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It hasn't been all that many years since medical device manufacturers discovered that their parts and repair services for capital equipment could be a valuable commodity to their customers. That realization made it possible for many medtech companies to negotiate more-inclusive contracts with their customers, and turned many companies' cost centers into profit centers.
Since that time, medtech field service and logistics have continued to evolve, offering increasingly sophisticated technologies for field support and even creating a lively market for third-party logistics providers. For this issue's roundtable discussion, MX called upon a panel of experts to provide their views about recent advances and current trends affecting medtech strategies for field service and logistics (see sidebar, 'Roundtable Participants').
MX: A decade or so ago, a lot of device companies would not have thought to consider field service and logistics a competitive business area or a profit center. Have most of them evolved since then?
Michael Aviotti: Cardinal Health employs a number of different models where service is a business or support center. Service is part of the lease for our dispensing products, so it's in essence a cost in that model. But on the infusion products side, it's a business model. We have to keep the sets coming in, and the consumables really are most important to the business.
Service for us is not a cost center or a profit center, I call it a business center.
Ted Nemetz: In all the companies I've worked for, service has always been a profit and loss (P&L) centerin fact, the major P&L center.
Warren M. Gitt: At Hill-Rom, service is both a profit center and a cost center. There's a greater tendency for the repair service to be a profit center, so there's more emphasis on that.
I think one factor in this is increasing consumerism and the emphasis on Internet convenience. People have such high expectations for speed and quality of service, and that's bled over into the medical technology business.
Donna McBride: Because our firm is an outsourcing business, most of the companies we deal with view logistics and service as a P&L center. But for some, it's also a competitive advantage.
How do medical device companies plan the area of field service and logistics? Is it strictly a head count and a guess at revenue and costs, or is there more to it?
Nemetz: Our strategy is based on service being the major P&L center for the corporation. So a lot of our dollars go back into research and development. You know, all of the company's compensation is based on what service brings in.
So, as we grow, our budget is put together in response to the growth of the installed base of imaging equipment that we hope to advance in the years going forward. We're the major annuity stream for Toshiba. Service looks out over a long-term period of four or five years because we have our contracts.
So, the strategic direction of the company has a lot to do with where it wants to take the service organization.
Aviotti: For our infusion business, the device we currently sell we designed so simply that it's really a parts business for us. It's quicker and easier for the customer to fix the instrument than it is to call up, get a return goods authorization, box up the entire unit, and send it back. So, our business is planned around parts and the availability of parts, and even more around user training. We're trying to keep the pumps going long enough, and to keep the customers satisfied, so that they continue running infusion sets through them.
When users go to buy the infusion device, they want to get an idea of what it costs to own it over five years. And on the basis of our experience with other people buying parts, we can tell them what percentage of their capital purchase they'll spend in partsso long as they don't decide to use the device for something like bowling. Some people are very destructive with the devices, but most of the time we can predict pretty accurately how much they'll spend on parts.
Gitt: I think that companies base their service planning on whatever history they have plus forecasts for sales activity--and then try to increase penetration to the installed base of equipment so as to get more service dollars.
I suspect that the more complex the equipment the more unpredictable it becomes, but I honestly don't have a broad enough base of experience in that area to be sure. In some cases, what makes it difficult to forecast from a revenue perspective is the extent to which the service function is actually being sold. Because sometimes it's a tack-on for people in the sales organization who are more interested in selling product than in selling service.
One thing that's happening today that wasn't 5 to 10 years ago is customers going to Web portals to find out what's going on with their service orders, to order parts online, things of that nature. That's an additional cost and an additional planning requirement.
McBride: This varies. Technology is enabling field engineers to be more productive. Engineers outfitted with handheld equipment can instantly scan a device and perhaps place a replenishment order while they're on-site. Our clients often come to us looking for recommendations on how to balance, for example, their inventory-carrying costs against the response-time requirements of their clients.
Intelligent Device Management
How has the technology of remote instrument monitoring, or remote diagnostics, evolved?
Nemetz: Obviously, it's improved immensely. Our service engineers use the Blackberry to code their calls and order parts and notify us of where they are within the service call. And our InnerVision headquarters facility has equipment to control all the remote diagnostics of our products.
Because we're working in a critical-care environment, we try to predict any types of concerns or issues the customer will have before they actually occur. That way, when we get on-site, we have the right parts, the right tools, and the right people to resolve the problem as quickly as possible.
It's basically over phone lines to protect proprietary information, but we can get into almost all the systems at any time, in order to monitor system performance.
Aviotti: I speak again in terms of two groups. With our infusion products, which are wireless devices, we put a server into the hospital network. We have a piece of software on the server that tells if there's any software or hardware problem with the server or the applications on it. Then we can remote in to see what's going on.
So, we can maintain our network applications remotely. There's nothing on the hardware though, because, again, the break being a very simple matter, the customer does all that is necessary to fix it.
