MTS Blog: Advancing Medical Device Supply ChainsSeptember 8, 2015

Supply chains in the medical device industry are evolving. Manufacturers are in the process of shifting

from a centralized distribution model to one where product is closer to the point of sale through

partnerships with third-party logistics providers (3PLs). The key is to institute a robust tracking system

that enables the manufacturer to leverage a comprehensive yet complex network with global visibility,

real-time communications, and sophisticated functionality. The benefits of this advanced supply chain

fall into two columns: financial and operational gains for the manufacturer and significant advantages to

healthcare providers and their patients.

Today’s System

In general, the medical device industry currently relies on a “forward stocked” inventory management

model. This results in an overabundance of product at the point of sale (aka the hospital), little or no

control over this inventory, and a great dependence on sales representatives and hospitals to manage

maintenance, reporting, and replenishment. It is as if a customer is sitting in his living room with a

cabinet stocked with a variety of high-end watches. The customer can choose a watch at any time. Not

until that cabinet is identified as having missing watches will the company know what was purchased.

Inventory management in the medical device industry today provides as little control as watches sitting

exposed in a living room cabinet.

Where We’re Headed

Third-party logistics providers are moving into position to serve the medical device industry. 3PL

industry leaders are becoming regulatory compliant and pursuing the state licensing necessary to

warehouse and distribute medical devices. With 3PL partners, manufacturers will tap into several

valuable advantages: warehouse space at a fraction of the current cost, distribution services perfected

through decades of shipping experience, and significantly shortened delivery times by virtue of

proximity.

Warehouse space is just space. But, instead of centralized warehouses, a manufacturer, working in

partnership with up to several 3PLs, can have many more, smaller spaces around the country. Using a

3PL changes the cost dynamic from ownership and overhead to rent and reduced expenses. Leveraging

a network of facilities enables the manufacturer to move product deeper into the supply chain and

closer to the point of sale. Inventory is suddenly within a truck delivery of hospitals, saving on delivery

costs. And, while inventory remains on hand at hospitals, the levels can decrease from a month’s

surplus to a week’s supply. Less inventory is needed overall because enhanced access reduces the need

for redundancies. Finally, sales representatives can get back to the business of selling, rather than

running after inventory.

Communication is Key

The challenge in establishing a network of 3PL partners and their facilities will be communicating across

several different enterprises each using a different technology. The answer is the institution of an

overarching software solution that tracks product codes, quantity, and locations. The system must also

provide global visibility, capture the use of product at the point of sale, create an action that signals

replenishment, and connect inventory use to billing. A centralized software solution allows the complex

web of manufacturer, sales representatives, and 3PL partners to work seamlessly to deliver product

where and when product is needed without requiring excess inventory to fill in gaps.

Why All the Fuss?

Transitioning from a centralized warehousing and distribution system to a decentralized system that

utilizes 3PL partners and their space and expertise offers a wide range of benefits. But, the advantages

of this new paradigm go beyond the usual returns of increased efficiency and cost-effectiveness. Some

of the rewards are less obvious.

First, manufacturers can reduce inventory in hospitals without increasing inventory anywhere else in the

supply chain. Removing inventory from hospitals is good for business. Inventory in hospitals is the least

controlled and is the inventory most likely to disappear. Product at hospitals can be lost, damaged, or

expire. The industry standard is 3% shrinkage, and some companies allow for as much as 10% shrinkage.

Removing the inventory from hospitals puts the product back in the hands of experienced inventory

management professionals. Finally, hospitals typically prefer not to store excess inventory because they

do not want to manage the product and they need to recover the storage space for the care of patients.

Second, this model allows sales representatives to spend more time selling and less time managing

inventory. On average, representatives can spend up to 10 hours per week tracking down inventory.

The use of the new model decreases this amount of time because electronic tracking offers greater

product visibility. A sophisticated software system with mobile functionality digitizes processes

currently managed via paper, email, and phone screen shots.

Third, manufacturers know when sales are happening and what is being purchased. Capturing and

utilizing these metrics makes it possible to identify inefficiencies and refine the system as needed. The

supply chain becomes less weighted and more streamlined because inventory turns double and the

amount of shrinkage is reduced. Manufacturers are better able to appropriately stock and “level load”

inventory to make product available where it is most needed.

What Hasn’t this Happened Before?

Industry-wide change is often slow to occur, perhaps particularly in the medical device world where

some manufacturers are still using antiquated software systems or even paper-based processes to

manage inventory. The transition from a centralized warehousing and distribution model to one that is

decentralized and utilizes 3PL partners has yet to be realized because 3PLs did not have warehouse

space that was licensed and approved to handle medical devices. In addition, software scalable enough

to accommodate a national network of warehousing and distribution did not exist. Without that piece

of the puzzle, the inefficiency that would ensue would encourage manufacturers to resort back the

outmoded methods. That critical tool, software that can provide global visibility and real-time

information, finally exists and will enable full employment of the new model. The value of this coming

industry change is simply the ability to more effectively manage inventory and deliver faster and better

service to meet the growing expectations of medical device customers and cost pressures of the

industry.