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Sigma Pharmaceuticals is a stockmarket-listed public company, with a proud history of manufacturing and distributing pharmaceuticals and other pharmacy goods. With their legacy ERP system on the distribution side reaching a ripe old age of 30 years, it was time to take a step forward and implement a new system. This is a story of an ERP implementation gone right due in no small measure to extensive due diligence on Sigmas part.
Published in MHD Supply Chain Solutions, May / June 2005
By Charles Pauka
A demanding patient
Chemists are a special breed of people. They devote many years to studying complicated chemical formulae as well as the biology of the human body, and usually spend the rest of their life in a pharmacy surrounded by concoctions of every imaginable colour, smell and texture, in the pursuit of helping fellow human beings with their ailments.
It follows therefore that those who supply them with their life-saving potions must also be special people. Consider this: a large percentage of orders are made up of item-level lots. Cases make up a minute proportion of the orders (mainly bulk, non-specialist goods such as toilet paper, nappies etc.), and full pallet orders are rarer than the teeth of the proverbial chook.
In addition, some of the goods happen to be scheduled drugs that must be handled with a high degree of security, and a portion of deliveries consists of temperature-sensitive medications. This can make the despatch and delivery operations complicated.
Over the years, chemists have come to expect twice daily deliveries, and, because of the fragmented nature of the industry, a complicated discount structure has also evolved (like those in many retail environments). The supplier works out the best deal for the pharmacy at the time of order processing.
It may seem strange but a majority of items stocked by pharmacies are generic products that are easily replaced by others. (How many different brands of aspirin, for example, do you find in a pharmacy?) Even if the product sought by the customer is a unique branded one, the manufacturer generally does not supply the pharmacy directly but goes through a distributor. And herein the problem lies.
There are several importers and manufacturers of pharmaceutical goods in Australia. Sigma is actually the largest contract manufacturer in the country, as well as producing their in-house brands Logicin and Herron (the latter acquired recently). With the manufacturing division being a completely separate entity to distribution, Sigma (manufacturing) sells its products into doctors surgeries, pharmacies and supermarkets through distributors, the three big ones being its own sister division Sigma (distribution), Australian Pharmaceutical Industries (API), and the Mayne Group.
The healthcare industry is one of the biggest in the land. It is not surprising, therefore, that the three big players are competing down to the wire.
When youre selling the very same goods to the very same customers as your competitors, value-added services become an important feature.
A suburban chemist facing the task of selecting his/her preferred supplier (distributor) has a veritable menu to choose from. In addition to standard services such as twice-daily deliveries, no minimum order quantities and liberal return policies, suppliers customarily offer advice and assistance with real estate issues (site selection, store design), as well as staffing, training, marketing and advertising, and private label development.
Taking care of the back end
Like many other businesses, Sigma has been well aware for some time of the burning importance of an optimised supply chain. Its legacy ERP system has served them well for over twenty years, but modern programming languages and software developments have overtaken it it was time for a change.
In light of the complex requirements and demands that Sigmas particular industry places on back-end supply chain management software, the first step in the review process was to write a detailed and comprehensive specification as to what the new system would be required to do. As always, the do nothing option was also on the table, as a complex implementation gone wrong can be more than unpleasant, it can be downright disastrous witness the now celebrated Nike and Sainsburys fiascos.
Despite the complexity of the RFQ, which was open to the market, no less than fourteen vendors responded. After evaluating applicants against a number weighted criteria, the initial qualifying round whittled this group down to just four candidates.
These four remaining vendors were able to satisfy Sigmas priority requirements, some of these being:
-ability to handle large volumes of suppliers, SKUs and orders: Sigma has approximately 4,500 customers, 500 suppliers, ranges 16,000 lines, and processes over 275,000 lines each day,
-ability for quick turnaround: within two hours of receiving the order, it is confirmed, invoiced and picked ready for despatch,
-ability to handle complex pricing structures: pharmacies can get discounts depending on manufacturers promotions, order size, cumulative orders reached (parcels), extended payment terms, buying group (eg. Amcal) discounts, complicated by the fact that a chemist can belong to any number of buying groups,
-ability to provide a reference site that has features close to Sigmas requirements (anywhere in the world).
At this point serious demands were placed on the applicants. They were provided with some representative data, based on which the vendors were required to set up a demonstration run over two days that covered forty (40) specific scripts. These scripts encompassed critical areas that were essential to Sigmas ongoing health as a pharmaceutical distributor.
And then there were two
Two more of the contestants dropped out at these hurdles. With just two applicants remaining, pre-contract negotiations and testing began. A copy of Sigmas reallife data was provided to each vendor, and 270 scripts (test orders) were run over an eight-week period in the cosy confines of Sigmas conference room. These tests were designed to provide Sigma with specific outcomes to help with the decision making.
