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Case study | Apotek Hjärtat

Apotek Hjärtat, the second-largest actor on Sweden’s recently deregulated pharmacy market, sought to improve customer service and efficiency in stores to increase customer satisfaction and profitability. They engaged BearingPoint to develop and implement a store operations program for all of its more than 270 pharmacies.

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About Apotek HjärtatApotek Hjärtat has more than 2300 employees and had a turnover of approximately SEK 7 billion in 2011. Their mission is to help customers achieve better health and well-being.

The company acquired 206 pharmacies in the deregulation in February 2010 and has since April 2010 opened more than 65 new pharmacies. Apotek Hjärtat is owned by Altor Fund III and operates through-out Sweden, from Tomelilla to Kiruna.

Staying profitable in a new competitive landscape In 2009, before the deregulation of the pharmacy market, Sweden had about 929 government-run pharmacies. After the decision to deregulate, two-thirds of these were sold to private actors. The result was a competitive landscape with about 10 chains and several individual players, many of them pure greenfield ventures. The largest actor is now government-owned Apoteket AB (36 percent market share), followed by Apotek Hjärtat (21 percent) and Kronans Droghandel (14 percent).

Since the deregulation, the number of pharmacies in Sweden has risen by 34 percent1 . While the higher pharmacy density has been positive for consumers, it has become highly challenging for the companies involved. By the end of 2011, overall market growth had stagnated. In that year, legacy stores (meaning those that had existed since before deregulation) experienced an average sales decline of about 11 percent compared with 2010, having lost that business to newly opened pharmacies2.

In addition, statistics show that in 2011, general retailers captured almost 20 percent of the Swedish market for non-prescription drugs. This represents a substantial risk to pharmacies’ profitability, given that sales of non-prescription drugs generate higher margins than sales of prescription drugs1.

During this market turbulence, Apotek Hjärtat also implemented a new IT system which resulted in heavier workloads and a need for efficiency solutions.

Hence, the challenge for Apotek Hjärtat as a newly established company was two-fold. First of all, they realized that they had to establish their own way of working; all routines and processes were originated from Apoteket AB, the previous state monopoly. Second, to manage profitability on this new, highly competitive market, they understood that they had to achieve the following objectives:

•decreasecostsandworkmoreefficiently

•improvecustomerinteractioninstoretofitwiththenewmarketsituation

•increasesalesmarginsbysellingmorenon-prescriptiondrugsandtradedgoods

•openadditionalstorestostrengthenmarketposition

Apotek Hjärtat realized that a total transformation of their store operations was necessary. The strategy was to implement a change program that would provide their employees with standardized processes and tools to help them in their daily work. Apotek Hjärtat knew that they were undertaking a tough journey, but that they had to take control of their operations if they were to outperform competition.

Store operations improvement program through a three-phased approachIn cooperation with BearingPoint, Apotek Hjärtat began a store operations program that featured three phases: analysis, design and implementation. The approach was to use pilot stores to identify symptoms and root causes for poor performance; define industry-leading practices; and test and validate new solutions.

Key findings from the analysis phase resulted in an extensive list of areas and specific required improvements:

•Organization:createanorganizationalstructurethatmoreeffectivelysupportsthe company’s operations

•Managementsystem:settheconditionsforeffectiveoperationscharacterizedbyimproved efficiency and a businesslike mindset

•Staffplanning:staffingrequirements(schedulingintermsoftotalnumberof

employees and their roles at specific times of the day and week) should primarily be determined by customer demand

•Processes:streamlineprocessesandredistributeemployeetimefromnon-value-adding activities to value-creating ones

•Sales:implementabehavioralandculturalchangeamongemployeestodriveincreased sales and better margins

•Inventory:adaptinventorylevelstoimproveservicelevelsandreduceamountsoftied-up capital

•Backroomorganization:reducedisruptivefactorsandcreateastructurethatfacilitates greater efficiency

The outcome of this list was a rollout package comprising training material including tools, exercises and new store standards to be met by each pharmacy, and a rollout plan.

