1

Real downstream internet-based supply chain management

(apresentado no POMS 2002)
Henrique Luiz Corra
hcorrea@fgvsp.br
Department of Production and Operations Management
Fundao Getulio Vargas Business School
So Paulo, Brazil
http://www.fgvsp.br
Track: Internet-Enabled Operations
Abstract
Much has been said about internet-enabled supply chain management
initiatives, but few are the cases in which a whole process of development
and implementation is described. The paper describes the case of General
Motors Brazil and its breakthrough change in management practices regarding
their downstream spare parts supply chain, showing data comparing before
and after inventory and service levels along the chain. We show that 4
basic conditions are necessary for companies to adopt such improvement
approaches and we also show how other industries are preparing to develop
them in Brazil.
Introduction
Few are the white papers and articles in which actual and relevant cases are reported and
results are shown of the new tools, techniques and management methods normally
associated with internet-enabled supply chain management: VMI (vendor managed
inventory), AR (automatic replenishment), ECR (efficient consumer response) and the like.
In this paper we present two cases: the first one is an update of a case presented in the 2001
POMS Conference, in Orlando, USA, regarding the revolutionary changes General Motors
Brazil decided to make in the way the whole downstream supply chain of the spare parts
business is managed aiming at reducing costs and improving responsiveness and customer
service levels (http://www.poms.org/2001/cd/papers/pdf/Correa1.pdf). However, although
this appears to be a successful case of applying such popular concepts both in terms of
developing the appropriate systems and implementing them, one might rightly argue that
the GM Brazil spare parts business is too particular a case, because of the relative power
that GM holds in the downstream part of the spare parts supply chain: the distributors and
retailers (dealers) are fully dedicated to GM and remarkably smaller in size than GM (GM
Brazil as a whole is a US$3 billion income business in 2.001 figures), with clear
implications to the power relationships in the chain. In Brazil they are called
concessionrias, what means that they have GMs concession to run their businesses
and this concession can be withdrawn by GM. In other words, the level of power GM has in
its chain to influence behaviour is not frequently found in other industries. Take the
pharmaceutical companies in Brazil, for example. Although some of them are medium to
large corporations they are one order of magnitude smaller than GM (Novartis, the largest
pharmaceutical company in Brazil is a US$ 304 million income business in 2001 figures).
The distribution structure is also different since distributors are normally working with a

2
number of pharmaceutical companies they are not fully dedicated to one (this
configuration is actually much more common in other industries in Brazil, such as food and
beverage, groceries, etc). Although distributors vary enormously in size and importance, the
largest independent one, for instance, runs a US$ 800 million business. In other words,
power is not so unbalanced between manufacturers and distributors in this supply chain as
it is in GMs chain. However, several reasons are making pharmaceutical companies
rethink their practices in terms of distribution and logistics and their interest for the more
contemporaneous approaches (e.g. VMI, AR and ECR) is nowadays great in Brazil.
We will describe how the Brazilian pharmaceutical companies are moving towards the goal
of getting the same benefits GM achieved, but adapting to their particular conditions. We
eventually hypotesize about 4 basic elements which must be present in order that supply
chains can adopt VMI demand pulled type supply chain management.
GM Brazil
General Motors Brazil started operations on the 26th of January 1925 assembling 25 CKD
vehicles per day, with kits imported from the USA, in rented premises. At the end of the
XXth Century, 75 tears later, GM has four large industrial complexes in Brazil producing
light and light commercial vehicles: one in So Caetano do Sul, surroundings of So Paulo,
one in So Jos dos Campos, between the cities of So Paulo and Rio one in Gravata, in
the Southern Region and one in Mogi das Cruzes, nearby the city of So Paulo, specifically
producing pressed panels for the after sales market.
The service parts business
The service parts business is increasingly important to GM on at least two accounts: firstly
it is a profitable business. Although GM Brazil overall income is around US$ 3.2 billion a
year of which only around US$ 250 million relating to service parts, the margins for
services are much larger.
Secondly, the service parts business has serious strategic implications for the new car
business because it can affect the level of serviceability (mostly in time speed and
dependability) and price of the car maintenance during its economic life and therefore the
very attractiveness of the car from the point of view of the prospective new car buyer.
Both reasons encouraged GM to rethink the way they were doing business with their main
partners downstream in the supply chain: the dealers.
The GM dealership in Brazil
There are 472 GM dealers, 9 GM authorized garages and 10 GM parts distributors in Brazil
summing up 491 service parts points of sale (p.o.s.). GM has 650 employees allocated to
the service part operation in Brazil, 3 distribution centers all located in the Southeastern
state of So Paulo, a total of around 75,000 part numbers, being 700 high turnover parts. 20
vehicle platforms are supported by this operation. The relationship between GM and the
GM dealers have always been somewhat independent. Consistently with most supply
networks, the nodes of the network were managed separately, favoring the zero-sum game
in other words, in many situations for one business partner to gain in a negotiation, the
other partner had to lose. This led to a less than cooperative relationship and the
independence in the management systems led to undesirable effects such as the bullwhip
effect in which small variations in demand downstream cause increasingly large variations
towards the upstream portion of the network. Imagine for instance the GM service parts
supply network. Even if the demand downstream, given by the rate at which the end

