Operational Excellence in the Medical Device Industry

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I gave this presentation on the opportunity for operational excellence in the medical device industry at an S&OP conference in Boston

Dan Dodd, Vice President of Operations and Supply Chain Sales & Operations Planning Summit September 15-16, 2011 | InterContinental | Boston http://www.theiegroup.com/SOP_Boston/Overview.html Operational Excellence in the Medical Device & OrthopaedicsIndustry

Presentation Structure Defining operational excellence The opportunity in the medical device industry The barriers The dynamics of the industry Key changes in the landscape #1 reason S&OP does not achieve potential

Operational Excellence – Two Keys Modern operational excellence is 75% lean and 25% S&OP in terms of effort/focus, but S&OP comes first because it sets the direction S&OP Lean Six-Sigma

How Well Does It Work? Danaher stock significantly outperforming: ,[object Object]

Even MicrosoftCooper Industries prior to Danaher attempted acquisition, underperforming to Dow Jones Cooper tracking to Danaher since

The Opportunity in Med Device The opportunity for operational excellence is significant Medical device/orthopaedic companies, avg=2.1  ||Other

The Barriers/Current Focus The great margins are going to SGA (37%) and R&D (6%)

Is the SG&A and R&D paying off? Market share is stable – is it all hot air?

Key Industry Dynamics Cost is #1 for High-tech, CPG, etc Med Device Required and increasing government controls have meant the industry moves slowly, including the adoption of new practices, such as six-sigma… but this is changing

A Changing Landscape Operational excellence is coming ,[object Object]

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Executive Overview If a supply chain leader cannot demonstrate improvement in operating margin, they are often fired. Consequences are severe. However, as complexity in global supply chains has increased, it has become increasingly difficult to improve profitability metrics. Among supply chain leaders, operating margin is one of the preferred measures of profitability. Successful supply chain management is about balance and particularly the balancing of growth, profitability, cycle and complexity. This is what we call The Effective Frontier. Supply chain management is getting tougher as commodity markets get more volatile, wage prices increase, and product life cycles shorten. It is up to the supply chain leader to design the network and processes to protect margin and balance the supply chain. This is becoming an increasingly difficult task. The challenges are many and they vary by industry. Commodity pressure is higher than at any previous point in time as shown in Figure 2. There is a limited toolkit for how to offset margin pressure. They include better planning, transportation optimization, rethinking network design, improved Sales & Operations (S&OP) execution, and Kanban events with suppliers and customers. None are easy or quick fixes. Additionally, while many think that calculating cost and monitoring profitability should be easy, this is not true. In our research, we find that only 24% of companies surveyed can easily access total supply chain cost information. The ability to get to the data and connect the dots on cost to operating margin performance remains difficult for most. In fact, as shown in Figure 3, for 53% of survey respondents, getting to total supply chain cost is difficult. Operating margin is a straightforward calculation with serious implications. Of the ten industries profiled in Table 1, only two have increased operating margin over the period: consumer electronics and consumer packaged goods. Furthermore, of the 18 companies profiled individually in this report, less than 40% (7/18 = 39%) have made progress on margin in 2012 compared to their result in 2000. As shown in Table 1, it is becoming more and more difficult for companies to maintain balance on their portfolio of supply chain metrics. This trend is true across all industry subgroups. Companies with the highest operating margin tend to be the least mature in their understanding of supply chain principles. As a result, they demonstrate the worst performance in balancing competing priorities on the Supply Chain Effective Frontier and are stuck on the Supply Chain Plateau. The positions of companies, and their relative successes over the last decade, are shown in figure 4. Table 1 is sorted by average operating margin with pharmaceutical companies returning the highest average value at 0.25 over the period. With the patent cliff, and significant changes in the healthcare environment including ongoing implementation of the Affordable Care Act, ...

