3m Health Care

CASE MEMO: 3M HEALTH CARE

3M Health Care’s medical market division could save $2.85 million per month if it chooses direct-sell model as opposed to selling its products to Canadian hospitals through Value-added resellers (VARs). The division’s current distribution model is a mix of VARs and direct selling, where direct-selling amounts to only $0.39 million i.e. 7% of the total sales of $5.57 million. With its high dependency on VARs for sales to hospitals, even though the cost savings are evident for changing to a full direct-sell model, there is plethora of issues for 3M to consider before taking a final decision.

In 2003, Canadian Healthcare services were government funded and delivered by organizations such as Regional Health Authorities (RHAs), hospitals, physician practices and health clinics. A number of initiatives were introduced to improve speed and efficiency in delivering healthcare. Large group purchasing organizations were formed for reducing supplier price and lowering total costs of ownership by negotiating contracts directly with manufacturers, as opposed to dealing with distributors.

3M Health Care was committed to supplying innovative and reliable products and services to the healthcare industry. Its strategy is to provide premium products with innovative features. In Canada, 3M’s sales representatives educate the clinicians of the superior benefits of the products and clinicians specify 3M products to hospital purchasing organization when making purchase decisions.

There are two channels for the purchasing organization to choose from – buy directly from 3M or through one of the VARs. VARs received commission (assumed to be 10%) based on sales made to hospitals for providing value-added services such as storage, transportation, product handling, billing, transaction processing, inventory management, etc. VAR acted as intermediary between 3M and hospital customers.

The advantage of the current model with VARs is that services like small lot shipment quantities and Just-in-time (JIT) deliveries can be offered to hospital customers. 3M could reduce its IT investment by getting special services from VARs for order processing and tracing. The competition between the VARs increases sales for 3M.

The downside of the current model is that there is less scope for maintaining direct relations with hospital customers. The commission of 10%, which is about $0.35 million (Exhibit 1) makes this an expensive channel for the company. Also, there is a possibility that different VARs compete for the same deal causing a channel conflict .

Exhibit 1: Sales by Market