DISTRIBUTION CHANNELS
Read the case titled “3M Canada: The Health Care Supply Chain (HBC # 9B15D011, 10
pages, available for purchase from Harvard Business Publishing) and prepare answers
to the following questions that will be served for class discussion for the coming
lecture. In addition, please use these questions as a guide to prepare your case
summary, which should not be written as a Q&A document. Rather, you are expected to
submit a document that summarizes key case information, which is presented clearly,
concisely, and logically. The summary report is restricted to between 800 and 1200
words. Use the following format in naming your file: student number – first and last
name – 3M Canada.
1. Briefly describe the Canadian healthcare system, the challenges facing this sector
of the industry, and how they have been addressed.
2. Briefly introduce 3M Company and describe how it structured and organised its
activities.
3. What is the main issue facing Scott David, the National Manager for Key Accounts
and Channel Markets?
4. What were the primary activities of 3M Canada’s Medical Division, what markets
were served by that division, and how were those markets served?
5. Briefly describe 3M Canada Company’s logistical network.
6. What are the cost and driving forces behind 3M Canada’s logistics system?
7. Which different organizations/partners participate in 3M’s health care supply
chain?
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W15359
3M CANADA: THE HEALTH CARE SUPPLY CHAIN
Professor P. Fraser Johnson wrote this case solely to provide material for class discussion. The author does not intend to illustrate
either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying
information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.
Copyright © 2015, Richard Ivey School of Business Foundation
Version: 2018-11-07
On Monday January 12, 2015, Scott Davis, national manager of key accounts and channel markets,
Medical Division at 3M Canada (3M) Health Care, was preparing for his meeting at the end of the month
with Matt Pepe, vice president of 3M Canada’s Health Care Business Group. The Medical Division
currently relied on value-added resellers (VARs) to distribute its products to Canadian hospitals. Recently,
however, these customers were pressuring 3M to ship products directly to the hospitals as opposed to using
VARs. Hospital strategic sourcing managers believed that major cost savings could be achieved in the
supply chain through a “direct distribution” model. Matt had asked Scott to prepare an analysis of the
Medical Division’s distribution system and to make recommendations by the end of the month regarding
potential changes to its existing method of distributing products to Canadian hospitals.
THE CANADIAN HEALTH CARE SYSTEM
Health care services in Canada were government-funded and delivered through a variety of organizations
such as Regional Health Authorities (RHAs), hospitals, physician practices and medical clinics. While the
provinces held the primary responsibility for delivery of health care services, the federal government
maintained regulatory authority through the Canada Health Act.
In addition to providing hospital and physician services, provinces and territories delivered a range of
additional health care support services including prescription drug plans, homecare, continuing care and
long-term care. The nature and scope of these services could vary depending on the province and territory,
and were influenced by changing health care demands and demographics.
In 2015, the Canadian health care system was under significant financial strain as a result of a number of
factors, including the aging baby boomer segment of the population, government fiscal constraints and
rising costs. Total health care expenditures were estimated at $215 billion in 2014. Government spending
on health care had more than doubled since 2000 and represented approximately 11 per cent of Canadian
gross domestic product (GDP), compared to 7.0 per cent of GDP in 1975. 1
1
Canadian Institute for Health Information, National Health Expenditure Trends, 1975 to 2014, CIHI October 2014,
www.cihi.ca/en/nhex_2014_report_en.pdf, accessed December 15, 2014.
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9B15D011
The major categories of health care spending in Canada from 1975 to 2014 included hospitals, drugs and
physicians. Hospitals had traditionally represented a prominent place in health care provision and the
single largest cost in the system; however, the share of health care spending on specific categories had
shifted during the past four decades. Spending on hospitals had declined from 47 per cent of the total in
1975 to 31 per cent in 2014, while spending on “other” health care costs (e.g., public health, nursing
homes, residential care facilities and other health care professions) increased from 28 to 37 per cent during
the same period. Drugs accounted for approximately 16 per cent of total health care spending, while
physicians constituted approximately 16 per cent (see Exhibit 1). 2
As a result of the fiscal pressures faced by government policy makers, a number of initiatives were
introduced with the objective of changing business practices in order to improve speed and efficiency of
service. One outcome was the closure of hospital beds and sites and the consolidation of hospital
operations. As a result, hospital spending as a percentage of total government spending shrunk
significantly, although spending on hospitals, in current dollars increased twelvefold between 1975 and
2014 (see Exhibit 1). 3
In most provinces, RHAs were created with responsibility for organizing, delivering and coordinating
public health programs, hospital services, community care and long-term or continuing care services.
