Michael Barbella, Managing Editor04.08.15
The Beer Game is a superficially deceptive activity. With its simple rules, even simpler concept and its comparably lax demands on skill, the game often is perceived as a cakewalk. But in truth, it’s not that easy to master (or win), as countless numbers of college students can attest.
Not to be confused with the beer game—the one involving plastic cups, ping pong balls and thirsty participants—the Beer Game is a business simulation exercise created by Massachusetts Institute of Technology (MIT) Sloan School of Management professor Jay Forrester more than a half century ago to teach key principles of supply chain management. The simulation is a virtual rite of passage for Sloan students: Each incoming class learns the oscillatory dynamics of product distribution and systems thinking by running a rudimentary beer supply chain.
Though it is available online (through a Java software application), the game is still played at MIT as its founder intended—with pen, paper, printed plastic tablecloths and poker chips. To begin, students group themselves into teams of eight. Each team then is divided into four units of two players each, with every pair assuming the roles of retailer, wholesaler, distributor and brewer (manufacturer).
All teams are tasked with emulating real supply chains by curtailing operating expenses through low inventory and nominal backlog. Naturally, the game comes with some built-in complications because, well, life is rarely simple: There is fluctuating consumer demand and forbidden communication between players (information is relayed by orders and shipment notes only).
The process inevitably derails after dozens of rounds, as incomplete data, structural dysfunctions and the fallibility of human behavior leads to kinks in the supply chain. Additional knots are tied by the “bullwhip effect”—a well-documented and appropriately named phenomenon caused by demand order variability, where fluctuations of any kind create ripples, or “snaps,” further along the chain.
Bullwhip lashes usually lead to big backlogs, soaring operating expenses and excessive inventory—problems that never seem to get resolved in the corporate world. They go unresolved in the academic realm as well, existing primarily as teaching tools in business management courses. At MIT, the bullwhip teaches students just how difficult it can be to manage a supply chain.
“Parts of this [game] are absolutely valid and the fundamentals do work,” said Mark Bonifacio, a former healthcare supplier who now owns Bonifacio Consulting Services, a Natick, Mass.-based medical device consultancy. “But now, you have to factor in a lot more. Supply chains have become inherently more complex simply because of the global marketplace that we’ve entered over the last 20 to 25 years. There have been a lot of changes to supply chains from that aspect—they’ve become very complicated because there are so many things that can crop up and really become an issue.”
Medical device supply chains are particularly convoluted. The industry traditionally has used an “inventory everywhere” business model to turn a profit, employing a highly fragmented supply chain to move products from manufacturer to customer. The seemingly ludicrous moniker is neither sarcasm nor hyperbole, as merchandise literally can be found everywhere—from regional distribution centers, forward stocking locations and logistics service provider warehouses to sales reps’ car trunks, hospital storerooms and sterilization facilities.
Each of these product touch points can be complex as well. Forward-stocking centers, for example, are small facilities (averaging 2,000 square feet) used to feed products to end customers in final mile deliveries. They typically are sprinkled throughout a company’s markets, numbering anywhere from 40 to 100 depending on the manufacturer’s size and its penetration in a particular sector.
Certainly, such a splintered system is ideal for avoiding stock outs, but the strategy almost always is accompanied by the dreadful double-whammy of increased supply chain complexity and cost. Neither consequence is a welcome attribute in the medtech world, where companies are under constant pressure to reduce expenses and simplify processes.
Compounding that pressure are challenges like operating room unknowns, expedited delivery services and expanded demand footprints, all of which hamper inventory visibility and jack up costs.
Operating room unknowns are perhaps the biggest troublemakers due to their typically low inventory rates and high days on hand ratio. Aiding and abetting the unknowns are implant surgeons, who seldom know in advance the kind (or size) of products they will need for particular procedures. To compensate for this uncertainty, a physician may order a tremendous number of parts in various sizes; a knee surgeon, for instance, might request sizes three through five for a surgery and use only one of the sizes ordered.
Any unused parts and instruments, consequently, are out of circulation and unavailable for sale even though they might never have been removed from their original packaging. These products must be decontaminated, inventoried, inspected and replenished—an extremely time-consuming and costly process for the manufacturer (still the rightful owner of the unused property). Days on hand in these cases easily can top 100.
