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Improving Logistics and Inventory Control

Medical device firms may benefit from using logistics vendors. Here are some tips on selecting the right third-party provider.

LOGISTICS

Moving and shipping medical devices, such as this infant incubator, requires skills and equipment that are often beyond a manufacturer's capabilities. A third-party logistics provider may have the necessary expertise.
It is common for medical device manufacturers to outsource the transportation and delivery of their devices to customers. This means that shippers tender their goods to carriers (i.e., truck lines) to perform the transportation of goods from origin to destination. The shipper selects the carrier it wants to use, but the carrier is responsible for routing, equipment, and scheduling.

The use of third-party logistics is not new, but service providers can now offer much more than truck lines getting the product from point A to point B. Services specific to the needs of medical device OEMs can include warehousing and inventory control, transportation, delivery, assembly, installation, and repair of equipment in the field.

The internal strengths of a medical device manufacturer are often rooted in product development and manufacturing, rather than in shipping or warehousing. Therefore, third-party providers can give OEMs the means to access existing equipment and material-handling services. They can also provide established inventory control, systems applications, and on-hand trained personnel.

If a medical device manufacturer elects to employ outsourcing services, the manufacturer is responsible for approving the third-party provider as a vendor. To become an approved vendor the provider must have an established quality program in place. The vendor is subject to compliance and is liable for quality facets required by the manufacturer.

These compliance factors, which are established by ISO guidelines and FDA regulations, are generally defined and audited by the manufacturer's internal regulatory department. Compliance factors include, but are not limited to, device history tracking (i.e., documentation and database control of inventory transactions related to receipts), cycle counts, picking, and distribution and transportation. Additional factors include delivery of devices by date, quantity, serial or lot number, consignee or facility name, and signature acceptance. For repair services, the date, time, and nature of the repair must also be recorded and included as part of the device tracking history. When customers demand improved services in these areas, device manufacturers find that they must also become experts in logistics.

It is important to evaluate whether a manufacturer can handle these functions in-house. A manufacturer's ability to track, ship, and service equipment efficiently can often be a competitive advantage. Such functions, however, require time, resources, facilities, and capital investment. This article provides an overview of the types of logistics services that manufacturers may prefer to outsource.

Warehousing Site Selection

An advantage of employing a logistics provider is its knowledge and experience in selecting warehousing sites. However, when logistics providers select a warehousing site, the process should remain driven by the device manufacturer. This means that when considering an option, it should be customized to fit the client's needs. The options should be built around the client rather than trying to fit the OEM into existing processes.

Criteria regarding warehousing are determined by the needs and objectives of the manufacturer. Factors that need to be considered when selecting a facility are numerous and should be defined prior to initial search.

One significant factor is facility size. The site's square footage must be sufficient to accommodate peak inventory levels. In addition, the level of security at the site should be high. Monitoring systems are a must, as are alarm systems. Fire protection and sprinkler systems should be rated in compliance with current insurance requirements. Older facilities that do not have upgraded sprinkler systems may not be rated to protect devices packaged in corrugated, wooden, or plastic cases.

Dock accessibility is another factor that must be taken into account. The facility must have a sufficient number of doors, including levelers and secured access, to accommodate the expected traffic volume and required equipment (trailers, bobtails, containers, parcel ramps, etc.). Another important consideration is the storage tools and handling equipment that are on-site to accommodate unloading, stocking, picking, and packaging (if necessary) of the medical devices. Determining whether the devices are stackable may also play into the storage techniques and processes. Some devices may be fast sellers and it makes sense to keep the floor loaded and organized for efficient product flow.

Whether the facility is in a free-trade zone (an area of a country that has limited taxes or tariffs to attract business and investments) might become a factor if medical devices are imported from other countries. If a facility is in a designated free-trade zone, the device shipper may benefit by avoiding import or customs tariffs if devices are released within designated time frames.

Device manufacturers may require environmental conditions that accommodate a certain temperature or humidity range. The facility must have heating and air-conditioning units to regulate both temperature and humidity. Systems applications should monitor and record these readings within the facility at all times. Protocols for measuring and monitoring must be defined by the device manufacturer, and compliance measured by output of the monitoring devices.

Most sites offer exclusive-use vehicles or dedicated trucks and drivers to perform delivery functions. During the process of site selection, make sure that all vehicles are well maintained. It's also critical to ensure that they have pallet jacks and proper equipment to transport materials, and are compliant with federal regulations. Drivers also must meet certification or training standards. Such detailed checks are routine for third-party logistics providers, which is helpful to manufacturers because many do not have the time to ensure these factors are in place.

Many logistics providers have an existing database of warehouse partners to help narrow the selection of suitable warehousing sites. If no match can be found, the logistics company can find a new warehousing site.