These efforts resulted in changes in the delivery of health care in Canada. For example, day surgeries were
on the rise and fewer patients were staying overnight in hospital. Overall, out-of-hospital health care was
increasing and health care professionals were developing innovative practices that allowed the aging
population to stay in homecare rather than long-term care institutions or hospitals.
Other cost reduction actions included the formation of larger centralized procurement organizations and the
consolidation of hospital supply chain operations. New centralized strategic sourcing organizations
targeted supplier price reductions and lower total costs of ownership through product and service
standardization. Supply chain operations consolidation provided improved control of inventories, invoicing
and product handling. Wherever possible, hospital procurement groups were attempting to reduce costs by
negotiating contracts directly with manufacturers, as opposed to dealing with distributors.
Most provinces had initiatives underway to restructure their health care supply chain organizations with the
objective of reducing costs. One example was in British Columbia, where the Health Shared Services BC
(HSSBC) was launched in February 2009 to provide services to the province’s six health authorities in the
areas of accounts receivable, accounts payable, payroll services, employee records and benefits,
technology services, and supply chain, which included purchasing and strategic sourcing, inventory
management, warehousing and in-hospital replenishment. 4 The supply chain group had approximately
1,000 employees located across six health authorities, and managed more than $1.9 billion in total annual
spending. The hybrid organizational model balanced the needs of the local regions with the need for
centralization by allowing each health authority to have a regional branch office that was responsible for
that particular health authority’s requirements. HSSBC supply chain estimated that it had achieved more
than $230 million in savings since its inception. 5
2
CIHI, National Health Expenditure Trends, 1975 to 2014, Canadian Institute for Health Information, October 2014,
www.cihi.ca/en/nhex_2014_report_en.pdf, accessed December 15, 2014.
3
Ibid.
4
Health Shared Services BC, “About Us—Health Shared Services BC,” HSSBC, www.hssbc.ca/AboutUs/default.htm,
accessed December 15, 2014.
5
Health Shared Services BC, “Services—Supply Chain,” HSSBC, www.hssbc.ca/Services/Supply-Chain/default.htm,
accessed December 15, 2014.
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9B15D011
3M COMPANY
The Minnesota, Mining and Manufacturing Company, now called 3M, was founded in 1902. After an
initial mining venture proved to be unsuccessful, the company established itself as a leading developer,
manufacturer and distributor of consumer and industrial products.
3M was a Fortune 500 Company with revenues of $31.8 billion in fiscal 2014. The company had more
than 30 business units organized into five business groups — consumer, safety and graphics, industrial,
health care, and electronics and energy. Headquartered in St. Paul, Minnesota, the company had operations
in more than 70 countries and served customers in more than 200 countries. 6
Known for innovation and problem solving, 3M was a science and technology company with laboratories
and manufacturing facilities in more than 38 countries. Its research and development (R&D) spending in
2014 was $1.8 billion, and in 2013, 3M’s CEO Inge Thulin committed to spending six per cent of the
company’s sales on R&D aimed at helping the company achieve its targeted four to six per cent organic
revenue growth over five years. 7 Some of 3M’s most widely recognized brands included ScotchgardTM
stain removal and fabric protection, FiltreteTM home filtration products, Post-itTM Notes, ThinsulateTM
Insulation, and LittmannTM Stethoscopes.
3M had operated in Canada for more than 60 years from their head office in London, Ontario. 3M Canada
was optimized for global alignment (with five business groups) as well as the ability to serve the priority
markets relevant to the country’s business landscape — the Priority Markets Division focused on the
construction, mining, oil and gas industries in Canada.
While the business groups operated with autonomy, they also benefited from involvement in the marketing
strategies of the more than 30 business units within these sectors globally. All local business units had their
own technical, sales and marketing functions, along with full access to the experience, knowledge,
manufacturing capabilities and other valuable assets of the global organization. The exchange was a twoway street, and many new 3M products carried the stamp of knowledge gained through 3M’s global
operations, including 3M Canada. This internal synergy positioned 3M Canada as a vital component in the
North American market. Unique centres of marketing, sales, administrative and manufacturing excellence
within 3M Canada also served some of 3M’s North American customers.
