There are significant opportunities for med tech companies to improve their working capital and inventory management practices by outsourcing non-critical areas of procurement.
Procurement in the Medtech Industry
Medtech companies have traditionally been reluctant to outsource procurement activities for several important reasons:
- Supplier Quality Management--The strict quality control standards and regulations governing medical materials and components have obligated medtech companies to not only ensure the quality of their own processes, but also that of their supply network investments.
- Continuity of Supply--The importance of ensuring on-demand availability of critical product materials and components has made medtech firms hesitant to rely on third parties to source, purchase, and deliver inventory as required.
- Storage and Distribution Conditions--Ensuring precise GMP (Good Manufacturing Practice) and GDP (Good Distribution Practice) controlled conditions for medical materials obliges many medtech companies to manage inventory in-house rather than outsource this to third party warehousing and logistics providers.
- Supplier Relationships--Established relationships with tightly managed approved vendors has limited the opportunities for medical supply chain and procurement professionals to look outside their own networks for improved value, variety, and cost.
Why Are More Medtech Companies Outsourcing Parts of Their Procurement?
Overseas manufacturing competition and government cutbacks in medical sector funding have placed strong downward pressure on margins in the medtech industry. This has resulted in consolidation within the industry and pressure to remove as much direct operational costs as possible.
Procurement functions are therefore becoming increasingly constrained by insufficient resources. As a result, a growing number of medtech companies have begun to outsource the procurement of non-core materials and empowered supply chain partners to manage Approved Vendor Lists (AVLs) on their behalf. This is enabling these organizations to reduce the level of capital tied up in inventory and free up their resources to concentrate on value-adding activities such as R&D, new product innovation, marketing, and sales. These companies are benefitting from:
- Cost savings on globally sourced materials and the elimination of mark-ups from several suppliers
- Freeing up capital normally tied up in inventory
- Supply chain complexity reduction
- Avoiding the high costs associated with vendor on-boarding approval and regulatory pressures, including auditors, audit management and travel requirements
- Balance sheet improvements driven by CEO and CFO led pressures to reduce inventories
- Improved location selection for new projects and investments as a result of enhanced plant efficiency criteria driven by the outsourcing of transactional procurement, quality inspections, and inventory processing
Opportunities to Release Cash in the Medtech Industry
Research into the inventory positions of companies across multiple sectors in 2015 indicates that firms in the pharmaceutical and life sciences sectors in general hold some of the highest levels of inventory relative to firms in other sectors, while they also have the longest sales cycles.
Pharmaceutical and life science firms on average held approximately 75 days of inventory in 2015 compared to the average working capital level of 29 days across all industries.
The pharmaceutical and life science sectors had both the highest number of days inventory outstanding (DIO) and the highest spread in DIO with a weighted average of 110 days in 2015.
This research strongly suggests that not only are medtech firms holding excessive levels of inventory, they are taking, on average, the longest length of time to convert this inventory into sales, relative to other sectors. These findings highlight the significant opportunities that exist for medtech companies to improve their working capital and inventory management practices.
Procurement Areas that Benefit from Outsourcing
Procurement outsourcing can add value across the spectrum of procurement areas, including transactional, analytical, project, and consultative activities.
Transactional activities are the starting point for procurement outsourcing. These include processing purchase requisitions and purchase orders, managing simple RFQs, invoice matching, and payment. The incorporation of lean approaches by a procurement partner will drive the efficiency and accuracy of these activities.
Measurement and Development
A procurement partner can deliver strong analytical methods that measure quality and analyze spending patterns and compliance.
Selection and Contracting
A procurement partner can develop close working relationships with internal procurement personnel, offering both consultative and project services, such as managing RFPs and many elements of contract negotiations.
Sourcing Strategy Development
A procurement partner can offer expert analysis and recommendations that assist procurement professionals in developing corporate supply and sourcing strategies, savings targets, savings analysis, and other special programs.
Advantages and Benefits of Procurement Outsourcing
Outsourcing procurement can deliver improvements in spend management, contract compliance, and savings from sourcing that are above the levels typically achieved by internal procurement departments. Typical improvements include:
Savings from sourcing can be increased year-on-year through category insights and improved visibility and compliance. Participation in common category markets on an ongoing basis rather than the one-off involvement of internal functions provides real-time insight into market price points and the opportunity for continuous refinements of sourcing tools and processes specific to each market. Through process standardization and improvements associated with procurement outsourcing, companies can benefit from a reduction in operational costs, staff right-sizing, and realization of scale economies. Companies can make significant cost savings on materials from open book costings and the elimination of mark-ups from several suppliers.
A good outsourcing contract will include an aligned set of service levels and an effective structure for measuring and reporting service level agreements (SLAs) consistently. SLAs can measure cycle times, satisfaction, and realization of savings and innovations more consistently than is usually achieved internally. Because year-over-year improvements are contractually specified and aligned to compensation, the SLAs receive the attention that they need.
The ability to provide supply market knowledge in many areas results in more effective sourcing. Companies will benefit from dealing with one single supplier, drastically reducing the burden of managing a vendor portfolio and freeing up their resources to focus on core competencies and high value activity. A procurement specialist with VAT infrastructure can facilitate local country billing which keeps VAT reporting extremely simple for the client company. In addition, procurement partners can perform data analysis to ensure that companies have the right inventory at the right time, which:
(i) Reduces expensive expedites, and
(ii) Controls excess and obsolescence
Procurement departments are often the last functions to obtain funding for improvement and growth, and often face significant staff reduction pressures, which results in procurement professionals having to do more with less resources. A procurement partner can leverage its resources across multiple clients and can be more adaptable in staffing for peaks and valleys in client company business activity.
Working Capital & Inventory Financing
Liberating working capital that would otherwise be tied up in inventory holding is another key benefit of procurement outsourcing. A number of outsourcing options can improve a company's working capital position, including:
- The sale of aged stock/spares while disposition options are being investigated
- Outsourcing the complete procurement function and empowering a procurement partner to finance the inventory
- Outsourcing the whole procurement and logistics function and allowing a partner to finance materials procurement, management, and fulfilment
- Outsourcing the financing of inventory to a variety of locations globally
The above solutions can result in cash flow, liquidity, and working capital ratios being immediately improved, while funds tied up in aged stock are eliminated, delivering a much stronger balance sheet.
Eamon Butler is the procurement manager at Exertis Supply Chain Services, a company that specializes in professional materials supply chain design and operation. The company has operations across Ireland, Poland, the United States, and China.
[Images courtesy of DAVID CASTILLO DOMINICI/FREEDIGITALPHOTOS.NET AND EXERTIS SUPPLY CHAIN SERVICES.]