Delivery service is equally as efficient at mucking up the medtech supply chain. Over the last few years, manufacturers have attempted to gain a competitive edge through accelerated shipping, often promising customers overnight delivery. As a result, hospitals frequently wait until the last minute—close to cut-off times—to place orders, thereby forcing manufacturers to rely on premium delivery systems to fulfill those requests. Accordingly, companies must locate their distribution centers next to air express hubs and use pricey premium express delivery service to meet clients’ next-day shipping demands. Medtronic plc took this exact approach in establishing its three U.S. distribution centers, judiciously positioning them in Elizabeth, N.J., a virtual stone’s throw from Newark-Liberty International Airport; Memphis, Tenn., home of FedEx; and Mira Loma, Calif., a mere seven miles from LA/Ontario International Airport.
“Medtronic’s three regional hubs are strategically located adjacent to major airports, which allow us to improve customer service, facilitate business continuity, support our growth and save transportation costs,” said Mitch Parrish, company vice president of global supply chain operations.
Speed, however, doesn’t always guarantee success. Despite its relative flexibility, distribution logistics is one of the weakest links of a supply chain because it is vulnerable to life’s bounty of curveballs. Iceland’s Eyjafjallajökull volcano, for example, shut down most of Europe’s airspace during its 2010 awakening, disrupting countless shipments of Technetium-99m, a radioisotope produced mostly in Belgium and France. The radioactive element is used in 80 percent of all nuclear medicine.
Japan’s triple calamity the following year (9.0-magnitude earthquake, tsunami, nuclear power plant meltdown) had a similar effect, suspending Becton Dickinson and Company’s local manufacturing operations for nearly a month and leaving Swedish contract manufacturing firm PartnerTech short-handed by about a dozen suppliers.
Yet that was just a preview of Mother Nature’s curveball potential. Still to come were flawless breakers like the Thailand floods, the Haitian earthquake, Superstorm Sandy, Typhoon Haiyan, the Southern California wildfires, the Polar Vortex, and record New England snowfall.
Not all supply chain disruptions are so dramatic, though. A simple power outage or miscommunication can bring business operations grinding to a halt.
Shire Regenerative Medicine of La Jolla, Calif., avoided such a fate by establishing a secondary cryogenic storage and distribution center in Louisville, Ky. The facility saved the company from almost certain ruin after a widespread power outage in the Southwest shuttered San Diego International Airport and paralyzed the city’s transportation system.
Shire’s distribution network barely flinched, however, as the company’s Louisville operation assumed control of order fulfillment for its living skin-cell product halfway across the country. “We’d have been out of business if we’d not been able to ship that day,” Shire Logistics Manager Mike Whitmore recalled.
Indeed, Shire’s ability to recognize and mitigate supply chain risk kept the firm from self-destructing. But its success is a rarity in the medtech industry—statistics show most companies still fail to develop effective contingency plans to safeguard their supply chains from future curveballs.
A 2014 survey conducted by UPS found that only 26 percent of global healthcare executives consider contingency planning a top priority in their organizations, presumably due to competing concerns like compliance, product protection, cost management and a general perception that disruptive events are rare. But in regions recently victimized by high-profile disasters, medtech bigwigs admit that disruptions have had a significant impact on their operations: Thirty-four percent of Asian executives and 22 percent of Latin American directors said unplanned events affected more than one-fourth of their companies’ supply chains in the past three to five years, according to UPS’ seventh annual “Pain in the (Supply) Chain Survey.”
Conversely, only 10 percent of North American executives and 5 percent of their Western European counterparts reported such a blow to their supplier network. The extent of the impact may partially be explained by the finding that fewer than four in 10 respondents claimed success in contingency planning.
“Contingency planning and risk mitigation need to take center stage for healthcare companies, including medical device suppliers,” said Melanie Alavi, UPS director of global healthcare strategy. “Healthcare is reaching new corners of the world and the middle class is quickly expanding in today’s increasingly connected marketplace. With this growth, supply chain networks are becoming more complex and contingency planning has never been more important.
“Contingency planning is particularly important when developing operations strategy and planning for future expansions,” she continued. “Having an alternate distribution facility and additional transportation capability is vital if an unplanned event occurs. When a network is being evaluated for optimization and efficiency, it’s a great opportunity to discuss strategies to build in resiliency at the same time. It’s an exciting time for the industry, but companies must take calculated risks and develop supply chain strategies that position them for success.”
Clearly, better contingency planning is necessary for long-term survival, but supply chain management must improve as well. In order to become more effective managers, though, companies must first devise strategies that reduce inventory and cost, improve visibility and responsiveness, and eliminate waste while guaranteeing high service levels.
It’s a tall order, surely, but entirely practicable through full-service supplier partnerships.