3
customer buys from the dealer, is reasonably stable, per item, the demand perceived by GM
distribution center is dependent on the inventory management systems and inventory
policies of the dealers. Considering each item, if reorder point policies are used, dealer
systems will use EOQ-type logic to benefit from scale economies in the logistics costs
between themselves and the distribution center. This means that they wait until the reorder
points are reached and then they issue replenishment orders (economic order quantities).
This means that the well behaved demand of the end user becomes, one tier upstream, a
lumpy demand in which zero demand is perceived between replenishments and a lump of
demand is perceived when replenishments are due. Now think about 483 p.o.s. with their
inventory management systems issuing replenishment orders at independently defined
moments, of independently defined quantities and you will soon notice that the demand that
the distribution center perceives bullwhips in an almost random way. Now consider that the
distribution center has its own inventory management systems with independently defined
inventory policies and parameters and you will see the bullwhip effect being passed on with
an amplified intensity to the suppliers, suppliers suppliers and so on. Because the
amplified effect is random, what normally happens is players increase their safety stock
levels. To make the problem even worse, another effect of the zero-sum relationship can be
seen in another aspect of the commercial relationship GM dealers. GM commercial
department set monthly purchase targets for the dealers based on past purchases. The result
of this push-type relationship acting for years and years was that parts were bought, many
of them not to be sold anymore: in 1999, GM considered that between 30 and 40% of the
Brazilian GM dealers inventories are obsolete tying up working capital. This on its turn
forces GM to increase payment periods, putting financial strain on the whole chain (in an
economy with the second highest interest rate in the world Brazil in the end of the 90s).
Changing the way GM does business in the service part market
The idea of changing the way GM did business in the service part market started in 1994
when a GM Brazil director, Steve Koch, of after sales got interested in introducing the
concept of automatic replenishment in Brazil. Steve took a group of GM dealership owners
who were opinion leaders (they were board members of the Brazilian association of GM
Chevrolet dealers - ABRAC) to a business tour in the USA for them to see companies who
were already using the concept. The director already knew the system and he was
convinced that it could work in Brazil but he wanted to get the commitment of the opinion
leaders who, he knew, would have a very important role in convincing the universe of
dealers if the system was to be adopted. Companies visited included Saturn, a then recently
launched GM division conceived, among other things, to be a GM laboratory for innovative
management practices. Very successful, mainly in their first years, Saturn had innovated
drastically the relationship with suppliers, with Unions, and with dealers they
implemented VMI (acronym standing for vendor managed inventory), a concept according
to which the dealers inventories are managed by the vendor (Saturn). They also
implemented the concept of automatic replenishment, with frequent deliveries, in some
situations, of just the right quantities of the parts sold the 3 days before. They had achieved
very high leve ls of parts availability (94%) and customer satisfaction what impressed the
visitors. However, Saturn had been built from a blank sheet of paper. A brand new set of
entrepreneurs who had accepted all the rules and regulations to be granted a dealership, free
of a legacy of historical love-hate relations were certainly easier to deal with than a group
of almost 500 Brazilian dealers with established practices and perceptions regarding GM.
One of the examples to illustrate the point was the issue of the inventory management

4
systems. Saturn dealers had all agreed to adopt Saturn system, things worked almost as if
they had Saturn inventory systems terminals in their premises they all communicated
easily. The communication infrastructure was built from scratch with state of the art
equipment and links. A very different situation could be found in Brazil more than 120
different (usually incompatible) inventory management systems among the dealers, poor
communication infrastructure, a somewhat heavy legacy.
Once the visitors came back with a preliminary approval of the new initiative, GM soon
noticed that the poor telecommunication infrastructure would be a millstone for the whole
project. They decided to launch the Satellite project, made explicit in the 8th Partial Brand
Convention (a document which regulates the relationship between GM and the dealers) to
sort out infrastructure and communications to support the project. Unfortunately, the
Satellite project came to a halt some months after it was launched, to cut costs. What had
already been done only allowed for the partial exchange of information between dealers and
GM and this was insufficient for the VMI / AR (vendor managed inventory / automatic
replenishment) idea.
It was not before March 1997 that GM Brazil started to talk about the project again. A
group of GM executives realized a series of international visits to companies who adopted
similar ideas between 1997 and 1998 (Nissan Infinity, GM Saturn, among others) and
started to generate ideas which were consolidated in a business case, presented to the
board of directors in the mid 1998. The business case was very clear: any initiative towards
VMI / AR would have to be preceded by the sorting out of three basic issues: information
technology and telecommunication infrastructure and, logistics. Reliability of the intense
information flows and intense material flows which would result would be a sine qua non
condition. 491 points of sales scattered around 5 million km2 requiring reliable deliveries,
with most transportation done by roads which are not always in good condition.
For the whole project, an overall investment of US$10 million with savings of US$2
million per year for the supply network in reduced safety stock levels (as a result of better
forecast systems), reduced bullwhip effect in the plants upstream, reduced cycle stocks in
the the dealers and costs in emergency transportation (as a result of more frequent
replenishment and better planned inventory), reduced obsolescence costs (only parts with
high probability of sales are replenished), reduced lost sales, let alone the possibility of
becoming more price competitive some of the savings mentioned previously would be
passed on to end users.
The board approved the business plan, not only the part regarding IT and
telecommunication infrastructure, but also logistics. The IT and Telecom initiative was
called the GM Connect project. In order to fund it, GM and the Dealers Association have
created a fund . GM would pay for 75% of the investment and the dealers would pay for
25%.The IT and communications infrastructure was commissioned to EDS (a company
formerly part of the GM group). The Emery Worldwide Global Logistics was chosen to
provide the carriers management.
In parallel, from 1998 on, in the GM Corporation a movement started to gain momentum:
that of using the successful Saturn experience with after sales to spread the practices of
VMI / AR to other GM divisions around the world. This was part of a GM worldwide
strategic move to aggregate more value to the after sale customer experience, aiming at
increasing customer loyalty to the GM brand. Following this trend, besides GM Brazil,
another GM division who showed explicitly interest in implementing a VMI / AR system
was the Swedish SAAB. The GM information technology corporate director, aware of the
interest of the two divisions and believing in the benefits of VMI / AR supported the two

