Sap r/3 implementation at geneva

SAP R/3 Implementation
at Geneva Pharmaceuticals1
Company Background
Geneva Pharmaceuticals, Inc., one of the world’s largest generic drug manufacturers, is the NorthAmerican hub for the Generics division of Swiss pharmaceutical and life sciences company NovartisInternational AG. Originally founded by Detroit pharmacist Stanley Tutag in 1946, Geneva movedits headquarters to Broomfield, Colorado in 1974. The company was subsequently acquired by CibaCorporation in 1979, which in 1996, merged with Sandoz Ltd. in the largest ever healthcare merger toform Novartis. Alex Krauer, Chairman of Novartis and former Chairman and CEO of Ciba,commented on the strengths of the merger: “Strategically, the new company moves into a worldwide leadership position in lifesciences. Novartis holds the number two position [globally] in pharmaceuticals,number one in crop protection, and has tremendous development potential innutrition.” The name “Novartis” comes from the Latin term novae artes or new arts, which eloquently capturesthe company’s corporate vision: “to develop new skills in the science of life.” Novartis inherited,from its parent companies, a 200-year heritage of serving consumers in three core business segments:healthcare, agribusiness, and nutrition. Business units organized under these divisions are listed inExhibit 1. Today, the Basel (Switzerland) based life sciences company employs 82,500 employeesworldwide, runs 275 affiliate operations in 142 countries, and generates annual revenues of 32 billionSwiss Francs. Novartis’ key financial data for the last five years (1994-98) are presented in Exhibit 2.
The company’s American Depository Receipts trade on the New York Stock Exchange under theticker symbol NVTSY.
Novartis’ global leadership in branded pharmaceuticals is complemented by its generic drugsdivision, Novartis Generics. This division is headquartered in Kundl (Austria), and its U.S.
operations are managed by Geneva Pharmaceuticals. In 1998, Geneva had revenues of $300 million,employed nearly 1000 employees, and manufactured over 4.6 billion dosage units of generic drugs.
1 This “freeware” case was written by Dr. Anol Bhattacherjee to serve as a basis for class discussion rather thanto demonstrate the effective or ineffective handling of an administrative or business situation. The author isgrateful to Randy Weldon, CIO of Geneva Pharmaceuticals, and his coworkers for their unfailing helpthroughout the course of this project. This case can be downloaded and distributed free of charge for non-profitor academic use, provided the contents are unchanged and this copyright notice is clearly displayed. No part ofthis case can be used by for-profit organizations without the express written consent of the author. This casealso cannot be archived on any web site that requires payment for access. Copyright 1999 by AnolBhattacherjee. All rights reserved.
ERP Implementation at Geneva Pharmaceuticals Geneva portfolio currently includes over 200 products in over 500 package sizes, covering a widerange of therapeutic categories, such as nervous system disorders, cardio-vascular therapies, andnonsteroidal anti-inflammatory drugs. Its major products include ranitidine, atenolol, diclofenacsodium, ercaf, metoprolol tartrate, triamterene with hydrochlorothiazide, and trifluoperazine.
Geneva’s business and product information can be obtained from the company web site atwww.genevaRx.com.
Generic drugs are pharmaceutically and therapeutically equivalent versions of brand name drugs withestablished safety and efficacy. For instance, acetaminophen is the equivalent of the registered brandname drug Tylenol, aspirin is equivalent of Ecotrin, and ranitidine HCl is equivalent of Zantac.
This equivalence is tested and certified within the U.S. by the Food and Drug Administration (FDA),following successful completion of a “bioequivalence study,” in which the blood plasma levels of theactive generic drug in healthy people are compared with that of the corresponding branded drug.
Geneva’s business strategy has emphasized growth in two ways: (1) focused growth over a selectrange of product types, and (2) growth via acquisitions. Internal growth was 14 percent in 1998,primarily due to vigorous growth in the penicillin and cephalosporin businesses. In pursuit of furthergrowth, Geneva spend $52 million in 1997 to upgrade its annual manufacturing capacity to its currentcapacity of 6 billion units, and another $23 million in 1998 in clinical trials and new productdevelopment.
Industry and Competitive Position
The generic drug manufacturing industry is fragmented and highly competitive. In 1998, Geneva wasthe fifth largest player in this industry, up from its eighth rank in 1997 but still below its second rankin 1996. The company’s prime competitors fall into three broad categories: (1) generic drugsdivisions of major branded drug companies (e.g., Warrick – a division of Schering-Plough andApothecon – a division of Bristol Myers Squibb), (2) independent generic drug manufacturers (e.g.,Mylan, Teva Pharmaceuticals, Barr Laboratories, and Watson Pharmaceuticals), and (3) drugdistributors vertically integrating into generics manufacturing (e.g., AndRx). The industry also hasabout 200 smaller players specializing in the manufacture of niche generic products. While Genevabenefited from the financial strength of Novartis, independent companies typically used public stockmarkets for funding their growth strategies.
In 1998, about 45 percent of prescriptions for medications in the U.S. were filled with generics. Thetrend toward generics can be attributed to the growth of managed care providers such as healthmaintenance organizations (HMO), who generally prefer lower cost generic drugs to more expensivebrand name alternatives (generic drugs typically cost 30-50 less than equivalent brands). However,no single generics manufacturer has benefited from this trend, because distributors and pharmaciesview generic products from different manufacturers as identical substitutes and tend to“autosubstitute” or freely replace generics from one company with those from another based onproduct availability and pricing at that time. Once substituted, it is very difficult to regain thatcustomer account because pharmacies are disinclined to change product brand, color, and packaging,to avoid confusion among consumers. In addition, consumer trust toward generics has remainedlower, following a generic drug scandal in the early 1990’s (of which Geneva was not a part).
ERP Implementation at Geneva Pharmaceuticals Margins in the generics sector has therefore remained extremely low, and there is a continuouspressure on Geneva and its competitors to reduce costs of operations.
Opportunities for international growth are limited because of two reasons. First, consumers in somecountries such as Mexico are generally skeptical about the lack of branding because of their culturalbackground. Second, U.S. generics manufacturers are often undercut by competitors from India andChina, where abundance of low-cost labor and less restrictive regulatory requirements (e.g., FDAapproval) makes drug manufacturing even less expensive.