If it is determined that the manufacturer's needs are best suited by a warehousing site not previously used by the logistics provider, the manufacturer can conduct initial interviews over the phone. If the site appears to be a match, a member of the project team within the third-party logistics provider should visit the site. Selecting the site is based not only on fulfilling the requirements of the OEM, but also on specific criteria already established by the third-party logistics provider. It is the logistics firm's reputation and overall obligations to the manufacturer that are at stake. Criteria may include visibility, location, safety measures, professional environment, and whether the device manufacturer's sales representatives are comfortable with the site. A clean, organized, and professional environment with a pleasing look suggests to the sales representatives that their product is well cared for and provides for the possibility of potential customer visitations or demonstrations on-site.

The final approval of a new site is granted by both the third-party logistics provider and the manufacturing company after ensuring that it meets all checklist standards. The manufacturer saves time by relying on the logistics provider to find the most appropriate site, but it should still have final approval rights.

Inventory Control

Inventory control is the practice of minimizing the total inventory costs, which is a key concern for medical device manufacturing. It plays a role in quality systems management for meeting regulatory requirements. The basic factors in inventory control and processes include the following:

  • The carrying cost of the material (with the current interest rate considered).
  • The cost of placing an order, including the setup cost of production.
  • The cost of shortage (the economic loss if the stock is insufficient to meet the demands).

The last factor is the most difficult to measure and is often handled by establishing a service-level agreement, meaning that an established percentage of demand will be met from stock without delay or shortages. Established inventory control practices and applications support improved control. Inventory control is a required expertise of a logistics company.

Inventory ABCs. Many manufacturers and third-party logistics providers operate under an ABC classification system. The ABC system is a method of grouping items according to annual sales volume, cost of product, or lead time for production to identify the small number of items that will account for most of the sales volume. These products are the most important for achieving effective inventory management. For example, the medical device unit or system is usually considered an A item. The unit itself is usually defined as high value based on assembly and as dictated by the sales price. Loss or damage of a device results in a significant dollar write-off or potential loss of sale. Accessory items (such as monitors, printers, or other add-on assemblies) that are not as critical and can be easily sourced or interchanged because they carry a lower dollar exposure are considered B-type items. Consumables such as paper, gel, and other disposable-type items carry a lower exposure from a dollar and replacement value and are usually considered C items. Long-lead-time items, although they carry a lower dollar value, are often considered an A or B item because back orders can affect sales.

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Product dimensions and weight need to be factored in for proper handling and storage. OEMs should also consider whether the material or product should be tracked by identification and description, by a serial number or lot control tracking bar code, or by a radio-frequency device. Automated tracking applications can improve accuracy by validating storage locations, item identification (by serial, lot, or radio frequency), cycle counting and picking, and order consolidation before shipping. By scanning locations and item labels controlled by scanning devices at each process, immediate verification is recorded and tracked by the system application. The system application stores these transactions in a database and is immediately accessible for cases in which potential regulatory recall may be required or inventory adjustments for investigation and validation are employed.

Regarding the inventory itself, any specific storage requirements such as temperature, climate control, and security must be addressed along with the quantity and packaging integrity of the product. The third-party logistics provider can then address any issues with facility requirements, such as the square footage required for storage and any special requirements for racking or storage equipment. In terms of setting up inventory control, the logistics provider must be told the historical activity by product and any forecast information related to shipment activity for the product.

Safety Stock. A logistics provider should be able to control the product. Its job is not only to make sure that the space is adequate and to validate transactions on receipts and distribution, but it also must prepare for unexpected events by emphasizing the importance of safety or buffer stock. Safety stock includes inventory remaining after an order is placed and before new stock is received. If there is insufficient product inventory, shortages can occur. Safety stock is a hedge to take care of unexpected events. Safety stock must be tracked and accounted for in terms of ensuring that the warehouse has enough space. System applications that control defined-lot product are managed by entering the expiration date into the system at time of receipt. The parameters that automatically place a product lot on hold or in quarantine are defined within the application by product. The system will not allow allocation and disbursement of an expired product by the application unless it is overridden by a product specialist with proper security access. Typically, expired product is placed in quarantine 30, 60, or 90 days before the actual expiration date.

Inventory Tracking. Once the warehousing site has been selected and inventory is moved in, it is time to deliver the product lots to the correct locations. Inventory tracking takes into account any delivery notification requirements expected from the OEM. It also determines whether any specific communications (such as proof of delivery) with the shipper or manufacturer are needed. A logistics company should be notified when signature by the consignee and proof of delivery are recorded. These should be made available to the device manufacturer for immediate revenue credit. Proof of delivery can come via automated e-mail notification, a Web site report, fax copy, or even phone verification, as the manufacturer prefers.

