To : Professor Scott Morton
From : Seiichi Hosotani
Date : Nov. 20, 1996
RE : Assignment 1: McKesson
McKesson Corp., founded in 1833, is a leading provider of health care products and services to independent and chain pharmacies, hospitals and health care organizations throughout the United States and Canada. The company, headquarters in San Francisco, also distributes health and beauty care products, specialty foods and general merchandise. McKesson Water Products Company is one of the largest distributors of bottled drinking water in the United States. McKesson is listed on the New York and Pacific stock exchanges under the ticker symbol.
Over the past year, McKesson has launched initiatives to improve logistics, operating efficiency and service levels. The company is heavily investing in systems and process improvements that will help the company’s customers reduce the amount of time, capital and administrative overhead they have tied up in the supply chain. I think that these moves will, over time, reinforce the company’s position as the distributor of choice in all segments of the pharmaceutical marketplace.
As an important results, Mckesson is creating value for supplier-customers by streamlining inventory throughout its distribution network. For example, its new regional distribution center in Memphis, established in fiscal 1995, improves overall inventory and service-level management by consolidating shipments from numerous manufacturers. These products are now shipped from Memphis to the company’s distribution centers throughout the country. The regional distribution center also accommodates overnight emergency pharmaceutical orders, manages the introduction of new items and supports seasonal variations in demand across the country.
As an important driver, information technology is playing big roles. During fiscal 1995, McKesson significantly enhanced its accuracy and efficiency in filling customers’ orders with the development of its new Acumax Plus warehouse management system in Denver. The system uses an arm-mounted computer and wrist-mounted laser bar-code-scanning system, worn by employees, that tracks every item handed by the distribution center, from the minute it is received until it is delivered to the customer’s door. Every time an item is moved, its new location is electronically recorded, and inventory quantities are automatically updated. Data are accurate up to the second because the scanned information is instantly transmitted by radio signal to the facility’s computer. As a result, customer orders are virtually error-free. The system is being deployed in 11 additional McKesson distribution centers in fiscal 1996.
McKesson is also continuing to invest aggressively in information systems designed to enhance customers’ efficiency and profitability. Omnilink, a new computer-based program that adds significant value for pharmacy customers, is an electronic payable reconciliation program for their-party claims. Also Pharmaserve provides pharmacists with computerized drug utilization information on potential drug interactions to assist them with patient counseling, as required by recent legislation.
These technological advances have resulted in new operational excellence and effectiveness. The accuracy of order-filling has improved, as has cost efficiency. An example of last year’s results tell the story. McKesson Drug added over $800 million in revenue, while selling and distribution expenses increased only $1 million.
As drugs move from manufacture to patient, it becomes more important for the McKesson to influence all aspects of pharmaceutical product flow such as selection, financing, procurement, prescribing, logistics and dispensing. By providing clinical relevant information on drug use, the company will help its health care provider customers manage their pharmaceutical utilization. At the same time, the company will be able to help its customers improve compliance with managed care. The company is convinced that a comprehensive approach to pharmaceutical management is the only way to assure quality health care at a reasonable cost.
This broader view of the marketplace has defined two related opportunities for McKesson. First, the company can improve profitability by leveraging its large core wholesale business. Second, the company can capture growth by developing products and services that make its health care provider and manufacture customers more operationally efficient and clinically effective.
To address these opportunities, the company has established two strategic objectives. The first is to extend the recognition of McKesson as the distributor of choice from the retail to the institutional market. The second is to take advantage of changes in the health care industry and achieve superior growth by serving the needs of all sites where pharmaceuticals are prescribed or dispensed. Therefore, it has become very important for the company to perfect the fundamentals of distribution, such as improving customer service, delivering new value-added services to the retail customers and developing technology to lower costs for the customers and the company itself. The company’s new information system actually help the company tackle these issues.