Med-Chem Products: Hospital Division

The following case is based on the experiences of one of the co-authors with an actual company and its management.

Fiona Richey knew that she had been given the opportu- nity of a lifetime. She had just been hired to be an internal
troubleshooter and consultant by the Hospital Division of Med-Chem Products. This was quite a feat. After all, she had graduated about four years ago with an undergradu- ate degree in Operations Management and Logistics from a large midwestern university. During that time, she had developed a reputation for being a good team player, cre- ative thinker, and someone who got things done quickly (and correctly). That was one of the major reasons that Med-Chem had hired her. Originally, she had been work- ing for a supplier to Med-Chem. About six months ago, she had been approached by one of the managers of Med- Chem, with a very attractive job offer.

Even though she had been at Med-Chem for only four weeks, she had begun to get a feel for the division, its prod- ucts, its operating plans and procedures, and its problems. During this time, she had not been given any major proj- ects. Rather, she was told to get to know people and to look around. As a result, she was ready and eager when Todd Hall, the division director, called her and gave her the first real assignment, and what an assignment. At this time, over coffee, Todd told Fiona that he had been concerned about the current planning system that was in place. He seemed to be finding out about problems after they occurred. The marketing and operations groups within the division always seemed to be making after-the-fact corrections to the plans that they each had generated. More important, no one in the division seemed to feel any responsibility for the plans. Whenever things went wrong, everyone took the position of blaming everyone else. What Todd wanted Fiona to do was two-fold: he wanted her to review the cur- rent system and to prepare a critique of it. In addition, he wanted her to recommend changes. Fiona knew that she had to do well on this project.

The Hospital Division of Med-Chem

Med-Chem was a Fortune 100 drug and chemical manu- facturer, headquartered in Germany and with divisions and plants located worldwide. The Hospital Division was a division of this company. In the United States, it was head- quartered in Atlanta, Georgia. This division manufactured a line of pharmaceuticals and testing equipment for use in hospitals, emergency rooms, nursing homes, and so on. Within this division, there were two major groups: marketing and operations.

Marketing was responsible for three major activities: sales, distribution, and forecasting. Of these three, forecasting was considered to be the most important. The products offered by this division were essentially make-to-stock. As a result, it was important that the right amounts be in stock at any point in time. As the marketing people had told Fiona, forecasting was a nightmare task. First, Med-Chem had a very broad product line, consisting of some 5,000 items. In addition, not all of the products were equally important. The group had adopted the product model developed by the Boston Consulting Group when describing the products. According to this model, the various products could be assigned to one of four categories. The first category was that of a star. A star product was one that was seen as being important. A product could be important because of a high contribution margin, unique position in the marketplace, or because it helped to enhance the reputation of the division (for being a leader in this product). These were products that management always wanted to ensure were delivered at or near 100 percent of actual demand. About 10 percent of the products fell into this category. Next came the cash cows. These products, about 35 percent of the current catalog, were highly stable, highly predictable in nature. They generated a very good revenue stream. Management never wanted to stock out of these items. The third group was the question marks (25 percent). In general, these were new products or ones that had not yet established their value in the marketplace. The final category, dogs, were products that were considered low performers. Typically, such product lines were old, were positioned in segments where the com- petition was severe, had very low contribution margins, or were not unique (i.e., there were a number of equally effective generic substitutes available). Many dogs were kept because marketing felt that they helped to round out Med-Chem's product offerings. For all four groups, marketing rarely informed operations of large orders by major customers or its attempts to stimulate ordering through special promotions or discounts. Marketing was allowed to change the forecasts at any point, up to and including the point that the products were scheduled to be shipped.

Operations was responsible for building the products required by marketing. At present, operations viewed this as a major problem because of marketing's constant modifications to the forecasts and the lack of any data concerning actual sales occurring in the marketplace. After talking with some of the plant managers, Fiona knew that their primary objective was to minimize the total production cost, including the cost of holding inventory. With the frequent production changes dictated by changes in the forecasts, operations found themselves expediting orders and under-taking dramatic production changes. If left alone, Fiona knew that operations would schedule operations to reduce cost.

Med-Chem's Current Planning System

The current system had been in place for as long as anyone could remember. This system did not differentiate between the performance of marketing and the performance of oper- ations. Everyone agreed that all the information needed by management to reduce the problems existed but no one really knew how to proceed. As Todd told Fiona before she left, there had to be a better way of planning at Med-Chem.

Questions

1. Describe the current system in use as it applies to the operations personnel and marketing personnel. To what extent does this system help or hinder Med-Chem's ability to achieve its objectives? Why?

2. For marketing and operations, what are the critical activities that they must do well for Med-Chem to be successful in the marketplace?

3. What general recommendations would you make to Todd regarding the current situation?