On the dispensing side also, we have agents on all the equipment and on the major console. We can look at the hardware and software condition remotely via the Internet before we dispatch any service tech to the customer's location.
In both cases, the hospital allows us access through its firewall. We come in through the Internet and look at our equipment after getting into their system that way. Once we're in, it's pretty much our box and our application and software. The only point of discussion is what, say, virus-control protection they want to put on there, and how we keep that up-to-date, and who does the patching on that as well as the operating systems.
McBride: I think certainly there's a significant move toward sophisticated handhelds for technicians in the field. And definitely a move toward paperless communication. Also, because of the accessibility of more and more instrumentation via the Web or other type of interface through which remote monitoring can be done, technicians are better equipped and better prepared when they get to the point of service, without so much diagnostics being required.
Then there's a move to drive all the data the monitoring equipment acquires automatically into some central processing point, perhaps through the nurse's station or directly into some kind of interface with the enterprise resource planning (ERP) system at the hospital.
With respect to the attempt to be paperless, how does recordkeeping work in an environment with a lot of handheld devices, no laptops, no use of paper? Are people still able to keep track?
Gitt: If you set it up appropriately with bar codes and scanners, and if you can move the data directly from the handheld into the ERP system, then it's not as difficult as one might think.
Of course, we al tend to be pack rats and like to have our paper around because we think we can get to it faster, but I really think that the days of lots and lots of paper are going away.
McBride: I think it probably improves the quality of the information that's stored, because it's been scanned in. You get more information, and it's probably more accurate. It also improves productivity, including that of the field engineers, because the self-diagnosis results in a higher first-time fix rate.
Let's talk a little about electronic medical records. Do customers have particular connectivity issues in that area?
Aviotti: Our dispensing products and the Pyxis products have for a long time had interfaces back to the medical record; so, when you take a drug out of the cabinet, it automatically populates that. It goes back to the pharmacy system, back to the replenishment system. The devices also send a message back to billing. And when a drug is taken out, that goes not only in the clinical record but also in any other record the customer wants us to send it to.
We just recently started sending infusion data back to the pharmacists so they can see what's going on and know when to do their premix drugs. The devices then also populate the electronic medical record with infusion data.
Of course, hospitals are liable for compliance with the privacy requirements of the Health Insurance Portability and Accountability Act (HIPAA). But as these systems are populating their data records, sensitive data are being transmitted. What kinds of protections are built into the systems to make sure that personal identifiers don't get out?
Aviotti: Obviously, it's part of everyone's quality training, so they're aware of HIPAA data. I don't know about the dispensing data, but with respect to the infusion data, we have processes to destroy the hard drive after we get that data. We would download that for the customer, and then built-in functions would destroy the hard drive of any laptop we've used to gather the dataor reconfigure it so the data are totally wiped out.
Gitt: I think that's right. I'd like to interject a couple of comments here as a person who's been responsible for third-party repairs and worked on a host of different types of infusion devices and ventilators.
We are trainedand we have internal processesto eliminate any patient data still resident on a device when it comes to us. There's a requirement in most hospitals that they shouldn't let go of a device unless it's had any identifiable patient data on it removed. Nonetheless, from time to time devices slip through. So, what we do with the hospitals with whom we have a repair relationship is, we sign a document, which is an extension of the chain of trust as it relates to their HIPAA requirements, saying that we conform to their requirement to remove all patient-identifiable data.
Now, to clarify things: the data that are resident on many of the devices may be patient specific, but generally speaking it's encrypted such that you'd have to know the patient's identifying number before you could connect the data on the device with a particular patient. Within the walls of the hospital, as these intelligent devices communicate amongst themselves and with the ERP system of the hospital and the electronic medical record, I think they're encrypted in some fashion as well.
Aviotti: Yes, wireless systems started with the Web, and have led to wireless protected accessWPA and now WPA2. So there are a number of different ways that hospitals can encrypt data through their wireless capability.
Gitt: I would further note that manufacturers who are ISO 13485 certified, as a part of the certification process, have identified and discussed how they protect patient-specific data and how they comply with the HIPAA regulations.
Aviotti: That's part of virtually every contract we have in the infusion business: we have an agreement with the customer on HIPAA. It's fairly standard now with any kind of sale of capital equipment that the parties have a HIPAA agreement in place, or a business partner relationship agreement.
McBride: We see that also with other industries we serve, that use handheld devices that hold customer-sensitive datanot necessarily HIPAA related but customer specific data. The services that some of these clients request are end-of-life services, where we do data cleansing before some of these products go to liquidation or through other end-of-life channels. In some cases, it is the actual data cleansing. In others it may be secondary processing. Something was already done on-site, and we're doing a second check just to make sure that everything was cleared.
