Outsourcing a portion of supply chain management can be more of a challenge. There is an element of “turkeys voting for Christmas” when asking a supply chain director whether he would consider outsourcing part of a company’s procurement and vendor management processes. But like every other department in a contemporary manufacturing facility, supply chain teams can often be under-resourced. As production demands escalate, management may decide to seek additional resources from a professional supply chain team. Conversely, working with a third party to manage part of the supply chain can increase productivity levels by assuming a greater workload with less staff.
When a procurement outsourcing service is connected with the ability of the service provider to transact with vendors, pay vendors, and hold inventory, the service can take on a new dimension. The ability of a service provider to hold inventory on behalf of a medtech manufacturer can have a positive effect on inventory balances and provide breathing space within a tight supply chain system. Supply chain directors are often under pressure from their finance teams to reduce inventories and hold minimum stocks of both finished goods and raw materials. Supply chain directors want manufacturing operations to run as lean as possible, but must always be conscious to provide enough materials to keep the production line running.
Vendor managed inventory (VMI) programs have increasingly become a way to reduce on-hand inventories while simultaneously ensuring that materials are readily available. Technology has enabled VMI programs to operate with full visibility to the business and supplier.
Even with a sophisticated VMI program in place, medtech companies may still require the expertise of a procurement services organization. VMI programs require a lot of management time. The business must constantly communicate with its vendor to ensure that supply is continuously maintained and the supply chain process is sustained during exceptions or delays. In addition, the VMI program manager must communicate internally among production stakeholders to ensure that required materials will be in place on time.
Materials management should also be considered, using the Pareto rule for inventory values. Keep in mind the supply chain team will naturally want to focus on key suppliers and materials. Managing a VMI program for lower-volume/lower-value materials is necessary, but it is perhaps not the most productive use of resources. Since many procurement organizations offer services around this “long-tail” part of the supply chain, medtech organizations might be better off relinquishing control of these items.
In general, medtech companies should treat the introduction of a VMI program as a process. Rather than expect a vendor to stage a large quantity of inventory locally to the supplier or commit a large volume of stock to the business immediately, it is better to work with the vendor to reduce the inventory levels needed to support the business over time. If the business can provide sufficient demand information to the vendor and effectively reduce the quantities of required inventory, the vendor is much more likely to participate in a VMI program. Medtech companies should not spook their vendors by making high inventory commitment a condition of the VMI program. Strong enterprise resource planning technology and vendor communication is key to this partnership.
Medtech companies can appreciate the inefficiencies associated with skilled procurement professionals managing simple transactions, creating purchase orders, expediting deliveries, and clearing payments. These inefficiencies are particularly clear when in-house procurement teams are asked to manage the “long tail” of the supply chain. Procurement teams’ time might be better spent vetting suppliers and designing better vendor-managed inventory programs.
Other industrial sectors like the electronics industry have vast experience working with third parties to manage procurement and inventory management. There are, of course, obvious differences between the electronics, automotive, and medical device industries. Medtech supply chain professionals easily become frustrated by demands that their industry operate more like the electronics sector. There is good reason for the frustration, too: Electronics supply chains are generally much longer than their medtech counterparts. Asian sourcing can contribute to this discrepancy, as Far East factories look unfavorably on vendor-managed inventory programs. In addition, buffering of materials to a local manufacturing facility in Asia may be required. Despite these challenges, though, many medical device companies have actively sought out electronics industry supply chain professionals to actively bring new thinking into the sector.
The medical device industry is a very broad church, encompassing everything from in vivo devices (stents, joints, etc.) to electro-mechanical products (machines that go ping, to quote Monty Python). There are different attitudes toward outsourced procurement services based on medical device subsector. Medical electro-mechanical supply chains, for example, generally reflect the business practices of the electronics industry. There is less emphasis on supply chain validation in electronics manufacturing compared to a medtech sector like cardiovascular, where manufacturers are more closely bound to suppliers due to the large investment required for authorization.
