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MTC Supply Chain Analysis & Opportunities
- 1. Medical Technologies Corporation (MTC) Supply Chain Analysis and Opportunities Presented by : DVS Krishna Teja
- 2. Business Case I, Krishna Teja, am working as Operations Manager at Medical Devices manufacturing company, Sangam Healthcare Products Ltd at Hyderabad, India. Business Problem : Medical Technologies Corporation (MTC) is a Medical Device manufacturing company based in the United States. MTC’s product portfolio includes high-tech medical surgical kits that are used in the critical care surgeries by surgeons in various hospitals across the US. ACA Medical Device Tax of 2.3% Revenue is imposed on all medical device manufacturers. This tax would translate to reduction in MTC’s Profits by 10%. We need to come up with Cost Savings plan for MTC so that the burden of 2.3% tax on Revenue is reduced. Major Stakeholders: 1. MTC – Board of Directors, Management, Sales Representatives 2. Distributors of MTC’s products 3. Third Party Logistics firm (3PL) 4. Hospital Group Purchasing Organizations (GPOs) 5. Surgeons 6. Hospital Administrators
- 3. Proposal : Decrease the current high Sales, General and Admin (SG&A) Expenses by 5% or $143 million annually to offset the 2.3% tax burden. Thereby Net Income increases by 8.6% from previous year 2014. This reduction in the SG&A Expenses is achieved by implementing the following ideas. 1. Logistics improvement 2. Operations improvement 3. Manage high Sales Reps in a better way 4. Sourcing improvement 5. Technology Development EXECUTIVE SUMMARY
- 4. 5 Areas of Improvement - Intended Outcome Financial Gain / Reduction in SG&A Expenses by 5% or $143 million to offset the Medical device tax burden of 2.3% through - Moving Sterilization facility to In-house Use Distributors to deliver the products Manage Sales Representatives in a better way Become a Strategic Supplier to Hospitals Develop Technology - 3D Printing
- 5. Existing Supply-Chain of MTC
- 6. Proposed Supply-Chain of MTC
- 7. Income Statement for 2015 (Estimate)
- 8. Income Statement for 2015 (Proposed) By Decreasing SG&A Expenses from Estimate $ 2812 to Proposed $ 2669 (Decrease by 5%), Net Income increases by 8.6% from previous year. So now the goal is to decrease SG&A Expenses by $143 million by optimizing the Supply-Chain process.
- 9. Area of Improvement – 1 Moving Sterilization facility to In-House • Move the existing out-side sterilization facility to In-house for better control on the sterilization process and on the inventory. • Use outside sterilization facility only if the in-house capacity is fully utilized. Benefits for MTC : 1. Reduce transit time of 48+48 = 96 hrs ( 4 days ) by having In-House Sterilization facility. 2. Eliminate Transportation costs by avoiding product transport to Out-side facility. 3. Save Sterilization charges paid to the outsourcing company. 4. Mitigate risk by having total control over Sterilization process.
- 10. Area of Improvement – 2 Use Distributors to deliver the products • Sell Products directly to Distributors and route the products through Central & Regional distribution centers to the hospitals. • Distributor is responsible to deliver the products to the hospital on demand. Transportation is arranged by distributor. Benefits for MTC : 1. Realize Revenue faster by selling directly to distributor 2. Better Inventory control and management 3. Avoid Overhead costs involved in maintaining Loaner and Branch offices. 4. Save Transportation costs from Loaner / Branch offices to the Hospitals
- 11. Area of Improvement – 3 Manage Sales Reps in a better way • Remove the existing “Trunk Stock” concept of carrying inventory by the Sales Reps to the Hospitals. • Deploy Smart Kiosks at Hospitals for better Inventory control. • As the inventory carrying and delivering is handled by Distributors, Sales Reps can do more productive job of marketing MTC’s products to other hospitals and expand to new areas. Benefits for MTC : 1. The High Sales Rep’s commissions are justified by allocating more productive work to them in terms of increasing the market share. 2. Smart kiosks ensure there is always sufficient inventory for surgeons. 3. Additional Revenue for MTC when Sales Reps bring new business.
