the supply chain model, the identification of customers' needs and the creation of product offerings to fill them must be communicated, marketed, and advertised with the same discipline as with any physical product. These offerings also should be protected from being commoditized and stripped of reciprocal value, which happens when physical products are improved or replaced. This task is the responsibility of service product management.
• Support Services
While some supply chain management practices may be with us for a while, others are open to completely new approaches. Increasingly, companies are looking to radically redesign how work gets done and re-create it under a process construct that changes how people work together internally and externally. These kinds of changes require new and different skills, which come under the umbrella of support services.
This is where consulting as part of overall supply chain service can prove of great value to customers. Our supply chain organization today includes a consultative capability to perform business process reengineering and project-management services both for external customers and within Becton Dickinson.
The alignment of process flows can eliminate both original work and rework. At the same time, it can improve the effectiveness and efficiency of each related supply chain process. Thus, by combining consultative services with other process-based service product offerings such as CRP, the supply chain organization can bring radical—but widespread and beneficial—changes. In addition to benefiting Becton Dickinson, this brings powerful advantages to the customer that can be leveraged across many other suppliers. This will result in considerable economic benefit to all parties in the chain.
In creating our supply chain business, we found that by creating account-management teams for key customers we could more effectively develop a focused capability to provide products, services, internal technology platforms, and efficient communication. Exhibit 4 depicts the key account-management model. This model also affords an excellent vehicle for coordinating multi-functional teams with customers and implementing win-win methodologies. When an account team agrees on its main purpose, it then can formulate and commit to a short list of goals.
By the very nature of its work, a supply chain management services organization such as ours tends to be large. Physical factories, like the distribution centers, require a relatively high number of workers. The same holds true for the administrative factories such as call centers and financial services that directly interface with the customers.
In managing any organization with large numbers of personnel, you need considerable resources to effectively support the infrastructure. Information technology, personnel management, finance, and quality-management resources all are essential to this activity.
Information technology, in particular, enables processes for status determination, planning, and execution. It provides the physical capacity of hardware and software to accommodate all the needed processing for all supply chain activities. IT also provides the investment infrastructure for accommodating industry-based supplier-customer and product-identification standards. This allows channel partners and end-user customers to efficiently and directly interchange activities under industrywide identification.
Identification standards in our industry include the HIN (health industry number), which identifies participants in the healthcare field; the UPN (universal product number) for products produced, moved, stored, and used; and the UCC/EAN, the bar-code product-identification standards. Information technology also supports the supply chain by maintaining infrastructure for moving and understanding information through EDI (electronic data exchange) standards and VAN (value-added information networks). These, in turn, support the efficient transfer and temporary storage of information between participants of the supply chain.
To remain highly efficient, effective, and competitive, we found, supply chain organizations must continually transform themselves. And strategic human-resource management is the key to making this happen. This starts with the coupling of activities into processes and organizing people around these new tasks. It continues with effectively managing how groups of people carry out the work.
Thanks to the IT support available today, people working in teams can solve business problems far more effectively than through traditional individual-directed or command-and-control approaches. Furthermore, they can do more work correctly the first time. Well-trained, empowered employees at Becton Dickinson are allowed to act as responsibly on the job as they do in running their personal lives. And that, in turn, demands a change in the way they think about their jobs. They now must strive for high-quality outcomes through less effort. This necessary transformation, which must be supported by human resources, allows supply chain management to become a change agent for the organization.
Quality management in a supply chain business differs significantly from traditional organizations. Since so much of the supply chain's performance depends upon people, Total Quality Management requires the same transformation in thinking and actions as does team management and empowerment. Specifically, it must focus on the specification and production of administrative and physical outcomes. In our particular business, it also must totally satisfy regulatory requirements to store or ship the products and certify levels of process and outcome controls. As a new organization operating internationally, Becton Dickinson Supply Chain Services is well into the process of having every one of our locations ISO 9000 certified.
Along with a people-oriented mindset, well-established financial support is a necessary part of the infrastructure. In developing our supply chain operation, we were constantly reminded of the old adage that "the devil is in the details." Finance carries out a number of significant support roles to ensure that supply chain management plans are executed successfully. It ensures the establishment of activity standards that allow for both aggregate and detailed measurement of the management process.
Finance also provides the standard costing systems that help identify where, for example, a facility's service product output needs to be assessed and monitored. Because of the different operations within supply chain management, activity-based costing and management may be a better way to identify the effort required to support customer-support tasks. Initially, most of our supply chain activities were managed by standard costing systems. However, we're now in the process of rolling out activity-based costing for all related supply-services activities and processes. This supports our ability to determine a "cost-to-serve" by customer/market segment; to cost out new service products; and to manage our service charges to the product business we support.
Regardless of what type of system is used, knowledge of the true cost to serve supply chain activities enables a profitable definition and use of the various service products. Detailed financial knowledge also helps formulate how supply chain value will be marketed and sold.
Finance also plays an important consultative role in quantifying the value of supply chain management service products. Finally, this function fills the more traditional role of controller, treasurer, and tax guide to ensure that the supply chain organization complies with all regulatory requirements while taking advantage of any available legal entitlements.
Managing Resistance to ChangeBusiness organizations are social organisms. And, as such, they view change—the kind of change involved in creating a new supply chain organization—as inherently threatening. That's because it upsets the established rules of business and diminishes the skills that individuals have gained over many years.
Supply change management success demands a new environment in which human-resource skills play a central role. Because of information techniques that are changing at an increasing rate, we need to do more than plan. Instead, we must strategically navigate our way to continual competitiveness to grow and prosper.
We discovered that competitiveness comes from trying to outdo others, which means that external environmental competitive factors dictate the outcome gap. In other words, the competition sets the pace of change required to stay at the front of the race. Setting goals based on external conditions forced us to approach things differently from how we did in the past. Fully expect to make decisions and enact changes with a rapidity that brings butterflies to your stomach. Ironically, anxiety may be one indication that the company is remaining on track, or even advancing its leadership position.
To manage this kind of change, an individual must understand his or her vulnerabilities. This forces you to acknowledge that there may be much you don't know. Reflecting on the words of a futurist I recently heard at a conference, I was reminded of what still needs to be learned by his observation on these four domains of knowledge:
- Things that we know.
- Things that we know we don't know.
- Things we don't know that we don't know.
- And things that we think we know but we don't know.
In our journey toward a new supply chain organization, we encountered each of these knowledge domains. And we will continue to encounter them in the future. Building a supply chain business is not without its challenges. When approached aggressively as we did, the balancing of new roles and responsibilities will result in mistakes. Plan for them, manage them, and maybe even celebrate some of them. But above all, learn from them and move ahead rapidly.
Speed of adaptation is critical to business success today. Change management at Becton Dickinson has become a capability—not a one-time episode of adjustment that an organization goes through. Within the context of supply chain business strategy, change management has become a continuous process of aligning the organization with its marketplace—and doing it more responsively and effectively than the competitors. Already, we've seen our supply chain management operation evolve from a narrow, technically focused support area to a process that underpins the company's broad service strategies.
At Becton Dickinson, competitiveness, growth, and profitability are the main tenets of any business model. Supply chain management is no exception.
| Author Information |
| Nicholas J. LaHowchic is president of Becton Dickinson Supply Chain Services, headquartered in Franklin Lakes, N.J. |
|
View All Blogs