Is this all going to become much more complex when there are even more devices that are truly interoperablewhere the data from one device is being used to drive another?
Aviotti: We have Care Fusion, a handheld that can interact with the Pyxis and pull drug data from it, and then actually program the pump off of that. So we are getting to where our different productsin series at leastare able to talk to each other. At other companies, the handhelds are reaching out, and other infusion devices are reaching over to the Pyxis side.
Yes, the complexity will grow as different pieces of equipment from different manufacturers start to interact with each other with data.
Gitt: I think all you have to do is to look at the evolution of the hospital software industry, and the ERP evolution within that, to see that it gets more difficult before it gets easier.
Inasmuch as there's a struggle over standards, that always occurs first, before the light goes on and people finally decide either to agree upon some form of middleware or to accept some sort of coding standard.
I think we've seen that happen now. Some of it, on the electronic medical record, was government driven, and that's helped to drive more teamwork amongst the developers of different kinds of softwarehospital software, physician software, et cetera.
AAMI, the engineering-standard professional organization, has done a lot to try to bring these kinds of things together. They have active working groups, and they actually have a separate area where they're combining IT and biomedical and design engineering functions to an extent that perhaps will help. Along with AAMI, HIMSS (the Healthcare Information and Management Systems Society) is, I think, going to be a thought leader with respect to this. And also whatever, 800-pound gorillas in the manufacturing sector stand to derive the greatest benefit from getting things standardized.
But still, I think it's going to get tougher before it gets easier.
Customer Relationship Management
Should companies be paying more attention to customer relationship management (CRM), and should they be using CRM systems?
Gitt: Eyes are the windows of the soul, they say. Well, I think that the service department is one of the greatest windows into what's actually happening with customers.
Happy customers don't necessarily let you know they're happy, but when they're upset, customers are quick to call. They want folks to know immediately that they have a problem. It could be a logistics issue, a pricing issue, or even a service issue.
Having the right kind of system in place to gather complaint information just makes sense: the more a company uses a system that helps it gather information about problems immediately and intelligently, so that it can be properly responsive, the greater the probability it is going to have happy customers.
The companies I've worked for in the service environment do use a CRM system. It figures in a great amount of the time that the internal IT department interfaces with the service area, and there can be subcomponents within the call centers or the customer service department where some off-the-shelf type of CRM system is being used.
Nemetz: The number one objective of our organization is customer satisfaction. Toshiba holds many of the leading ratings in medical imaging. But one of the things we on the service side say is that sales sells the first product and service sells the rest.
There's even more to it than that. Not taking away from our sales organization, but when you're dealing with very high-end equipment that typically costs $1 million or $2 million for one item, it's a lot easier for sales to be effective if that product is as reliable as can be, especially in the critical-care area.
I believe the reason we've been very successful in terms of customer satisfaction is not all the technology but our organizational structure. With the right organizational structure in place from top to bottom, the service engineer has support from a specialist, from an area manager, from backup support, and from a customer support manager.
The technology today is helping us communicate much better through all levels of the organization, so we can respond as quickly as possible to customer needs. We have to be very agile in communicating to the management team and to the field, because we guarantee the OEMs 98, 99% uptime on their high-end Toshiba systems.
Aviotti: I agree about structure playing a role. We invest a lot into soft skills training, emotional intelligence, change management, and managing difficult customers. Any time we hold a training session for people that interact with the customer base, it's a combination of equal parts technical training and training in the soft skills.
McBride: With us, in many cases the customer interface is still handled by our client. The role we as an outsourcing firm would play is to provide the client's call center with real-time information to allow it to have conversations with customers based on up-to-the-minute data.
In a scenario where we're the entity that the customer is speaking to directly, we take the calls and record the information in our corrective and preventive action databases. But in most cases we're not in that position.
Manufacturers have to decide whether to maintain in-house staff for service and logistics or outsource all or part of it. Is there an advantage to one strategy over the other?
Gitt: I think it's a question of an organization deciding whether it has a core competency to provide service. The first step is serious introspection as to whether it has the capability and the desire and the willingness to do it. A lot depends on whether it's a small organization that's just evolving into a significant market share or a large organization that can foot the bill to do this stuff right itself.
As was suggested, there are a lot of soft skills, as well as other investments, involved in doing this thing appropriately. From my experience as a manager of a third-party service organization, I see a tendency to start small, to parcel out some segment of the service function and then see how well it goes. It can evolve into something as great as a total turnkey thing, where an organization doesn't even have a service department. It has outsourced the entire function.
What we've seen happening over the past five years or so is a big increase in the outsourcing of things that are surprising. It used to be subcomponents perhaps. Now it's total manufacturing. In some cases, it's design. You begin to wonder, what is a medical device manufacturer now?
