Finding the Hidden Value of Existing Inventory
There’s no quick fix; a long-term effort yields significantly bigger rewards.
Kelly Lucenti, Millstone Medical
First, the new healthcare reform law could have significant ramifications for medical device manufacturers (MDMs). The law would impose billions of dollars in fees on MDMs as part of a new national healthcare plan.
Second, the U.S. Food and Drug Administration (FDA) is cracking down on MDMs. Manufacturers of medical devices are accountable for the quality of their end products and are increasingly liable for the
To effectively manage inventory, companies must first conduct a full physical audit of every field location and any other place inventory is stored.
level of quality with which the product is manufactured, cleaned, packaged and distributed. The FDA recently enhanced its oversight of manufacturers to ensure adequate controls are in place throughout the production and supply chain process.
Finally, the recession is not making anything easier. Research suggests that the medical device industry will continue to grow due to technological advances that make treatment and diagnosis simpler and more effective. Future healthcare legislation may provide more insurance coverage for procedures involving the use of medical devices. But these positive outcomes will not be felt for several years. Meanwhile, MDMs are responding to the current economic crisis like most other companies—they are looking for ways to contain or cut costs, increase sales and enhance the bottom line.
Cost-cutting for MDMs is a tricky business. Devices—from guidewires to hip and knee replacements—require the highest level of quality. Staying ahead of the competition requires advanced research and development (R&D) initiatives. How do MDMs achieve cost savings without compromising quality or cutting back on R&D? By outsourcing. A cost-effective avenue largely overlooked, outsourcing can help MDMs maximize investments already made in existing inventory, such as open but unused product, instruments, and surgical loaner kits.
Making the Case for Inventory Control
Demand for most medical products remains robust despite the tough economy. Medical devices help people throughout the world—especially those in the United States—live longer and remain active as they get older. For example, joint replacement operations are becoming almost routine procedures for hospitals and doctors. The changing demographic is good for business, but it also creates increased pressure for more new devices. MDMs are under the gun to develop and produce innovative products that address the needs of an active but aging population.
Setting R&D aside, production of medical devices and the instruments used in surgeries is an expensive and time-consuming endeavor. The cost and time required to manufacture, inspect, clean, package, and distribute one device, one instrument or one loaner kit is staggering. When that existing inventory sits idle on a shelf, the opportunity cost as well as the loss of potential revenue represents value that is lost to the manufacturer. Maximizing existing inventory enables manufacturers to save millions of dollars that can be redirected to the research, development, and production of new products.
Several of the world’s top MDMs recently established manufacturing facilities in China in an effort to drive down costs. Another prominent domestic MDM made a strategic move with the acquisition of a reprocessing company. These moves prove that there is money to be made by containing costs and utilizing existing inventory.
Managing Inventory, Maximizing Returns
Managing inventory is really about maximizing inventory. To effectively manage inventory, companies must first conduct a full physical audit of every field location (hospitals, distribution centers, warehouses, etc.) and any other place inventory is stored. Next, the amount of inventory must be compared to the sales volume associated with each location and an inventory to sales ratio must be developed for those sites. These two steps enable manufacturers to establish an average inventory to sales ratio and determine the field locations that have excess inventory as compared to sales revenue.
Most companies stop here. To truly benefit from an inventory management plan, however, excess inventory must be captured and reused so the manufacturer can reduce the costs associated with producing and distributing product unnecessarily. Reducing product costs might be enough of an incentive, but inventory maximization also enables a manufacturer to gain control of excess inventory, which offers efficiencies that impact the company.
Recapturing the value of existing inventory is something MDMs have historically tried to manage internally with limited success. Manufacturers are focused, and rightly so, on development and production of new devices. Locating, identifying, tracking, inspecting, cleaning, packaging and redistributing existing inventory already deployed in warehouses and hospitals nationwide requires significant additional resources. Outsourcing companies that provide these services have stepped in to fill the void. Some of the cost-effective solutions offered by experienced outsourcing companies include field inventory auditing, repackaging, instrument recycling, and loaner kit processing and distribution.
Field Inventory Auditing
MDMs send products to global distributors. Conducting physical field audits of inventory in every storage facility, just one time (much less annually), can be an overwhelming task even for the most sophisticated manufacturers. Field inventory auditing services provided by an outsourcing partner can help manufacturers accurately count and identify excess inventory of devices and instruments already deployed in the field with little disruption to normal business activities.
The benefits of utilizing a trained, experienced, and independent auditor can include objective inventory control, compliance with Sarbanes-Oxley regulations, the reclaiming of “lost” products, removal of expired and/or damaged products, and the prevention of duplicative expenditures.Moreover, first-time audits can serve as a baseline to track future audits. Eventually, the inventory audit process will enable a manufacturer to develop an accurate variance number that helps determine manufacturing and distribution quantities.