- 12. Area of Improvement – 4 Become a “Strategic Supplier” to Hospitals • Make Business contracts with hospitals by assuring lower per unit costs to the hospitals in exchange for higher volume business to MTC. • The R&D team of MTC can work closely with top surgeons and develop new products in the market. • Develop a win-win situation with major hospital groups and aim for building long-term business relationship with them. Benefits for MTC : 1. Get assured business from the hospitals. 2. Increased Revenue by selling new products in the market. 3. Sustainable business growth.
- 13. Area of Improvement – 5 Develop Technology – 3D Printing Develop on-demand 3D printing service to quickly manufacture medical devices for patients in need. Work closely with major hospital groups and offer on-demand prosthetics, implants and other surgical tools. Benefits for MTC : 1. Customized devices for surgeons can be made at affordable cost. 2. On-demand 3D manufacturing lets hospitals source necessary parts from MTC that can be completed with an acceptably short lead time. 3. Better inventory management.
- 14. Resources Needed for Improvement • Invest in new sterilization machinery and facility at MTC factory. • Recruit new technical staff to operate the sterilization machine. • Researching and Appointing new Distributors for MTC’s products. • Possible Investments in R&D if any new products are to be developed. • Development of infrastructure for Smart Kiosk systems. • Development of 3D Printing Technology.
- 15. Risks and Contingencies : RISKS FOR THE PROPOSAL CONTINGENCIES TO MITIGATE RISK Handling Sterilization Machinery and Process Control is a major challenge as MTC is new to it. Recruit high skilled technical staff who can handle the Sterilization process with minimal risk. Getting good Distributors who can readily buy MTC’s products and start distributing them. Research all across the US for good reputed Distributors who can support MTC Convincing Sales Reps to divert from their existing working model and work towards expanding the business to other hospital groups. Motivate the Sales Reps to get new business and give them incentives if they get orders from new hospital groups. Deploying Smart kiosks and convincing the hospital staff in using these kiosks as the hospital staff may be reluctant in using new things. Explain the hospital staff all the benefits they get in using these smart kiosks in terms of better inventory control. Convincing the top surgeons of major hospital groups to work with R&D team of MTC in developing new products. Give the surgeons access to MTC’s R&D facility and invite them to the factory and involve them in decision making regarding future growth prospects. Convincing the hospitals to get into strategic partnership with MTC by having business contracts. Assure the hospitals top notch product quality with reasonable discount in the per unit cost of products. Making investment in 3D printing technology and getting returns from the investment. Make alliances with top hospital groups in the US and get into good relationships with the surgeons. Give them sample prototypes for testing.
- 16. Project Timeline 1. Order New Sterilization machine 2. Start recruiting technical staff 3. Research for new Distributors and appoint them Q1 2O15 Q2 2015 Achieve 50% Sales through Distributors Achieve 100% In-house Sterilization Q3 2015 Q4 2015 Achieve 100% Sales through Distributors. Additional Revenue through Strategic Partnerships and selling new products 1. Start In-house sterilization 2. Start selling to Distributors 3. Sales Reps to start selling in new markets 1. Get into strategic business contracts with hospitals and start developing new products. 2. Invest in 3D Printing and Smart Kiosk Systems 1. Start selling new products in the market 2. Start selling customized 3D Printed Products Achieve the target of reducing SG&A expenses by $143 million to offset the 2.3% Medical Device tax
- 17. Final Thoughts • By implementing changes in the 5 Areas of Improvement – Logistics, Operations, Sales Representatives, Sourcing, and Technology, • MTC has a very good opportunity to re-invent the existing Supply- Chain and thereby reduce the Medical Device Tax burden of 2.3%. • In a phased manner as shown in the project timeline, MTC can realize financial gain and in fact MTC can increase Net Earnings by 8.6% from previous year 2014. • Implementing all these changes in the Supply-Chain requires highest levels of commitment from the Management of MTC and also requires support from Distributors and Hospital groups.