Continuous price pressures has resulted in a number of recent industry mergers and acquisitions in thegeneric drugs sector in recent years, as the acquirers seek economies of scale as a means of reducingcosts. The search for higher margins has also led some generics companies to venture into thebranded drugs sector, providing clinical trials, research and development, and additionalmanufacturing capacity for branded drugs on an outsourced basis.
Major Business Processes
Geneva’s primary business processes are manufacturing and distribution. The company’smanufacturing operations are performed at a 600,000 square foot facility in Broomfield (Colorado),while its two large distribution centers are located in Broomfield and Knoxville (Tennessee).
Geneva’s manufacturing process is scientific, controlled, and highly precise. A long and rigorousFDA approval process is required prior to commercial production of any drug, whereby the exactformulation of the drug or its “recipe” is documented. Raw materials are sourced from suppliers(sometimes from foreign countries such as China), tested for quality (per FDA requirements),weighed (based on dosage requirements), granulated (i.e., mixed, wetted, dried, milled to specificparticle sizes, and blended to assure content uniformity), and compressed into a tablet or poured into agelatinous capsule. Some products require additional coatings to help in digestion, stabilizing,regulating the release of active ingredients in the human body, or simply to improve taste. Tablets orcapsules are then imprinted with the Geneva logo and a product identification number. Following afinal inspection, the medications are packaged in childproof bottles with a distinctive Geneva label, orinserted into unit-dose blister packs for shipment.
Manufacturing is done in batches, however, the same batch can be split into multiple product typessuch as tablets and capsules, or tablets of different dosages (e.g., 50 mg and 100 mg). Likewise,finished goods from a batch can be packaged in different types of bottles, based on customer needs.
These variations add several layers of complexity to the standard manufacturing process and requirestracking of three types of inventory: raw materials, bulk materials, and finished goods, where bulkmaterials represent the intermediate stage prior to packaging. In some cases, additional intermediatessuch as coating solution is also tracked. Master production scheduling is focused on the manufactureof bulk materials, based on forecasted demand and replenishment of “safety stocks” at the twodistribution centers. Finished goods production depends on the schedule-to-performance, plusavailability of packaging materials (bottles and blister packs), which are sourced from outsidevendors.
ERP Implementation at Geneva Pharmaceuticals Bulk materials and finished goods are warehoused in Broomfield and Knoxville distribution centers(DC) prior to shipping. Since all manufacturing is done was done at Broomfield, inventoryreplenishment of manufactured products is done first at Broomfield and then at Knoxville. To meetadditional customer demand, Geneva also purchases finished goods from smaller manufacturers, whomanufacture and package generic drugs under Geneva’s level. Since most of these outsourcers arelocated along the east coast, and hence, they are distributed first to the Knoxville and then toBroomfield. Purchasing is simpler than manufacturing because it requires no bill of materials, nobulk materials management, and no master scheduling; Geneva simply converts planned orders topurchase requisitions, and then to purchase orders, that are invoiced upon delivery. However, thedual role of manufacturing and purchasing is a difficult balancing task, as explained by Joe Camargo,Director of Purchasing and Procurement: “Often times, we are dealing with more than a few decision variables. We have tolook at our forecasts, safety stocks, inventory on hand, and generate a replenishmentplan. Now we don’t want to stock too much of a finished good inventory because thatwill drive up our inventory holding costs. We tend to be a little more generous on theraw materials side, since they are less costly than finished goods and have longershop lives. We also have to factor in packaging considerations, since we have apretty short lead time on packaging materials, and capacity planning, to make surethat we are making efficient use of our available capacity. The entire process ispartly automated and partly manual, and often times we are using our ownexperience and intuition as much as hard data to make a good business decision.” Geneva supplies to a total of about 250 customers, including distributors (e.g., McKesson, Cardinal,Bergen), drugstore chains (e.g., Walgreen, Rite-Aid), grocery chains with in-store pharmacies (e.g.,Safeway, Kroger), mail order pharmacies (e.g., Medco, Walgreen), HMOs (e.g., Pacificare, Cigna),hospitals (e.g., Columbia, St. Luke’s), independent retail pharmacies, and governmental agencies(e.g., U.S. Army, Veterans Administration, Federal prisons). About 70 percent of Geneva’s salesgoes to distributors, another 20 percent goes to drugstore chains, while HMOs, government, retailpharmacies, and others account for the remaining 10 percent. Distributors purchase generic drugswholesale from Geneva, and then resell them to retail and mail order pharmacies, who are sometimesdirect customers of Geneva. The volume and dollar amount of transaction vary greatly from onecustomer to another, and while distributors are sometimes allow Geneva some lead time to fulfill in alarge order, retail pharmacies typically are unwilling to make that concession.
One emerging potential customer segment is Internet-based drug retailers such as Drugstore.com andPlanetRx.com. These online drugstores do not maintain any inventory of their own, but insteadaccept customer orders and pass on those orders to any wholesaler or manufacturer that can fill thoseorders in short notice. These small, customized, and unpredictable orders do not fit well withGeneva’s wholesale, high-volume production strategy, and hence, the company has decided againstdirect retailing to consumers via mail order or the Internet, at least for the near future.
As is standard in the generics industry, Geneva uses a complex incentive system consisting of“rebates” and “chargebacks” to entice distributors and pharmacies to buy its products. Each drug isassigned a “published industry price” by industry associations, but Geneva rebates that price todistributors on their sales contracts. For instance, if the published price is $10, and the rebatesassigned to a distributor is $3, then the contract price on that drug is $7. Rebate amounts are ERP Implementation at Geneva Pharmaceuticals determined by the sales management based on negotiations with customers. Often times, customersget proposals to buy the product cheaper from a different manufacturer and ask Geneva for acorresponding discount. Depending on how badly Geneva wants that particular customer or push thatproduct, it may offer a rebate or increase an existing rebate. Rebates can vary from one product toanother (for the same customer) and/or from one order volume to another (for the same product).
Likewise, pharmacies ordering Geneva’s products are paid back a fraction of the sales proceeds aschargebacks.