Application databases hold all transaction history and must be accessible and available upon request by the OEM. The logistics provider should have information available instantly online or within minutes to e-mail or download it via file transfer protocol. Keep in mind that downloads may only be available during normal business hours. Online information does not have such time restrictions but the shipper should require security codes to access data.

The inventory control application should be able to manage national holds on specific lot numbers as needed. Time is a significant variable when managing a national hold or a recall. The sooner information is available, the sooner a device manufacturer can invoice, react to inventory demand, and react to potential recalls. Quick delivery of such information means that the OEM can minimize its recall or hold costs.

Transportation and Delivery

It is up to the third-party logistics provider to determine the transportation requirements of the manufacturer for safe and effective delivery of the product. To determine these requirements, the provider may analyze the breakdown of historical information and the number of shipments required for same-day, second-day, and three-to-five-day processing and delivery.

Delivery requirements vary based on each specific commodity. Logistics providers should ask the manufacturer to help define those delivery requirements for its products. There are certain commodities that require inside delivery to a specific area for unpacking, general setup, and some assembly with debris removal, while other commodities may just require a dock signoff delivery. Whatever the needs might be, logistics providers should match their service requirements to accommodate the prescribed transportation mode and commodity delivery requirements.

For example, a medical device that weighs more than 1000 lb may need to be delivered to a specific room or floor within a facility. Such an instrument would require at least a four-person delivery crew to properly off-load the device and manipulate it through a receiving dock or parking lot (consider offices or labs in a plaza or small clinic). The delivery crew must protect the facility's floors and interior from damage caused by a heavy device or the material-handling equipment required to move the device through the facility. Such equipment might include a crawler for stairs if a freight elevator is not available, or a forklift or pallet jacks to move the device through halls. The delivery crew also needs to bring the necessary tools to uncrate or unpack the device and to place the device in a specific location or lift it onto a table or other item.

Medical devices must be tracked using device history folders. The serial number with consignee signature should be documented and given to the manufacturer to include with the device history package.

Reverse Logistics

Picking up should be as simple for the logistics provider as dropping off. A comprehensive reverse logistics program offered by third-party logistics providers typically includes some or all of a set of several tasks. These tasks include repacking in appropriate crates that offer maximum protection for the product, equipment removal from the end-user site, equipment pickup, and disposal or destruction of items that are no longer of value (these are often destroyed in the field to avoid return transportation costs). Proof of destruction in the field must be recorded on approved documents and provided to the manufacturer for inclusion in the device history record.

Returns should also be recorded through the system application, as should the address, signature of the returning facility, and the return location and signature.

Upon completion of delivery, third-party logistics providers can bring the packing materials back to the warehouse and save them until needed at no charge. Instructions on how to properly pack each specific instrument would be included in the pickup alert. Instructions for unpacking are usually only defined for devices.

All of these tasks can be tedious and time consuming; the manufacturer may want to hire a logistics provider to take responsibility for them. However, choosing an outsourcer requires a manufacturer to define its needs up front.

Selecting a Provider

Choosing a logistics provider is a multistep process. The manufacturer sends formal requests for information and requests for quotes. These documents provide the basic required information. The logistics provider does not necessarily have a script or formula to extract, but instead uses the data provided by an OEM to form a logistics plan.

The request for information (RFI) is usually submitted as a formal document (either on paper or via e-mail) to several potential logistics providers that offer services that seem to fit the basic requirements. On the RFI, the OEM lists its broad-based requirements with enough information to give the provider an idea of the general scope. The manufacturer should request references and contact information from other companies using the logistic provider's services. The RFI should also ask the logistics provider to define its existing processes in detail and to provide flowcharts detailing those processes.

The third-party logistics provider should describe options for problem-solving and proposed methods, along with quality programs and systems currently employed. General pricing to accommodate the services and detailed information regarding the firm's organizational structure and support groups should also be provided.

Once a short list of the candidates is selected, the manufacturer submits a formal request for quote (RFQ) to each. The RFQ is typically more detailed and describes actual volumes and product composition. Further detailed requirements are defined as a result of input from the RFI answers. Often a manufacturer requests that a formal presentation be made by each of the bidding companies to the selection committee.

After the formal answers to the RFQ are submitted and presentations are complete, the company can evaluate the options and make its selection based on any predetermined factors (e.g., cost is more critical than the actual geographical location, or quality is more important than cycle time for receipt or storage).