5
divisions initiative with the Corporate board in Detroit. A joint project them was born. GM
Brazil and SAAB would join efforts and resources to develop a VMI / AR system. A world
bid was done and 5 companies were invited to present proposals. Three out of the 5
companies presented proposals to develop the system: IBM, EDS and the French Cap
Gemini (through the Swedish branch). Cap Gemini won the contract.
The development costs would be shared between GM Brazil and SAAB.
The system started to be developed in Sweden in December 1998 and it took a year. Some
Engineers from SAAB and from GM Brazil took part intensively in the development
process with the support of an internal consultant who had taken part in the development of
the Saturn VMI / AR system.
The AutoGIRO system: VMI / AR in GM Brazil service parts supply network
The VMI / AR system to be impleme nted was named AutoGIRO. The logic behind it is
quite simple and can be explained by some of its principles:
It is a VMI system: GM assumes the responsibility for the management of inventories of the
dealers.
VMI makes sense in this situation because GM, being the common denominator of the
network, is the only player in the network who can actually see the aggregated demand of
the almost 500 dealers. So, on top of forecasting the demand for the specific market served
by each dealer via projections of time series accumulated of each dealers sales respecting
the particulars of each region, only GM is able to identify national patterns of demand and
therefore enriching the demand forecast of each dealer with these national patterns. Since
demand forecast is a great part of the task of managing inventories, GM assumes the
responsibility for managing the inventories too. VMI also makes sense in this situation
because GM delivers thousands of different items (each dealer has around 6,000 active
inventory items, of which around 2,500 are normally purchased within any month) to a
defined and stable group of dealers. This means that economies of scale in logistics can be
achieved if deliveries to several dealers share the transportation costs using milk-run type of
routing in which one mode of transportation makes periodic and coordinated deliveries to a
group of dealers. GM is the player who can coordinate these deliveries (even if it actually
happens via the use of a logistics service provider, which is actually the case, with Emery).
This means that GM will suggest when, how many and what the dealers should buy.
However, given the past relationship in which GM tried to maximize sales by pushing parts
downstream in the chain it would be plausible that the dealers wo uld resist the idea of GM
managing their inventories. To overcome this resistance, GM grants:
Protection against part obsolescence and parts stock out
Dealers would fear that GM would push them parts to maximize sales and that these parts
would become obsolete. To avoid that, AutoGIRO grants dealers who actually accept GM
suggestions for parts replenishment that any part which becomes obsolete (more than 9
months without a sale) will be subject to buyback by GM for the maximum between the
current price and the price the dealer purchased the part. This means that if GM
overestimates the purchases, it assumes the costs of the mistake. The same way, if the
dealer accepts the GM suggestion for the replenishment and runs out of a part, GM will
ship the part in the fast track urgent delivery with no extra cost for the dealer. Before the
AutoGIRO program, obsolete parts were dealers problem and urgent deliveries would be
charged high fees.

6
Provision of an internet-based parts locator
In order for GM to be able to manage the dealers inventories and provide automatic
replenishment, they need to have very frequently updated information on the stock position
of each stock item of each dealer (in a further section the information flows of AutoGIRO
will be explained). GM makes this information available to the dealers this means that in
case of a stock out, a dealer with an urgency to serve a customer can browse in the internet
(extranet to be precise) and search for that part availability in a dealer nearby, getting the
part in the same day (depending on the dealers location, even the fast track delivery might
take 2 days).
Replenishment done twice, 3 times or 5 times a week depending on the dealers demand
volume
Present reorder point systems used by dealers tend to treat items independently. Therefore
the logic used is to dilute logistics costs by transporting a large number of units of each
item and this tends to take cycle inventories up (the average level of inventory which
builds up as a function of the replenishment cycles the less frequent the replenishment,
the higher the cycle inventory). One of the most utilized systems actually limits the
replenishments to a maximum of three times a month per part. This means that in the most
favorable case, the replenishment will be of a quantity equivalent to 1/3 of the monthly
demand. Average cycle inventory will therefore be 1/6 of the monthly demand. In the case
of AutoGIRO, in which a part is possibly delivered daily, the replenishment will be of a
quantity of around 1/20 of the monthly demand and the average cycle inventory will be
around 1/40 of the monthly demand. Quite a reduction, made possible because AutoGIRO
considers that the transportation cost does not have to be diluted by a large number of
units of one item, but by a small number of units of a large number of different items. The
system recognizes that different items will go from the same origin to the same destination,
in a joint replenishment.
Internet-based periodic review inventory management system done by GM
To make it possible that the economies of scale in logistics are achieved, it is necessary that
the replenishment for all items in need are done at regular intervals. This means that for this
type of VMI, the system which is more applicable is the so called periodic review system.
This system makes sure that the possible need for replenishment for all the items of a dealer
is checked in a synchronized manner, periodically (AutoGIRO does it daily). Depending on
the stock position of the item at the review point, a certain quantity is replenished. This
quantity is calculated as the difference between a maximum pre-established level and the
stock position.
Why has GM Brazil decided to change the way they were doing business in the spare
parts market?
First, spare parts are a good business. Margins are substantially higher in spare parts than in
the new vehicle business. A popular (low-priced, actually representing 80% of all cars
made in Brazil) car can maximally fetch a 4% gross margin. For spares, the margins can be
as high as 30 to 40%. Here something similar to other industries seems to be happening.
Manufacturers subsidize the new product to actually make sure that the future flow of
business with consumables and spares is generated. Consider the low prices commanded by
HP for a new printer. Now think about how much a HP printer owner pays for the ink
cartridge when he needs one replaced.

Second, the spare parts business has strategic implications for the new vehicle business.
Increasingly customers are considering not only prices paid for the new product but the
overall costs incurred with the product along its economical life. This includes costs of
maintenance, serviceability and the time it takes to get the car up and is related to the spare
parts availability.
Third, until 1990, the Brazilian market was protected against imported cars with import
taxes as high as 250%. This situation allowed dealers and manufacturers to command
relatively high prices which included comfortable margins. After the year 1990, import
taxes started to be reduced and new plants started to be built in the Country. This increased
competition heavily and reduced margins. The implication was that the financial health of
the dealers who relied almost solely on the new car margins started to suffer. GM who is
still dependent on the dealers as a market channel (sales in the Internet are still negligible in
Brazil) had to find ways to keep them profitable via the parts and repair service business.
Some potential advantages and disadvantages of GM Auto GIRO can be listed. See Table I.
Table I Some potential advantages and disadvantages of AutoGIRO
Potential advantages
Potential disadvantages
GM
Reduced bullwhip effect with Increased logistics costs more
corresponding
reduced frequent deliveries
manufacturing costs upstream
Increased investment in IT and telecom
Reduced end of the month demand infrastructure
surges
Increased
costs
with
inventory
Increased availability of parts
management
team
and
system
Reduced levels of safety stock
maintenance
More competitive prices of parts
Shared risk of obsolescence and stock
Increased market share
outs whereas data accuracy is not
Increased level of control upon the totally under GM control
supply network
Better distribution of tasks in the
supply network
Dealers