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Executive Overview Supply chain leaders struggle to align corporate and supply chain strategy and drive improved performance. We term this difficult balancing act The Effective Frontier and explain it as the process of balancing growth, profitability, cycle and complexity within a company’s supply chain operations. A supply chain is a complex system with increasing complexity. A major gap in many supply chain strategies is a nuanced understanding of supply chain potential when these elements are viewed together as a system. The focus of this report is semiconductor and hard disk drive manufacturers. As seen in table 1, when it comes to supply chain performance, the industry is neither the best nor the worst. They fall squarely in the middle. While middle of the pack in operating margin, the industry has shown an increase in the cash-to-cash cycle and a decrease in inventory turns. With increasing complexity, the industry has struggled to maintain inventory turn performance over the period. Companies further back in the supply chain have struggled to a higher degree to balance The Effective Frontier than those closer to usage. This is largely due to the bullwhip effect—the distortion of a demand signal as it gets passed downstream from trading partner to trading partner. The chemical industry manufacturers, like semiconductor & hard disk drive manufacturers, are three to five levels back in the supply chain. Comparing the results in table 1 for the two industries illustrates how much better the semiconductor & hard disk drive manufacturers have done in a similar orientation. Operating margin is comparable across the two, but the chemical industry has a higher cash-to-cash cycle level and almost a 50% lower inventory turns value. Semiconductor and hard disk drive manufacturers have been successful in a challenging downstream position. Cost pressure from OEMS has not (as of yet) cut into margin, and growth levels have remained strong with the move to mobile. Inventory remains problematic with all six companies in this report, demonstrating increased DOI and decreased inventory turns, since the start of the century. Part of this is likely due to the lengthening of the global supply chain, while another part is partly due to rising product and process complexity, but it remains a concern. Historically, the industry has made strong gains on productivity. An increasing move towards automation in the precision driven manufacturing environment is expected to continue the rise in revenue per employee performance. In this report, we discuss the financial realities of the semiconductor and hard disk drive supply chain and offer recommendations for improvement.

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Operational Excellence in the Medical Device Industry

1. Dan Dodd, Vice President of Operations and Supply Chain Sales & Operations Planning Summit September 15-16, 2011 | InterContinental | Boston http://www.theiegroup.com/SOP_Boston/Overview.html Operational Excellence in the Medical Device & OrthopaedicsIndustry

2. Presentation Structure Defining operational excellence The opportunity in the medical device industry The barriers The dynamics of the industry Key changes in the landscape #1 reason S&OP does not achieve potential

3. Operational Excellence – Two Keys Modern operational excellence is 75% lean and 25% S&OP in terms of effort/focus, but S&OP comes first because it sets the direction S&OP Lean Six-Sigma

5. Berkshire Hathaway

6. Dow Jones

7. Even MicrosoftCooper Industries prior to Danaher attempted acquisition, underperforming to Dow Jones Cooper tracking to Danaher since

8. The Opportunity in Med Device The opportunity for operational excellence is significant Medical device/orthopaedic companies, avg=2.1  ||Other

9. The Barriers/Current Focus The great margins are going to SGA (37%) and R&D (6%)

10. Is the SG&A and R&D paying off? Market share is stable – is it all hot air?

11. Key Industry Dynamics Cost is #1 for High-tech, CPG, etc Med Device Required and increasing government controls have meant the industry moves slowly, including the adoption of new practices, such as six-sigma… but this is changing

12.

13. IP for 75% of devices expired/ing

14.

15. Next Steps In Medical Device

16. Thank you!

Editor's Notes

Doctors are aligning with hospitals55% of practices are now hospital-owned Up from 50% in 2008, and 30% in 2003 While 65% of physicians who changed jobs in 2009 moved to a hospital-owned practice..and hospitals pay for the devicesWell over 100 pedicle screw companiesCommons devices are rolling off patents The medical device is a relatively new industry, dating to antibiotics 75% of the orthopaedic implant industry consists of devices that are expired or soon to be expired IP (intellectual property)…and don’t need a sales rep in the ORProcedures have almost doubled in the past 10, but prices are 60% higher A generic medical device industry is developing, similar to the pharmaceutical model…and they care about costThe big players are starting to feel the heat…they are hiring and building up lean expertise…but will they reactlike Lucent did to Cisco or like Cooper did to Danaher?

Operational Excellence in the Medical Device Industry

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