The majority of Geneva’s orders come through EDI. These orders are passed though multiple filtersin an automated order processing system to check if the customer has an active customer number andsufficient credit, if the item ordered is correct and available in inventory. Customers are thenassigned to either the Broomfield or Knoxville DC based on quantity ordered, delivery expirationdates, and whether the customer would accept split lots. If the quantity ordered is not available at theprimary DC (say, Knoxville), a second allocation is made to the secondary DC (Broomfield, in thiscase). If the order cannot be filled immediately, a backorder will be generated and the Broomfieldmanufacturing unit informed of the same. Once filled, the distribution unit will print the order andship it to the customer, and send order information to accounts receivable for invoicing. The overalleffectiveness of the fulfillment process is measured by two customer service metrics: (1) the ratiobetween the number of lines on the order that can be filled immediately (partial fills allowed) to thetotal number of lines ordered by the customer (called “firstfill”), and (2) the percentage of items sendfrom the primary DC. Fill patterns are important because customers typically prefer to get all itemsordered in one shipment.
Matching customer demand to production schedules is often difficult because of speculative buyingon the part of customers. Prices of drugs are typically reassessed at the start of every fiscal year, anda distributor may place a very large order at the end of the previous year to escape a potential priceincrease at the start of the next year (these products would then be stockpiled for reselling at higherprices next year). Likewise, a distributor may place a large order at the end of its financial year totransfer cash-on-hand to cost-of-goods-sold, for tax purposes or to ward off a potential acquisitionthreat. Unfortunately, most generics companies do not have the built-in capacity to deliver suchorders within short time frames, yet inability to fulfill orders may lead to the loss of an importantcustomer. Safety stocks help meet some of these unforeseen demands, however maintaining suchinventory consumes operating resources and reduce margins further.
SAP R/3 Implementation
Up until 1996, Geneva’s information systems (IS) consisted of a wide array of software programs forrunning procurement, manufacturing, accounting, sales, and other mission-critical processes. Theprimary hardware platform was IBM AS/400, running multiple operational databases (mostly DB/2)and connected to desktop microcomputers via a token-ring local area network (LAN). Each businessunit had deployed applications in an ad hoc manner to meet its immediate needs, which wereincompatible across business units. For instance, the manufacturing unit (e.g., materials requirementsplanning) utilized a manufacturing application called MacPac, financial accounting usedSoftware/2000, and planning/budgeting used FYI-Planner. These systems were not interoperable,and data that were shared across systems (e.g., accounts receivable data was used by order ERP Implementation at Geneva Pharmaceuticals management and financial accounting packages, customer demand was used in both sales andmanufacturing systems) had to be double-booked and rekeyed manually. This led to higher incidenceof data entry errors, higher costs of error processing, and greater data inconsistency. Further, datawas locked within “functional silos” and were unable to support processes that cut across multiplebusiness units (e.g., end-to-end supply chain management). It was apparent that a common,integrated company-wide solution would not only improve data consistency and accuracy, but alsoreduce system maintenance costs (e.g., data reentry and error correction) and enable implementationof new value-added processes across business units.
In view of these limitations, in 1996, corporate management at Geneva initiated a search fortechnology solutions that could streamline its internal processes, lower costs of operations, andstrategically position the company to take advantage of new value-added processes. Morespecifically, it wanted an enterprise resource planning (ERP) software that could: (1) implement bestpractices in business processes, (2) provide operational efficiency by integrating data across businessunits, (3) reduce errors due to incorrect keying or rekeying of data, (4) reduce system maintenancecosts by standardizing business data, (5) be flexible enough to integrate with new systems (as morecompanies are acquired), (6) support growth in product and customer categories, and (7) is Y2K (year2000) compliant. The worldwide divisions of Novartis were considering two ERP packages at thattime: BPCS from Software Systems Associates and R/3 system from SAP. Eventually, branded drugdivisions decided to standardize their data processing environment using BPCS, and generics agreedon deploying R/3.2 A brief description of the R/3 software is provided in the appendix.
R/3 implementation at Geneva was planned in three phases (see Exhibit 3). Phase I focused on thesupply side processes (e.g., manufacturing requirements planning, procurement planning), Phase IIwas concerned with demand side processes (e.g., order management, customer service), and the finalphase was aimed at integrating supply side and demand side processes (e.g., supply chainmanagement). Randy Weldon, Geneva’s Chief Information Officer, outlined the goals of each phaseas: “In Phase I, we were trying to get better performance-to-master production scheduleand maybe reduce our cost of operations. Our Phase II goals are to improve salesand operations planning, and as a result, reduce back orders and improve customerservice. In Phase III, we hope to provide end-to-end supply chain integration, so thatwe can dynamically alter our production schedules to fluctuating demands from ourcustomers.” For each phase, specific R/3 modules were identified for implementation. These modules along withimplementation timelines are listed in Exhibit 3. The three phases are described in detail next.
2 However, each generics subsidiary had its own SAP R/3 implementation, and therefore data sharing acrossthese divisions remained problematic.
ERP Implementation at Geneva Pharmaceuticals Phase I: Supply Side Processes
The first phase of R/3 implementation started on November 1, 1997 with the goal of migrating allsupply-side processes, such as purchasing management, capacity planning, master scheduling,inventory management, quality control, and accounts payable from diverse hardware/softwareplatforms to a unified R/3 environment. These supply processes were previously very manual andlabor intensive. A Macpac package running on an IBM AS/400 machine was used to control shopfloor operations, prepare master schedules, and perform maintenance management. However, thesystem did not have simulation capability to run alternate production plans against the masterschedule, and was therefore not used for estimation. The system also did not support a formal processfor distribution resource planning (DRP), instead generated a simple replenishment schedule based onpredefined economic order quantities. Materials requirements planning (MRP) was only partiallysupported in that the system generated production requirements and master schedule but did notsupport planned orders (e.g., generating planned orders, checking items in planned orders against theinventory or production plan, converting planned orders to purchase orders or manufacturing orders).
Consequently, entering planned orders, checking for errors, and performing order conversion were allentered manually, item by item, by different sales personnel (which left room for rekeying error).
Macpac did have a capacity resource planning (CRP) functionality, but this feature was not used sinceit required heavy custom programming and major enhancements to master data. The system hadalready been so heavily customized over the years, that even a routine system upgrade was consideredtoo unwieldy and expensive. Most importantly, the existing system did not position Geneva well forthe future, since it failed to accommodate consigned inventory, vendor-managed inventory, paperlesspurchasing, and other innovations in purchasing and procurement that Geneva wanted to implement.
The objectives of Phase I were therefore to migrate existing processes from Macpac to R/3, automatesupply side process not supported by MacPac, and integrate all supply-side data in a single, real-timedatabase so that the synergies could be exploited across manufacturing and purchasing processes.