The Perks of Partnering
Supply chain management has become considerably more complicated over the last decade, as consolidation among provider networks spawned an era of downward price pressure, decreased tolerance for inventory on hand, and a shift in control toward the customer. The level of compliance and pedigree required by regulators (for safety and security) has reached an all-time high, and the promise of emerging markets has thrust medical device firms quite literally into foreign territory, where customs are unfamiliar and the infrastructure is uneven at best.
Managing suppliers no longer is as simple a matter as moving product between two points; it increasingly entails distributorships, complex regulatory requirements (between countries, districts and states), and local supplier ecosystems, experts contend.
“There’s been a shift away from importing and exporting and a trend toward actually producing the products where you’re going to sell them,” Bonifacio said. “It’s okay to ship $1 million or $2 million in [product] sales to China, for example, but if you’re going to ship $20 million-$30 million or more of product it obviously makes a lot more logistical sense to have your own ecosystem in that particular market—China for China, Europe for Europe, so to speak. I think we’re going to see more of this localization of the global supply chain. We’ve seen it already in automotive. Nobody is really shipping seats and dashboard assemblies all around the world, that doesn’t get done anymore. You just put the distribution facility right next to the big assembly plant and you just kind of drive the components through the parking lot. We’re not really there yet in medical but that evolution has begun. For the large-volume products in the really large markets where there’s high dollar volume in production, you’re going to begin to see more of those localized supply chains be the norm rather than the exception.”
Such chains are the norm at Siemens Healthcare, which relies on CIMC Tank Equipment Co. Ltd. in Nantong, China, to supply the vessel kits for its locally produced magnetic resonance imaging (MRI) systems. The multi-walled kits house large coils that generate the powerful MRI magnetic field as well as the liquid helium used to cool the coils.
Johnson & Johnson (JNJ) is a fan of localized supplier networks as well. Three years ago, the healthcare/consumer products conglomerate acquired Spectrum Vision LLC, a full-service distributor of contact lenses to Russia, with facilities in the Ukraine and Kazakhstan. The move has enabled JNJ to provide same-day or next-day delivery of more than 85 percent of Acuvue brand contact lenses to consumers in all Russian time zones.
Perhaps more important than delivery speed and convenience, however, is the cost savings involved with supply chain partnerships.
The Congressional Budget Office projects U.S. health spending to grow roughly 5.7 percent annually through 2021; the pace is 0.9 percent faster than the expected annual increase in gross domestic product (GDP) during that period. As a result, the healthcare slice of the GDP pie is forecast to climb to 19.6 percent by 2021.
Such runaway spending potential has turned government agencies like the U.S. Center for Medicare and Medicaid Services into virtual tightwads, as they increasingly are limiting insurance reimbursements and questioning price hikes for slightly-upgraded products. The penny-pinching is trickling down the production chain, too: Hospitals and group purchasing organizations are demanding better prices from medtech manufacturers, who in turn, are putting the squeeze on their suppliers.
“In the current environment, our clients expect more for less. From the standpoint of an outsource provider to the medical device industry, we’re getting pressure to provide a broader range of services at reduced costs,” noted Damon Peary, founder/CEO of Summit Corporate Services Inc., a Bozeman, Mont.-based customized outsource solutions provider serving the medical device and life science industries. “We’ve had to sharpen our pencils, while implementing software solutions and processes that maximize efficiencies and streamline operations in order to meet the needs of our clients. It used to be enough to simply offer the highest quality services with logistics, distribution and field support, but today it’s assumed that those professional services will also deliver cost savings over doing them in-house. Expectations are much higher now and require a commitment to maintaining a robust Quality System and ISO Certification. We’ve seen similar pressures across all industries we serve but even more so in the medical device sector.”
A fair assessment, by far. Medtech’s traditional business model has become unsustainable due to new regulations and taxes, evidence-based medicine, greater patient influence, and a shift in buying power from doctors to administrators, payers and procurement groups. It’s a whole new ballgame, governed by a “more for less” Golden Rule.
Supplier partnerships provide companies with a fairly easy way to comply with this new rule. Industry observers say a condensed, strategically structured network can save device firms significant time and money on various aspects of product distribution, including travel, paperwork, parts inspection, device history record handling, shipping, auditing, purchase order processing, and other logistics.
Full-service providers also can help companies streamline their supply chains, reducing lists by as much as 30 percent. JNJ, for example, reduced its list by 100 suppliers between 2011 and 2012 after deciding to maintain a preferred catalog of top-tier contractors based on spend, risk and strategic importance to the company.
