GUIDE TO OUTSOURCING: supply chain

The coming years are pivotal ones for the medical device industry, which will adjust in response to external forces, including a weakened economy, new forms of competition, mounting regulatory pressures, and evolving customer demands. Medical device manufacturers must capture new market opportunities while keeping supply-chain costs down. Supply-chain costs must be managed carefully and from the outset when exploring a new market or product, an acquisition, or even a facility expansion.
 

As device manufacturers move forward, examining all parts of the supply chain will be especially important. Supply chains must be flexible enough to respond to market changes and efficient enough to be cost effective. In short, healthy supply chains will be those that can bend without breaking and those that can stretch without losing their elasticity. Most critically, companies that have the right supply-chain processes can deliver profitability to the bottom line.

Combating Rising Costs
 

Supply-chain planning requires an analysis of current costs and a strategy for how to best manage those costs going forward. The process begins with what can be described as a white board session, in which all of the flows of the supply chain are mapped—the goods, the information about those goods, and the flow of funds. Next, it's important to look at the costs associated with each link in the chain. A knowledgeable third-party logistics provider (3PL) can help develop scenarios based on experience that will reduce touch points, decrease time in transit, and improve cash flow. Touch points refer to handoffs in the supply chain such as when a product changes hands from one journey of the manufacturing process to the next.

Managing supply-chain costs should be a top priority in the current economic environment. Cost containment will become more critical as device companies expand their supply chains to explore new sourcing strategies and distribution channels for getting products to market efficiently and cost-effectively. In a 2008 UPS survey called “Pain in the (Supply) Chain,” managing and containing supply-chain costs ranked as a primary concern.¹ One important note was that 60% of supply-chain leaders at medical device, pharmaceutical, and biotech companies reported that they were “very concerned” or “extremely concerned” about the potential impact of supply-chain costs on their business (see Figure 1). Only 25% selected “managing costs” as the issue they had been most successful at addressing.

Given the current credit crunch, it is no surprise that capital cost pressures in particular are among the first to take a hit when it comes to setting operational budgets. This reality is driving more companies to look at outsourcing areas such as manufacturing, research, warehousing, and distribution as a way to manage costs and enable them to focus on their core business. A correlated UPS online survey targeted healthcare manufacturers within the medical device (heavily represented), pharmaceutical, and biotech industries with revenues of $1 billion and higher. In that study, nearly half (46%) of these companies planned to increase the amount they outsource in the next one to two years (see Figure 2). The same percentage planned to work with 3PLs “in the near future.”

One key area that medical device manufacturers often look at for outsourcing and cost containment in general is distribution. More companies are considering regional sourcing and regional distribution strategies, such as sourcing from China and India to serve customers in Europe, and sourcing from Mexico to serve customers in the United States.

Such a strategy enables companies to take advantage of third-party shared distribution facilities in these regions. Shared facilities eliminate the need for companies to invest in building such assets on their own, especially when they may not need the space year-round or at full capacity. Shared distribution facilities, known as multiclient facilities, are set up so that the warehousing costs are shared by all companies whose products are housed in that facility.

Many medical device manufacturers, for example, have excess capacity in their distribution facilities. On the other end of the spectrum, some device companies find their facilities constraining due to fluctuating demand. Companies in these situations can reduce costs significantly by moving products out of these facilities and outsourcing their warehousing and distribution to a 3PL. The extent of the cost reduction would vary on a case-by-case basis.

A good 3PL will have in-house compliance experts who understand the particular needs of warehousing and distribution of the medical device industry. Understanding these compliance issues can remove much of the burden of staying current on the latest regulatory requirements from the manufacturer. This could be any regulation that companies are required to comply with to get products to market including those related to packaging, labeling, and storing of medical devices.

In some cases, 3PLs provide technology platforms that track products and information tied to those products across the supply chain, thereby increasing visibility and allowing companies to make alternate decisions if products are delayed. These platforms can leverage existing transportation networks to get products to market in the most efficient and cost-effective manner. A shared environment provides adequate staffing to address peak periods and improved business continuity plans. This involves having a trained staff available to help keep the business running during events that could otherwise disrupt business operations.