3M CANADA MEDICAL DIVISION
3M Canada Health Care Group was committed to supplying innovative products and solutions for medical,
oral care, health information management, drug delivery and food safety. Major product categories
included skin and wound care, infection prevention, stethoscopes, medical devices, dental, orthodontics,
drug delivery systems, veterinary and animal care, and health information systems (see Exhibit 2). The
Medical Division focused on institutional customers, such as hospitals, long term care facilities and home
care agencies.
6
3M, “About Us – Who We Are,” 3M, http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/Information/AboutUs/
WhoWeAre/, accessed August 12, 2014.
7
3M, “Corporate Profile – 3M Performance,” 3M, http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/Information/
Profile/Performance/, accessed August 12, 2014.
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9B15D011
The Medical Division was staffed with dedicated sales, marketing and technical personnel. Many of the
sales and technical staff were health care professionals who had left the hospital system to work at 3M.
Their highly specialized health care knowledge helped them gain credibility with customer user groups.
Medical Division sales to Canadian hospitals were approximately $9 million per month, or 65 per cent of
the Medical Division’s revenue, while the remainder went to the out of hospital market. Sales to hospitals
were channeled through specialized distributors called value-added resellers (VARs). There were five
VARs distributing 3M health care products to approximately 350 hospital customers in Canada. Only
approximately 5 per cent of the Medical Division’s sales to hospitals were sold on a direct basis.
The out-of-hospital market, which comprised approximately 5,000 organizations across the country, such
as home care agencies, surgical centres, long-term care facilities, walk-in clinics and private physician
offices, was serviced by both VARs and another distribution channel identified as the Professional Health
Care Dealers (PHC). PHCs responded to the unique needs of the various sub-segments of the out-ofhospital market.
3M Canada Medical Division sales representatives spent almost all their efforts working with the hospital
customers. The company’s sales strategy was to offer premium products with innovative features that
improved the health and healing processes of the patients. The sales representatives and regional managers
worked with clinicians and educated nurses and doctors of the superior benefits of 3M products. Their
efforts were tailored to the needs of the local RHA and health care delivery model.
Clinicians would be encouraged to specify 3M products to hospital strategic sourcing committees when
making contracting decisions. Hospitals were free to choose their channels to purchase 3M products. The
hospitals could elect to buy their goods directly from 3M (for full case shipments only) or through one of
the VARs. In either case, the unit price for products remained the same; only the terms and conditions were
negotiable.
VARs received an agency fee, which averaged 8 per cent, based on sales to hospital customers for
performing value-added services such as storage, transportation, product handling, transaction and order
processing, credit management, billing, returns and inventory management. By contractual agreement,
VARs could also be required to provide special services, such as EDI (electronic data interchange) for
order processing and sales tracings, to 3M. Some VARs serviced only certain parts of Canada, such as a
province or region, while others operated nationally.
3M Canada was usually indifferent as to which VAR serviced its hospital customers since contracts were
between 3M and the hospitals, and the VAR acted as an intermediary or agent (see Exhibit 3). VARs
competed for the award of 3M hospital contracts by providing value-added services to the hospital. For
example, some VARs offered small lot shipment quantities and just-in-time (JIT) deliveries.
Scott estimated that one in four hospital deliveries from VARs were full case shipments. Some VARs also
accommodated hospital requirements for specific delivery windows that supported JIT delivery
arrangements. Many VARs had invested in information systems that supported the billing preferences of
the customers.
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3M CANADA COMPANY LOGISTICS NETWORK
Like all 3M Canada businesses, the Health Care Group drew its logistical support from the company’s
shared services organization. Products were manufactured globally, and Canadian materials management
staff ordered products that were shipped to 3M’s distribution centre (DC) in Milton, Ontario
(approximately 50 kilometers west of Toronto) from 3M’s Forest City, Iowa DC. Approximately 7.5 per
cent of the Milton DC capacity was dedicated to Medical Division products.
A third party logistics company operated the Milton DC, which had monthly facility costs of
approximately $250,000. The DC handled only full case shipments and current volumes for the Medical
Division were approximately 76,000 cases per month. The associated monthly picking costs were
approximately $12,000, of which the hospital portion was approximately 65 per cent.
The company targeted inventory turns of 12 times in all of its distribution centres, and the Milton DC
maintained an average inventory level of approximately $5.5 million in Medical Division products,
including $3.575 million for the hospital market. The distribution centre manager indicated to Scott that
moving to subcarton picking to support direct distribution would require significant changes to the
warehouse configuration and picking processes, which would be much more labour-intensive. He indicated
that picking costs for hospital products would increase by approximately tenfold under direct distribution.