A shorter supplier list alleviates the headaches normally associated with deep networks. It also helps companies strengthen and streamline their supplier controls, ensure quality and reduce regulatory risks.
“Supply chain consolidation is becoming very common in our industry. Customers are asking a company like us to manage suppliers, take on other various roles and responsibilities and services we may not otherwise perform,” said John S. Cavalier Jr., vice president of sales and marketing for Latrobe, Pa.-based CI Medical Technologies Inc., a provider of injection-molded components for medical, pharmaceutical and healthcare applications. “The larger companies want to consolidate their suppliers, going from managing maybe 30 or more to managing 5. So obviously, we have to be more cost competitive and always be at the top of our game. Quality service and delivery are always paramount. We want to be managing other suppliers or processes, services or goods for our customers. We don’t want to be on the other end, with a larger supplier managing us. That would take us out of direct communication with our customers and make winning new business much more difficult.”
Playing second fiddle also contradicts the very purpose for partnering: To help companies leverage volume and improve their bottom line. Greater purchasing power also gives manufacturers better visibility over their suppliers’ operations and more control over their chosen investment channels.
Ultimately, full-service suppliers can help enterprises conduct a leaner, more efficient business. Also, collaborations allow companies to focus on their core competencies, freeing up time and resources for product development, marketing and sales.
Relationship Advice
Continued cost pressures, regulatory oversight and growing demand for global market access is driving the need for supply chain partnerships as the medtech industry re-engineers its business model.
Unlocking the full potential of these collaborations is dependent upon the relationship. Partnerships can make or break a company’s supply chain strategy; thus, they should not be taken lightly. It is important for device manufacturers to choose their partners carefully, evaluating each suitor’s ability to make the supply chain more adaptable, responsive, strategy-enabling, patient-centric and value-focused.
Communication, of course, is key to any business relationship. Without an open platform and clearly understood expectations on both sides, supply chain optimization is practically impossible, industry observers claim.
Ideal partners also should be committed to Lean principles and quality initiatives. Lean suppliers can remove waste from the network, decrease cost and reduce lead times in ways that require less effort, investment, inventory and logistics on their customers’ part.
Suppliers with broad, in-depth quality systems expertise can boost a company’s chances of successful product commercialization and help improve efficiencies within existing quality initiatives. In addition, the right supplier can help manage risk by ensuring continued compliance to ISO 13485 and other global mandates.
Regulatory expertise, in fact, is another crucial element of any supply chain partnership. Full-service suppliers with an experienced regulatory team can help companies navigate the complicated product approval process, both domestically and internationally. A supplier can add even more value to manufacturers by effectively communicating with the U.S. Food and Drug Administration to obtain clarification on a 510(k) approval application before it is submitted.
Value chain management is imperative as well. A full-service partner with the resources and proficiency to audit and maintain an entire value stream (including other suppliers) simplifies a company’s purchasing process and reduces waste and expenses along the chain.
“You have to look at what the partner can offer, look at the whole range of solutions they have. Can they take a project all they way through from concept/design to packaging?” asked Joe Zuzula, sales and marketing vice president for Orchid Orthopedic Solutions LLC, a Holt, Mich.-based contract manufacturing organization. “Vertically integrated companies stand a better chance of becoming a valued partner nowadays. For a large reconstructive joint implant, a manufacturer may send the product out to be forged, coated and packaged/sterilized, each time bringing it back in-house for inspection. That is a lot of steps in the value stream—all the shipping back and forth, all the inspections that have to be done, all the different P.O.s [purchase orders] that have to be written.
Companies stand a better chance if they can integrate all those steps within their four walls. That makes the supply chain less complex for the customer—they write one P.O., have less cost in their process, less inspections, and more of the risk is taken on by the supplier. Those suppliers who are doing more, adding more value, more services to their processes are able to do more for the customer and therefore, reduce the complexity of the supply chain.”
* * *
The medtech industry is undergoing a transformation as it adapts to the new realities of a changing U.S. healthcare landscape. Increasing cost pressures, product tracking regulations, shrinking reimbursements, and escalating service demands all are straining the current supply chain model.
Manufacturers, consequently, are exploring new solutions to manage their distribution networks, partnering with full-service suppliers to improve cost efficiency, stimulate growth and strategically traverse dynamic market conditions. Companies with agile, efficient, flexible supply chains have the best chance of long-term survival.
“Outsourcing supply chain management has never been more important in our space,” Bonifacio said. “It’s becoming a core competency and more contract manufacturers are beginning to realize that. It’s now front and center because it’s important to the larger manufacturers and it fits in with their goal of managing less suppliers. Anything to lessen the complexity in the supply chain is seen as a benefit.”