Once the third-party logistics provider is selected, contract negotiations begin. The OEM and the logistics provider must agree on and document terms for length of contract, terms for payment, and terms for legal liabilities. There are usually service-level agreements attached to the contract, (e.g., third-party logistics providers will maintain 99% inventory accuracy, 98.5% orders shipped complete,

99.4% damage-free, receipt and storage within 24 hours; and orders processed within two hours). Once the timeline for implementation is defined and the contract is signed, the relationship between the client and the provider begins.

Assessing Outsourcing Services

When considering whether to employ a third-party logistics provider, it is important to factor in the expenses and costs associated with them. Determine whether the costs of such services are a worthwhile investment.

Using a third-party logistics company requires an investment that is similar to keeping logistics in-house. And at times, costs related to labor and facilities are more than a manufacturer anticipates. But these costs are necessary expenses of doing business, whether in-house or with a third-party provider.

Third-party logistics providers have some advantages over in-house processes simply because the provider may have more experience. Their processes, facilities, system applications, personnel, and equipment are already in place. Most third-party logistics providers enter into term contracts with their customers that can range from as little as 12 months to five years. Moreover, the burdens of facilities investments and depreciation of assets currently exist with logistics providers.

Third-party logistics providers are staffed with personnel that have been professionally trained and educated in business logistics. They can often develop unique customer reports and notifications that can be formatted to electronically notify customer and personnel applications securely.

Such reports provide specific information that includes shipment origin information, consignee information, shipment date, shipping status, serial and lot information if present, quantity, receipt date, consignee signature, and any related comments or exceptions related to the delivery. Other reports include inventory balance on hand, cycle count reports, inventory transaction activity reports broken down by receipts, and inventory adjustments. These reports can be provided by specific part number, range of part numbers, or the entire inventory. Additional reports also include shipment activity, labor resource activity, and product use reports.

If needed, there are logistics providers that operate an OEM's own software applications.

Some have also developed transportation routes that allow for same-day, next-day, or expedited ground services to meet customer needs. These can minimize costs by taking advantage of shipment volume that they offer over their entire customer base. Route management provides methodology to consolidate shipments destined for a specific metropolitan or regional geographic area. By consolidating shipments, the cost for shipping is spread across all of the shipments, thus reducing the overall cost of an individual shipment. For example, instead of sending an individual shipment via an expedited parcel carrier, shipments can be consolidated to travel via LTL (less than truckload) at a reduced cost and arrive within the same transit parameters. In addition, route management can report on shipment trends so that a manufacturer can effectively trend transportation cost and schedule and predict order releases.

Third-party logistics providers can present personnel assistance to deliver equipment inside the end-user's facility. They can unpack the equipment, assemble, and even perform a start-up of the equipment, or they can simply meet a field service engineer on-site at a predetermined time to assist with these processes. They can also create space for field service personnel to perform system maintenance and upgrades to avoid the costly expense of shipping a unit or several units back to a repair facility. Additionally, they can set up strategic stocking centers that allow a manufacturer to warehouse units or critical parts close to the customer to avoid costly downtime and additional transportation costs for shipping the product overnight.

Manufacturers should evaluate their internal strengths and determine whether they can perform these tasks without enlisting outsourcing vendors. Once the manufacturer decides to outsource, it should work with the logistics provider to define continuous improvement objectives to ensure that benefits can be recognized and cost savings are shared. Such improvements can easily be achieved by evaluating the history of shipping products.

For example, examine the number of expedited shipments versus products sent via normal transportation mode. Evaluate the reason expedites were required and then make a plan to reduce the need by building more inventory, implementing order placement cutoffs, and improving warehousing organization.

Conclusion

As technology continues to evolve, it is only natural that the demands of customers increase. Device manufacturers have specific needs, and their selected logistics provider must be sensitive to those needs.

Manufacturers must also be aware of the changing demands of their customers. Some items are becoming more compact, and larger loads are expected to be moved. Not only are customers demanding expedited arrivals, but they want it done more efficiently and effectively, with proof of performance or function. Third-party logistics providers can help navigate these changes so that manufacturers remain effective. Today, in-house fleets of trucks and drivers are often impractical due to the changing sizes of goods and the amounts that need to be sent. A third-party logistics provider can adjust to these changes without the OEM's assets depreciating or the company having to absorb costs. Third-party logistics providers simply adjust to the changing product needs.

Third-party logistics providers can offer services that are difficult and time-consuming for manufacturers to perform in-house. Examine the areas of strength, such as warehousing, inventory control, transportation, delivery, and reverse and repair logistics, that are offered through outsourcing to help make a selection. Employing third-party logistics enables an OEM to focus on its areas of expertise.

Len Batcha is president of Technical Transportation Inc. (Southlake , TX). He can be contacted at len@techtrans.com.

Copyright ©2007 Medical Device & Diagnostic Industry
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