I think service is one of the areas that is starting to peel away from being something that is closely held internally. But an outsource service organization has to have a track record. It has to be a trustworthy partner and be able to prove that it can provide almost instantaneous access to information. It has to have regular conversations with the partnering company, because there are quality issues, regulatory issues, customer satisfaction issues, and it's very complex.
Outsourcing is becoming much more common, but companies don't go into that lightly.
Larger companies might decide to have an in-house service and logistics group. Can emerging companies match them in this area?
Aviotti: We have the critical mass because of all the equipment out there. And we know what our costs are. We looked into outsourcing service, but because of our size, we can do it more competitively than we could ever outsource it for.
Smaller companies may have to outsource because they don't have the critical mass to get the kind of coverage and service they want to provide, and it'll be a little more expensive than having their own in-house group.
Nemetz: I know there are a lot of good third-party companies out there, but when you get into the high-technology areas like computed tomography and magnetic resonance imaging where the advances come every couple of years, customers like the fact that the OEM has the background, the engineering, and everything else that may be needed to take care of that product, and therefore meet the customers' requirements.
All the companies I have worked for in that capacity have been large enough that it was much more efficient for them to manage service and logistics themselves. The service organization was a P&L center for all those companies, and they were because they knew they could provide satisfaction to the customer and still make a profit.
Companies in some medical device sectors seem to have a parts depot every five miles to ensure timely delivery. How do differences among various sectors affect logistics and the postmarket supply chain?
McBride: It is driven somewhat by the size of the company, type of inventory, its ability to support forward positioning of inventory, whether it has a field engineer network that is in-house, and its delivery commitments to clientsit really depends. Things are changing, and the economy is driving this, as some companies are drawing back on size because they have fewer resources. They still have client base to preserve, so they tend to focus on core competencies and outsource other pieces.
Gitt: Whether it's a depot, trunk stock, or forward-positioned, inventory is largely based on three or four parameters. One is the criticality of the equipmentwhat it means to the end-user ultimately for it to be down. If you've got millions of dollars invested in something that is a big revenue producer and it costs a lot of money to have a backup, then that certainly drives having inventory placed at a forward location, so there can be almost immediate repair.
The second thing is the cost of the parts. If the parts aren't very expensive, then you can afford to have a few more of them as backups, or even backup equipment.
Third is the size of the equipment in question. In some cases, relatively small equipment can be shipped around fairly readily. The pieces are not ultraexpensive, and it's affordable to send them back to the depot for processing.
Nemetz: I agree. It depends on the products. All of ours are basically critical-care products, very expensive. So we have a lot of forward stock locations that we try to monitor closely, so that we don't have excess inventory.
We keep good records on what parts fail on specific units and try to have them up front as quickly as possible. Of course, 90% of our equipment is under a contract, and we have to provide 98% uptime or else pay penalties. Because we have to get that part to the customer quickly, we have a lot of forward stocking locations.
Aviotti: With us, our infusion customers typically just buy parts and do their own repairs. They keep their own inventory because we have a very high fill rate. And because infusion's a critical area, they typically have more devices on hand than they use at one time.
On the dispensing side, some parts are actually kept at the customer location. There's trunk stock and there's forward stock.
So, we utilize all three methods to keep parts available.
What Comes Next
Where are things going in terms of companies responding to ongoing competition, the economic climate, and changing customer demands?
Nemetz: The economic climate today is really driving our business. We sell very high-end products. Customers want, obviously, the best technology we can give them to drive the image quality and optimize image-based diagnosis, but they're also very concerned about the cost.
What we're trying to do is produce the most technologically advanced diagnostic imaging product we can. To hold down the cost of service support, we're just going to have to be as efficient as possible.
Aviotti: With all the CRM data we collect, all the input from customers, we continue to improve the product. Really, the way we're going to reduce cost is to continue to build quality into the products so there are fewer failures and less servicing.
Especially with next-generation technology, we're asking how we can produce a device that has to be serviced less or is easier and quicker to service. We build that into our product development cycle now; at one phase, we put in requirements about installation and support. Those requirements have to be met before the product can move forward. We're building in the quality up front so that there's less servicing down the road.
McBride: The things we can bring to the table, I think, are innovative ideas on how to potentially make the field engineers more productive by doing spare sharing and device-specific kitting, so that they're sure they have the right part every time they go out on a service call.
Gitt: I'm a little bit more pessimistic about the next year or two. I think the current economic climate is going to cause end-users, the hospitals and other buyers of the equipment, to take a hard look at whether they could extend the life of the product they have in use. If that's the case, then it places an additional burden on the service provider in that they're going to have to keep dealing with some products that they otherwise might not have had to continue to service.
But I agree that the general goal is to develop equipment that requires as little servicing as possible. Downstream, that is what's going to happen. Ultimately, it will all boil down to customer satisfaction issueskeeping the customers as happy as possiblebut I think it's going to be tough for a while for some service organizations to keep everyone happy.