3M Canada had a centralized materials management and customer service team based in London, Ontario.
A team of customer service staff managed all orders that were received from 3M customers, including the
Medical Division. The orders placed for the hospital market differed from much of the other health care
group orders in that orders were primarily received from the five VARs, who ordered in large volumes.
Scott estimated that, of the approximately 500 orders 3M currently received each month, more than 80 per
cent were electronic orders and the balance were manual orders. Moving to a direct-distribution model
would result in a significant increase in the number of Medical Division orders processed each month and
the percentage of manual orders was expected to increase dramatically because many hospitals did not
have systems to support electronic orders. Scott estimated that the customer service team would need to
add additional staff and resources to handle the increased workload at a total cost of approximately
$550,000 per year.
THE DIRECT-DISTRIBUTION ALTERNATIVE
Matt Pepe expected Scott to evaluate the existing method of distribution for the Medical Division and to
make appropriate recommendations. As part of this assignment, Scott decided to interview several
directors of strategic sourcing at 3M’s largest hospital customers. These interviews indicated a strong
perception that major cost savings could be achieved in the supply chain if hospitals bought product
directly from 3M as opposed to using VARs. As part of initiatives to restructure provincial health care
supply chain organizations, most hospitals were members of regional supply chain service organizations,
such as HSSBC and Health Care Materials Management, located in London, Ontario. These organizations,
although not a substitute for the VARs, provided some of the logistical services offered by the VARs, such
as consolidation, inventory management, replenishment and small lot shipments. Contracts with VARs
compensated hospitals for services by regional supply chain service organizations through reductions in the
agency fee.
Scott also investigated how direct distribution would affect supply chain costs in the areas of warehouse
handling and transportation. Exhibit 4 summarizes the warehouse handling costs incurred by 3M Canada
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under the existing distribution model for both the hospital and out-of-hospital markets. Based on
conversations with the manager of the Milton DC, Scott expected that these costs for the hospital portion
would triple under direct distribution. He also estimated that hospital inventories at the Milton DC would
need to be increased by approximately 25 per cent to support a direct-distribution model.
Working with the transportation manager, Scott had also been able to collect information from the VARs
concerning their transportation costs. Exhibit 5 provides estimates of the additional transportation volumes
and costs from the 3M Milton DC to hospital customers under direct distribution.
PREPARING FOR THE MEETING WITH MATT PEPE
Although direct distribution had several advantages, Scott was concerned about the ability of 3M to
transition from a distribution network that relied on VARs to a direct-distribution model. If 3M Medical
Division adopted the direct-distribution model, it would pull away from the existing distribution model that
was used by most other 3M Canada businesses. As part of his report to Matt, Scott would have to identify
the specific changes that 3M would have to make to its supply chain organization and the accompanying
changes in areas such as sales and marketing, finance and accounting, sourcing and logistics. Scott
identified five areas that he believed would have to be addressed in his assessment of direct distribution
with respect to logistics: storage, fulfillment, customer service, transportation and warehouse handling.
However, Scott was also acutely aware of perceptions by some customers of the existing distribution
model. The Medical Division had recently participated in a benchmarking project managed by a third-party
consulting firm. As part of the benchmarking process, the consultants collected data from hospital
managers, including representatives from purchasing, finance and clinicians, in seven areas that included
business relationship and support, manufacturer personnel, products, business education and support,
contract administration, logistics and supply chain management, and customer service and support.
Overall, the Medical Division ranked very high among the 15 health care companies that participated in the
benchmarking project. However, its poorest rating was in the area of logistics and supply chain
management, and each of the companies that ranked above the Medical Division in the benchmarking
report used a direct distribution model.
As Scott looked at his calendar and recognized that he had only three weeks to complete his analysis and
develop recommendations for his meeting with Matt, he wondered what value the VARs provided to the
hospitals, and whether the current distribution model provided the best value to the Medical Division and
its customers. While 3M Canada was responsible for the entire product and pricing support, VARs were
paid a commission in the form of an agency fee. Several VARs claimed there was not enough profit to
support the services they provided. Other major competitors in Canada, such as Johnson & Johnson,
maintained a direct distribution supply chain model, and Scott felt he should carefully evaluate the
opportunities associated with such a system. He felt the direct-distribution model would be considered if
variable expenses were less than the prevailing agency fee.
