Case study: Baxter’s

The story.
In the 1980s, Baxter, the US healthcare group, supplied commoditised products such as IV solutions to hospitals. All the main companies in this sector supplied products in more or less the same way, which meant the only differentiating factor between the companies was price.

The challenge.
Baxter’s products were “boxed in” as commodities were subject to price competition. So, the president of one the group’s business units formed a team to do a “challenge-everything” study in order to rethink the process. The aim was to find a new way to differentiate Baxter’s offering.

The analysis.
The team looked at Baxter’s internal operations but found only limited scope for improvement. So, it decided to look at what happened to Baxter’s products after they were dropped at the hospital. This revealed three sources of inefficiency: managers focused on counting individual products rather than on replenishing entire orders; duplication of functions, with tasks performed by Baxter and the hospital; and hospital activities that, if adjusted, could greatly reduce Baxter’s costs. This meant that by the time one of Baxter’s products reached the patient, the final cost was a large multiple of the original product cost and about half of that was avoidable.

A new model.
The team suggested a new system in which Baxter would distribute products directly to the hospital’s patient care areas, with Baxter personnel working within the hospital to oversee orders and the shelving of products.

Results for the hospital.
Baxter was able to eliminate redundant steps performed by both the hospital and the company. For example, the company realised that for most hospital supplies, personnel was a much more important cost than the cost of carrying inventory.

The problem before the new system was implemented was that hospitals did not measure the cost of staff time, which often comprised almost half of the total supply chain costs. By factoring in the cost of staff time, Baxter and the hospitals realised that it was less expensive for the hospital to carry a little more inventory and order new stock less often.

The result.
The new system lowered relevant hospital costs by at least 30 per cent and also freed up scarce space for clinical use.

Baxter’s own costs also decreased, because the company gained control over hospital inventories and smoothed the order pattern. This allowed the company to reduce its own inventories and eliminate the many unexpected “emergency” deliveries each day.

Baxter’s sales also rose by more than 35 per cent in the hospitals that utilised the new system. This occurred for two reasons: first, top hospital managers found the cost reductions and enhanced reliability compelling; second, the head nurses formed strong bonds with Baxter’s in-hospital personnel.

This translated into strategic benefits, as the way in which hospitals chose their suppliers shifted from a focus on low-level purchasing decisions based on price to senior management decisions based on whether a supplier could be trusted to operate capably and comfortably within the hospital.

The unexpected problem.
Baxter’s sales representatives were sceptical, because they had built the key relationships with the hospitals’ purchasing staff. The new system introduced an important new relationship between Baxter’s operations/supply chain managers and their hospital counterparts. But once they saw the enormous sales increases, they all wanted the new system in their accounts.

Key lessons.
First, “challenge-everything” studies are critical to improve value for customers.

Second, customer-supplier integration can offer lasting gains for each partner, but operations managers and sales representatives have to work together at all points in both account selection and account management or the process will fail.

Third, even in today’s tough economy, companies that have identified their “sweet spot” in the market and developed ways to deepen their customer value proposition can achieve surprisingly large market share and profitability improvements that will last for years.
- Financial Times, 17 Nov 2010