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Medtech companies must evolve their supply chain capabilities to mitigate the risks born from the complexity of their supply chains, a large portfolio of products (millions), and the increasing frequency and intensity of disruptions.

The pandemic was a wake-up call for many medtech companies as it exposed many vulnerabilities across their supply chains. But as the effects of COVID-19 wane, and with many companies having not yet addressed these vulnerabilities, the increasing frequency and intensity of disruptions pose a unique threat to the industry, with research by McKinsey estimating that “within a ten-year period, shocks could cause some medtech companies to lose approximately 38 percent of one year’s earnings.”

One reason why medtech supply chains are especially exposed to the risks of supply chain disruptions is their complexity, or rather, the lack of the capabilities needed to manage said complexity.

The five factors driving medtech supply chain complexity

1. A lack of end-to-end visibility

The global medtech supply chain is highly interconnected and includes hospitals (provider), point of care facilities,  multi-stage distributors, multiple third- and fourth-party logistics providers (3PLs and 4PLs), as well as multi-stage manufacturing that includes multiple CMOs and multi-tier suppliers (1, 2, and 3). Lack of end-to-end visibility into these partners, including the hospitals and providers, is one of the biggest challenges the industry is dealing with.

2. Field-service inventory challenges

Managing field-service inventory (inventory of products and kits at the hospital and the in-transit inventory) has been one of the most complex challenges to solve. Lack of demand and inventory signals from the end customer (i.e., hospitals) significantly impacts the ability of both distributors and medtech manufacturers to accurately predict demand and balance supply accordingly. Other challenges include assembling and tracking kits with multiple product combinations and tracking loaners. This ultimately results in carrying higher levels of inventory at multiple nodes of the supply chain to mitigate forecast accuracy risks.

3. Product portfolio complexity

Medtech supply chains also deal with a complex product portfolio (sometimes more than a million SKUs), resulting in demand forecasting challenges due to a lack of a segmentation-based approach. Since products often undergo design changes and revisions, tracking and effectively managing the changes and integrating them into the planning process can be highly complex. Most companies lack analytics capabilities to effectively segment the products beyond the traditional approaches. Segmentation can be one of the key enablers to improving and simplifying planning versus the current approach of common planning across the entire product portfolio. (e.g., differences in surgical products, eye care, vision, wound care, and diagnostics). 

4. Lack of a robust demand planning capability impacts supply management and service levels

This lack of end-to-end supply chain visibility and a robust demand planning capability creates a risky situation for medtech supply chains; one disruption, such as a key sourcing supplier experiencing factory downtime, could not only generate heavy financial losses but a danger for patients dependent on life-saving equipment. The lack of accurate demand and inventory signals both from the hospitals and tier 2 and 3 distributors, combined with no direct digital collaboration, significantly impacts demand forecasting accuracy and the overall demand planning process. From a supply management perspective, such a large product portfolio combined with complexities in planning and scheduling causes capacity shortages, both at the resource level and labor capacity level, which impacts both manufacturing and packaging, ultimately impacting the service level.

5. A fragmented, legacy IT landscape

These challenges are further compounded by a fragmented ERP and business application landscape that creates significant complexities to connect the data across disparate systems and drive planning and decision-making. Most companies have already established ERP and transaction layers. While the efforts to re-engineer these platforms and processes to the next generation applications, there is a critical need to connect the data from the disparate systems and also integrate the data from external partners. This sets the foundation for gaining critical visibility across the internal and external supply chain and ultimately drives better decision-making capabilities.

To better address this complexity, medtech companies must focus on three core capabilities.

1. Model a digital twin of the end-to-end supply chain 

One of the first steps medtech companies can take to address supply chain complexity is to leverage the real-time operational and master data from across their supply chains, like supply chain locations, products, forecasts, plans, orders, shipments, and inventory to create a digital twin—a model of their end-to-end supply chain. With this digital twin, medtech companies have a real-time virtual representation of their network, with the ability to receive alerts, plan ‘what if’ scenarios, and build comprehensive and accurate market (hospitals, customers, channels, competitors, and public health events), demand (accounts, budgets, products, people, and clinical trials), and supply (suppliers, factories, DCs, distributors) knowledge models that help anticipate and match supply and demand.