System integration was also expected to reduce inventory and production costs, improveperformance-to-master scheduling, and help managers make more optimal manufacturing andpurchase decisions. Since R/3 would force all data to be entered only once (at source by theappropriate shop floor personnel), the need of data reentry would be eliminated, and hence costs ofdata reconciliation would be reduced. The processes to be migrated from MacPac (e.g., MRP,procurement) were fairly standardized and efficient, and were hence not targeted for redesign orenhancement. Three SAP modules were scheduled for deployment: materials management (MM),production planning (PP), and accounts payable component of financial accounting (FI). Exhibit A-1in Appendix provides brief descriptions of these and other commonly referenced R/3 modules.
Phase I of R/3 implementation employed about ten IS personnel, ten full-time users, and ten part-timeusers from business units within Geneva. Whitman-Hart, a consulting company with prior experiencein R/3 implementation, was contracted to assist with the migration effort. These external consultantsconsisted of one R/3 basis person (for implementing the technical core of the R/3 engine), three R/3configurators (for mapping R/3 configuration tables in MM, PP, and FI modules to Geneva’s needs),and two ABAP programmers (for custom coding unique requirements not supported by SAP). Theseconsultants brought in valuable implementation experience, which was absolutely vital, given thatGeneva had no in-house expertise in R/3 at that time. Verne Evans, Director of Supply ChainManagement and a “super user” of MacPac, was assigned the project manager for this phase. SAP’s ERP Implementation at Geneva Pharmaceuticals rapid implementation methodology called Accelerated SAP (ASAP) was selected for deployment,because it promised a short implementation cycle of only six months.3 Four months later, Geneva found that little progress had been made in the implementation processdespite substantial investments on hardware, software, and consultants. System requirements werenot defined correctly or in adequate detail, there was little communication or coordination of activitiesamong consultants, IS personnel, and user groups, and the project manager was unable to identify orresolve problems because he had no prior R/3 experience. In the words of a senior manager, “Theimplementation was clearly spinning out of control.” Consultants employed by Whitman-Hart weretechnical specialists, and had little knowledge of the business domain. The ASAP methodologyseemed to be failing, because although it allowed a quick canned implementation, it was not flexibleenough to meet Geneva’s extensive customization needs, did not support process improvements, andalienated functional user groups from system implementation. To get the project back into track andgive it leadership and direction, in February 1998, Geneva hired Randy Weldon as its new CIO.
Weldon brought in valuable project management experience in R/3 from his previous employer,StorageTek.4 From his prior R/3 experience, Weldon knew that ERP was fundamentally about people and processchange, rather than about installing and configuring systems, and that successful implementationwould require the commitment and collaboration of all three stakeholder groups: functional users, ISstaff, and consultants. He instituted a new project management team, consisting of one IS manager,one functional manager, and one senior R/3 consultant. Because Geneva’s internal IS department hadno R/3 implementation experience, a new team of R/3 professionals (including R/3 basis personneland Oracle database administrators) was recruited. Anna Bourgeois, with over three years of R/3experience at Compaq Computers, was brought in to lead Geneva’s internal IS team. Weldon was notparticularly in favor of Whitman-Hart or the ASAP methodology. However, for project expediency,he decided to continue with Whitman-Hart and ASAP for Phase 1, and explore other options forsubsequent phases.
By February 1999, the raw materials and manufacturing component of R/3’s MM module was “upand running.” But this module was not yet integrated with distribution (Phase II) and therefore didnot have the capability to readjust production runs based on current sales data. However, severalbusiness metrics such as yield losses and key performance indicators showed performanceimprovement following R/3 implementation. For instance, the number of planning activitiesperformed by a single individual was doubled. Job roles were streamlined, standardized, andconsolidated, so that the same person could perform more “value-added” activities. Since R/3eliminated the need for data rekeying and validating, the portion of the inventory control unit thatdealt with data entry and error checking was disbanded and these employees were taught new skillsfor reassignment to other purchasing and procurement processes. But R/3 also had its share ofdisappointments, as explained by Camargo: 3 ASAP is SAP’s rapid implementation methodology that provides implementers a detailed roadmap of theimplementation life cycle, grouped into five phases: project preparation, business blueprint, realization, finalpreparation, and go live. ASAP provides a detailed listing of activities to be performed in each phase,checklists, predefined templates (e.g., business processes, cutover plans), project management tools,questionnaires (e.g., to define business process requirements), and a Question & Answer Database4 StorageTek is a leading manufacturer of magnetic tape and disk components also based in Colorado.
ERP Implementation at Geneva Pharmaceuticals “Ironically, one of the problems we have with SAP, that we did not have withMacpac, is for the job to carry the original due date and the current due date, andmeasure production completion against the original due date. SAP only allows us tocapture one due date, and if we change the date to reflect our current due date, thatthrows our entire planning process into disarray. To measure how we are fillingorders, we have to do that manually, offline, on a spreadsheet. And we can’t recordthat data either in SAP to measure performance improvements over time.” Bourgeois summed up the implementation process as: “Phase I, in my opinion, was not done in the most effective way. It was done asquickly as possible, but we did not modify the software, did not change the process,or did not write any custom report. Looking back, we should have done thingsdifferently. But we had some problems with the consultants, and by the time I camein, it was a little too late to really make a change. But we learned from thesemistakes, and we hope to do a better job with Phases II and III.” Phase II: Demand Side Processes
Beginning around October 1998, the goals of the second phase were to redesign demand-sideprocesses such as marketing, order fulfillment, customer sales and service, and accounts receivable,and then implement the reengineered processes using R/3. Geneva was undergoing major businesstransformations especially in the areas of customer sales and service, and previous systems (Macpac,FYI Planner, etc.) were unable to accommodate these changes. For instance, in 1998, Geneva starteda customer-based forecasting process for key customer accounts. It was expected that a betterprediction of order patterns from major customers would help the company improve its masterscheduling, while reducing safety stock and missed orders. The prior forecasting software, FYIPlanner, did not allow forecasting on a customer-by-customer basis. Besides, demand-side processessuffered from similar lack of data integration and real-time access as supply side processes, and R/3implementation, by virtue of its real-time integration of all operational data would help manage cross-functional processes better. Mark Mecca, Director of Customer Partnering, observed: “Before SAP, much of our customer sales and service were managed in batch modeusing MacPac. EDI orders came in once a night, chargebacks came in once a day,invoicing is done overnight, shipments got posted once a day; so you don’t knowwhat you shipped for the day until that data was entered the following day. SAP willallow us to have access to real-time data across the enterprise. There will becomplete integration with accounting, so we will get accurate accounts receivabledata at the time a customer initiates a sales transaction. Sometime in the future,hopefully, we will have enough integration with our manufacturing processes so thatwe can look at our manufacturing schedule and promise a customer exactly when wecan fill his order.” However, the second phase was much more challenging than the first phase, given the non-standardand inherently complex nature of Geneva’s sales and service processes. For instance, customer rebate ERP Implementation at Geneva Pharmaceuticals percentages varied across customers, customer-product combinations, and customer-product-ordervolume combinations. Additionally, the same customer sometimes had multiple accounts withGeneva and had a different rebate percentage negotiated for each account.