Reduced
cycle
and
safety
inventory levels
Increased availability of parts
Better price-competitiveness
Freed management time to
dedicate to sales and marketing
Protection against obsolescence
and stock outs
Increased margins and better cash
flow
No more purchase targets

A certain level of independence is lost

Increased logistics costs (receiving and
storing material is done more
frequently)
Need to be more accurate and precise
in dealing with information on sales,
lost sales, inventory status etc
Increased level of reporting and more
intense information flows with GM

Implementation strategy adopted by GM Brazil

GM understood that a successful implementation would have to be based upon the
following pillars (see figure 1)

Figure 1 Pillars Considered by GM as Important for a Successful Implementation of

AutoGIRO When the Implementation Process Started (Source: GM)

Logistics
Logistics
service
service
provider
provider

Certification
Telecom
Telecom
Certification
infrastructure
dealers
infrastructure of dealers
inventory
inventory
management
management
systems
systems

Comercial
Training
Comercial
Training &
&
policies
to
communication
policies to communication
favor retail
(Vision
retail
(Vision +
sales
Operations)
Operations)

Key aspects for successful implementation include:

1. The use of a logistics service provider (Emery) to guarantee reliable deliveries
2. The complete revision of the telecom infrastructure to guarantee reliable flows of
information
3. Commitment from the general managers / owners of the dealerships this was done
by offering owners (and parts managers) of dealerships (before anything else) a
series of one-day seminars in which the following aspects were discussed by an
independent University professor:
?
?
?
?

Introduction to demand forecasting

Introduction to inventory management
Introduction to supply chain management
Description of the AutoGIRO system using the concepts discussed before

9
?

Presentation of the results of a simulation (using PROMODEL simulation software)

in which a real three month demand for three different parts was simulated. To
deal with the demand, the model simulated AutoGIRO replenishing inventories and
in parallel, one of the systems (which many dealers used) doing the same.
? Presentation of VMI present related cases (Saturn, Wal Mart / Procter and Gamble
and others) to make it clear that GM Brazil was basing the design of the new system
on concepts already tested in other places / industries.
To close the seminar, a 9 minute video was shown to the participants in which Mr. Jos
Favarin, GM General Director of After Sales in Brazil gave a speech. He said that GM was
fully engaged in the AutoGIRO program and that it was paramount for the future of GM
business in Brazil. Secondly, he presented the outline of the new commercial arrangements
designed to support AutoGIRO. Arrangements include extinction of the purchase goals.
Instead sales goals would be defined and a new bonus policy would reward excellence in
sales performance rather than purchase volumes. Thirdly, he presented the outline of the
new training programs being made available by GM to dealerships to increase the
competence of the parts managers to better perform their new tasks of marketing,
merchandising and sales.
The use of a pilot project in which 4 carefully chosen dealerships were invited to actually
adopt the system, before the seminars had even started. Results of the pilot project were
very valuable to help refine and improve the system itself. One example of improvement
made possible by the pilot participants is illustrative. One of the dealerships of the pilot
noticed that after he had made a promotion to get rid of some obsolete parts, the parts were
automatically replenished by AutoGIRO. This called the attention of the development team
that the system should have a special feature to make it possible for deale rships to inform
the system that a specific (abnormal) demand should not be replenished and should not be
included in the demand time series. Secondly, as the results were considered to be very
good, they served to help convince other dealers to engage in the AutoGIRO system.
The AutoGIRO team, aiming at dealing with the several non-compatible information
systems involved, decided to adopt the following strategy: They chose 5 inventory
management systems (see figure 7 in the case) which together had been adopted by 52% of
the dealers and approached them proposing that they themselves developed interfaces with
AutoGIRO. So they did and this gave them an edge over smaller competitors. Dealers who
actually used these 5 systems were given priority in taking part in the seminars and
adopting AutoGIRO. This strategy resolved at least partially the non compatibility problem.
The AutoGIRO team created a newsletter called AutoGIRO News periodically sent to all
dealers to keep them informed about the development of the system and its implementation.
Did GM Brazil manage to achieve the foreseen goals?
GM Brazil consider they did. Implementation was successful and the strategy adopted
actually proved to be a good one. One of the most effective initiatives was the series of
seminars run by an outsider with legitimacy (a University professor) aimed at explaining
the system carefully and in detail. Seminars were run in couples of days first day,
dealership owners attended; second day, spare parts managers of the same dealerships
attended: same content, but different approach. Owners and managers were given enough
time to ask questions, to give suggestions (many were actually very useful in the very
development of the system) and to comment about their fears and preoccupations.
Normally the seminars were very well assessed by participants and they were actually a