This trial for better or worse proved that Sigmas initial evaluation was spot on: the two software providers came out of the test fairly even, with obvious modifications required in different areas.
As Sigma has unique industry requirements that needed change to the base software in the areas of pricing, they could not change to suit: it had to be the other way around. On issues that the vendors could demonstrate that best practice works better and more efficiently, Sigma was committed to making the change to their in house processes. Sigma wanted to ensure that it did not close the door to future upgrades by modifying the base software unnecessarily.
Jackie Toh is Sigmas General Manager Group IT & Management Systems. She and her team set down some definite parameters that were to form the basis of the successful vendors contract:
- fixed price: price must be set up front and the implementation guaranteed to work, with no unforeseen modifications at extra cost
- the system must be a complete package, any gaps must be agreed up front
- any modifications required to adapt the software to Sigmas best-practice processes must be incorporated into the base package
- guaranteed box size: the system must be guaranteed to be able to cope with the volume of business without any further add-ons.
The eight-week pilot was designed to not only flush out any incompatibilities, but also to give the vendors a realistic picture of what changes they needed to incorporate into their offering to make it acceptable.
Absolutely every aspect of Sigmas specifications and acceptable performance levels was put down on paper, and it was not the vendor but the Sigma Pharmaceuticals team who wrote the agreement, designed to cover all eventualities.
In the end, the decision came down to choosing the best fit considering all aspects. There were three major deciding factors: the winner, IBS, had a solution that was robust and a close fit to Sigmas specifications, they were able to demonstrate a good track record in the industry and proved it with an impressive representative implementation in Switzerland, and were a sound and stable corporate entity with strong local representation.
Living with the decision
As we have covered all bases in the pre-contract negotiation phase, we can report having a very good relationship with IBS, says Jackie Toh. It is not only that the contract is being adhered to, but the spirit of the agreement is being respected by both sides, which is extremely important.
With a complex implementation such as this one, there is bound to be a few - albeit very, very few areas not covered by the contract. Sigma realises that some of these are not vendor issues but additional requests or modifications not foreseen in the negotiation stage.
If its a software issue, we expect the vendor to resolve it at their cost, which they do, says Jackie. But if its additional to the original specifications, we accept that we have to pay for it over and above the contract. To date we have incurred very little out of scope expenditure.
With the contract having been signed in October 2003, they set to work quickly. Implementation started in November 2003, and by April 2004 the financial, buying and pricing modules were rolled out nationally. Tasmania went fully live in October 2004 with no hiccups, and in January 2005 Queensland went live as well. We can say that the software is truly tried and tested by now, says Jackie. It is too expensive to run the legacy system and the new one side by side. It is time to expedite it.
What IBS had learnt during the pre-contract eight-week period was put to good use after the sale was concluded. As IBSs pre-sales people also provide ongoing customer support, they were intimately familiar with Sigmas systems and provided comprehensive train the trainer sessions during the implementation phase.
To date, the IBS system has been coping with the vagaries of the pharmaceutical distribution industry with aplomb. As orders come in, it works out the best deal available on any particular item within the order from the myriad of combinations (noting to which buying group/s the customer belongs, tracking parcel sizes, applying manufacturer and/or distributor promotional discounts), applies extended payment terms, tracks regulations by state governments as well as various product-related restrictions, - and it even manages to get the orders out.
So what does the future hold? The federal government is promoting the roll-out of broadband to pharmacies, just as it did to doctors, as it will make the work of the Health Insurance Commission (HIC) more productive. Pharmacy suppliers and the HIC have a common goal in this, as broadband access will expedite the take-up of Parma Extranet, a WAN gateway, which would improve on the current Point-of-Sale (POS) and PDE (hand-held device)-based ordering and replenishment systems.
Just what the doctor ordered?
The supply chain domain is awash with horror stories of failed ERP implementations. It would be easy to dismiss Sigmas IBS experience as just a lucky coincidence, given that many supply chain managers go into such a venture relying more on crossed fingers than due diligence, research and preparation. They can be forgiven (or can they?) for doing so as many CEOs and CFOs fall for the hype and demand quick action to make them look good at the next shareholders meeting.
At the end of the day an ERP implementation is a long-term investment not to be taken lightly. Not only is your company going to have to live with it for many years to come, but your career may well come to an abrupt and undignified halt should the business go pear-shaped.
But, as Sigmas example demonstrates, it can be done successfully. If you know your business well, and are prepared to put the hours into preparation, research and evaluation, the rewards are there.