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Retail | Store Operations Increased profitability, sales and efficiency by transforming store operationsApotek Hjärtat, the second- About Apotek Hjärtatlargest actor on Sweden’s Apotek Hjärtat has more than 2300 employees and had a turnover of approximately SEKrecently deregulated pharmacy 7 billion in 2011. Their mission is to help customers achieve better health and well-being.market, sought to improvecustomer service and efficiency in The company acquired 206 pharmacies in the deregulation in February 2010 and has sincestores to increase customer April 2010 opened more than 65 new pharmacies. Apotek Hjärtat is owned by Altor Fund IIIsatisfaction and profitability. They and operates through-out Sweden, from Tomelilla to Kiruna.engaged BearingPoint to developand implement a store operationsprogram for all of its more than Staying profitable in a new competitive landscape270 pharmacies. 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 hadInsight | Case Study

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Retail | Store OperationsFigure 1. Number of pharmacies for main stagnated. In that year, legacy stores (meaning those that had existed since beforeactors on the Swedish market 1 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 Apoteket AB, 365 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 Kronans Apotek Hjärtat, 270 resulted in heavier workloads and a need for efficiency solutions.Droghandel, 209 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:“The analysis phase gave us several newinsights to how our operations • decrease costs and work more efficientlyfunctioned –for example, before, we • improve customer interaction in store to fit with the new market situationcould never had imagine that almost25% of our pharmacy personnel’s time • increase sales margins by selling more non-prescription drugs and traded goodswas spent on goods receiving/picking” • open additional stores to strengthen market position Apotek Hjärtat realized that a total transformation of their store operations wasJacob Calmvik, necessary. The strategy was to implement a change program that would provide theirHead of Business Development 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.Figure 2. 41% do not welcome thecustomer Store operations improvement program through a three-phased approach In cooperation with BearingPoint, Apotek Hjärtat began a store operations program that featured three phases: analysis, design and implementation. The approach was to use 41% 59% 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: Welcomes the customer Do not welcome the customer • Organization: create an organizational structure that more effectively supports the company’s operationsFigure 3. Results from observations • Management system: set the conditions for effective operations characterized by improved efficiency and a businesslike mindset 6% 11% 9% • Staff planning: staffing requirements (scheduling in terms of total number of employees and their roles at specific times of the day and week) should primarily be 10% determined by customer demand 40% • Processes: streamline processes and redistribute employee time from non-value- 24% adding activities to value-creating ones • Sales: implement a behavioral and cultural change among employees to drive increased sales and better margins Sales non-prescription drugs and traded goods • Inventory: adapt inventory levels to improve service levels and reduce amounts of Sales prescription drugs tied-up capital Handling goods Other • Backroom organization: reduce disruptive factors and create a structure that Administration facilitates greater efficiency Non-value creating The outcome of this list was a rollout package comprising training material including2 Insight | Case Study tools, exercises and new store standards to be met by each pharmacy, and a rollout plan.

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The rollout was implemented using a train-the-trainer approach. BearingPoint provided Figure 4. The scheduling is not based onthe regional managers with training sessions focusing on the methodology and rollout customer demand.package. The regional managers then trained their pharmacy managers, who in turn 14trained their employees. The regional managers developed their own individual rollout 12 10plans, gradually increasing the number of pharmacies involved in the training. 8 6 4 2During the implementation phase, the regional managers held weekly meetings with 0 7 8 9 10 11 12 13 14 15 16 17 18the pharmacy managers to track implementation status and decide on corrective Staffing need based on customer demand Actual staffing of pharmacyactions. A standardized follow-up tool was utilized for this purpose so that allpharmacies were evaluated using the same criteria.Throughout the project, Apotek Hjärtat and BearingPoint representatives workedhand-in-hand, and a critical factor for the implementation’s success was that theregional managers led the initiatives taken in their own pharmacies. In addition,communication and a change of mindset among employees were two key factors forsuccess.Sustainable results and value createdToday, Apotek Hjärtat is realizing the benefits from the store operations project. Figure 5. Effect on main KPI:s fromKey financial results include: implementation Productivity• More than 30 percent of EBITA effects were realized in 2011, and at an annual run rate, total effects will be captured in 2014.• Working capital was reduced by 15 percent while overall customer-service levels were retained.• Improved work processes and a new way of working with staff planning resulted in greater productivity (weighted volume/number of work hours).In addition, because personnel costs have been reduced, customers’ overall waitingtimes have been cut – thanks to a combination of the standardized sales process and 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43improved usage of the new IT system. Waiting times are a critical KPI for pharmacies, Customer service rateand the fierce competitive landscape has resulted in further pressure to serve customersquickly.However, the improvements encompassed more than just financial results. ApotekHjärtat has also benefited in the following ways:• New store-management system implemented in all pharmacies, involving the use of new store standards; KPIs; roles and responsibilities; a daily checklist and so on• Improved work climate after a 5S exercise (sort; set in order; shine; standardize; 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 systematize) in accordance with Lean Six Sigma principles was performed in all pharmacies as part of the rollout• More effective and standardized processes for ordering, goods receiving, and goods flow “The effect of the project has been• Clearer organizational structure significantly improved results, mainly due to increased productivity, improved processes and a thorough storeLooking ahead management system. The fourth quarterApotek Hjärtat’s transformation journey has just started. Although the initial change is of 2011 showed the best result sincecomplete, continuous improvements are necessary to stay ahead of the competition. Apotek Hjärtat was founded.”Therefore, as a final step in the project, Apotek Hjärtat has appointed a storedevelopment manager whose main responsibility is to monitor the quality of ongoing Anders Nybergefforts to improve store operations. As a complement to this, audits are performed on a CEOregular basis to help the company’s pharmacies remain compliant with the new storestandards of work that were implemented.1) Sveriges Apoteksförening, branschrapport 2011, http://www.sverigesapoteksforening.se/apoteksbranschens-arsrapport-2011/2) Årsredovisning, ApoPharm Holding AB 2011 Insight | Case Study 3

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We are BearingPoint. Management and Technology Consultants.BearingPoint is an independent management and technology consultancy managed andowned by its Partners throughout Europe. Serving commercial, financial and public servicesclients, BearingPoint focuses on offering its clients the best possible value in terms oftangible, measurable results by leveraging business and technology expertise. Its seamlesscross-border approach, an entrepreneurial culture, long-standing relations with reputableorganisations, profound industry and functional knowledge as well as solutions customisedto clients specific needs make the company a truly trusted adviser. BearingPoint hasEuropean roots, but operates with a global reach.To get there. Together.To learn more, visit our Web site at www.bearingpoint.com.BearingPoint Sweden KBSveavägen 21111 34 Stockholmwww.bearingpoint.se© 2012 BearingPoint. All rights reserved. Printed in Sweden. BENO1237.Insight | Case Study