Prune your Production Costs

29 March 2009 (Last Updated March 29th, 2009 18:30)

Although traditionally an economic survivor, the device industry needs to be aware of the potential financial problems. It should employ cost-cutting measures wherever possible. Mahender Singh of MIT tells Nic Paton how a supply chain can become more efficient with careful consideration.

Prune your Production Costs

Only the most arrogant chief executive would state publicly that their company or industry was recession proof. Yet, in the grip of the worst global downturn for a generation, the prospects for the medical device industry remain relatively healthy – despite some local concerns.

The economic gloom may be having an impact in some subsectors, such as the concern over European R&D and innovation, but the majority of the industry is experiencing positive effects. The aging of populations in the West, opening of vibrant new markets within the emerging economies, and the growing shift towards disposable, mobile or personalised devices all potentially bode well and create challenges for future growth. The personalisation of medical care, where physicians will be able increasingly to tailor care to a patient's genetic profile, is also set to give the industry a boost when trading conditions improve.

Devices such as Johnson & Johnson's SEDASYS personalised sedation system, which is becoming an increasingly important part of the firm's portfolio, or Nanosphere's Verigene warfarin genetic test kit highlight this latter trend in particular.

Money matters

The Wall Street Journal has estimated that healthcare spending in the US will almost double over the next decade, reaching an eye-popping $4tn by 2017, largely fuelled by the baby-boomer generation heading into old age.

Similarly, the growing convergence of diagnostic and imaging technologies, greater collaboration within the pharmaceutical industry and the embedding of medical devices within pharmaceutical or biologic products are all exciting areas of innovation and potential future growth for the industry, with some observers estimating the latter area alone could reach a value of as much as $10bn in 2009.

Nevertheless, this generally upbeat long-term prognosis for the industry is no excuse for throwing around money needlessly, especially when investment is more difficult because of reductions in private and public healthcare spend and credit is less accessible. The continuing uncertain macro economic climate, the pressure on the money supply and even issues such as the strength of the dollar against many international markets mean these are still uncertain times. It therefore makes sense for medical device firms to be looking at how best to trim costs without diluting or harming the quality of their product.

In January 2009, for example, Johnson & Johnson reported lower-than-expected quarterly sales as a result of the strong dollar and the loss of patents on one of its leading branded drugs. In the devices and diagnostics arena, sales declined by 1.9% on the back of lessening demand from hospitals and clinics as cash-strapped consumers cut back on non-essential medical treatments.

"It makes sense for firms to be looking at how best to trim costs without diluting or harming the quality of their product."

Given that cutting back on innovation and R&D spending within medical devices is often a case of cutting off your nose to spite your face, one of the areas medical device firms can look at when it comes to making cost savings is the supply chain. An effective supply chain, often relying as it does on a people-heavy operation with an array of different components spread across varied geographical and cultural environments, is never cheap to establish, run and maintain effectively.

But, argues Mahender Singh, research director at the Massachusetts Institute of Technology's Center for Transportation and Logistics, any axe wielding or even trimming of costs has to be carefully planned and thought through, and is definitely not something where quick fixes can be implemented.

"First you need to look internally and think about your competencies and how you succeed in your environment," he says. "What are your skills and capabilities at a very basic level and how do you go about changing them to create a value proposition that no one else offers?"

Risks and concerns

The trend of recent years to take costs out of the supply chain through outsourcing has also made driving down costs much harder, not only because costs have already been pared back but because it has made the device firms more reliant on other, perhaps smaller, players who may be at greater risk of struggling in the current climate. "Supply chains have become longer," Singh warns. "If you can outsource your manufacturing you will have lowered your asset intensity and become more flexible. But smaller suppliers have become the backbone of the supply chain world and many have now become unable to raise money.

"If they go down, then the big ones can go down too because they are dependent on them. Right now this is a problem but two years ago this, pushing the inventory out, was a solution."

There is no "one-size-fits-all" solution when it comes to taking costs out of the supply chain. Singh cites the example of the IT/computer industry, with Dell and HP being in many respects quite similar companies, but both having very different supply chains. Therefore each would need to address any cost-cutting measures in very different ways. "There is no right or wrong answer. It is about who you are and you have to be comfortable with the fashion you are wearing," he points out.

"Smaller suppliers have become the backbone of the supply chain world and many have now become unable to raise money."

It is also important not to ignore the wider, perhaps more positive industry picture, and make cuts that may end up damaging your business or leave you less well placed to take advantage of any upturn, whenever it comes. "For medical devices, the important thing is that devices are going to become increasingly important for the delivery of healthcare," says Singh. "There is, particularly in the US, a big shift from acute to chronic healthcare. More money is being spent on chronic care rather than on acute alone."

It is estimated that by 2017, 80% of the money will be being spent on chronic care. It is going to become a significant part of the industry, and medical devices will become more critical in helping patients to manage their health in a more proactive manner. There will be dramatic changes in the nature and volumes of demand and the business model that is needed behind these medical devices. There is probably going to be much more personalisation of devices and the software that goes with them.

"If you are looking to cut costs you have to make sure that you are doing things right – you have to look at the future at the same time," Singh says. "You need to look at your business strategy – how you want to compete as a business – and this mustn't be looked at in isolation. You cannot develop a supply chain model or cost-cutting solutions unless you have a clear idea of what your strategy is. It has to be not so much a supply chain issue as simply a business issue."

Solutions for success

In practical terms, one of the things a firm needs to do in this scenario is to sit down at a high level and do some "strategy mapping". This is the process of determining objectives and your means of getting there, looking at elements such as your financial strategy, strategic themes, value proposition and critical internal processes. There may also be a number of barriers to effective strategy execution that need to be looked at, such as insufficient employee skills or capabilities, insufficient training and development, inadequate leadership and direction and poorly prepared line managers.

"It is about thinking clearly about how you compete, what you do and in terms of the investment decisions you want to make," explains Singh. "Are the investments you are making really supporting the targets that you have set yourself? What are the things that you are actually doing on the ground, not what you should be doing? It is at this level that you will probably start to see holes in your strategy and, in turn, how they may be aligned better with your strategic objectives or business strategy. You have to be introspective first. It is not a revelation and it is simple to say, but it can often be hard to do. It is just about discipline.

"You have to think about your supply chain as more than just something that delivers products for you. For example, if your business strategy says that you need to be in China or India, then developing a supply chain network there is a good way to get into those environments. If you have an opportunity to go into Eastern Europe or Africa, then in addition to your local capabilities to make the product, you need to look at where you want to be in five or ten years time. If it is China or India where you need to be, then that is where you need to be."

"The one certainty when it comes to supply chain management is that it is evolving at a fearsome speed."

The one certainty when it comes to supply chain management is that it is evolving at a fearsome speed, as Singh points out. "If you look back even just five years there have been huge changes in supply chain management," he says. "I suspect there will be just as many changes in the next five years too."

Security will become a growing concern as the length of the supply chain continues to grow. Counterfeiting will also continue to be a big issue, especially within and to the US market. There is also going to be more device personalisation, and the availability and demand for such devices will go up. Manufacturers could end up with a device that morphs into 1,000 different versions of what is, essentially, the same device but tailored to the need of the patient or physician. In turn, this is likely to create a whole new set of challenges for the supply chain. "There is going to be much more complexity of product," explains Singh. "Companies will have to start thinking hard about their hardware and software solutions, with some companies developing roles more as guides and coaches and dealing less with the customer directly.

"I can see a real hodge-podge of business models coming through. The world spins faster all the time. The length of business models will be shorter lived and innovation will become the key."