Bourgeois was assigned overall responsibility of the project, by virtue of her extensive knowledge ofEDI, R/3 interface conversion, and sales and distribution processes, and ability to serve as a technicalliaison between application and basis personnel. Whitman-Hart was replaced with a new consultingfirm, Arthur Andersen Business Consulting, to assist Geneva with the second and third phases of R/3implementation. Oliver White, a consulting firm specializing in operational processes formanufacturing firms, was also hired to help redesign existing sales and distribution processes using“best practices,” prior to R/3 implementation. Weldon explained the reason for hiring two consultinggroups: “Arthur Anderson was very knowledgeable in the technical and configurationalaspects of SAP implementation, but Oliver White was the process guru. UnlikePhase I, we were clearly targeting process redesign and enhancement in Phases IIand III, and Oliver White brought in ‘best practices’ by virtue of their extensiveexperience with process changes in manufacturing organizations. Since Phase I wassomewhat of a disaster, we wanted to make sure that we did everything right inPhases II and III and not skimp on resources.” Technical implementation in Phase II proceeded in three stages: conceptual design, conference roompilot, and change management. In the conceptual design stage, key users most knowledgeable withthe existing process were identified, assembled in a room, and interviewed, with assistance fromOliver White consultants. Process diagrams were constructed on “post-it” notes and stuck to thewalls of a conference room for others to view, critique, and suggest modifications. The scope andboundaries of existing processes, inputs and deliverables of each process, system interfaces, extent ofprocess customization, and required level of system flexibility were analyzed. An iterative processwas employed to identify and eliminate activities that did not add value, and generate alternativeprocess flows. The goal was to map the baseline or existing (“AS-IS”) processes, identify bottlenecksand problem areas, and thereby, to create reengineered (“TO-BE”) processes. This informationbecame the basis for subsequent configuration of the R/3 system in the conference room pilot stage.
A core team of 20 IS personnel, users, and consultants worked full-time on conceptual design for 2.5months (this team later expanded to 35 members in the conference room pilot stage). Another 30users were involved part-time in this effort; these individuals were brought in for focused periods oftime (between 4 and 14 hours) to discuss, clarify, and agree on complex distribution-related issues.
The core team was divided into five groups to examine different aspects of the distribution process:(1) product and business planning, (2) preorder (pricing, chargebacks, rebates, contracts, etc.), (3)order processing, (4) fulfillment (shipping, delivery confirmation, etc.), and (5) post-order (accountsreceivable, credit management, customer service, etc.). Thirteen different improvement areas wereidentified, of which four key areas emerged repeatedly from cross-functional analysis by the fivegroups and were targeted for improvement: product destruction, customer dispute resolution, pricingstrategy, and service level. Elaborate models were constructed (via fish bone approach) for each ofthese four areas to identify what factors drove these areas, what was the source of problems in theseareas, and how could they be improved using policy initiatives.
ERP Implementation at Geneva Pharmaceuticals The conceptual design results were used to configure and test prototype R/3 systems for each of thefour key improvement areas in the conference room pilot stage. The purpose of the prototypes was totest and refine different aspects of the redesigned processes such as forecast planning, contractpricing, chargeback strategy determination, receivables creation, pre-transaction credit checking,basic reporting, and so forth in a simulated environment. The prototypes were modified several timesbased on user feedback, and the final versions were targeted for rollout using the ASAP methodology.
In the change management stage, five training rooms were equipped with computers running theclient version of the R/3 software to train users on the redesigned processes and the new R/3environment. An advisory committee was formed to oversee and coordinate the change managementprocess. Reporting directly to the senior vice president level, this committee was given the mandateand resources to plan and implement any change strategies that they would consider beneficial. Achange management professional and several trainers were brought in to assist with this effort.
Multiple “brown bag luncheons” were organized to plan out the course of change and discuss whatchange strategies would be least disruptive. Super users and functional managers, who had theorganizational position to influence the behaviors of colleagues or subordinates in their respectiveunits, were identified and targeted as potential change agents. The idea was to seed individualbusiness units with change agents they could trust and relate to, in an effort to drive a grassrootsprogram for change.
To stimulate employee awareness, prior to actual training, signs were put up throughout the companythat said, “Do you know that your job is changing?” Company newsletters were used to enhanceproject visibility and to address employee questions or concerns about the impending change. Aseparate telephone line was created for employees to call anytime and inquire about the project andhow their jobs would be affected. The human resources unit conducted an employee survey tounderstand how employees viewed the R/3 implementation and gauge their receptivity to changes injob roles as a result of this implementation.
Training proceeded full-time for three weeks. Each user received an average of 3-5 days of trainingon process and system aspects. Training was hands-on, team-oriented, and continuously mentored,and was oriented around employees’ job roles such as how to process customer orders, how to moveinventory around, and how to make general ledger entries, rather than how to use the R/3 system.
