Multiple factors are converging in the medical device industry to drive manufacturers toward growth via mergers and acquisitions (M&A) versus relying solely on organic growth of their existing portfolios. One factor is the U.S. regulatory landscape. While some will say regulatory hurdles are starting to improve, there is little evidence to prove that it is easier to get a medical device approved today than it was a few years ago.
A second driver fueling M&A activity in the medtech industry is the growing focus on preventative diagnostics and personalized wellness. Healthcare providers are now held more accountable for the quality of care they provide. Provisions of the Affordable Care Act are hitting them where it hurts most – in the wallets – cutting Medicare reimbursements for excessive readmissions, denying reimbursements for never events and tying reimbursements to quality of care metrics. With such tremendous pressure on the industry to improve quality while reducing costs, it is no wonder there is currently a trickle-down effect where the industry is rapidly developing new technology that holds the patients themselves accountable for their wellness.
Companies outside of the medtech space are capitalizing on this trend and innovating wearable devices aimed at enabling patients to keep themselves healthier. A notable example is Google’s recent announcement regarding its contact lens that measures glucose levels in tears to help diabetes patients better manage their condition. It is likely that big medtech players will acquire these types of technologies versus developing them in-house as a way to broaden their portfolios, innovate and keep ahead of the competition.
Meeting New Standards in Supply Chain Operations
The mingling of medtech with the consumer/retail space is likely to open up a Pandora’s Box of issues and, most importantly, opportunities related to how differently these two industries operate. I’ve worked in the healthcare industry for 23 years, all of those years in healthcare supply chain, IT and operations. I believe one of the greatest challenges medical device manufacturers will face as they commercialize revolutionary preventative diagnostics and wearable medical devices will be streamlining the supply chain.
Companies in the consumer/retail industry know how to move and track their products effectively and efficiently. From the time a product is manufactured to the time it is purchased, standardized data on that product is captured through automatic identification and data capture (AIDC), such as barcodes or RFID tags. Also warehousing, inventory and distribution costs are optimized across the end-to-end supply chain.
While medtech manufacturers design and develop advanced technologies to monitor, diagnose and treat the most complex machine of all, the human body, let’s face it, most are not optimized when it comes to their end-to-end supply chain data and processes. The majority use proprietary identifiers for their products rather than global data standards such as GS1 Global Trade Item Numbers (GTINs) or HIBCC Labeler Identification Codes (LICs). Many communicate product data updates to business partners (GPOs, distributors) and customers manually using Excel spreadsheets, and in turn receive a significant volume of orders for their products manually (e.g. phone, fax). Without data standardization and process automation adopted broadly in healthcare, all trading partners are impacted by constantly having to manually update discrepant data and sources, and address costly errors that arise in their external transactions.
I am excited about medtech manufacturers approaching a consumer brand like Google, Amazon or Walmart regarding a wellness product related commercialization opportunity because that partnership will likely be a catalyst for change and innovation across the end-to-end supply chain.
Mike Wagner, executive director leading the talent development division at The Advisory Board Company, commented on this topic in his October 28, 2013, post on Harvard Business Review’s Bringing Outside Innovations to Healthcare blog:
“While businesses in other sectors have become adept at bringing in ideas from outside their walls and why healthcare has lagged behind. Leaders in healthcare often isolate themselves from the outside world, believing that their industry's challenges are entirely unique. These leaders resist the idea of learning from exemplars both inside and outside of healthcare. As a result, they are often ignorant of the managerial advances being made in other industries. To respond to the challenges to reduce healthcare costs, healthcare leaders need to first acknowledge their blindness and then actively overcome it by learning how best in class companies in healthcare and other industries are addressing similar challenges.”
Suppliers that adopt best practices and new solutions from outside of the healthcare industry will realize greater success and differentiation. With the twin forces of healthcare reform and personalized medicine, device manufacturers will be feeling greater pressure to transform their supply chains in the years ahead. As their current customers, healthcare providers, are forced to operate more efficiently to cut costs, they are increasingly looking to their vendors to deliver added value, such as providing ways to streamline the procure to pay process. For those manufacturers partnering with consumer brands on wellness offerings and/or acquiring products developed in this sector, they will face added pressure to bring their supply chain data and processes up to the consumer products sector’s high standards. The leaders that emerge in this new wellness space will do so because they partner for supply chain expertise coupled with product innovation.
A Question of Time, Money and Resources
I’m sure most readers of this article are thinking, “Our companies are focused on product innovation and growth in preventative diagnostics and wearable devices – we cannot allocate resources and time to streamlining our supply chains.” The reality is that one of the easiest ways you can free up resources for innovation is to stop supply chain revenue leakage caused by inaccurate data and manual processes.
Many leading manufacturers have already started taking steps towards making process improvements and are significantly ahead of their peers when it comes to their supply chain operations. They’ve standardized their product data and are transacting it with business partners and customers in an electronic, automated manner. Something as simple as transitioning from manual orders to ecommerce significantly drives down operational costs. For example, the effort required to manage and fill orders is reduced by up to 75 percent, from $20 to $5 per order, on average. Furthermore, processing more accurate orders and reducing research on disputes and write-offs associated with incorrect orders can help reduce days sales outstanding (DSOs) by up to 30 percent, enabling a manufacturer to free up its cash flow.
Best in class companies focus on product innovations in parallel with making supply chain improvements – why wouldn’t you?
Taking the Plunge
Supply chain transformation is likely easier than you think. The healthcare industry has the solutions and tools to do it. They are just underutilized. Many manufacturers have neglected their supply chains because they have been focused on other areas of their businesses. But if they allocate just a small portion of their time and energy on supply chain improvements, they can cut labor and costs, increase sales in existing portfolios by improving customer satisfaction and retention, and free up resources that can be allocated to fund growth strategies.
Here are five steps that you can take today to position your supply chain for success:
1. Reduce Cost-to-Serve By Changing Costly Business Practices
To drive down cost-to-serve in a sustainable way, all trading partners have to act in the best interest of the entire end-to-end supply chain. How will you start? First, set up meetings with key customers to specifically talk through costly business practices including: rush orders, returns and manual transactional processes. Then, implement process changes with a few pilot customers to validate savings for both organizations. Once you’re satisfied that savings can be achieved, rollout the business practice change across your customer base.
2. Establish Yourself as a True Strategic Partner with Key Customers
Dedicating time to build trusting relationships with your key provider customers should be an immediate goal. Manufacturers and providers who have built trusting relationships will begin to act in a concerted manner based on transparent information to resolve issues as they happen.
3. Track Progress Toward Performance Metrics That Drive Operating Costs
Supply chain partners should begin to use process performance management data to measure their performance relative to competitors. Process performance gives you the “What, How and Why” behind the numbers with direct impact on an organization’s financial performance. Key metrics include: customer satisfaction, process cost, delivery reliability, and error/discrepancy rates.
4. Establish Firm Deliverable Dates for Standards Adoption
We are seeing a shift away from healthcare providers willing to "do things the old way" to choosing only to work with manufacturers/distributors who are actively re-engineering their business processes to adopt healthcare data standards. Set a goal for you and your organization to adopt the standards in a manner where you will streamline your end-to-end supply chain processes.
5. Identify, Adopt and Share Solutions from Best Practice Companies
Learn how best in class companies in healthcare and other industries are addressing similar challenges. Suppliers that adopt best practices and new solutions from outside of the healthcare industry will realize greater success and differentiation.