The medical device manufacturing industry is undergoing a significant transformation. Driven by global economic growth, innovation, and an aging population, the U.S. medical device market was poised to reach $800B by 2030 before COVID-19 hit. During the pandemic, some medical device companies selling essential supplies and equipment faced demand surges. Others were impacted by a loss of revenue due to procedure postponement. Still, many expect the industry as a whole to recover by 2023.
Concurrently, growth, globalization, and ever-increasing complexity have caused new stressors at the factory level:
- Increasing levels of product customization
- Complex supply chains with long-lead-time components
- Pressure to reduce costs
- Increased regulatory requirements
While overcoming these challenges at a rapid pace can seem daunting, it’s also costly for medical device manufacturers to maintain the status quo—today, they can lose 21 percent of profits by not embracing digital transformation. With real-time visibility into inventory levels and improved tools to execute on inventory goals, leading medical device manufacturers can drive down supply chain costs while ensuring customers have the critical equipment and supplies needed to save lives.
Demand and Complexity Present Inventory Optimization Challenges
Due to high demand in the market and stiff competition, medical device manufacturers are under constant margin pressure. This situation is further complicated by the lack of operational visibility and the inability to balance inventory levels across complex, multi-sourced supply chains. This imbalance results in bloated inventory and leaves procurement teams struggling to resolve critical shortages. When a disruption such as COVID-19 occurs, it becomes challenging to quickly ramp production up or down to respond to demand changes. Here’s what we see happening:
- Unpredictable demand causes excess inventory levels to balloon, tying up working capital. Many medical device manufacturers hold an overage of 150 days of inventory (DOI) on average—that’s almost half a year of inventory sitting on the shelves. Given the ongoing, unpredictable nature of market conditions, this situation is likely to become worse.
- Shortages of key inventory components can grind production to a halt and create low on-time in-full (OTIF) delivery performance. Before COVID-19 disrupted the industry, medical device manufacturers achieved an average 93 percent OTIF performance vs. 99 percent in automotive and other industries (source: AT Kearney, 2009), and it has gotten significantly worse since. With hospitals and patients dependent on device availability for critical procedures, ensuring customer on-time delivery (COTD) is not just an objective—it’s a necessity.
Gain Control of Inventory Levels with Validated ERP Data and Real-Time Visibility
Given the complexities and challenges of today’s environment, how can medical device manufacturers adapt and thrive? Static spreadsheets with complex formulas are error-prone and manual, and they don’t provide leaders with the tools to achieve their three top priorities: optimize inventory, improve COTD, and reduce overall costs. In today’s environment, the demand to improve operational performance is increasing and the cost of errors is too high.
Instead, inventory levels must continuously be up-to-date, harmonized, and validated. By keeping accurate and harmonized inventory data in one place, supply chain leaders have a single source of truth for inventory management. They can analyze metrics such as COTD and DOI across sites and ensure inventory targets are updated and optimized.
For example, improved supply chain visibility empowered one top medical device company to track, analyze, and meet inventory reduction goals across multiple sites, saving over $700K in one month. In addition to the cost savings, team members who previously spent the bulk of their time consolidating cross-site visibility data in SharePoint were able to shift focus to revenue-generating activities.
Leverage AI to Empower Fast Execution on Inventory Goals
Once medical device manufacturers have clear visibility into their ERP data, they can use it to progress towards their inventory and shortage reduction goals. Most medical device manufacturers have deployed complex fulfillment, distribution, and supply chain strategies to avoid excess inventory, stock-outs, and obsolescence. However, with regulatory issues and medical procedures at stake, it’s imperative for medical device manufacturers to quickly prioritize and take action on order policies that can negatively impact production.
While there have been tremendous advancements in product innovation, the medical device industry has been left behind when it comes to deploying advanced supply chain digitization technologies. Legacy supply chain solutions, still used by many medical device companies, often answer, “Which factory is making which products?” or “What is our production forecast?” While important, the answers to these questions don’t give site leaders the ability to understand the root cause of inventory issues, such as which order policies lead to shortages or waste. And they certainly don’t help teams prioritize inventory issues by level of cost or delivery impact.
As a result, many medical device manufacturers have turned to inventory optimization solutions to help procurement teams understand the next step to reach organizational goals. Using AI, operational procurement teams can understand exactly what to make, when to order it, and where to put it, even when demand changes.
Industry innovators, such as Terumo, use AI technology to align teams around joint goals and stop shortages before they negatively affect on-time delivery. Using forward-looking shortage reports and AI recommendations, Terumo’s team broke impactful work into manageable chunks that anyone could tackle. These actions allowed the team to quickly ramp up inventory levels during the pandemic and deliver much-needed supplies to patients all over the world.
Medical Device Manufacturing: The Frontier of Inventory Modernization and Revenue Growth
With so much at stake, medical device manufacturers must cut through the complexity and gain control of inventory operations—the cost of doing nothing is too high. When procurement teams have a clear view of inventory levels and a way to tackle organizational goals quickly, they can reap the rewards of their competitive advantage and continue improving the human condition.
Want to learn how to align your team around your highest priority inventory optimization opportunities? Learn how Terumo BCT turned their inventory insights into action.
This piece was originally written on October 24, 2019. It was last updated on December 9, 2020.