Weldon described the rationale for this unique, non-traditional mode of training: “Traditional system training does not work very well for SAP implementationbecause this is not only a technology change but also a change in work process,culture, and habits, and these are very difficult things to change. You are talkingabout changing attitudes and job roles that have been ingrained in employees’ mindsfor years and in some cases, decades. System training will overwhelm lesssophisticated users and they will think, ‘O my God, I have no clue what this computerthing is all about, I don’t know what to do if the screen freezes, I don’t know how tohandle exceptions, I’m sure to fail.’ Training should not focus on how they shoulduse the system, but on how they should do their own job using the system. In ourcase, it was a regular on-the-job training rather than a system training, andemployees approached it as something that would help them do their job better.” ERP Implementation at Geneva Pharmaceuticals Several startling revelations were uncovered during the training process. First, there was aconsiderable degree of confusion among employees on what their exact job responsibilities were,even in the pre-R/3 era. Some training resources had to be expended in reconciling these differences,and to eliminate ambiguity about their post-implementation roles. Second, Geneva’s departmentswere very much functionally oriented and wanted the highest level of efficiency from theirdepartment, sometimes to the detriment of other departments or the overall process. This has been asticky cultural problem, and at the time of the case, the advisory committee was working with seniormanagement to see if any structural changes could be initiated within the company to affect a mindsetchange. Third, Geneva realized that change must also be initiated on the customer side, so thatcustomers are aware of the system’s benefits and are able to use it appropriately. In the interest ofproject completion, customer education programs were postponed until the completion of Phase III ofR/3 implementation.
The primary business metric tracked for Phase II implementation was customer service level, whileother metrics included days of inventory on hand, dollar amount in disputes, dollar amount destroyed,and so forth. Customer service was assessed by Geneva’s customers as: (1) whether the item orderedwas in stock, (2) whether Geneva was able to fill the entire order in one shipment, and (3) ifbackordered, whether the backorder delivered on time. With a customer service levels in the 80’s,Geneva has lagged its industry competitors (mostly in the mid 90’s), but has set an aggressive goal toexceed 99.5 percent service level by year-end 1999. Camargo observed that there was some decreasein customer service, but this decrease was not due to R/3 implementation but because Geneva facedan impending capacity shortfall and the planners did not foresee the shortfall quickly enough toimplement contingency plans. Camargo expected that such problems would be alleviated asperformance-to-schedule and demand forecasting improved as a result of R/3 implementation. Giventhat Phase II implementation is still underway at the time of the case (“go live” date is February 1,2000), it is still too early to assess whether these targets are reached.
Phase 3: Integrating Supply and Demand
Geneva’s quest for integrating supply and demand side processes began in 1994 with its supply chainmanagement (SCM) initiative. But the program was shelved for several years due to the non-integrated nature of systems, immaturity of the discipline, and financial limitations. The initiativeresurfaced on the planning boards in 1998 under the leadership of Verne Evans, Director of SCM, asR/3 promised to remove the technological bottlenecks that prevented successful SCMimplementation. Though SCM theoretically extends beyond the company’s boundaries to include itssuppliers and customers, Geneva targeted the mission-critical the manufacturing resource planning(MRP-II) component within SCM, and more specifically, the Sales and Operations Planning (SOP)process as the means of implementing “just-in-time” production scheduling. SOP dynamically linkedplanning activities in Geneva’s upstream (manufacturing) and downstream (sales) operations,allowing the company to continuously update its manufacturing capacity and scheduling in responseto continuously changing customer demands (both planned and unanticipated). Geneva’s MRP-II andSOP processes are illustrated in Exhibits 5 and 6 respectively.
Until the mid-1990’s, Geneva had no formal SOP process, either manual or automated.
Manufacturing planning was isolated from demand data, and was primarily based on historical ERP Implementation at Geneva Pharmaceuticals demand patterns. If a customer (distributor) placed an unexpected order or requested a change in anexisting order, the manufacturing unit was unable to adjust their production plan accordingly. Thislack of flexibility led to unfilled orders or excess inventory and dissatisfied (and sometimes lost)customers. Prior sales and manufacturing systems were incompatible with each other, and did notallow the integration of supply and demand data, as required by SOP. In case production plansrequired modification to accommodate a request from a major customer, such decisions were made onan ad-hoc basis, based on intuition rather than business rationale, which sometimes had adverserepercussions on manufacturing operations.
To remedy these problems, Geneva started a manual SOP process in 1997 (see Exhibit 6). In thisapproach, after the financial close of each month, sales planning and forecast data were aggregatedfrom order entry and forecasting systems, validated, and manually keyed into master scheduling andproduction planning systems. Likewise, prior period production and inventory data were entered intoorder management systems. The supply planning team and demand analysis team arrived at theirown independent analysis of what target production and target sales should be. These estimates(likely to be different) were subsequently reviewed in a joint meeting of demand analysts and masterschedulers and reconciliated. Once an agreement was reached, senior executives (President ofGeneva and Senior Vice Presidents), convened a business planning meeting, where the finalproduction plan and demand schedule were analyzed based on business assumptions, key customers,key performance indicators, financial goals and projections (market share, revenues, profits), andother strategic initiatives (e.g., introduction of a new product). The purpose of this final meeting wasnot only to fine-tune the master schedule, but also to reexamine the corporate assumptions, growthestimates, and the like in light of the master schedule, and to develop a better understanding of thecorporate business. The entire planning process took 20 business days (one month), of which the first10 days were spent in data reentry and validation across corporate systems, followed by five days ofdemand planning, two days of supply planning, and three days of reconciliation. The final businessplanning meeting was scheduled on the last Friday of the month to approve production plans for thefollowing month. Interestingly, when the planning process was completed one month later, theplanning team had a good idea of the production schedule one month prior. If Geneva decided tooverride the targeted production plans to accommodate a customer request, such changes underminedthe utility of the SOP process.
While the redesigned SOP process was a major improvement over the pre-SOP era, the manualprocess was itself limited by the time-lag and errors in data reentry and validation across sales,production, and financial systems. Further, the process took one month, and was not sensitive tochanges in customer orders placed less than a month from their requested delivery dates. Since muchof the planning time was consumed in reentering and validating data from one system to another,Evans estimated that if an automated system supported real-time integration of all supply and demanddata in a single unified database, the planning cycle could be reduced to ten business days.
Though SAP provided a SOP module with their R/3 package, Geneva’s R/3 project management teambelieved that this module lacked the “intelligence” required to generate an “optimal” production planfrom continuously changing supply and demand data, even when all data were available in a commondatabase. The R/3 system was originally designed as a data repository, not an analysis tool to solve ERP Implementation at Geneva Pharmaceuticals complex supply chain problems or provide simulation capabilities5. Subsequently, in 1999, whenSAP added a new Advanced Purchase Optimizer (APO) module to help with data analysis, Genevarealized that the combination of R/3’s SOP and APO modules would be the answer to their uniqueSOP needs.