The rollout was implemented using a train-the-trainer approach. BearingPoint provided the regional managers with training sessions focusing on the methodology and rollout package. The regional managers then trained their pharmacy managers, who in turn trained their employees.

During the implementation phase, a standardized follow-up appraoch was utilized so that all pharmacies were evaluated using the same defined criteria.

Throughout the project, Apotek Hjärtat and BearingPoint representatives worked hand-in-hand, and a critical factor for the implementation’s success was that the regional managers led the initiatives taken in their own pharmacies. In addition, communication and a change of mindset among employees were two key factors for success.

Sustainable results and value createdToday, Apotek Hjärtat is realizing the benefits from the store operations project. Key financial results include:

•Morethan30percentofEBITAeffectswererealizedin2011,andatanannualrunrate,totaleffectswillbecapturedin2014.

•Workingcapitalwasreducedby15percentwhileoverallcustomer-servicelevelswereretained.

•Improvedworkprocessesandanewwayofworkingwithstaffplanningresultedingreater productivity (weighted volume/number of work hours).

In addition, waiting times that are a critical KPI for pharmacies, have been reduced thanks to a combination of a standardized sales process and a new IT system. Also, the fierce competitive landscape has resulted in further pressure to serve customers quickly.

However, the improvements encompassed more than just financial results. Apotek Hjärtat has also benefited in the following ways:

•Newstore-managementsystemimplementedinallpharmacies,involvingtheuseofnew store standards; KPIs; roles and responsibilities; a daily checklist and so on

•Improvedworkclimateaftera5Sexercise(sort;setinorder;shine;standardize;systematize) in accordance with Lean Six Sigma principles was performed in all pharmacies as part of the rollout

•Moreeffectiveandstandardizedprocessesforordering,goodsreceiving,andgoodsflow

•Clearerorganizationalstructure

Looking aheadApotek Hjärtat’s transformation journey has just started. Although the initial change is complete, continuous improvements are necessary to stay ahead of the competition. Therefore, as a final step in the project, Apotek Hjärtat has appointed a store development manager whose mainresponsibilityistomonitorthequalityofongoingeffortstoimprovestoreoperations.Asacomplement to this, audits are performed on a regular basis to help the company’s pharmacies remain compliant with the new store standards of work that were implemented.

1) Sveriges Apoteksförening, branschrapport 2011, http://www.sverigesapoteksforening.se/ apoteksbranschens-arsrapport-2011/ 2) Årsredovisning, ApoPharm Holding AB 2011

FIGURE4:THESCHEDULINGISNOTBASEDONCUSTOMERDEMAND.

”The effect of the project has been significantly improved results, mainly due to increased productivity, improved processes and a thorough store management system. The fourth quarter of 2011 showed the best result since Apotek Hjärtat was founded.”

Anders Nyberg CEO

FIGURE5:EFFECTONMAINKPI:SFROMIMPLEMENTATION

FIGURE1:NUMBEROFPHARMACIESFORMAINACTORSONTHESWEDISHMARKET1

FIGURE2:41%DONOTWELCOMETHECUSTOMER

FIGURE3:RESULTSFROMOBSERVATIONS

”The analysis phase gave us several new insights to how our operations functioned –for example, before, we could never had imagine that almost 25% of our pharmacy personnel’s time was spent on goods receiving/picking”

Jacob Calmvik, Head of Business Development

101214

7 8 9 10 11 12 13 14 15 16 17 18

Sta�ng need based on customer demandActual sta�ng of pharmacy

15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Productivity

Customer service rate

41% 59%

Welcomes the customerDo not welcome the customer

Sales non-prescription drugs and traded goodsSales prescription drugsHandling goodsOtherAdministrationNon-value creating

Apotek Hjärtat, 270

ApoteketAB, 365

KronansDroghandel,

Case Study | Apotek Hjärtat Case study | Apotek Hjärtat