Managing supply-chain costs requires taking a broad view of the supply chain and then controlling the factors that can be controlled. Taking a broad view means ensuring that reducing costs in one area won't simply result in added costs in another area further down the supply chain. For example, a company may have multiple U.S. distribution centers serving its customers. On one hand, by reducing the number of warehouses, it can reduce labor, facility costs, and inventory. However, without a proper modeling exercise, increased transportation costs may offset the savings and service levels, resulting in the company not meeting its customers' needs. It is important to analyze supply-chain spending so that companies have a realistic view of where costs are coming from. One suggestion would be to select a 3PL that has the knowledge to examine a company's supply chain and develop a specific strategy that meets the company's needs.

Executives considering outsourcing need to ask themselves a few important questions:

Is your company prepared culturally to make a transformational decision in case an evaluation supports a decision to outsource a function currently being handled in-house?

Is there a senior-level executive who could champion the evaluation?

Have you identified a 3PL that offers a portfolio of services specific to your needs and a process to evaluate your supply chain?

Cost management is not just about identifying ways to save costs. It is equally important not to incur costs fixing what should have been done right in the first place. Among the companies surveyed with more than $1 billion in revenues, 74% of respondents estimated that costs related to product expirations, returns, and recalls ranged from hundreds of thousands to millions of dollars every year. In the case of recalls, for example, cost management would involve equipping supply chains to better handle recalls more efficiently.

The good news is that there are many ways to control costs in the supply chain. In addition to reexamining distribution strategies, companies can take a more strategic approach to areas like inventory management and transportation to remove costs across the supply chain. Better planning for inventory and exploring options for multimodal transportation, for example, can help manufacturers get products where they need to be at the right time and in the most cost-effective manner.

Changes Ahead

Predicting the future is difficult in any industry, but one thing is certain in the medical device industry—change is coming. Medical device companies will see a greater focus and need to manage costs in the years ahead. One trend driving the need for business and supply-chain changes is the evolution of the distribution channels, especially those in which device companies are exploring new go-to-market strategies. Market changes, including the rise of home-based healthcare, for example, are demanding that companies reexamine their old distribution models. Medical device manufacturers are considering new options that include going direct to wholesalers or, as is the case for many companies, direct to consumers.

In fact, 90% of survey respondents reported that they expect to make changes to their distribution models in the next one to two years (see Figure 3). More specifically, 61% plan to implement a direct-to-consumer channel strategy and 55% plan a direct-to-wholesaler strategy. Interestingly, 37% of manufacturers surveyed expected to expand to both direct-to-consumer and direct-to-wholesaler channels. Among the surveyed companies with revenues of $1 billion and higher, 46% reported plans to change their distribution channel or go-to-market strategy.

Although making business changes like these can seem daunting at first, manufacturers that plan ahead from a supply-chain perspective can reap the benefits of new market and revenue opportunities. Keeping an eye on the future while taking care of the present is key to future growth. Planning strategies include researching geographies where manufacturing could take place in the future, evaluating new marketing strategies such as going direct to consumer and considering international expansion. Strategies also include investigating new product introductions or new technologies.

Conclusion

It's good news for the industry that medical device manufacturers are planning to continue investing in areas that can bring them greater business flexibility, better customer service, and ultimately, higher profitability. This is how companies will get ahead of the competition and deliver more value to their customers, no matter what distribution channels they choose. It's also how the industry as a whole will continue to grow and thrive.

Bill Hook is vice president of global strategy, healthcare logistics at UPS (Alpharetta, GA).

References

1.“UPS Pain in the Healthcare (Supply) Chain Survey,” United Parcel Service of America Inc., 2008; available from Internet: http://pressroom.ups.com/pix/UPS_Pain_in_the_Chain_Survey_Summary.pdf

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