At the time of the case, Geneva was in the initial requirements definition stage of SOPimplementation. To aid in this effort, Oliver White had created a template that could aggregate allrelevant data required for SOP from distribution, operations, purchasing, quality control, and otherfunctional databases, and tie these data to their source processes. It was expected that the templatewould provide a common reference point for all individuals participating in the SOP process andsynchronize their decision processes.
The primary business metric targeted for improvement in Phase III implementation is “available topromise” (ATP), i.e., whether Geneva is able to fulfill a customer order by the promised time. ATP isan integration of customer service level and business performance, the erstwhile key business metricsin the pre-SOP era. Customers often placed orders too large to be fulfilled immediately, and ATPwas expected to provide customers with reasonably accurate dates on when they should expect whichpart of their order to be filled. Generating and meeting these dates would enable Geneva improve itscustomer service levels that not providing any fulfillment dates at all. With declining profit margins,as the generics industry is forced to explore new means of cost reduction, Geneva expects that thininventories, just-in-time manufacturing, and top quality customer service will eventually be thedrivers of success, hence the importance of this metric. Evans explains the importance of ATP as abusiness metric as: “Most of our customers understand the dynamics of our business, and how difficult itis for us to fulfill a large order instantaneously with limited production capacity. Butmost of them are willing to bear with backorders if we can promise them areasonable delivery date for their backorder and actually deliver on that date. Thatway, we take less of a customer service level hit than defaulting on the order or beingunable to accommodate it. In commodity business such as ours, customer service isthe king. Our customers may be willing to pay a little premium over the market forassured and reliable service, so that they can meet their obligations to theircustomers. Customer service may be a strategic way to build long-term relationshipswith our customers, but of course, we are far from proving or disproving thathypothesis.” Future Plans
Despite some initial setbacks in Phase I, Geneva is now back on the road to a successful R/3implementation. The senior management, functional units, and IS personnel are all enthusiastic aboutthe project and looking forward to its deployment in all operational areas of business and beyond.
R/3 implementation has opened up new possibilities to Geneva and more means of competing in the 5 Typically, manufacturing companies requiring SCM analysis used additional analysis tools from I2Technologies or Manugistics on top of ERP databases from SAP or Oracle for SCM purposes.
ERP Implementation at Geneva Pharmaceuticals intensely competitive generic drugs industry. Weldon provided an overall assessment of the benefitsachieved via R/3 implementation: “In my opinion, we are doing most of the same things, but we are doing them better,faster, and with fewer resources. We are able to better integrate our operationaldata, and are able to access that data in a timely manner for making critical businessdecisions. At the same time, SAP implementation has placed us in a position toleverage future technological improvements and process innovations, and we expectto grow with the system over time.” Currently, the primary focus of Geneva’s R/3 implementation is timely completion of Phase II and IIIby February 2000 and December 2000 respectively. Once completed, the implementation team canthen turn to some of R/3’s additional capabilities that are not being utilized at Geneva. In particular,the quality control and human resource modules are earmarked for implementation after Phase III.
Additionally, Geneva plans to strengthen relationships with key suppliers and customers byseamlessly integrating the entire supply chain. The first step in this direction is vendor managedinventory (VMI), that was initiated by Geneva in April 1998 for a grocery store chain and a majordistributor. In this arrangement, Geneva obtains real-time, updated, electronic information aboutcustomers’ inventories, and replenish their inventories on a just-in-time basis without a formalordering process, based on their demand patterns, sales forecast, and actual sales (effectivelyoperating as customers’ purchasing unit).6 Geneva’s current VMI system, Score, was purchased fromSupply Chain Solutions (SCS) in 1998. Though Mecca is satisfied with this system, he believes thatGeneva can benefit more from R/3’s ATP module via a combination of VMI functionality andseamless company-wide data integration. Currently, some of Geneva’s customers are hesitant toadopt VMI because sharing of critical sales data may cause them to lose bargaining power vis-à-vistheir suppliers or prevent them from speculative buying. But over the long-term, the inherentbusiness need for cost reduction in the generics industry is expected to drive these and othercustomers toward VMI. Geneva wants to ensure that the company is ready if and when suchopportunity arises.
6 Real-time customer forecast and sales data is run through a VMI software (a mini-MRP system), whichdetermines optimum safety stock levels and reorder points for customers, and a corresponding, more optimumproduction schedule for Geneva. Initial performance statistics at the grocery store chain indicated that customerservice levels increased from 96 percent to 99.5 percent and on-hand inventory decreased from 8 weeks to sixweeks as a result of VMI implementation. For the distributor, Geneva expects that VMI will reduce on-handinventory from seven months to three months.
ERP Implementation at Geneva Pharmaceuticals Exhibit 1. Novartis’ divisions
PharmaceuticalsConsumer HealthGenericsCIBA Vision Infant and Baby NutritionMedical NutritionHealth Nutrition Exhibit 2. Novartis’ five-year financial summary
Note: All figures in millions of Swiss Francs, except otherwise indicated.
Pre-1996 data is on pro forma basis, based on pooled data from Ciba and Sandoz.
ERP Implementation at Geneva Pharmaceuticals Exhibit 3. Phases in R/3 implementation at Geneva
Implementation timeline(inception to go-live) Note: 1Vendor selection took place in mid-1997 2MM: Raw materials inventory Exhibit 4. Geneva’s order management process
ERP Implementation at Geneva Pharmaceuticals Exhibit 5. Geneva’s manufacturing resource planning process
Exhibit 6. Geneva’s sales & operations planning process
Key Activities:
• Product planning • Master production • Consolidation of Current Planning Cycle (Monthly):
To reduce the planning cycle time from one month to 10 business days.
ERP Implementation at Geneva Pharmaceuticals Appendix
SAP (Systems, Applications, and Products in Data Processing) is the world’s fourth largest softwarecompany, and the largest enterprise resource planning (ERP) vendor. As of February 1999, thecompany employed 19,300 employees and had annual revenues of $5 billion, annual growth of 44percent, over 10,000 customers in 107 countries, and 36 percent of the ERP market. SAP AG wasfounded in 1972 by Dr. H.C. Hasso Plattner and Dr. Henning Kagermann in Walldorf, Germany withthe goal of producing an integrated application software, that would run all mission-critical operationsin corporations, from purchasing to manufacturing to order fulfillment and accounting. Thisintegration would help companies optimize their supply chains, manage customer relationships, andmake better management decisions. SAP brings in 26 years of leadership in process innovations andERP, and invests 20 percent of its revenues back into research and development.
