Question

Case 2: 3M Canada: The Healthcare Supply Chain

1. Draw the supply chain for 3M Canada’s medical division indicating the major players in it.
2. What value do VARs provide in the health care supply chain?
3. What is the incremental cost of adopting the direct distribution model? Hint: If the warehouse costs increase from $20,000 to $30,000 the incremental cost is $10,000.
4. Comparing your estimate of incremental costs from (3), to the commission / agency fee being paid to VARs, does it make financial sense to replace VARs with a direct distribution model? In other words, is the incremental cost offset by the savings in agency fee payments to VARs?
5. Other than the cost analysis, what other factors are important in making this decision about the direct distribution model? Consider strategic, and customer service-related dimensions of the decision and any other factors you identify.
6. Scott Davis is currently only evaluating direct distribution vs using VARs. Are there any other options he should be considering?
7. What is your final recommendation after considering all of the above questions? Should 3M Canada medical division move to a direct distribution model for hospitals (that account for 65% of its sales), keep using VARs, or do something else?

Answer 1

1. Supply Chain of 3M Canada's Medical Division

2. Value provided by VAR in the health care supply chain

Medical Divisions sale to hospitals through VAR is approximately $9million per month or around $108 million per year  

3. Incremental cost of adopting the direct distribution model

Cost of additional staff= $5,50,000/year

warehouse handling cost= $9,76,140/year

Transportation cost= $19,15,826/year

Inventory Cost= $13,75,000/year

Total incremental cost= $48,16,966/year

4. The VAR are paid a commission of 8% of hospital sales which comes to approximately $7,20,000, which is far less than the incremental cost for adopting direct distribution channel. Thus, it is not financially viable to replace VAR with a direct distribution system

5. The other factors (except cost) which could be considered for adopting direct distribution channel can be timely delivery of the medical products, supply in adequate quantities, storage facility, data collection, etc

6. According to me, there are no other considerations that should be considered by Scott Davis. In my view, there can only be two methods of supplying the products to the customers: direct method and in-direct method. VARs is an indirect method of supplying products to the customers. Since Scott Davis is comparing between direct method and indirect method (VAR), there is no other methods that should be considered

7. 3M Canada medical division should not move to direct distribution model since it has a very high incremental cost. It should continue with the exsisitng method of VAR distribution method