Mr. Alan Huang, Director and China Healthcare practice leader, PRTM, will chair the Outsourcing and Supply Chain Forum on Sept. 8 during MEDTEC China. He will present a paper on Direct Material Sourcing Costs and Performance Trends in the Medical Device and Diagnostic (MDD) Industry and host a panel discussion with several other experts from the medical device industry. We are honored to have Mr. Huang share some of his views on the challenges and opportunities of medical device manufacturers and how they can optimize their outsourcing and supply chain operations.
Q: What are the key subjects of the Outsourcing and Supply Chain forum?
This forum focuses on the challenges and opportunities MDD companies face in an outsourced environment. Being more dependent on suppliers nowadays, MDD companies must manage a lot of complexities while meeting regulatory requirements. If they outsource more of their products to another company, how do they ensure that the final product meets quality standards? We will explore trends and the methods leading companies have adopted for achieving those goals while managing an increasingly dispersed supply base.
CMDM: Some opinions in your presentation are based on a survey conducted by PRTM. Tell us about the significance of this survey to the MDD industry?
Mr. Huang: Every year, PRTM conducts a benchmark survey to understand the trends of direct material sourcing in the MDD industry. The purpose is to address the relative lack of sourcing analysis data to support the MDD companies’ objectives of sustainable cost reduction. For this benchmark survey, we cover a total of 21 world-leading MDD companies, including such notable names as Philips, Cardinal, Varian, and Bausch & Lomb.
Over the 30+ years since PRTM was founded, we have done extensive work with the world’s top MDD companies. Twenty of the top 25 MDD companies in the world are our clients. We intimately understand the realities and challenges of this industry. This survey is a regular part of our work to keep up with the latest trends, it enables our fact-based approach.
CMDM: What are the key findings of the PRTM survey?
Mr. Huang: One of the key insights of the latest 2010 PRTM study is that mid-sized companies perform worse than small or large companies in achieving cost reductions. The reason appears to be that small companies are focused on what they do best, while large companies benefit from economies of scale. This leaves mid-sized companies relatively weak in obtaining the best terms from suppliers. Another interesting finding is that constraints imposed by US FDA present the largest obstacle to cost reduction. Finally, direct material sourcing capability maturity leads to differences in performance.
Our interpretation is that companies still tend to use purchase volume as the main negotiation lever. From the narrow perspective of “obtaining the best price based on purchase volume,” the result from our survey is expected. However, there are many other sourcing levers that can be used to lower purchase costs. For example, a company can seek suppliers from lower cost countries, design the product for lower overall complexity, and standardize components across multiple products. These are some techniques that PRTM has helped many leading MDD companies to adopt.
Therefore, mid-sized companies—or a company of any size, for that matter—should approach direct material sourcing holistically, using multiple techniques to optimize costs. This connects with our finding about sourcing capability maturity. More mature companies have built capabilities into their businesses to optimize costs through multiple levers.
CMDM: In general, what elements contribute to optimal supply chain performance in the medical device industry? Is cost the only criteria for evaluating supply chain management?
Mr. Huang: Supply chain performance encompasses broader considerations than just direct material costs. Please note that the term “optimizing costs” is not just lowering costs. By “optimizing cost”, we should look for the lowest possible cost while fulfilling other supply chain and regulatory requirements. Another way to look at this is that supply chain performance requires trade-offs among multiple dimensions.
We suggest looking at supply chain performance as a combination of external- and internal-facing metrics. External metrics include delivery performance, order fulfillment lead times and accuracy, and production flexibility. Internal metrics include supply chain management costs, the cost of goods sold, cash-to-cash cycle time, inventory levels, and asset turns.
Specific to the MDD industry, the additional burden of regulatory compliance is also present for the supply chain. These are well specified by various regulatory agencies. The key is to realize that the need to comply applies to all competitors in the same market—the law does not make exceptions. Therefore, the question is how to achieve the best overall performance, as stated by the metrics above, while satisfying regulations.
CMDM: What do you anticipate as being among the “hot topics” during the panel discussion?
Mr. Huang: I assume that questions about what global MDD companies look for when evaluating and selecting suppliers, what actions Chinese suppliers should take to become preferred suppliers to global MDD companies, and so forth will interest the audience the most.
MEDTEC China will be held at the Intex Center, Shanghai, on September 7 and 8, 2011. For more information about the event, go to the MEDTEC China site, www.medtecchina.com.
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