10
good way of gaining commitment from the partners. It was also very important to address
the dealerships spare parts managers because one of their fear that the new system would
make them redundant. After all they were used to spending 80% of their time doing what
the system would automate. In the seminar for the managers, one of the stressed points was
the change in the role of the spare parts manager: from bulk buyers to a retailer, marketer,
and customer relationship manager. It was also important that GM provided them with
courses on the areas they would soon be required to act. The seminars also were run in an
evolutionary way. As the months went by, more results would be available of dealers who
had already adhered to the system and this continuously helped to make the presentation
more convincing. The most impressive results started to come in November 2000. Then the
three pioneer dealerships had been benefiting from AutoGIRO for 6 months and the figures
show that (see Appendix 1).
Notice the effect of AutoGIRO in the overall levels of inventory of the three involved
dealerships. It resulted in almost 20% inventory reduction in 6 months. Now consider that
around 30% of the inventory considered is obsolete. If one discounts the obsolete
inventory, the reduction becomes something like 30%, which is impressive.
Now notice the chart Purchase Analyses. Dealerships purchases used to bullwhip (green
line) and be totally disconnected of the sales line. With AutoGIRO, in the first few months
there is a reduction in the relative quantities bought but soon quantities purchased and sold
become similar (the automatic replenishment working). It means that the demand perceived
by GM distribution center becomes very similar to the demand perceived by the
dealerships. The bullwhip effect was practically neutralized. When data like this is shown
to dealerships considering the adoption of AutoGIRO, convincing them about the
advantages of the system is not that difficult. Another way used to convince the renitent
was the use of testimony. Some spare part managers and dealership owners who have gone
through the adoption started spreading the word. AutoGIRO News brought interviews with
the newly converted to the broad readership of dealers. These proved to be effective
tools.
Genexis.com and the Brazilian pharmaceutical industry
The pharmaceutical sector in Brazil, in 1999, made transactions of US$ 7.61 billion,
according to the Associao Brasileira da Indstria Farmacutica (Abifarma) (Brazilian
Association of the Pharmaceutical Industry), with a drop of 26% in relation to the previous
year. This reduction occurred, basically, due to the devaluation of the Real and, therefore,
did not change the optimistic perspectives of the company regarding the future of the local
market, which has a great growth potential. Between 1992 and 1998, the sector had already
reached an expansion of nearly 180%.
There are 350 pharmaceutical laboratories in the Brazilian market, which employ 50
thousand people, of which 56 are multinational. Although there are less, the companies
with headquarters abroad are responsible for a little over 70% of the invoicing. In Brazil, as
in most of the world, the pharmaceutical sector is concentrated. In 1999, the 40 largest
companies added up to a share of 88% over the total sales.
The pharmacies and drugstores are responsible for 82% of the sales of drugs in Brazil. The
rest reaches the consumers by means of public and private healthcare institutions, which is
equivalent to 15% and through the agreements of large companies for purchasing drugs.

11
Brazil has a consumption per capita a little over US$ 50 per year; however, 48% of the
drugs are purchased by 15% of the population with an income over 10 minimum salaries.
Those who earn less than 4 minimum salaries consume 16% of the drugs sold in the
Country. About 40% of the Brazilian population has no access to drugs.
The transformations in the 90s.
The sector has undergone great changes during the last years. Among the main factors are
the release of the prices, the economic opening, the Plano Real (a macroeconomical plan
which brought stability to the inflation rates in Brazil), the approval of the Patent Law and
the creation of Mercosur.
The end of the price control and the opening of the market for imported goods occurred at
the beginning of the 90s and had positive impacts on the strategy of the companies in
relation to Brazil. Investments had a great increase.
With the stabilisation of the prices as from the Plano Real, the expectations of the
companies grew even more, as the end of the very high inflation rates increased the
purchasing power of the population and offered conditions so that the businessmen could
make long term plans in Brazil. The Mercosur was important because it brought the
perspective of rationalising the production structures located within the block.
The companies intensified the sales of their products by means of increasing the installed
capacit ies of the units of the subsidiaries localised in the developing market or via the
increase of foreign trade. The Brazilian imports of drugs originate mainly in Europe and the
United States, where the headquarters and main plants of the largest laboratorie s of the
world are. During the 90s, there was an increase of over 1,400% of the Countrys imports
of drugs.
Another important factor, is the strategy of the laboratories in relocating their units
worldwide. The objective is to lower the number of plants, concentrating their production
in a few countries, which supply a certain region.
In Latin America, together with Mexico and Argentina, Brazil has benefited from this
attitude of the multinationals. Due to the size of its market, the Country has received
investments directed towards the enlargement of their local subsidiaries, which export
drugs to other countries of the region.
Mergers and Acquisitions
Another international movement that has had an impact on the Brazilian market are the
mergers and acquisitions that have been occurring since the 80s. The size of the
laboratories is getting larger and, consequently, the Brazilian companies are seeing their
investment power in marketing or research become more distant from the world leaders.
The movement of mergers and acquisitions, which has been occurring for several years, and
must continue during the next decade. The number of large pharmaceutical companies must
decrease to approximately 12 or less.

12
Future Growth

Share of the largest world markets 1999 ( %)

18%
2%
3%

39%

4%
6%
6%

8%

14%

USA
Japan
Latin America
Germany
France
Italy
England
Spain
Others

The world pharmaceutical sector must register an average annual increase of 7% between
1999 and 2003, (according to IMS Health), reaching at the end of this period, an invoicing
of US$ 435 billion.
In the next years, it is most probable that this industry will undergo large growth in the
United States and that country will consolidate even more its position of the largest world
market. With perspectives of an annual growth of 8.6%, it will reach an invoicing of US$
175 billion, with a share of 40%.
Latin America
The Latin American pharmaceutical sector invoiced US$ 23.6 billion in 1998 and
represented 7.7% of the world market. Among the largest markets are, in order of ranking,
Brazil, Mexico and Argentina, which together represent 80% of the sales in the region.
They are followed by, also in order of size, Venezuela, Colombia, Chile and Peru.
Latin America will show an average annual growth of 7.2%, after having an annual
expansion of 4.8% between 1994 and 1999.
Among the factors that must benefit the growth is that of the region becoming more
attractive for the multinationals, with the implantation of the patent law in several
countries. Another determining factor for a better perspective is the increase of oil, which
has benefited some markets, such as Mexico, Venezuela and Colombia. In addition, a return
of the confidence of the international investors in relation to Latin America is happening.
Mercosur
The pharmaceutical industry carried out transactions of a little more than US$ 12 billion in
the Mercosur. Brazil and Argentina are the most important markets, with a weight of more
than 92% over the total.
The ceation of the Mercosur favours the relocation movement of the plants of the
laboratories and the profile of the local industries favours these changes. The two main
countries became attractive markets to stimulate productive relocation processes. Argentina