Not to be confused with the beer game—the one involving plastic cups, ping pong balls and thirsty participants—the Beer Game is a business simulation exercise created by Massachusetts Institute of Technology (MIT) Sloan School of Management professor Jay Forrester more than a half century ago to teach key principles of supply chain management. The simulation is a virtual rite of passage for Sloan students: Each incoming class learns the oscillatory dynamics of product distribution and systems thinking by running a rudimentary beer supply chain.
Though it is available online (through a Java software application), the game is still played at MIT as its founder intended—with pen, paper, printed plastic tablecloths and poker chips. To begin, students group themselves into teams of eight. Each team then is divided into four units of two players each, with every pair assuming the roles of retailer, wholesaler, distributor and brewer (manufacturer).
All teams are tasked with emulating real supply chains by curtailing operating expenses through low inventory and nominal backlog. Naturally, the game comes with some built-in complications because, well, life is rarely simple: There is fluctuating consumer demand and forbidden communication between players (information is relayed by orders and shipment notes only).
The process inevitably derails after dozens of rounds, as incomplete data, structural dysfunctions and the fallibility of human behavior leads to kinks in the supply chain. Additional knots are tied by the “bullwhip effect”—a well-documented and appropriately named phenomenon caused by demand order variability, where fluctuations of any kind create ripples, or “snaps,” further along the chain.
Bullwhip lashes usually lead to big backlogs, soaring operating expenses and excessive inventory—problems that never seem to get resolved in the corporate world. They go unresolved in the academic realm as well, existing primarily as teaching tools in business management courses. At MIT, the bullwhip teaches students just how difficult it can be to manage a supply chain.
“Parts of this [game] are absolutely valid and the fundamentals do work,” said Mark Bonifacio, a former healthcare supplier who now owns Bonifacio Consulting Services, a Natick, Mass.-based medical device consultancy. “But now, you have to factor in a lot more. Supply chains have become inherently more complex simply because of the global marketplace that we’ve entered over the last 20 to 25 years. There have been a lot of changes to supply chains from that aspect—they’ve become very complicated because there are so many things that can crop up and really become an issue.”
Medical device supply chains are particularly convoluted. The industry traditionally has used an “inventory everywhere” business model to turn a profit, employing a highly fragmented supply chain to move products from manufacturer to customer. The seemingly ludicrous moniker is neither sarcasm nor hyperbole, as merchandise literally can be found everywhere—from regional distribution centers, forward stocking locations and logistics service provider warehouses to sales reps’ car trunks, hospital storerooms and sterilization facilities.
Each of these product touch points can be complex as well. Forward-stocking centers, for example, are small facilities (averaging 2,000 square feet) used to feed products to end customers in final mile deliveries. They typically are sprinkled throughout a company’s markets, numbering anywhere from 40 to 100 depending on the manufacturer’s size and its penetration in a particular sector.
Certainly, such a splintered system is ideal for avoiding stock outs, but the strategy almost always is accompanied by the dreadful double-whammy of increased supply chain complexity and cost. Neither consequence is a welcome attribute in the medtech world, where companies are under constant pressure to reduce expenses and simplify processes.
Compounding that pressure are challenges like operating room unknowns, expedited delivery services and expanded demand footprints, all of which hamper inventory visibility and jack up costs.
Operating room unknowns are perhaps the biggest troublemakers due to their typically low inventory rates and high days on hand ratio. Aiding and abetting the unknowns are implant surgeons, who seldom know in advance the kind (or size) of products they will need for particular procedures. To compensate for this uncertainty, a physician may order a tremendous number of parts in various sizes; a knee surgeon, for instance, might request sizes three through five for a surgery and use only one of the sizes ordered.
Any unused parts and instruments, consequently, are out of circulation and unavailable for sale even though they might never have been removed from their original packaging. These products must be decontaminated, inventoried, inspected and replenished—an extremely time-consuming and costly process for the manufacturer (still the rightful owner of the unused property). Days on hand in these cases easily can top 100.
Delivery service is equally as efficient at mucking up the medtech supply chain. Over the last few years, manufacturers have attempted to gain a competitive edge through accelerated shipping, often promising customers overnight delivery. As a result, hospitals frequently wait until the last minute—close to cut-off times—to place orders, thereby forcing manufacturers to rely on premium delivery systems to fulfill those requests. Accordingly, companies must locate their distribution centers next to air express hubs and use pricey premium express delivery service to meet clients’ next-day shipping demands. Medtronic plc took this exact approach in establishing its three U.S. distribution centers, judiciously positioning them in Elizabeth, N.J., a virtual stone’s throw from Newark-Liberty International Airport; Memphis, Tenn., home of FedEx; and Mira Loma, Calif., a mere seven miles from LA/Ontario International Airport.
