Supplying Some Muscle
Once a competitive advantage, supply chain flexibility now is imperative to survival in the medtech market.
Theoretical physicist Albert Einstein once declared: “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” Einstein, of course, is renowned for his genius as well as his theories of relativity (special and general), the first of which explains the now-famous equation—E=mc2—that helped inspire nuclear research and the Manhattan Project during World War II.
Though he made major contributions to quantum mechanics, cosmology, statistical mechanics, the photoelectric effect and astronomy, Einstein’s greatest achievement was perhaps his unconventional approach to thinking. Often viewed as idiosyncratic, eccentric and lost in a remote world of numeric equations and complex scientific formulas, his unique ways of study and thought often led him to pace in circles or “draw out” mathematical equations (the latter practice is immortalized in dozens of photos where Einstein is seen mapping out his arithmetical theories on a green chalkboard).
At the time, Einstein’s thinking methods were considered idiosyncratic and largely ignored by conventional scientists. Yet his modus operandi proved there is no “wrong” way to learn; they showed the naysayers of his day that it was okay—preferable, even—to take risks and still be wrong. Through error comes knowledge.
Sometimes, those errors can lead to a change in thinking. Einstein, for example, was forced to change the way he thought about the universe during his quest to better understand gravity. Through his theory of general relativity, Einstein found that space and time can bend, twist and warp, much like a trampoline moves to the forces of a jumping child. In fact, Einstein’s math showed that it was impossible for the universe to stay fixed and unchanged, as Sir Isaac Newton had concluded and most scientists of the early 20th century still believed. Einstein wanted to believe it as well (that was, after all, one of the motivating factors behind his theories of relativity), but his mathematical equations suggested otherwise.
Einstein initially did not like the underlying message of his theories. He found the notion of a perpetually expanding or contracting universe to be blatantly erroneous and completely contradictory of the prevailing wisdom instituted by Newton, one of history’s most influential scientists. Einstein’s calculations proved Newton wrong.
While disproving scientific theory is not uncommon in physics or astronomy, hypotheses that radically alter well-accepted principles can be difficult to accept, particularly if they require a change in thinking. Like most scientists of his day, Einstein was not ready to accept the change in thinking that his theories suggested. Rather than stand firmly behind his suppositions, Einstein slightly modified the equations associated with his theory of general relativity and came up with something just as mind-boggling as a constantly expanding universe—antigravity, or quite simply, a gravitational force that pushes instead of pulls. Einstein dubbed this force “the cosmological constant” and he found that by finely adjusting its value, the repulsive gravity it produced would cancel the attractive energy coming from stars and distant galaxies, thereby producing a static cosmos.
And thus, the status quo was maintained. No change in thinking was required. At least not for another dozen or so years, when American astronomer Edwin Hubble discovered in 1929 that distant galaxies are all rushing away from us,ultimately proving that Einstein’s theory of an expanding universe was indeed correct.
“The basic human desire is for certainty, even if it is thecertainty of impossibility, and change is often avoided when it brings risk or uncertainty,” authors Gerald Ashley and Terry Lloyd write in their 2010 book “Two Speed World The Impact of Explosive and Gradual Change—Its Effect on You and Everything Else.” The 243-page guide to change—both gradual and explosive—details ways to improve decision-making and risk-taking for more successful and profitable outcomes.
“A large part of any world view is based on facts, whether simple observations, considered deductions or carefully worked out rules and laws that can be considered immutable,” the authors continue. “Facts are the concrete base on which risks are quantified…”
Quantifying risk is common in business but it particularly is crucial among manufacturers of life-saving medical devices. These companies are surrounded by potential risks, from imbedded software and shelf life to outsourcing, poor quality and sloppy approval procedures. But one of the biggest risks to device makers may be their suppliers, especially those that have not built flexibility into their processes.
For decades, supply chain management was really more of a quest for the lowest possible price, the leanest processes with the shortest throughput time, and the lowest level of risk. But the economic, political and even geological upheaval of the last four years has forced suppliers to become a more flexible part of their customers’ business practices. Low prices and efficiency no longer are enough to win or keep customers, industry experts note. Such factors are important, but suppliers increasingly are realizing that they must adjust their business models to survive in today’s volatile market.
“If you want to win in this market it’s not going to be just price in the future, it’s also going to be about being a good business partner and being easy to do business with,” explained Kevin R. Stout, executive director of the Medical Device Supply Chain Council, an 8-year-old organization focused on improving the industry’s supply chain. ““Price per unit, form and function (how well it does what it needs to do), how the product helps improve outcomes and reduce cost of the procedure have typically been the only factors in supplier selection. What we are beginning to see is if the products are close, then how you support the customer in achieving their business goals of improved profitability (in the face of continued reductions in reimbursement), lower operating costs and lower inventories will be a differentiator. In the past, these factors were generally not considered. If you have price differentiation and product differentiation, the next step is service differentiation. How well can you support that customer? And if a healthcare provider is willing to talk about “total cost of ownership”, now you can have a broader discussion on how you can develop a mutually beneficial business partnership rather than just focusing on price.”
Such discussions now are commonplace at B. Braun Medical Inc., a Bethlehem, Pa.-based manufacturer of infusion therapy and pain management products. The supplier selection process no longer focuses primarily on price and delivery; it also encompasses such factors as Lean manufacturing and inventory management.
“Years ago, [supplier selection criteria] would have primarily been price and delivery. Now it’s a combination of factors in addition to those two,” Marty Gehman, associate director of strategic purchasing at B. Braun, told Medical Product Outsourcing. “Lean manufacturing and process improvement programs can improve our long-term outlook on a vendor’s price, quality and delivery. We seek robust, well-documented quality systems to help mitigate risk. And we’re looking for flexibility through vendor-managed inventory programs. The more they can do to separate themselves by focusing beyond the big three—price, quality, delivery—the more attractive they will become.”
