Historically, the supply chain philosophy for most medical products manufacturers has been 'don't run out', or 'product anywhere, any way, all the time, at any cost'. Strong margins, global sales growth and an insatiable appetite for new medical technology covered up the operational sins of the industry.
While margins are still good relative to most industries, margin compression has significantly increased focus on the cost side of the income statement and the asset side of the balance sheet. Most companies in this industry who were once valued by Wall Street as 'growth' companies are now viewed more as 'value' companies, with an accompanying shift in focus from top-line to bottom-line growth. This has changed how a company's stock (and options) is valued, which can have a significant impact on behaviour, particularly in publicly traded companies.
That was before the recent run-up in commodity prices, which drove up the costs of purchased materials and had a significant impact on global transportation costs. The speed of those increases – in many cases within the last fiscal year – left companies unable to react quickly enough to protect margins and financial projections in a market where stock prices declined at an unprecedented rate.
There is a general belief in the industry that reimbursement will not keep pace as device manufacturers try to pass along cost increases in the form of price increases, which has traditionally been the mechanism for maintaining margins to offset cost increases.
Will these conditions persist? Oil and commodity prices have dropped significantly. Unfortunately, no one knows if they will turn around and rise quickly again. Extreme volatility appears to be a fact of life for the foreseeable future. Most manufacturers are assuming that cost and service pressures will not abate. Cost containment, however, is not the only focus for supply chain executives.
A unique challenge?
Every industry has supply chain challenges and those factors that make it unique. The software manufacturers and consultants have used this as the basis for their sales pitch for decades, to the delight of executives who believe that their entire supply chain is 'different'. The question is, what is truly unique?
At a macro level you could overlay a number of industries, such as food or personal care products, on the supply chain model for medical devices and they would look very similar. At the next level of detail some of the unique attributes come to the surface. Two of the key areas of differentiation for the medical device industry are the role of government and the customer base.
Role of government and regulators
Governmental bodies set rules, enforce compliance and are the largest acquirers of medical products and services. Much of the discussion focuses on the FDA, Medicare and Medicaid in the US and their impact on regulatory compliance, pricing and reimbursement.
These organisations, at the federal and state level, also have significant control over many operational factors, including: compliance with approved production processes and quality systems, and their ability to pull products from the market if these processes are not being followed (with the associated impact on revenue, profit and stock price) the ability of manufacturers to change products, sources of materials and components, manufacturing processes, or move production in search of cost savings, due to the time and cost of the validation process product tracking and the ability to perform recalls effectively and efficiently product packaging and labelling requirements, for example, 23 languages on a single product insert.
Most major and developing countries have similar bodies that set these rules. A typical US-based device manufacturer generates roughly half of their sales outside the US. Keeping up with the country-based rules around the globe, and being in a position to react quickly, is critical to supply chain executives. While in the past many countries followed the lead of the FDA, many are no longer waiting. A recent example is the Turkey government publishing product new product labelling rules on 10 October 2008, which need to be implemented by 1 January 2009.
Another factor impacting compliance is a fundamental change in the industry – combination products. An example of this would include drug-eluting stents which are covered by medical device and pharmaceutical regulations, often not the same.
On a global basis this increases operational and regulatory complexity. This is a trend that is expected to increase as companies look beyond traditional product development to new applications.
Unlike many other industries, there is no '600lb gorilla' in the customer base that can drive change the way US giant Walmart has done in retail. While there has been healthcare provider consolidation within the US with an associated aggregation of spend, providers have historically been poor at managing supply chain functions because they focused on their primary mission, providing quality care. Without this industry leadership, the total medical device supply chain remains inefficient and costly.
As US healthcare providers have gained a better understanding of their cost structure, they have discovered that improved supply chain management can not only have a positive impact on patient care, but can also significantly contribute to profitability. Organisations such as Sisters of Mercy ROi have been formed exclusively to manage their supply chain while supporting their strategic focus on clinical, financial and operational improvement.
This led to their being awarded the Supply Chain Innovation Award by the Council of Supply Chain Management Professionals in 2006, the first healthcare provider to be given such an honour.