“Medtronic’s three regional hubs are strategically located adjacent to major airports, which allow us to improve customer service, facilitate business continuity, support our growth and save transportation costs,” said Mitch Parrish, company vice president of global supply chain operations.
Speed, however, doesn’t always guarantee success. Despite its relative flexibility, distribution logistics is one of the weakest links of a supply chain because it is vulnerable to life’s bounty of curveballs. Iceland’s Eyjafjallajökull volcano, for example, shut down most of Europe’s airspace during its 2010 awakening, disrupting countless shipments of Technetium-99m, a radioisotope produced mostly in Belgium and France. The radioactive element is used in 80 percent of all nuclear medicine.
Japan’s triple calamity the following year (9.0-magnitude earthquake, tsunami, nuclear power plant meltdown) had a similar effect, suspending Becton Dickinson and Company’s local manufacturing operations for nearly a month and leaving Swedish contract manufacturing firm PartnerTech short-handed by about a dozen suppliers.
Yet that was just a preview of Mother Nature’s curveball potential. Still to come were flawless breakers like the Thailand floods, the Haitian earthquake, Superstorm Sandy, Typhoon Haiyan, the Southern California wildfires, the Polar Vortex, and record New England snowfall.
Not all supply chain disruptions are so dramatic, though. A simple power outage or miscommunication can bring business operations grinding to a halt.
Shire Regenerative Medicine of La Jolla, Calif., avoided such a fate by establishing a secondary cryogenic storage and distribution center in Louisville, Ky. The facility saved the company from almost certain ruin after a widespread power outage in the Southwest shuttered San Diego International Airport and paralyzed the city’s transportation system.
Shire’s distribution network barely flinched, however, as the company’s Louisville operation assumed control of order fulfillment for its living skin-cell product halfway across the country. “We’d have been out of business if we’d not been able to ship that day,” Shire Logistics Manager Mike Whitmore recalled.
Indeed, Shire’s ability to recognize and mitigate supply chain risk kept the firm from self-destructing. But its success is a rarity in the medtech industry—statistics show most companies still fail to develop effective contingency plans to safeguard their supply chains from future curveballs.
A 2014 survey conducted by UPS found that only 26 percent of global healthcare executives consider contingency planning a top priority in their organizations, presumably due to competing concerns like compliance, product protection, cost management and a general perception that disruptive events are rare. But in regions recently victimized by high-profile disasters, medtech bigwigs admit that disruptions have had a significant impact on their operations: Thirty-four percent of Asian executives and 22 percent of Latin American directors said unplanned events affected more than one-fourth of their companies’ supply chains in the past three to five years, according to UPS’ seventh annual “Pain in the (Supply) Chain Survey.”
Conversely, only 10 percent of North American executives and 5 percent of their Western European counterparts reported such a blow to their supplier network. The extent of the impact may partially be explained by the finding that fewer than four in 10 respondents claimed success in contingency planning.
“Contingency planning and risk mitigation need to take center stage for healthcare companies, including medical device suppliers,” said Melanie Alavi, UPS director of global healthcare strategy. “Healthcare is reaching new corners of the world and the middle class is quickly expanding in today’s increasingly connected marketplace. With this growth, supply chain networks are becoming more complex and contingency planning has never been more important.
“Contingency planning is particularly important when developing operations strategy and planning for future expansions,” she continued. “Having an alternate distribution facility and additional transportation capability is vital if an unplanned event occurs. When a network is being evaluated for optimization and efficiency, it’s a great opportunity to discuss strategies to build in resiliency at the same time. It’s an exciting time for the industry, but companies must take calculated risks and develop supply chain strategies that position them for success.”
Clearly, better contingency planning is necessary for long-term survival, but supply chain management must improve as well. In order to become more effective managers, though, companies must first devise strategies that reduce inventory and cost, improve visibility and responsiveness, and eliminate waste while guaranteeing high service levels.
It’s a tall order, surely, but entirely practicable through full-service supplier partnerships.