Editor's Notes
- Having an in-house sterilization facility lowers the transport cost and time dramatically. At present, it takes 5 days for the product to get sterilized and reach the factory. If the sterilization is made in-house, 4 days of transport time can be saved as well as the transport cost can be saved. Also a lot of risk is involved at off-site sterilization. This risk can be mitigated if we have more control on our own sterilization.
- The loaner offices / Branch offices can be removed and the supply can be made through distributor through central & regional distribution centres. By making the distributor responsible for the inventory, MTC can reduce the inventory holding burden and realize the revenue faster. Also the transport cost can be saved a lot. The delivery time to hospital can be improved. Also managing the Inventory becomes easier than before. The additional costs at loaner & branch offices can be reduced. All the above changes would definitely have positive financial outcomes and will have direct bearing on the Net Income
- This concept of carrying "trunk stock" by the salespeople is very outdated and adds lot of cost to the company. Already, the commissions of salespeople are sky-rocketing and their salaries form a very significant percentage of Selling costs to the company. So at the outset, delivering the products through salespeople is a bad idea. Instead, the product delivery responsibility has to be upon the distributor through the Regional distribution centres to the Hospital central supply centres. By adopting this delivery model, MTC can directly sell to the distributor and need not worry about the Inventory management till the last step in the supply chain. Also MTC can realize Revenue faster. Here the concept of "Smart Kiosks" at the hospitals makes sense. Here is my thought process: 1. Install "Smart kiosks" at hospitals and ensure those kiosks are always full with the relevant medical devices the surgeons need for the surgeries. 2. The surgeons will start using the products from the kiosks. As and when the kiosks are becoming empty, the hospital staff notifies the Hospital central supply and they will place the order to the Distributor. 3. The Distributor then sends the supply to the hospital central supply and from there the product reaches the hospital and then to the smart kiosks to refill. 4. This process continues and by employing this method of delivery, the role of salespeople to directly deliver the product to the hospitals is fully eliminated.
- MTC is very well a Strategic Supplier to the major hospital groups. MTC's product portfolio includes critical Medical Devices such as Surgical kits that are used by surgeons in many important surgeries. These devices are high-quality and high-cost products and these medical devices form an important part of equipment in the hospitals for performing surgeries. Without sufficient supply of these critical medical devices, the hospitals cannot manage to perform the surgeries and also the hospitals cannot afford to delay the surgeries due to lack of equipment. So the products supplied by MTC will have high Supply Risk and High Profit Impact to the hospitals. As such, MTC is a strategic supplier to the major hospital groups. The major hospital groups and MTC can make some business contracts together by assuring MTC higher volume business in exchange for lower per unit costs to the hospitals. By implementing such contracts both will have win-win situation. The major hospital groups should build good relationship with MTC and integrate well with them and work with them. They should not worry only on the aspect of price itself, but should strive to build up the long term relationship with MTC. Furthermore, hospitals can align the surgeons' preferences and can work with the R & D team of MTC to develop specialized and customized products to be used in performing highly critical surgeries. Also, MTC should work very closely with all major hospital groups as they give the core business to MTC. By doing all these activities, MTC and hospital groups should aim to have a win-win situation and can create value together.
- Additive manufacturing or 3D Printing gives access to many facilities to industries such as 1. Complexity Surgical implants require complex and organic structures to be accepted by the host tissue. These structures are prohibitively expensive with traditional manufacturing methods, but a 3D printer can create them with no additional cost. 2. Customization 3D printed parts can be shaped to fit perfectly with a patient's anatomy. Dental implants, cosmetic prosthetics, and even scale models can all be created to exact specifications. 3. Sterilization Medical devices must be made from sterilizable materials. Most of the materials used for FDM printing or 3D metal printing can be sterilized by steam autoclave or gamma radiation. 4. Speed Medical procedures seldom happen on a relaxed schedule. On-demand 3D manufacturing lets hospitals source necessary parts that can be completed with an acceptably short lead time. 5. Cost The flexible nature of additive manufacturing has greatly reduced the cost of custom medical devices. Individualized prosthetics and implants have now become a reality for patients across the world.