Every day, open but unused product worth millions of dollars is returned to MDMs. Repackaging is a time-consuming process, particularly after an inventory audit when there is a large influx of unused product returning from field locations for processing. These unpackaged returns can accumulate, costing companies time and money in storage and maintenance. Perhaps the greater risk though, is the insurmountable backlog unprocessed returns can create for manufacturers. This backlog, in turn, creates other headaches such as a shortage of staff to handle returns, variable volume that makes it difficult to manage processes, and off-process work that creates inefficiencies.
The repackaging process is involved. Each product must be identified and classified as non-sterile and open but unused; non-sterile and ready for restocking; sterile with shelf/container damage; or sterile but not compromised or expired. Each product must then be inspected and handled in accordance with FDA guidelines. Best practices include tracking (using a Web-based inventory management system) of all returned products from the time they are received, through each step of the repackaging process, and until the products are delivered as finished goods. Repackaging is resource intensive, but the process allows MDMs to recapture value and avoid duplicative expenditures. In addition, a successful repackaging program can enhance efficiency as well as quality and inventory control.
One instrumentation set required to perform some surgeries can cost as much as $100,000. These instruments typically are not sold to the hospital, doctor or patient but are loaned to the surgeon to complete the implantation of a medical device. The manufacturer’s profit comes from the sale of the device; the instruments are supplied at the manufacturer’s expense. As often as not, instruments are not returned to the manufacturer and end up languishing at hospitals, distributorships, and sales offices. Without a comprehensive system for tracking, maintaining, cleaning, and redeploying surgical instruments, MDMs can lose millions of dollars in inventory and potential revenue. Recycling programs for surgical instruments include reclaiming used instruments and then cleaning, inspecting, warehousing, and redeploying them.
An experienced outsourcing partner can reclaim instruments from field sales offices and have them back in circulation within days. First, instruments must be collected and shipped to a central facility. Items must then be sorted and logged into a Web-based inventory management system. The instruments are cleaned and inspected against current versions of product drawings provided by the manufacturer. Approved parts are repackaged and relabeled. Labeled parts are warehoused and tracked, and salespeople around the world can access the online system to order the instruments. Beyond the prevention of duplicative expenditures, instrument recycling programs enhance the efficiency of sales professionals and the sales process.
Loaner Kit Processing
Distributing surgical kits in an efficient and cost-effective manner is critically important to MDMs. The more surgical kits available to surgeons, the more surgeries can be completed. Most of the top MDMs
manage surgical kit programs that consist of roughly 70 percent of consignment kits (those in the hands of sales representatives in the field), and 30 percent of loaner kits, (those available to sales professionals in need of backup kits). To avoid delays in getting loaner kits to surgeons, manufacturers develop redundant systems, pay millions of dollars in overstock and shipping costs, and depend on sales personnel to inspect and replenish kits while in the field.
Processing loaner kits involve the inventory of kits, the inspection of items, the replenishment of items to the most current bill of materials, re-boxing, and shipping to finished goods for redeployment. Outsourcing the processing of loaner kits reduces shipping costs, personnel expenses and the need for additional inventory. Plus, outsourcing partners can achieve a faster turnover rate than a manufacturer, often in less than 24 hours.Moreover, outsourcing these functions to an experienced partner offers significant advantages in the management of kit quality and increases confidence in the loaner kit program.
The Effort Pays Off
As the economy stabilizes, MDMs will need to continue to shift their focus to core competencies in order to build their businesses. Maximizing existing inventory provides a ready avenue for cost containment and savings without adversely affecting quality. Improved inventory control results in significant cost reductions to free up capital that can be leveraged for research and development. And more attention to R&D will make it possible for manufacturers to realize opportunities and advance the medical device industry.
A recent example of the value of maximizing inventory involved a large orthopedic manufacturer that engaged its outsourcing partner to conduct a field inventory audit for several months in late 2009. The project involved a full physical audit of all field locations and a reconciling of product versus sales to develop a baseline for the upcoming year. After the audit, the outsourcing partner processed all the excess product, including identifying and categorizing units into expired, damaged, ready for restock, and acceptable for repackaging. As a result, the orthopedic manufacturer reclaimed more than half a million dollars in product that otherwise would have gone to waste. The benefits, beyond the financial gain and the ability to act “green,” were the chance to quickly fill backorders, avoid redundant orders, and develop future efficiencies.
Inventory management is not a quick fix. In order to maximize return of the investment of existing inventory, MDMs must consider inventory management as a long-range plan. While there are short-term gains to be won, it is the long-term effort that will reap the biggest rewards. v