Baxter Health Care: Strategic Alliance

1. Baxter Health Care: Strategic Alliance • Background • Business Process Redesign: Process, IT • Lessons Learned

2. Baxter Is a World Leader in the Production and Distribution of Health Care Products • Sales exceeded $7 billion in 1990: • Manufacturing plants all over North America • Strategy to be “low cost producer” • Supplier alliance programs since early 80’s • Purchases over $50 million in corrugated material: • Quality packaging critical to distribution • Considered a “strategic material”

3. Baxter Corrugated Strategic Alliance Was a Multi-Year Commitment Objectives: • Reduce the supplier base to a minimum number • Develop a long term strategic alliance • Have a continuous improvement program

4. The First Step Was to Select Suppliers for Partnerships 1990 Corrugated Purchases Plant A Plant B Plant C Plant D Plant E 30 Others 3 Others St. Joe GP/GNN Westvaco GP/GNN Weyerhaeuser Weslvaco Stone PCA Boise Cascade Wabash Fibre Temple Inland Green Bay JSC/CCA Green Bay JSC/CCA Stone Longview Stone Western Kraft Weyerhaeuser Temple Inland Union Camp Boise Cascade MacMillian Bloedel Miller Container Weyerhaeuser JSC/CCA Percent of Total International Paper Temple Inland Temple Inland JSC/CCA Temple Inland Georgia-Pacific/GNN MacMillan Bioedel 1990 Purchases

5. A Target Was Established to Reduce the Supply Chain Cost by 16 to 24 Percent % 20 Box redesign • Spec consolidation • Source reduction (tray substitution) • High performance linerboard • Reusable containers • Suppliers: • Production planning • Shipping logistics • Fewer customer/products • Buyer: • Packaging line downtime • Receiving inspection • Accounts payable • JIT delivery • Capacity utilization • Long-term committed volumes • Singular opportunity for competitive bid 15 System cost Percent of Savings 10 Volume discount/ price reduction 5 0 • Targeted savings ranged from $8 to $12 million.

6. Sent to Production Floor Issues to Workorder Electronic Matching Checked Issued Forecast Baxter and the Supplier Identified 34 Major Steps in the Supply Chain Process Baxter Process Before Redesign: Initiated Purchase Orders (MRP) Order Received and Matched Master Scheduling (MRP) Planned Purchase Orders Issue Purchase Order Transfer to Inventory Obtain Quotes Select Supplier Order Inspected Forecast Picked and Sent to Production Floor Held and Tracked as Inventory Matched in Accounts Payable Workorder Issued (MRP) Issues to Workorder Inventory Reconciled (MRP) Cycle Counted Picklist Generated Check Issued Inventory Current Baxter Process:

7. The Value Improvement Process Reduced the Effort to Eight Major Steps Corrugated Supplier Process Before Redesign: Receive “Request for Quote” Match to Accounts Receivable Acct. Send Docu- ments to Baxter Prepare Shipping Invoice Build to Inventory Pick Order (1) Prepare Invoice Receive Order Order Shipped Prepare Quote Receive Check Forecast Current Corrugated Supplier Process: Receive Plant Request Order Shipped Receive Check Forecast (1) Does not include internal plant manufacturing systems

8. The New Procurement Process Is a Whole New Way of Doing Business Old New • Selected two suppliers in stategic alliance - they invest and share in program • Price base on published corrugated plus convesion • Taken off MRP and inventroy systems • Decision-making responsibility at the lowest possible level • Pre-released at supplier and process monitoring/validation to ensure quality • Electronic process with high IT utilization; matching of purchase order with goods(electronic funds transfer • Rules established for partnering continuious improvement with revenue sharing • Multiple suppliers: 68 in United States • Each purchase was priced • All planning through Forecase and MRP system • Low employee empowerment—lack of decision- making authority and responsibility at the execution level • Inspection on each lot at receiving • Payments to suppliers are made upon receipt of the invoice • Improvement projects managed seperate at Baxter and suppliers

9. Baxter Achieved Many benefits from the CorrugatedStrategic Alliance Cost Reduction Benefits Increased Quality • Savings exceede $12 M by year three • Reduced inventories by $17M • Reduced accounts payable staff • Reduced receiving staff • Streamlined administrative functions—practically eliminated paperwork and indirect overhead • Quality improved 34 percent • “0” defects rather that % acceptance Supplier Benefits • Improved profit margins • Increased plant capacity • Used program with other customers • More effective use of capital • Early involvement in new design • Joint problem solving Staff Benefits • Allowed Buyers to pursue other area • Plant staff actively involved in programs • More interesting work

10. Key Lessons Learned • A Strategic Alliance takes over two years to fully realize: • Requires continuous involvement of management (champions) and employees • Always establish financial/quality targets • Information technology is not always the answer: • System justifications are critical • Not a solution looking for a problem