The Perks of Partnering
Supply chain management has become considerably more complicated over the last decade, as consolidation among provider networks spawned an era of downward price pressure, decreased tolerance for inventory on hand, and a shift in control toward the customer. The level of compliance and pedigree required by regulators (for safety and security) has reached an all-time high, and the promise of emerging markets has thrust medical device firms quite literally into foreign territory, where customs are unfamiliar and the infrastructure is uneven at best.
Managing suppliers no longer is as simple a matter as moving product between two points; it increasingly entails distributorships, complex regulatory requirements (between countries, districts and states), and local supplier ecosystems, experts contend.
“There’s been a shift away from importing and exporting and a trend toward actually producing the products where you’re going to sell them,” Bonifacio said. “It’s okay to ship $1 million or $2 million in [product] sales to China, for example, but if you’re going to ship $20 million-$30 million or more of product it obviously makes a lot more logistical sense to have your own ecosystem in that particular market—China for China, Europe for Europe, so to speak. I think we’re going to see more of this localization of the global supply chain. We’ve seen it already in automotive. Nobody is really shipping seats and dashboard assemblies all around the world, that doesn’t get done anymore. You just put the distribution facility right next to the big assembly plant and you just kind of drive the components through the parking lot. We’re not really there yet in medical but that evolution has begun. For the large-volume products in the really large markets where there’s high dollar volume in production, you’re going to begin to see more of those localized supply chains be the norm rather than the exception.”
Such chains are the norm at Siemens Healthcare, which relies on CIMC Tank Equipment Co. Ltd. in Nantong, China, to supply the vessel kits for its locally produced magnetic resonance imaging (MRI) systems. The multi-walled kits house large coils that generate the powerful MRI magnetic field as well as the liquid helium used to cool the coils.
Johnson & Johnson (JNJ) is a fan of localized supplier networks as well. Three years ago, the healthcare/consumer products conglomerate acquired Spectrum Vision LLC, a full-service distributor of contact lenses to Russia, with facilities in the Ukraine and Kazakhstan. The move has enabled JNJ to provide same-day or next-day delivery of more than 85 percent of Acuvue brand contact lenses to consumers in all Russian time zones.
Perhaps more important than delivery speed and convenience, however, is the cost savings involved with supply chain partnerships.
The Congressional Budget Office projects U.S. health spending to grow roughly 5.7 percent annually through 2021; the pace is 0.9 percent faster than the expected annual increase in gross domestic product (GDP) during that period. As a result, the healthcare slice of the GDP pie is forecast to climb to 19.6 percent by 2021.
Such runaway spending potential has turned government agencies like the U.S. Center for Medicare and Medicaid Services into virtual tightwads, as they increasingly are limiting insurance reimbursements and questioning price hikes for slightly-upgraded products. The penny-pinching is trickling down the production chain, too: Hospitals and group purchasing organizations are demanding better prices from medtech manufacturers, who in turn, are putting the squeeze on their suppliers.
“In the current environment, our clients expect more for less. From the standpoint of an outsource provider to the medical device industry, we’re getting pressure to provide a broader range of services at reduced costs,” noted Damon Peary, founder/CEO of Summit Corporate Services Inc., a Bozeman, Mont.-based customized outsource solutions provider serving the medical device and life science industries. “We’ve had to sharpen our pencils, while implementing software solutions and processes that maximize efficiencies and streamline operations in order to meet the needs of our clients. It used to be enough to simply offer the highest quality services with logistics, distribution and field support, but today it’s assumed that those professional services will also deliver cost savings over doing them in-house. Expectations are much higher now and require a commitment to maintaining a robust Quality System and ISO Certification. We’ve seen similar pressures across all industries we serve but even more so in the medical device sector.”
A fair assessment, by far. Medtech’s traditional business model has become unsustainable due to new regulations and taxes, evidence-based medicine, greater patient influence, and a shift in buying power from doctors to administrators, payers and procurement groups. It’s a whole new ballgame, governed by a “more for less” Golden Rule.
Supplier partnerships provide companies with a fairly easy way to comply with this new rule. Industry observers say a condensed, strategically structured network can save device firms significant time and money on various aspects of product distribution, including travel, paperwork, parts inspection, device history record handling, shipping, auditing, purchase order processing, and other logistics.
Full-service providers also can help companies streamline their supply chains, reducing lists by as much as 30 percent. JNJ, for example, reduced its list by 100 suppliers between 2011 and 2012 after deciding to maintain a preferred catalog of top-tier contractors based on spend, risk and strategic importance to the company.
A shorter supplier list alleviates the headaches normally associated with deep networks. It also helps companies strengthen and streamline their supplier controls, ensure quality and reduce regulatory risks.
