Ivey Publishing

Prescribing a distribution strategy: 3M Canada, the health care supply chain

Ivey Publishing recently spoke with Fraser Johnson, professor of operations management at Ivey Business School, about his 46th published case, 3M Canada: The Health Care Supply Chain.

The case captures 3M Canada’s health care division at a critical moment. Scott Davis, national manager of key accounts and channel markets, must make a decision on whether he should cut out value added resellers (VARs) and adopt a direct distribution model for the medical division. VARs have been key partners for 3M in a variety of business units, and the decision could greatly affect both financial results and strategic alignment.

The original 3M Health Care case was set in 2003. Twelve years later, 3M Canada continues to review its distribution strategy with new direction from CEO Inge Thulin, who has committed to spending six per cent of the company’s sales on R&D.

Bringing the health care industry to the classroom

Why focus on health care? Johnson points out that we simply need to look at where the money is, especially in North America. “When you take a look at health care spending and GDP, the figures are striking. Health care spending is 11 to 12 per cent of total GDP in Canada and even higher in the U.S.A.  at 15 to 16 per cent,” Johnson explains.

Cross-sector and cross-discipline learning 

Although this case focuses on the health care supply chain, the learnings are applicable across sectors. “These issues not necessarily about health care, but about how to provide service to customers,” Johnson says. Customers will always give advice (in this case, asking 3M Canada to consider disintermediation to save them money) but they won’t necessarily stay loyal if a business follows it.

Aside from electives in supply chain or logistics, the strategic elements in the case make it ideally suited to a marketing course on distribution channels. “This is a supply chain management case and marketing case as much as anything. Marketing people ultimately decide on channels, answering questions such as whether to use VARs or sell directly to customers. The supply chain function needs to be able to support that decision,” Johnson says. 

The financial component is key to both students studying the supply chain and those in marketing, and it complicates strategic considerations. “Customers prefer direct selling; this is an interesting situation because you need to look at not only the financial analysis but also the strategy. It’s a real balancing act. Strategy must align with the quantitative analysis. It’s important for any company to carefully consider their operational capabilities,” Johnson explains. 

Innovation company or logistics company?

In the classroom, Johnson asks students what 3M is known for. The answer is clear: 3M is concerned with having the best product on the market, not the cheapest one. The case includes an exhibit that examines how 3M could handle the transition to a disintermediation strategy without becoming a logistics company. Keeping in mind that 3M is to spend 6 per cent of company sales on R&D, should it spend money on warehouse managers and logistics staff or instead on developing the best new products?

“Looking at the numbers alone, it makes sense to go with the direct distribution model, but it isn’t that simple. The “aha” moment when reading the case is that when you go through the direct distribution process, lease the warehouses, etc., then in the end the customers are going to ask for savings. They won’t get any ROI.”

View the abstract to download an inspection copy of the case.

View the teaching note to decide if this case is right for your class.

Do you have a question about the case?

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