Continued focus and improvement by providers will provide opportunities to drive significant benefits for all participants in the industry supply chain. This will require a fundamental change to the industry mindset – a significant focus on cross-industry collaboration.
Probably the most significant change to the customer base in the US will be the increased role of Walmart in healthcare. Many device manufacturers now sell products to Walmart through their personal care products and pharmacies. As they now become a healthcare provider, they may become the '600lb gorilla' the industry has so desperately needed.
The focus for 2009
In light of the state of the global economy, the government and the industry, where are medical device supply chain executives focusing their efforts in 2009? A recent survey conducted by the Medical Device Industry Supply Chain Council (MDISCC) and the consulting firm PRTM, looked at priority business areas and initiatives planned for 2009. The survey was completed by senior supply chain executives in large and mid-sized device manufacturers.
The focus of the survey was on the traditional supply chain functions and, for the most part, excluded manufacturing. The participants covered a broad range of products but generally excluded low-end commodity products that are often sold through retailers (such as bandages) and high-end capital equipment due to significant differences in their respective supply chains. Results of the survey were as follows:
- The activities for 2009 are primarily centred on cost and asset management (transportation costs, inventory, warehousing facilities).
- The primary focus of supply chain in the industry is on basic supply chain capabilities, not on innovation. For those companies that do business in multiple channels, most of the more advanced practices come from retail or from individuals who have come to their organisations from other industries.
- Supply chain is not viewed as a strategic asset across the industry. According to industry executives, you cannot 'exceed expectations' as a supply chain executive unless it relates to cost savings.
- Collaboration is key. The first step is improving collaboration within the four walls of the device manufacturer to improve supply and demand planning. This is the driver for the industry-wide focus on sales and operations planning. The next step will be improved collaboration with healthcare providers for purposes of reducing cost, reducing inventory and improving service. Providers need to continue to improve, but manufacturers can facilitate this process by teaming with the innovators and redefining practices in a way that provides a win-win for the manufacturer and the provider.
- Most supply chain executives to not believe they have the data or tools to effectively manage their functions. ERP systems provide only a portion of the capabilities required, and use of the existing tools is not at the required level of proficiency. Because of the ERP 'hangover', IT investments require an ROI rigor not required in the past.
- Another factor relating to data and information is a lack of data standards across the industry. An entire industry has been created to help solve this problem, and the government has got involved because there is a belief that this is a foundational building block for achieving efficiencies and cost savings. Again, without a Walmart-type figure to drive change, getting global agreement given the breadth of products and stakeholders will continue to be a significant challenge. The payors (governments, insurance companies) are viewed as the major change agents because they control the majority of the healthcare spend.
- The industry is moving quickly toward globalising the governance of supply chain functions. It has only been over the last few years that many organisations have appointed a global leader of supply chain. Up to that point, the functions were managed regionally or locally, along product lines, or some combination. There is now recognition that a global view of many supply chain functions is required to optimise performance, cost and investment. The degree of globalisation varies greatly across the industry and the globe.
- Outsourcing of warehousing and distribution has increased across the industry, though not to the level of many other industries. Concern over supply risk (due to transportation disruption or quality issues), rising transportation costs, or a ‘do it in house’ culture are identified as major constraints. Also, because there is a limited number of sizeable device companies, third parties often do not build capabilities specific to the device industry which also limits adoption. Lastly, due to typically lower volumes and higher value products, outsourcing of supply chain functions often cannot be cost justified versus the inherent risks.
A number of observations could be drawn from the survey results and other input from supply chain executives within the industry . It should be noted that these observations do not apply equally to all companies within the industry, but do provide a fair representation of 'the state of the industry' relative to supply chain practices. Selected organisations have invested in technologies such as RFID in an effort to get ahead of the curve and try to influence industry standards.
While all participants in the medical device supply chain (manufacturers, distributors, group purchasing organisations, providers and retailers) have their individual objectives, all participants agree there is a need to look for ways to improve efficiency and reduce costs across the industry supply chain. The status quo will not persist long term – it is not sustainable or affordable. Based on observations and interactions across the supply chain, the future may be sooner than expected.