2. Improve collaboration and visibility across the network

End-to-end supply chain visibility is considered a dream for most medtech companies. But while you may think visibility challenges only extend to n+1 suppliers, unfortunately, the problem applies to tier-1 suppliers as well. According to a 2021 McKinsey survey of senior supply chain executives, “just under half said they understood the location of their tier-one suppliers and the key risks those suppliers face.” That matters because most disruptions originate in these deeper supply chain tiers. With such a complex network of suppliers and with so many medtech companies relying on sole-source suppliers for critical components or select finished goods, improving supplier visibility—and ultimately cooperation—is paramount. Improved supplier visibility allows for medtech companies to collaborate and manage CMOs and tier n+1 suppliers, who are often single-sourced and critical, increase collaboration and visibility across CDMO and 3PL operations, and the joint creation and assessment of supply scenarios, risk sharing, and mitigation, and buffers across key nodes within the network.

The visibility and collaboration between the medtech manufacturer, distributors, and hospitals (customers) is one of the most critical capabilities that the companies must consider. This will close the critical missing gap, enhance the ability to exchange forecasts and inventory signals, and establish the foundation for managing the field service inventory. These are the key enablers to improving the service levels while optimizing the inventory levels.  

3. Improve demand-supply balancing, scenario planning, and decision-making 

Many companies now face increased exposure in their planning processes because their forecasting algorithms rely too heavily on historical demand. Disruptions due to COVID have made it even more complex due to high variability in demand patterns. The lack of visibility of demand and inventory signals from the hospitals and distributors further amplified this challenge.  Furthermore, differing regulatory requirements and approvals make for high levels of product and SKU fragmentation across regions, limiting the ability to distribute products (and components) that are most urgently needed—and, in some cases, constraining production acceleration as well.   

Advanced demand-supply matching and balancing capabilities that consider constraints (procurement, manufacturing and capacity, and distribution), optimize plans, and leverage analytics to derive segmentation ( products, channels, and distribution models) allow for the clustering of large volume products for more effective aggregate level planning. Incorporating attributes and external drivers to extend the planning capabilities for demand and supply planning and prioritization provides an opportunity to design a more tailored supply chain based on the channels beyond the traditional models, e.g., direct to hospital and clinics, direct-to-home patients, CMI & VMI with major customers.

Multi-echelon inventory optimization (MEIO) combined with predictive analytics allows for smarter network-stocking strategies both at DCs and for distributors to minimize excess stock and inventory obsolescence. Scenario planning and exception management capabilities allow for the identifying of supply risks, and their impact on service levels, capacity shortages, and P&L. Replacing manual planning processes and tools with an integrated business capability connects commercial, finance, and supply chain functions on one aligned plan to derive real-time insights and integrated decision-making capabilities with predictive capabilities.

What is the business case and value generated?

Transforming and optimizing the medtech supply chain can provide significant benefits to the industry. At a strategic level, it enables the organization to better plan the end-to-end medtech value chain, improves visibility across the internal and external network, and enhances decision-making. There is an opportunity to improve several KPIs, increased service levels, improved OTIF, increased demand forecast accuracy, reduction of WC (inventory), optimization of safety stock, reduced inventory obsolescence, reduced expedite costs, reduced lead times, improved resource capacity management, improved end-to-end visibility, and planning productivity. Ultimately, organizations can leverage the next-generation medtech supply chain capabilities to create a competitive advantage over their peers.

Interested in learning more?

Request a demo to learn how the o9 Digital Brain generates a digital twin of your end-to-end medtech supply chain, improves visibility and collaboration across your entire supplier network, and significantly improves the speed and quality of your planning and decision-making.

Vijay Mohan

Vijay Mohan is an accomplished life sciences leader with over 25 years of leadership and hands-on experience in driving technology-enabled business transformations for global life sciences companies, with a focus on the biopharma and medtech industries. At o9 solutions, Vijay is the global leader for life sciences, where he is responsible for driving strategy, go-to-market execution, industry thought leadership, and delivering the most value to global biopharma and medtech companies.