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Inventory Management: Reduce Waste & Cut Costs

Wed, 06/25/2014 - 10:47am
Tobi Laczkowski, Associate Principal, ZS Associates

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In the face of increased commoditization among medical technology (medtech) products, many companies have turned to advances in manufacturing materials to obtain a competitive edge. One of the most well-known examples is the drug coatings utilized in the stent market, which caused a radical shift from bare-metal stents (BMS) to drug-eluting stents (DES). However, one challenge posed by DES is its relatively short shelf life.

These same manufacturers often operate in a consignment commercial model where the customer does not actually pay for the product until a doctor utilizes it in a patient. As a result, stent manufacturers carry the inventory risk of product expiration. Medtech manufacturers of battery-operated implantable devices with a finite shelf life, such as pacemakers and defibrillators, face a similar risk.

While these trends in product development are likely to continue — and possibly intensify — as drug elution and battery operation find their respective ways into additional applications, the issues for manufacturers may be compounded by the fact that Integrated Delivery Networks (IDNs) are continuing to expand and consolidate.

IDNs often consolidate suppliers to manage inventory, and the largest IDNs face the highest risks as they attempt to centralize their logistics and operate out of only a few warehousing hubs. As a result, the time to end users may be considerably longer than in the previous environment, when a stand-alone hospital might purchase a product and have it directly shipped.

These industry trends and challenges make inventory management an area that is ripe for improvement and critical for both manufacturers and IDNs as they look to reduce costs and minimize waste.

According to The Wall Street Journal, General Electric Co. attributed $50 million in lost sales during the second quarter of 2010 to supply constraints for its GE Healthcare division’s electronic components. Similarly, a client operating in the stent market recently shared that the annual dollar value of its products scrapped due to expired inventory is approximately $30 million.

Traditionally, companies have approached supply chain efficiencies through optimizing the upstream elements, such as manufacturing and logistics. However, as mobile information technology continues to improve, a new focus area for optimization has emerged — commercial operations.

Commercial operations can enable the downstream arm of a manufacturer to close the loop on supply chain optimization. For example, the field sales force can become the eyes and ears for local field activities, including:

  • Checking on inventory, confirming stocking levels and rotating consignment stock
  • Determining evolving customer needs and sharing them with R&D
  • Observing “work-arounds” that local customers are implementing in light of product characteristics and deficiencies
  • Monitoring local competitive activity and sending requirements back to the headquarters
  • Tracking pricing trends and incorporating them into local marketing plans

Commercial operations can help the field team work more effectively and efficiently, and companies that invest in a robust commercial operations infrastructure and have best-in-class commercial operations practices have a distinct advantage over those who do not.

Improved commercial operations can take a variety of forms, and might include:

  • A robust mobile reporting infrastructure that provides the field sales force with timely information about its respective accounts and products
  • A feedback mechanism for the field to supply the headquarters (R&D, marketing, etc.) with required information
  • Systems and processes to incorporate the field-supplied inputs and convert them into appropriate management decisions and actions

In order to achieve the highest degree of success, manufacturers should focus on reducing the time it takes to get products to patients, particularly with products that have a short shelf life. This serves as a key differentiator in a highly competitive market, and inventory management can have a direct impact on the overall profitability of a product.

While medtech companies will continue to pursue innovations that involve sophisticated materials — many of which will have a finite shelf life — it is imperative that manufacturers optimize their supply chains wherever possible and enable the sales force by instituting commercial operations best practices.

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