13
and Brazil were chosen by the large multinational laboratories for their distribution
production plants, closing the units in small markets.
The evolution of the trade balance between Brazil and its partners in the Mercosur shows
that the plants of the clock complement each other.
The growth of foreign trade with the member countries of the Mercosur was greater than
the increase of the transactions with the world. The total value of the imported goods in
1999 by Brazil was 15 times greater than that in 1989, but the transactions within the
Mercosur grew 55 times.
Due to the size of its industry and its market, incomparably more important than those of
Paraguay and Uruguay, the increase of foreign trade with Argentina is what determines the
transactions of foreign trade of Brazil, within the Mercosur.
Wholesalers/Distributors
According to the Abafarma (The Brazilian Association of Pharmaceutical Companies), 1.5
thousand wholesalers/distributors of drugs and personal hygiene goods and by-products,
200 being specialised in drugs make up the market in Brazil. The wholesalers are
responsible for the delivery of 72% of the drugs in the Country, distributing them to
drugstores, hospitals and clinics.
In the Country there are 45 thousand drugstores, of which about 3.5 thousand belong to the
large chains, which negotiate directly with the industry. Distributors supply the rest.
Distributors/industry relationship
Up to the 70s, the industry concentrated its sales direct to the drugstores. From the
beginning 80s, it opted to concentrate its sales representatives in medical advertising,
leaving the distribution to the specialised companies.
The discount granted by the industry to the wholesalers/distributors is 16% on average and
the payment term is of 25 days. In some laboratories, for example, sectorial sale statistics,
sometimes even per drugstore, are demanded.
During the 90s, there was a modernisation movement of the wholesale/distributor sector,
whose companies began to concentrate on fast attention and to offer better marketing
conditions to retail. There was also a movement of operating costs reduction, from the
investments in IT, telemarketing, logistics and stock automation.
At present, the market is computerized and agile. In addition, the logistic structure of the
distributors allows, in some cases, that deliveries be carried out daily in less than 6 hours.
The trend of the wholesale sector is the redirection of the operations to conquer new
markets in other regions of the Country, following the strategy of some Brazilian
manufacturers of increasing their presence outside the Southeast of Brazil. The main target
is the Northeastern region.
Consumption Profile
The South and Southeastern regions are responsible for about 2/3 of the drug consumption
potential in Brazil. Approximately 42% of the Brazilian population lives in the Southeast of
the Country, but its potential consumption rate (IPC) is responsible for little more than half
of what is spent on drugs in all the Country. It is in that region that the largest markets of
Brazil: So Paulo and Rio de Janeiro, are located. Of the 52% share of the region, So
Paulo is responsible for 31.02 percentage points and its population would have a potential

14
annual expenditure of a little over R$ 3.59 billion on drugs, followed by Rio de Janeiro, far
behind, 12.15%.
The generic issue
According to the IMS, institute that audits the pharmaceutical industry, the annual sales of
generics in Brazil already reached 55 million Dollars and the expected growth is 15% per
month. In the US, the generic market invoices 10 billion Dollars per annum of a total of
nearly 100 billion Dollars, being, however, 50% of the volume of drugs due to the
extremely lower prices than those of the brand drugs.
Data from the Agncia Nacional de Vigilncia Sanitria (National Agency of Sanitary
Vigilance) show that at present there are approximately 300 generic drugs in Brazil
produced by 24 companies, but the offer can reach 4,000 as 80% of the brand drugs sold in
the Country can have, according to the new patent law of 1996, their corresponding
generics.
Another reason that must rapidly increase the offer will be the arrival in Brazil of large
global leading companies in the generic sector, such as the Indian RANBAXY, the Israelis
TEVA and the German HEXAL. As well, several of the large laboratories that dominate the
ethic drug market worldwide, such as MERCK and NOVARTIS, faced with the
irreversibility of the generics in Brazil, decided to enter the fight for that market.
As the other sectors of the Brazilian industry in recent times, the Generic sector will
undergo strong accommodation movements due to those enormous impacts of offer and
demand, with mergers and associations between local and foreign companies, transforming
the local market into a land of explicit trade war.
On the side of the demand, in spite of the intensive efforts of the public authority as
purchaser, the great wave is still to come and will arrive when the health insurance plans
begin to cover the cost of the drugs of their clients. In the USA, where this practice is
already consolidated, when a generic is adopted by the health insurance plans its
corresponding brand is literally extinct from the market.
In the other relevant portion of the demand, which generated by individual purchases, the
introduction of generic drugs totally changed the focus in the supply chain management.
When there were only brand drugs, when a client did not find the drug prescribed by his
physician in the first drugstore, he looked for it in others until he found it. Because of this,
there was a low service rate the lack of the drug in the outlet was only harmful to the
drugstore, since the manufacturing laboratory always finished up selling the product. With
the appearance of the generics, the drugstore attendant, when the brand drug prescribed is
missing, he will have several options to offer the client making that the lack of the product
now results in a loss of sale for the manufacturer and no longer for the drugstore. This new
situation strongly alters and redirects the main focus of the distribution chain management.
This new situation associated with the extreme present and future competitiveness in the
sector is strengthened by the low profit margins resulting from low prices, even taking into
account that investments in research and development are not necessary, makes the
management of the production and distribution cost critical for the company survival in the
sector.
The proposed solution
To worsen the situation even more, the reality of the pharmaceutical industry, the same as
other industrial sectors of consumer goods, undergoes trade practices that help to amplify
the dynamic effects of dis-integrated supply cha in management practices (also called

