Many medtech industry leaders have focused on driving value through world-class procurement practices, and have elevated procurement and supply chain to a strategic role in their organizations. Many of these companies have also recognized the value of sustainable procurement and continue to implement and improve sustainable practices in their supply chain operations. This is reflected in leading companies’ results: A Hackett Group study on procurement agility found that world-class companies have 18 percent lower procurement operating costs and use 28 percent fewer full-time equivalents staff than their peers. However, only 41 percent of Fortune 500 healthcare companies have set formal targets, according to Ceres. Regardless of your organization’s size, have you set a target to measure success in this area? The benefits are becoming more clear.

Procurement and supply chain management in small- and medium-sized medtech companies have often been overshadowed by other functions such as R&D, finance, IT, or sales and marketing. This emphasis is changing—or should be changing—rapidly due to increasing regulatory requirements, ongoing margin pressures, demands for improved supply chain transparency, and higher supply chain risks from market expansion and increased outsourcing. Furthermore, mainstreaming of big data, cloud computing, and mobile procurement applications are creating new business models at a breathtaking pace. Digitization is revolutionizing the medtech industry too, and it is likely to radically change the way supply chains and supplier relationships are managed.

Ongoing cost reduction pressures and flat budgets mandate that procurement must continuously innovate and transform itself. As was mentioned in this column in the April 2017 issue of MPO, world-class medtech companies stay ahead of the competition by being customer-centered, and by allocating resources to high-value rather than low-value procurement activities. Chart 1 in that column showed that companies have to balance supply chain priorities between costs and growth. Leaders are transforming service delivery models and capitalizing on data and use of effective analytical tools. What sets these companies further apart is that they continuously upgrade their procurement staff’s skills and are able to retain that skill. 

Procurement staff in the leading companies spend considerably more time on strategic sourcing and planning activities than on operative activities and supplier compliance management. It creates value because it affects the ability of a company to compete over the long term and directly affects profits as well as the bottom line.

The rate of change and unpredictability in business has accelerated to unprecedented levels, and all companies are looking for ways to be more agile. Despite their size, product range, organizational structure and geographic considerations, medtech companies should consider procurement as a strategic function and act accordingly. Medical procurement represents approximately 40 percent of companies’ spending; even when other departments are involved, procurement usually has the final say in where and how goods or services are sourced. The era of focusing solely on quality, price, and lead time is long gone, and it is imperative for survival to shift procurement’s role from tactical to strategic, and to incorporate sustainability into procurement strategy and operations.

Sustainable procurement (SP) is a relatively new approach but it is much more than a buzz word. SP has proven to deliver operative and financial results five to seven years after its implementation, in addition to enhancing brand reputation and supplier relationships. Fortune 500 medtech companies like Edwards LifeSciences, Varian Medical Systems, and 3M are currently investing heavily to ensure sustainability is ingrained across all aspects of their supply chain and procurement operations.

According to an HEC benchmark published this past spring, 97 percent of surveyed companies considered sustainable procurement important or critically important to their success. In comparison, only 40 percent of the companies considered those points important in 2003, yet only 41 percent of medtech companies have set a formal target.

Environmental issues remain important, but labor and social issues have begun to receive growing attention due to increased regulation, widespread media coverage of supply chain disasters such as factory collapses, forced and child labor, human trafficking, etc. The medtech industry as a whole has more controls and more thorough supplier screening in place than companies in other sectors, but medtech supply chains are not above or entirely free of such problems. Customers and regulators have demands for increased transparency, and as medtech companies continue to outsource more of their operations to geographically dispersed locations, as well as to countries with less strict regulations, labor and social issues, challenges with second- and third-tier suppliers, and beyond will require careful consideration.  

Sustainability Risk Management
Risk management is one of the key concerns for chief procurement officers in the years to come; according to research, sustainability and corporate social responsibility risks rank among the top five supply chain risks. This is especially true in the medtech world as supply chain transparency is becoming more critical at all levels of the chain. As larger Fortune 500 medtech companies begin to drive targets, OEM suppliers will have more demands upon them to report their efforts.

Sustainable procurement improves risk management capabilities as sustainability criteria that are part of supplier sourcing and evaluation to single out risky suppliers. This goes beyond codes of conducts and compliance and simply checking off boxes. Smaller and low-spend suppliers, typically 70 to 80 percent of company suppliers, may often represent a much larger sustainability risk than the large and strategic suppliers that are by and large under control in the medtech industry.

Demands from legislators for financial and supply chain transparency are forcing medtech companies to take responsibility beyond their first-tier suppliers. The California Supply Chain Transparency Act, or the UK Modern Slavery Act, The Dodd-Frank Act, the French Devoir de Vigilance, as well as European Union (EU) regulation on medical devices and EU initiatives on Green Public Procurement and Sustainable Public Procurement are a few examples of the increasing regulatory or voluntary pressures. This trend is very likely to continue.

It’s Worth Measuring SP: Establish Metrics
Sustainability leaders are taking various steps to transform their operations, including identifying a sustainable procurement champion, using CSR data when selecting new suppliers, and evaluating existing suppliers. Almost half of all sustainability leaders use third-party supply sustainability databases or scorecards and include sustainability criteria at individual performance objectives and appraisals. Medtech companies that have pursued sustainable procurement practices for the past few years are now reaping the benefits through better risk management, improved brand reputation, and supplier relationships, as well as through cost savings, decreased supply chain disruptions, and increased sales through more innovative and sustainable products and services.

Organizations that have implemented sustainable procurement successfully assert that sustainable procurement provides an outstanding opportunity for building partnerships and cross-functional teams within companies, as well as with suppliers and other external stakeholders. Sustainable procurement also further enhances brand reputation and a firm’s ability to attract talent.

The new ISO 20400 standard on sustainable procurement, the UN Global Compact and the United Nations Sustainable Development Goals (SDG), can provide further sources of inspiration for companies that decide to embark on a sustainable procurement journey. Due to the complexity of supply chain sustainability issues and lack of institutionalized and quantitative measures, cooperation is critical to achieving greater impact. This means working with peers, suppliers, academia, legislators, and intergovernmental and non-governmental organizations while remaining innovative and agile.

Continued efforts are needed to implement sustainable procurement and supply chain practices. The road may sometimes be bumpy, but sustainability will be the near-future norm in business, and alongside new technologies, it will transform the way medtech companies conduct business. Early adapters will gain a considerable competitive advantage by reaping the financial benefits, remaining agile, and securing their supply chains.

So What is Your Target?
Cardinal Health, known to be under tremendous cost pressure due to its specific segments, is reporting that it has more than 20 projects in this area. The company anticipates annual savings of more than $500,000 and a payback per project of less than three years.

As you think about your company’s sustainability efforts, it is no longer enough to incorporate the practice into your overall philosophy. It’s time to know your goals. Feel free to share those goals—we’ll be watching and rooting for your success. 

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Susanna Harkonen is long-time supply chain expert with significant experience in the medtech industry, including working for GE/Datex-Ohmeda. She can be reached at susanna.harkonen@gmail.com.

Dave Sheppard is a former Fortune 500 executive and is now a principal at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.