Supply chain flexibility is more complicated than it sounds. Tobecome a more flexible medical device supplier, experts contend that vendors first gain a thorough understanding of the term “flexibility” and the ways in which it applies to the medtech supply chain. Flexible companies, according to Merriam-Webster, are those that are characterized by a “ready capability to adapt to new, different or changing requirements.” Though it provides a good foundation, that definition only scratches the surface of the true meaning of flexibility as it pertains to medical device suppliers.
PwC management consulting subsidiary PRTM created its own definition of the word in a survey it conducted last year on global supply chain trends. In the survey, “Achieving Operational Flexibility in a Volatile World,” PRTM coins the phrase “operational flexibility” and defines it as the “ability to rapidly adapt to changes in customer demand or internal/external supply by ramping up or down internal and partner operations.” Operational flexibility, the subsidiary contends, involves the entire supply-demand chain, from product launch to end-of-life management, with interaction points at every stage of the product lifecycle.
To improve its adaptability and ultimately achieve operational flexibility, PRTM’s survey recommends that supply chain leaders institute five key levers into their management strategies:
- Focus on supply assurance and proactive capacity management for critical resources;
- Engage in collaborative end-to-end demand and supply planning;
- Tightly integrate their own and their partners’ supply chain architectures;
- Tear down the wall between supply chain management and product development/engineering;
- Drive superior collaboration maturity.
Implementing these “flexibility levers” can both reduce costs and boost revenue, PRTM said in its survey. In fact, survey respondents who implemented the five levers reduced cost by 8 percent to 10 percent and increased their annual revenue by 12 percent to 15 percent.
A Two-Speed World
Industry pundits have used the term “new normal” repeatedly since the Great Recession to describe the funding and economic environments companies face as they attempt to recapture the revenue and market share they lost during Wall Street’s near-death experience several years ago. A challenging financing climate and rapidly changing customer base both have been deemed the “new normal.” The uncertain public policy environment? That’s a “new normal” too, as is increased regulatory scrutiny and pricing pressures.
There’s also the “new normal” growth pattern that has emerged from the recessionary rubble, a pattern characterized by slow growth in the developed countries of Europe, North America and Japan, and faster growth in emerging markets (China, India and Brazil, among others). To thrive in this “new normal” two-speed world, companies must create supply chains that are adaptable to both paces.
For mature, low-growth markets, adaptability may mean close communication with customers and suppliers to more effectively monitor demand, or improved service on components supplied to the finished product. By contrast, supply chain flexibility in emerging markets might result in customized devices or the use of local suppliers. Using a local vendor can be financially advantageous because these suppliers have fewer expenses than their Western counterparts (they don’t have to pay as much for items such as raw materials or labor). They also can be a good source of innovation. However, local vendors may not always be the best fit for medtech firms due to differences in quality regulations throughout the world.
Nevertheless, many large device companies are leveraging supply chains in emerging markets to establish a stronger presence in those economies and create a local sourcing and distribution network. GE Healthcare, for instance, moved its 115-year-old X-Ray business from Wisconsin to China late last year to capitalize on the huge growth potential of that market. The company expects to develop between 20 percent and 25 percent of its X-Ray products in China during the next three to five years for worldwide sale. GE Healthcare also has launched a three-year “Spring Wind” initiative designed to help the Chinese government develop affordable healthcare products, boost the medical distribution network across the Middle Kingdom and offer training for Chinese healthcare professionals.
To make such longstanding commitments in the world’s high-growth markets, companies must have the financial resources to support their vision and trusted partners who can help them fulfill their business goals. Finding the right partner, however, can be quite challenging, industry experts claim.
“From a U.S. or European perspective, having supply chain partners outside your home market that you have confidence in and can provide the level of quality and service that you have historically relied upon in Europe and North America is a challenge,” said Matt Jennings, CEO of Phillips-Medisize Corporation, a global outsource provider of design, development and manufacturing services to the medical device and diagnostics, drug delivery, and commercial markets. “The challenge in emerging markets is identifying supply chain partners who know OEM quality and sourcing requirements, and can deliver the OEM’s products to them on time, at a cost structure that meets expectation. That is always a challenge for the OEM looking to expand into new regions. This, of course, also represents an opportunity for supply chain partners with global footprints that OEMs already have confidence in. If the supplier can translate that knowledge into its global footprint, it makes the OEM’s decision process much easier.”
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Before the economic and political tumult of the last four years, supply chain management was fairly one-dimensional. Executives tasked with the job focused mostly on minimizing the risk of defaults and other potential disruptions to the quality and delivery of supplies. Over the last several years, however, that focus has become part of a more inclusive approach to supply chain risk management as medical device OEMs assume sole responsibility for the products they develop. Such accountability has prompted medtech firms to more closely scrutinize vendors and whittle down their cache of available suppliers to both minimize risk and gain better control of the entire productdevelopment process. As the world’s markets continue to evolve, suppliers will have to evolve as well, becoming more flexible and responsive to their customers’ needs. They’ll also have to draft strategies for both low-growth developed countries and high-growth emerging economies, as OEMs look to both types of markets for growth. These dual forces might even trigger closer cooperation between rivals someday. One expert already has a name for it.
“When we look at our current competitors, they may eventually become our suppliers,” noted Barry Sos, director of global sourcing for SMC Ltd., a Somerset, Wis.-based provider of contract manufacturing and molding services for the medical device, orthopedic, cardiovascular and pharmaceutical industries. “We use the term ‘co-op-a-tition’—meaning we will cooperate with you and be in competition with you at the same time. Of course, there are challenges that come with that. It’s a very delicate balance.”
Staying on the Short List