15
bullwhip effect). One of them is the practice of the distributors to concentrate their
purchases in the few last days of each month. One of the justifications for this is that the
sellers of the drug manufacturers have their bonuses coupled to the monthly targets. This
results in that some of the purchasers of the large distributors keep them expecting the nonattainment of the targets until moments before the closure of the month, causing a larger
disposition to cede to the discount requests in exchange of purchases that help them reach
their targets. This makes that the oscillation that the demand requested by the distributors to
the manufacturers is not a discrete alteration, but one that might concentrate over 80% of
the orders during the last 4 days of the month. It is easy to imagine the bull- whip effect of
an alteration of this size in the demand to the right for the operations to the left and the
costs that this brings about.
It is important to understand the reasons of the bull- whip effect, in this simplified example.
One of the reasons that cause the bull- whip effect is the short-sightedness of the several
links of the chain. Each link only sees the demand of its immediate client. This demand,
in its turn, is distorted by the stock policies of all the links to the right, which were defined
independently and not necessarily adapted for a better performance of the chain as a whole.
In addiction, there is also an effect that adds more oscillation to the demands to the left,
which is the inertia of the information and material flows, going from one link to another.
Summarising, this effect is caused by the lack of a proper and cohesive management of the
supply chain as a whole. Each link, in a traditional arrangement, only looks at its demand
and seeks to maximise its financial performance, even if for this, it harms tremendously the
performance of other links, which, in a consolidate manner, will damage the performance
of the chain in the eyes of the sole link that injects money and sustains the chain: the final
consumer. Note that the other links are transferors of resources: they receive money for
the products that they sell, they pay their operating costs (including taxes), pay the
investment made in the link itself and transfer the remaining money that they received to
their suppliers, in the form of payment for the services and goods purchased.
The implication in the logistics at the different points of the chain
The implications of the bull-whip effect are more drastic when more upstream of the chain
is the link in question, however, in a greater or lesser degree, the effects for the links are:
The oscillating demand with high amplitude is not foreseeable, since it is the result of the
effect added to a large amount of out of control variables: stock polices of the links to the
right defined in not coordinated manner, moments in which the orders occur obeying
distorted trade logics. As is of common knowledge, for a company to offer its clients high
service levels (understood as availability) and simultaneous high uncertainty of future
demand, it is necessary that it work with high security stock levels, a fact that increase
enormously the operating costs and fatally is transferred from link to link up to the final
user, who perceives a high price.
The oscillating demand in the manufacturing links (laboratories, their manufacturers,
manufacturers of their manufactures and so on) leads to the overuse (with the resulting
costs of overtime, hiring, etc) and under-use (with the resulting costs of idleness and bad
use of capital) of the productive capacity altering themselves, increasing even more the
production costs of the chain as a whole, which fatally will be transferred from link to link
up to the final consume r, once again resulting in the products loss of competitiveness.
The impossibility of maintaining so high security stocks in the intermediary links that
would guarantee high availability levels at the outlet, make the service levels to the final

16
user drop. In a situation in which the presence at the outlet is increasingly important, this
also conspires for an additional degradation of the competitiveness of the chain as a whole.
In the case of GM, because of their power, size and level of influence in the chain, all 4
factors were developed by GM at a cost reaching something in the range of US$ 10 million.
But what about supply chains, such as the pharmaceutical chain, which do not have such a
dominant player and the distributors of which are not fully dedicated to one manufacturer?
If each pharma manufacturer set off efforts to develop their own AutoGIROs, distributors
would have to interface with something like 80 to 100 different management systems. Each
of the pharma manufacturers would also have to face the costs of maybe millions of dolars
to develop their own sytems with clear implications for the overall cost of the chain. An
alternative solution would obviously be required. One of the first Companies in Brazil to
come up with a better proposal working with the pharmaceutical industry was genexis.com.
Genexis.com: background of the Company
The company that later originated GENEXIS, appeared in Brazil in 1994 as an answer to
the need of the pharmaceutical industry for sale information, called "sale maps",
represented by the sale reports that each industry requested through its distribution
channels. This information is highly strategic, since the industries allocate on average
approximately 25% of their invoicing in the so called promotional activity, by means of
their sales force, which divulges the Companys products directly to the physicians, a fact
that, the industry expects, will generate prescriptions to the patients and, finally, demand
for the product at the end of the chain, the drugstore.
Up to 1994, the industry did not have an efficient and effective mechanism that measured
the result of that substantial expense: if the right physician was being visited, at the right
time and divulging the right product. This occurred because the companies, which rendered
this service at that time, did it in a sampling manner, with results being shown to their
clients after some months, when a possible corrective measure could already be too late.
In 1994, the Company, under the name ITX, was getting prepared to start rendering
services to CESP, gathering and processing data on the consumption of electric power
when, with the investiture of Governor Covas, it had its contract terminated. Trying to take
advantage of the existing infrastructure and of the Companys technical capacity, its
founder and current president, Fernando Luiz Cabral, in informal talks with some people
connected to the health area, identified the adaptability of the Companys functions, i.e.,
gather in a census way, process, analyse and make available, in real time via EDI, a large
quantity of information, to the follow up needs of the various participants of the productive
and distribution chain of the pharmaceutical industry.
In 1994, SSI is created and signs the first contract with the Bristol Myers-Squibb
Laboratory to develop the model conceived to gather, format and summarize the
information on demand and register of clients of all the Bristol distributors, on a daily
instead of monthly basis, thus allowing the Laboratory to know the demand per outlet
throughout Brazil in a census and not sample format.
In 1995, with the experience gained by the development of the project for Bristol MyersSquibb, the Company, in consortium with EMBRATEL (one of the Brazilian national
telecom companies), wins the public bid to apply the same methodology and technology to
a much larger universe. At the beginning there was the participation of 12 laboratories and
approximately 100 wholesalers, already in 1996 it offered services to 20 laboratories and
300 wholesalers.

17
As a result of the growth situation, inside and out side the company, in 1996 the option for
Internet, as an operating means, is made and a year later the e-commerce activities begin
through the www.server.com.br site and the first business management project for the
Pfizer laboratory is developed.
1999 marks the beginning of negotiations between the Company and the Pactual Electro
investment fund, which would culminate, the following year, with the creation of IBP Internet Business Partner that becomes the main controller of SSI and the resulting
investment of approximately US$ 15.5 million, being US$ 10 million in technology and the
rest in hiring human resources.
At the same time, as a result of the same association, IBP acquires a share in the Healthlink
portal, a start- up company that had the knowledge of the healthcare market, through the
development of corporative applications for hospitals. In addition, he saw an opportunity of
optimising the processes with the desired and necessary reduction of the enormous
administrative costs of the health operating companies, thus, finally the GENEXIS portal
appeared, presently covering GENEXIS Farma and GENEXIS Healthcare.
GENEXIS Farma is an e-business portal for companies that make up the pharmaceutical
segment (manufacturers, wholesalers, drugstores, hospitals, clinics) supplying real time
information on demand to support decisions and products that optimise the critical
management processes: demand, production, marketing and sales.
GENEXIS Healthcare offers connectivity and services of added value for relationship
between health operators, service companies and professionals (authorisation
authentication, claim processing) with high synergy with the Farma area.
Recently the Company began its international expansion through the creation of GENEXIS
Portugal.
The model of chain management in development in the Brazilian pharmaceutical
industry
One of the possible solutions to lessen and, in some cases, eliminate the bull-whip effect is
the use of VMI / AR (vendor managed inventory / automatic reposition) models of supply
chain stock management.
In this type of model, what is intended is to redistribute the activities necessary to be
executed within the supply chain to links with larger vocation / competency to carry it out.
An example is the distributors stock management. One pharmaceutical laboratory that
supplies products to, lets say, 250 distributors, knows the national added demand of its
drugs much better (in reality it is the only link in the chain that is able to see the added
demand) than any of its distributors. With this, it is capable (in other words, because of its
position in the chain, it has a greater vocation) to forecast demand much more accurately
than any of its distributors. In this way, it is more sensible, from the chain management as a
whole point of view, that the demand provision activity of the distributors themselves be
made by a link that knows the added demand in this case, the pharmaceutical laboratories.
As the great difficulty of managing stocks in general is to forecast sales, it makes sense
that, since the manufacturer link is going to forecast the sales of the distributors, it also
manages its stocks and the consequent replacements of such stocks. In this way, with a
global management of the replacement processes for all the distributors, it is possible to
carry out a more adequate logistic management, in which the logistic costs can be diluted
using ways of transport common to several distributors. Thus, with lower logistic costs, it is
possible to make more frequent deliveries and, therefore, of smaller quantities per product,