Obviously, there are impediments to medtech companies borrowing supply chain practices from the electronics industry. Quality—always a primary concern in healthcare—is a major hurdle. Medtech companies spend significant time validating suppliers and thus are reluctant to change processes, regardless of efficiency and service levels. Medtech supply chain managers are expected to reduce inventories and increase productivity levels while not disrupting the validated supplier base. But that’s a tough challenge.
Nevertheless, medtech companies are beginning to consider outsourcing inventory management and procurement.
There are a number of areas within the medtech sector where companies can start their outsourced procurement journey.
Consumables and MRO
Non-bill of material stocks are more readily available for procurement outsourcing. These materials could be maintenance, repairs, and operations (MRO) products. Materials might also be consumables such as gloves, blades, and engineering-type items. While these materials do not sit on the company balance sheet, they do represent a considerable spend within the business.
Part of the challenge for an outsourced procurement service is how MRO and consumable materials are treated from an accountancy perspective within the business. These items are generally not considered inventory. Rather, the business posts these items to various departments and ledger codes, and considers the items consumed when delivered. If part of the value proposition from an outsourced procurement company is inventory reduction, then MRO and consumables do not fall into this value category.
Part of the value proposition that resonates with a business is the reduction of purchase order (PO) numbers and more streamlined supplier integration. Most companies place a cost against each PO raised. Consumables and MRO materials naturally generate lots of POs, as each request can require a separate purchase order to allocate spending against each department.
Some procurement companies may modify their enterprise resource planning systems to provide a portal to organizations that helps streamline the order process for MRO and consumables.
Long Tail Electro-Mechanical Items
Medical device companies offering electro-mechanical devices are often willing to consolidate the procurement of materials such as leads, batteries, screens, screws, and labels. In many cases, procurement responsibility for this type of material is turned over to a contract manufacturer but sometimes larger medtech firms might source these materials themselves, even with the benefit of contract manufacturing services.
The electro-mechanical supply chain can quickly become complex, and medtech companies often lack the resources to properly manage lower-volume, less frequently ordered parts. A macro analysis of the supply chain may yield a surprisingly large number of suppliers that offer a limited number of SKUs. There have been instances where components have reached the end of their life, or the vendor may have stopped trading without a buyer’s knowledge. It can be impossible for stretched procurement departments to monitor low-volume, low-value vendors. This is where additional procurement services can come in handy.
Small to mid-sized medtech companies frequently use contract manufacturers to produce their products. CMs are happy to source component materials for the product build, but they seldom are willing to hold finished goods stock for clients.
Small to mid-sized electro-mechanical product developers might also be surprised at the minimum order quantity demanded by contract manufacturers.
Moreover, growing medtech companies may not be in a position to get a volume-based price break. Expanding companies cannot afford to tie up their cash in large quantities of inventory or suffer from limited credit terms as product demand increases. Procurement organizations can help smaller medical device companies in two ways: First, by providing supply chain resources to bolster the in-house team, as medtech firms may not have the resources to employ enough buyers or supply chain managers; and second, by providing a financing model for finished goods. An inventory financing service can provide a mechanism to remove large cash commitments from the business. The company pays for inventory as it is consumed rather than on delivery, offering a capex to opex business model for the company that is greatly appreciated by financial executives.
The medtech supply chain is changing due to competition and customer demands. Consequently, supply chain directors want to dictate the pace of this change and control the strategic direction of the business supply chain function. Even when procurement outsourcing makes sense for a business and there is a clear value proposition, the supply chain team must present any changes to the quality management team. If small changes to the quality management system (QMS) are required, there must be a clear and significant benefit to the business before any paperwork is warranted. Supply chain directors are constantly under pressure to reduce inventories, promote vendor-managed inventory programs, and eliminate stock. A professional outsourced procurement service can provide much-needed relief to the medical device supply chain, but it must be provided in a stable and proven manner that will meet any QMS requirements.
Dan O’Mahony leads customer engagement within the lifesciences portfolio of Exertis Supply Chain Services. He helps medical device and pharmaceutical firms outsource non-core activities. He has more than 20 years of experience working with companies to create robust supply chains and sales channels across EMEA markets.