Meanwhile, the staff in the 3M Canada logistics group warned Scott of major challenges that would be
presented by changing to a direct distribution model. Scott wanted to make sure he had considered all
possible ramifications and cost implications as part of his report to Matt.
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EXHIBIT 1: SHIFTING SHARES OF HEALTH CARE SPENDING IN CANADA 1975 – 2014
50%
Percentage of Total Health Care Expenditures
45%
40%
35%
30%
Hospitals
25%
Other
20%
Physicians
Drugs
15%
10%
5%
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
0%
Source: Canadian Institute for Health Information, National Health Expenditure Trends, 1975 to 2014, CIHI October 2014,
www.cihi.ca.
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EXHIBIT 2: 3M HEALTH CARE — SELECTED PRODUCT LINES
Dental
•
•
•
•
•
•
Adhesives
Cements
Composites
Curing Lights
Digital Materials and Equipment
Finishing and Polishing
•
•
•
•
•
•
•
•
•
•
•
•
•
Diagnostics
Fabric Drapes
Hand Antiseptic
Hygiene Monitoring
Immobilization
Incise Drapes
•
•
•
•
•
Coding and Reimbursement
ICD-10 Solutions and Services
Medical Records Abstracting
Patient Care Planning
Classification and Grouping
•
•
In Vitro Diagnostic Components
Optical Laboratory Consumables
Glass Ionomer and Liner
Implants
Impression Materials and Equipment
Infection Control
Preventative Care
Provisional/Temporizing
Teeth Whitening
Infection Prevention
• Masks and Respirators
• Patient Monitoring
• Skin Preparation
• Staplers
• Sterilization
• Surgical Hair Removal
• Surgical Scrub
Health Information Systems
•
•
•
•
•
Clinical Documentation Improvement
Coding and Billing compliance
Consulting Services
Health Data Interoperability
Medical Dictation and Transcription
Medical Devices
•
Stick to Skin
Skin and Wound Care
•
•
•
•
•
Cleaners
Compression Systems
Dressings
Foam Padding
Hydrogel
•
•
•
•
•
I.V. Site Dressings
Medical Tape
Moisture Barriers, Creams and Lotions
Self-Adherent Wraps
Skin Closures
Veterinary and Animal Care
•
•
•
Casting and Splinting
Diagnostic Imaging
Sterilization Assurance
•
•
•
Stethoscopes and Accessories
Surgical Products
Wound Management
Source: http://solutions.3mcanada.ca/wps/portal/3M/en_CA/Products/ProdServ/Dir/HealthCare/, accessed August 12, 2014.
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EXHIBIT 3: 3M MEDICAL MARKET DISTRIBUTION STRATEGY
Acute Care/Institutional Markets
3M will conduct its business as required to meet customer
expectations including the negotiations for pricing of products and
terms. However, we will allow our customers alternatives to how
the product is purchased, inventoried, delivered. Customers may
select to receive goods directly from 3M or from a select list of
value-added resellers. 3M encourages its customers to select a
prime distributor to enable a tripartite optimization of the supply
chain.
Non-acute Markets
3M will always allow its customers a choice of distributor but will
endeavor to leave the setting of prices to the needs of the market
and channel that delivers the product.
Intent
3M will seek other ways to control our brands, markets and
relationships with customers without becoming a logistics
company.
Source: Company records.
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EXHIBIT 4: MONTHLY WAREHOUSE HANDLING COSTS UNDER CURRENT MODEL
Receipts
Put away
Let down
Movement
Legislative labeling
Serial number
Lot number
Bill 101 relabel
$
$
$
$
$
$
$
$
3,732
2,343
919
340
28
48
19,664
41
Source: Company records.
EXHIBIT 5: ESTIMATED TRANSPORTATION COSTS — DIRECT DISTRIBUTION MODEL
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Northwest Territories
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon Territory
Average transportation
rate ($)*
Estimated number of
shipments per year
60.17
69.76
41.52
58.51
64.69
50.86
91.31
26.76
15.84
31.64
26.61
114.68
3,676
3,621
1,372
1,097
933
1,262
55
33,302
165
8,559
768
55
* Transportation costs based on three-day standard ground transportation, except Ontario and Quebec — next-day
service and adjusted for typical shipment size (weight and volume).
Source: Company records.
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