18
causing a reduction in the distributors average stock levels, with the consequent
advantages from the point of view of costs within the supply chain.
However, there is the need of some elements to be present in order to be able to instrument
this type of chain management.
1. Firstly, it is necessary that all this management start from the final users demand
(or as near as possible). This means that it is necessary that the managing link (the
one that sees the added demand) has the information of the demand at the outlet
(since any other point more to the left that is chosen to gather demand information
will have suffered, in a greater or lesser degree, the effect of distortions caused by
the stock policies of the particular links.
2. Secondly, for this information (given its volume) to be perceived by the managing
link with the necessary capillarity and frequency and taking into account the
continental size of the Country, an agile and trustworthy telecommunication
infrastructure that connects the several links of the chain is necessary (as well as,
from the material physical flow point of view, an agile and trustworthy logistic
infrastructure).
3. Thirdly, it is necessary that, given the diversity of the demand features of the
various products that the laboratories supply, there be a library of administration
models of stock management, sale forecasts and logistic models, so it be possible to
use different models to manage, contingently, different situations, clients, products,
demands, etc.
4. Fourthly, it is necessary that there is sufficient management intelligence so that the
allocations of the various management models (and their parameterisation) for the
several situations be carried out properly and that this allocation and
parameterisation develop with time responding to the possible contour condition
changes.

By noticing that these four elements sho uld be present to any complex VMI-type system,
Genexis.com started to develop as a company to offer those elements as a service to a
nember of different manufacturers in order that the overall costs of the system development
could be diluted among them. Lets recap:
1. Management starting from the final users demand (pulled by demand).
Genexis.com used their lead in capturing daily data related to sales at the sales
points (which had already been developed during the second half of the 90s) in
other words they had already worked extensively on data format standardisation and
they actually were already capturing data with the frequency and quality needed.
2. Communication infrastructure. Genexis.com already used the Internet extensively as
a means to communicate and exchange information with all their commercial
partners, including manufacturers and distributors
3. A library of management models to accommodate the particulars of forecasting
and management techniques which each of the manufacturers would require.
Genexis.com acquired the i2 Technologies suite, with a special (and costly) contract
which would allow them to use the suite as a platform upon which to develop
particular solutions to be used (ASP-type) by their customers this way all the cost

19
with this expensive system could be shared by a number of customers to the benefit
of all
4. Management intelligence. Genexis.com has invested to develop a group of business
analysts who are able to support different customers in their needs to develop their
own particular VMI systems.
Final remarks
What we see here is an apparently important new player. One who plays the role of a
service provider and brings value to the supply chains by means of allowing for economies
of scale to take place: the so-called VANs (or value-added networks), such as genexis.com.
Costs of the development of the VMI-type systems can now be shared by several members
of the supply chain possibly reducing costs for all and allowing for the advantages of
systems such as AutoGIRO can be made available even to companies who are not so
dominant of powerful in their respective supply chains.
It appears that these new players can represent an enourmous potential for step changes in
the performance (in both cost and services) os supply chains. Such companies, however
will have to be aware that technology alone is not sufficient. GM case brings interesting
evidence that implementation is at least as important as is technology: changing
commercial practices, changing relationships, changing trust levels and a series of other
aspects should be also taken into account. VANs who master both: technology and
implementation skills will certainly take the lead.

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Appendix 1 data related to the first 6 months of AutoGIRO working in the three pioneer dealers

Inventory Analysis
Consolidated information
(3 dealers = Motorio + Natal + Servibrs)
2.500.000

AutoGIRO
2.000.000

1.500.000

1.000.000

500.000

Mar'00

Apr'00

May'00

Jun'00

Jul'00

Aug'00

Set'00

Out'00

Nov'00

Values (R$) 2.023.901,7 2.070.358,2 2.082.761,0 1.989.757,1 1.897.265,1 1.975.948,6 1.879.144,0 1.835.646,0 1.633.237,8
* July00 sales campaign

21

Inventory Turnover
Consolidated information
(3 dealers = Motorio + Natal + Servibrs)
5

AutoGIRO
4

0
(T/O)

Mar'00

Apr'00

May'00

Jun'00

Jul'00

Aug'00

Set'00

Out'00

Nov'00

2,2

2,1

2,3

2,7

2,9

2,6

2,2

2,7

2,9

* July00 sales campaign

22

Purchase Analyses
Consolidated information
(3 dealers = Motorio + Natal + Servibrs)
600

AutoGIRO
500

400

300

200
Objetivo
Compra
Dealerde
purchase

target
Vendas
Dealer sales

100

Comprado
Dealer purchase
0
Jan'00

Fev'00

* July00 sales campaign

Mar'00

Abr'00

Mai'00

Jun'00

Jul'00

Ago'00

Set'00

Out'00

Nov'00

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