“Supply chain consolidation is becoming very common in our industry. Customers are asking a company like us to manage suppliers, take on other various roles and responsibilities and services we may not otherwise perform,” said John S. Cavalier Jr., vice president of sales and marketing for Latrobe, Pa.-based CI Medical Technologies Inc., a provider of injection-molded components for medical, pharmaceutical and healthcare applications. “The larger companies want to consolidate their suppliers, going from managing maybe 30 or more to managing 5. So obviously, we have to be more cost competitive and always be at the top of our game. Quality service and delivery are always paramount. We want to be managing other suppliers or processes, services or goods for our customers. We don’t want to be on the other end, with a larger supplier managing us. That would take us out of direct communication with our customers and make winning new business much more difficult.”
Playing second fiddle also contradicts the very purpose for partnering: To help companies leverage volume and improve their bottom line. Greater purchasing power also gives manufacturers better visibility over their suppliers’ operations and more control over their chosen investment channels.
Ultimately, full-service suppliers can help enterprises conduct a leaner, more efficient business. Also, collaborations allow companies to focus on their core competencies, freeing up time and resources for product development, marketing and sales.
Relationship Advice
Continued cost pressures, regulatory oversight and growing demand for global market access is driving the need for supply chain partnerships as the medtech industry re-engineers its business model.
Unlocking the full potential of these collaborations is dependent upon the relationship. Partnerships can make or break a company’s supply chain strategy; thus, they should not be taken lightly. It is important for device manufacturers to choose their partners carefully, evaluating each suitor’s ability to make the supply chain more adaptable, responsive, strategy-enabling, patient-centric and value-focused.
Communication, of course, is key to any business relationship. Without an open platform and clearly understood expectations on both sides, supply chain optimization is practically impossible, industry observers claim.
Ideal partners also should be committed to Lean principles and quality initiatives. Lean suppliers can remove waste from the network, decrease cost and reduce lead times in ways that require less effort, investment, inventory and logistics on their customers’ part.
Suppliers with broad, in-depth quality systems expertise can boost a company’s chances of successful product commercialization and help improve efficiencies within existing quality initiatives. In addition, the right supplier can help manage risk by ensuring continued compliance to ISO 13485 and other global mandates.
Regulatory expertise, in fact, is another crucial element of any supply chain partnership. Full-service suppliers with an experienced regulatory team can help companies navigate the complicated product approval process, both domestically and internationally. A supplier can add even more value to manufacturers by effectively communicating with the U.S. Food and Drug Administration to obtain clarification on a 510(k) approval application before it is submitted.
Value chain management is imperative as well. A full-service partner with the resources and proficiency to audit and maintain an entire value stream (including other suppliers) simplifies a company’s purchasing process and reduces waste and expenses along the chain.
“You have to look at what the partner can offer, look at the whole range of solutions they have. Can they take a project all they way through from concept/design to packaging?” asked Joe Zuzula, sales and marketing vice president for Orchid Orthopedic Solutions LLC, a Holt, Mich.-based contract manufacturing organization. “Vertically integrated companies stand a better chance of becoming a valued partner nowadays. For a large reconstructive joint implant, a manufacturer may send the product out to be forged, coated and packaged/sterilized, each time bringing it back in-house for inspection. That is a lot of steps in the value stream—all the shipping back and forth, all the inspections that have to be done, all the different P.O.s [purchase orders] that have to be written.
Companies stand a better chance if they can integrate all those steps within their four walls. That makes the supply chain less complex for the customer—they write one P.O., have less cost in their process, less inspections, and more of the risk is taken on by the supplier. Those suppliers who are doing more, adding more value, more services to their processes are able to do more for the customer and therefore, reduce the complexity of the supply chain.”
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The medtech industry is undergoing a transformation as it adapts to the new realities of a changing U.S. healthcare landscape. Increasing cost pressures, product tracking regulations, shrinking reimbursements, and escalating service demands all are straining the current supply chain model.
Manufacturers, consequently, are exploring new solutions to manage their distribution networks, partnering with full-service suppliers to improve cost efficiency, stimulate growth and strategically traverse dynamic market conditions. Companies with agile, efficient, flexible supply chains have the best chance of long-term survival.
“Outsourcing supply chain management has never been more important in our space,” Bonifacio said. “It’s becoming a core competency and more contract manufacturers are beginning to realize that. It’s now front and center because it’s important to the larger manufacturers and it fits in with their goal of managing less suppliers. Anything to lessen the complexity in the supply chain is seen as a benefit.”