SAP’s first breakthrough product was the R/2 system, which ran on mainframe computers. R/2 andits competitors were called ERP systems, to reflect the fact that they extended the functions of earliermaterials requirements planning (MRP) systems in manufacturing firms to include other functionsand business processes such as sales and accounting. In 1992, SAP released its R/3 system, theclient/server variant of the earlier R/2 system, which was installed in 20,000 locations worldwide, andR/2 is installed in over 1,300 locations by mid-1999. Initially targeted at the world’s largestcorporations such as AT&T, BBC, Deutsche Bank, IBM, KPMG, Merck, Microsoft, Nestle, Nike,and Siemens, R/3 has since been deployed by companies of all sizes, geographical locations, andindustries. SAP solutions are available for 18 comprehensive industry solutions (“verticals”) forspecific industry sectors such as banking, oil & gas, electronics, health care, and public sector.
The R/3 system is designed as an “open” solution, i.e., it can run on a variety of hardware/softwareenvironments such as UNIX, Windows NT, or OS/400 on Sun, IBM, or HP servers, Intel-basedservers, and IBM AS/400 machines. R/3 uses a thin client-based, 3-tier architecture, consisting of adatabase tier, an application server, and a presentation tier (see Exhibit A-2). The database serverprovides a common, central repository of all organizational data in relational form, which can beaccessed via application servers. Back-end databases supported include Oracle, Microsoft SQLServer, DB2, Informix, and ADABAS. The application server provides job scheduling, printspooling, user validation, and application programming interfaces (API) requested by the presentationserver. The presentation server provides the desktop graphical user interfaces (GUI) running on thinclients, which can retrieve data from or store data to the database server via the application server.
Front-end GUIs supported by SAP include Windows 3.1/95/NT, OS/2, Macintosh, and OSF/Motif.
SAP requires a TCP/IP networking environment, but supports a wide variety of middleware such asRFC, DDE, OLE, and ALE for client-server interaction.
R/3 is organized in form of over 8,000 configuration tables that define how the system shouldfunction, how users should interact with it, and how transaction screens should look like. Though itcan be implemented as a “standard” application, generally some configuration is required to meetcustomer-specific business needs. Configuration is done by changing settings in R/3 configurationtables. Implementers first model how a business process should function, then map these models into“scripts,” and finally translate scripts into configuration table settings. Typically, external consultants(e.g., Anderson Consulting, Price-Waterhouse-Coopers) are hired to assist with the configuration ERP Implementation at Geneva Pharmaceuticals process. Implementing R/3’s basic modules may take 18-24 months, however the new AcceleratedSAP (ASAP) methodology can reduce the implementation time to under six months.
R/3 is packaged as a set of application modules (see Exhibit A-1 for a listing of common R/3modules, their functions, and key elements); plus the core system called the Basis System. The basissystem provides the operating system, database, communications middleware, and technicalinfrastructure required by all application modules, and also manages the data dictionary, security,ABAP/4 programming workbench, operations, transactions, change requests, and administration. Acustomer may implement the core plus any combination of application modules, depending on itsspecific needs. These modules interact with business data that are defined as objects, with predefinedattributes and behaviors. R/3 configuration involves setting up “values” for these attributes, buildingcustom forms to map business processes, building interfaces to transfer data across applications, andpopulating data from prior databases after appropriate data mapping, cleansing, conversion, andextraction (using SAP-supplied tools such as BDC or IDOC).
Although R/3 typically supports 80-95 percent of a large company’s needs, some companies mayrequire additional functionality for unique business processes. This remaining functionality can beobtained in four ways: (1) interfacing R/3 to existing legacy systems via SAP-supported middleware,(2) interfacing R/3 to third-party (SAP partners) solutions (which can be coded in C or C++), (3)writing custom software in ABAP/4 (a proprietary fourth generation language) that extends R/3’sfunctionality, and (4) modifying R/3 source code directly (this approach is strongly discouraged bySAP and may lead to loss of after-sales support). The scope and complexity of R/3 implementationrequires the hiring of consulting agencies (e.g., Anderson Consulting, Price Waterhouse Coopers,KPMG), who not only configure the system based on business specifications and custom-codeadditional requirements using ABAP/4, but also plan and manage company-wide rollout, training, andchange management.
ERP Implementation at Geneva Pharmaceuticals Exhibit A-1. R/3’s application modules
General ledger, Accounts payable, Accounts reporting of GL, A/R, A/P, and other sub- receivable, Treasury, Special-purpose ledger, ledger accounts with a user-defined chart of Legal consolidation, Accounting information Represents the company’s flow of cost and revenue, and is a management instrument for costing analysis, Activity based costing,Profitability analysis.
Designed to manage and supervise individual Inventory control, Traditional assetaccounting (depreciation, etc.), Investmentmanagement.
products with defined goals, accelerates work Links SAP R/3 modules with cross-application technologies, tools, and servicesto automate business processes.
Utilities/telecommunications, Healthcare,Process industries, Oil & gas, Hightech/electronics, Automotive.
accounting, Benefits, Recruitment,Workforce planning, Trainingadministration, HR information system.
completion of plant maintenance tasks, track Supports quality planning and control for Quality inspection, Quality planning, Quality Bill of materials, Work centers, Sales and operations planning, Master productionscheduling, Material requirements planning,Shop floor control, Product costing, Kanban.
Purchasing, Inventory management, Reorder point processing, Invoice verification,Material valuation, External servicesmanagement.
Helps optimize all tasks and activities carried out in sales, delivery, and billing.
Quotations, Sales order processing, Deliveryprocessing, Billing.
Note: This is not a complete list of SAP R/3 modules. New modules are being added at the time of the case, such as BIW(Business information warehouse) and APO (Advance purchase optimization).
ERP Implementation at Geneva Pharmaceuticals Exhibit A-2. R/3’s three-tier client/server architecture
User requests data or transaction from presentation server via the GUI Presentation server relays user requests to appropriate application servers via set of middleware Application server creates appropriate SQL queries and transmits them to the database server Database server processes the query and returns results to application server Application server returns the data to the requesting presentation server Presentation server formats data and presents it to the user.
Exhibit A-3. System platforms supported by R/3
OSF/Motif, Presentation Manager, Macintosh ALE, DDE, EDI, OLE, Mail, RFC, Q-API, CPI-C

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