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Supply chain fixes help medtech manage global headwinds
Feb 17, 2023
In the face of global headwinds, medtech companies should start to implement a broad array of measures across the value chain to help manage pressures on multiple fronts.
Global inflation is not expected to stabilize at 4.1% until 2024.1 Global macro inflationary trends have put significant pressure on the profitability of medtech companies, constraining investment capacity and contributing to declines in market valuations over the last year. Furthermore, geopolitical instability has led to surging fuel and energy prices, affecting key medtech supply industries like plastics, resins and base and precious metals. Shortages of semiconductor components have resulted in massive delays in sourcing and have constrained growth.
Because many medtech companies currently lack the ability to rapidly respond to sudden shocks to their supply chains, they’re often enduring higher operating costs. These supply disruptions may continue through at least 2023, so it’s critical to strengthen the resiliency and agility of the entire supply chain.
How should your company respond? Let’s look at five areas of the business and take action to help improve efficiencies and get in better shape to handle future demands.
- Supply chain visibility
- Sourcing and procurement
- Manufacturing, R&D and quality
- Digital capabilities
- Commercial outlook
Supply chain visibility
Control tower-based solutions have the potential to provide medtech organizations with an end-to-end view of the supply chain, enabling real-time and data-based decision-making. These solutions can also be linked with scenario modeling tools that can help you identify points of failure in the network, understand network response to significant changes and plan accordingly.
Cross-functional planning is becoming more important. Information should be gathered across the business (for example, commercial, procurement, manufacturing, logistics and finance) and shared on a digital platform with visualization tools for easy comprehension. Rather than working in silos, your key decision-makers can understand the larger picture of capacity and potential bottlenecks and collaborate to achieve shared outcomes.
With supply chain visibility solutions in place, your company can analyze network costs and success metrics across the supply base, manufacturing plants, and warehousing and logistics. That means making key decisions around network cost optimization in real time, keeping a handle on high-cost carriers, routes and shipment modes. Detailed cost visibility, for instance, might show that the total landed cost of an assembled catheter is higher when sourced from China than Germany due to a difference in container costs, and short-term purchases could be adjusted as needed.
Additionally, to maintain availability of critical parts and components, operations leaders should work on improving forecasting, planning of batch sizes and safety stock management. Advanced modeling tools can help evaluate the potential effects of stockouts and other disruptions. In short, to become more resilient, medtech supply chains may have to adopt a “just in case” inventory model over the “just in time” model.
Sourcing and procurement
The first step for procurement organizations is a holistic assessment of the supply risk profile, specifically focusing on critical or single sourced raw material and components. A detailed review of supplier contracts and pricing is required to help determine potential cost impacts by category and product class and help prioritize areas that require attention.
It’s also important to define clear and holistic strategies for critical raw materials such as resins, metals, electronics and single sourced components. Procurement leaders should identify alternate sources by broadening the supply base locally and globally, balancing risk and cost.
Furthermore, consider what components are best produced in-house as opposed to working with a strategic business partner. Is your company able to keep up with newer technologies for in-house manufacturing, including 3D printing, Internet of Things (IoT) and robotics? We advise developing strong, future-focused relationships with contract manufacturers (CMs) that can help deliver on long-term growth and have a shared interest in cost optimization.
Manufacturers have been rethinking their supply footprints, particularly from traditionally low-cost countries like China. Nearshoring and onshoring of manufacturing are viable options to help reduce response times and exposure to currency volatility or global trade policies. Keep in mind, however, that reconfiguring complex supply networks typically requires expensive overhauls, so you’ll have to carefully weigh costs and potential benefits.
Manufacturing, R&D and quality
Driven by supply chain disruption and materials shortages, operations leaders and cross-functional task forces are examining ways to help unlock efficiencies in the supply chain. Setting up dedicated teams and/or ring-fencing resources to support product introductions and transfers can help you reduce the risk for bottlenecks.
The design-to-value approach can help you identify unnecessary specifications that can drive up cost, spot limited availability issues and find good substitutes. The approach can also help in designing new materials and modules that are compatible across the device portfolio thereby reducing complexity.
It’s crucial to help identify and address major sources of waste in manufacturing and the supply chain. A comprehensive waste reduction program can improve efficiencies and yields. Effective solutions include a robust overall equipment efficiency (OEE) program in addition to a recycling program for metal and resins scrap.
Digital capabilities
In our August 2022 PwC Pulse survey of Fortune 1000 companies, 71% of chief operating officers (COOs) said that they’re looking to decrease workforce dependency. Investing in advanced digital capabilities can help with staffing challenges as well as potentially improving supply chain visibility, agility and reliability overall.
Examples of digital solutions that can improve labor efficiency in medtech include automated imaging systems for quality checks of orthopedic tools and implants as well as integrated vision and assembly systems. Long-term benefits of digital solutions can offset the short-term cost increases associated with skilled labor retention.
Medtech companies should assess their digital footprint across their manufacturing and supply chain. Disparate legacy systems should be replaced or upgraded with modern, cloud-based, AI/ML-enabled collaborative platforms. This upgrade can enable companies to take advantage of the best technology for data visibility, predictive planning, scenario modeling and optimization, helping to drive down costs in the long term.
Commercial outlook
Now is a good time for your company to evaluate your customer landscape, including a thorough review of customer contracts and pricing terms, and act quickly to plug sources of margin leakage. Customer contracts should allow for price renegotiations linked to rapid increases in input costs and incorporate holistic forecast related clauses to help support overall supply chain planning.
Inflation will likely continue to put pressure on medtech industry margins for the foreseeable future, so it’s imperative that companies start to apply short-term sourcing and procurement levers to help address today’s problems, while teeing up longer-term actions for sustained benefits and cost improvements.
Companies that can navigate the current volatile customer and supply markets will differentiate themselves from their competition in the longer term, and the current constraints will likely force the industry as a whole to step up the pace of innovation and modernization of their supply chains.
References
1 World Economic Outlook: Countering the cost-of-living crisis. International Monetary Fund website. October 2022. Accessed December 15, 2022.
2 Murray B., Bradley S. The semiconductor chip shortage hits medtech: Strategies to build resilient supply chains. AdvaMed website. Published September 23, 2021. Accessed December 15, 2022.
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