Rethinking manufacturing and distribution networks in medtech

Changes in the medtech market have left many companies struggling with their operational footprints. A network redesign can help them save costs, increase flexibility, and create a competitive edge.

Under pressure from a rising cost base and increasingly demanding service expectations, many medtech companies are looking to reduce operating expenditure and increase their flexibility. Through our work with industry leaders over the past few years, we have found that redesigning manufacturing and distribution networks can be a powerful way to achieve these aims. A few leading companies have saved 10 to 15 % of their manufacturing and supply chain costs while reducing delivery lead times by 20 to 30 %. At the same time, they have built more flexibility into their networks by forming relationships with contract manufacturing organizations (CMOs), third party logistics providers (3PLs), and other partner’s relationships that better equip them to handle fluctuations in demand and mitigate supply risks. What is more, their optimized footprints have positioned them well to grow in emerging as well as legacy markets.

However, most medtech companies still struggle with their manufacturing and distribution networks, for a variety of reasons. For some, a growth strategy focused on M&A has resulted in a fragmented network with high costs. Others are aware their footprints are no longer fit for purpose but fear that network redesign would be enormously complex, take too long to deliver impact, or fail to yield adequate returns on the management time and effort involved. Yet we believe that network optimization is rapidly becoming a necessity if medtech companies want to stay competitive in today’s markets, for four reasons.

First, medtech companies are lagging other sectors including highly regulated industries, such as pharmaceuticals in developing manufacturing capabilities in emerging markets. Second, as patterns of demand shift, companies need to consider where their future growth is likely to come from and adjust their networks accordingly. Third, CMOs and 3PLs are now mature enough for integration into operations and ecosystems, enabling medtech companies to migrate away from legacy operating models that are slow and awkward to scale and adapt. Finally, network optimization need not be as costly, slow, or difficult as companies fear. We have seen leading medtech companies find ways to derisk their transformations and capture value at speed while also creating a competitive edge.

Incorporating best cost locations into operational footprints

Historically, the largest markets for medical devices have been in Europe and North America, and companies have located their production facilities accordingly. Most medtech companies continue to manufacture in these markets to stay close to customers or meet regulatory requirements. Some companies that have moved manufacturing to emerging countries have found that the benefits of lower labour costs and proximity to fast growing markets have been outweighed by quality issues and logistics disruptions or have eroded over time. However, many leading companies are rethinking their approach in the light of two industry trends.

First, industry leaders are beginning to build their networks around best cost locations, taking into account not only labour costs but also the costs associated with quality issues and distance from key markets. Countries such as Costa Rica and Malaysia have emerged as viable manufacturing hubs that meet quality and talent requirements, with governments offering wide ranges of incentives making them even more attractive to multinationals.

Second, some emerging economies are rapidly becoming sizable markets for medtech products, yet these markets are often challenging to serve from Europe or North America. Local regulations may include country of origin stipulations requiring local manufacture, while the logistics costs of importing products and transporting them over long distances may be prohibitive. As a result of these and other factors, more and more medtech companies are setting up production facilities in emerging markets. However, the industry as a whole still lags other regulated sectors, such as pharmaceuticals, in the share of overall product volumes manufactured in emerging markets. We believe that locations in emerging markets will play increasingly critical roles in the operational footprints of medtech companies over the next five years.

Engaging contract manufacturing organizations and third party logistics providers in supply ecosystems

With the right approach, CMOs and 3PLs can play key roles in accelerating network transformations. Recognizing the strides CMOs have made in improving quality and costs, leading companies are increasingly willing to enlist their support, and the use of CMOs is growing rapidly. In fact, over the next four years, CMOs in medtech are projected to grow roughly twice as fast as the medtech industry as a whole.

This growth is accelerating the evolution of a supplier ecosystem for some of the key production processes used in the medtech industry. In orthopaedics, for example, a number of third parties offer casting services; similarly, electronic component manufacturing and subassembly for in vitro diagnostics are available from multiple third party sources. Our analysis suggests that outsourcing opportunities are also multiplying in other major end markets, such as surgical tools, intravenous pumps, and neurostimulation.

Adopting an outsourcing approach based on core competencies rather than on labour cost arbitrage can allow a medtech company to focus on core activities and help it develop the flexibility to respond more rapidly to shifts in demand. Such an approach can also accelerate the network transformation process. In our experience, companies that use CMOs effectively can realize the value of a network transformation between nine and 18 months earlier than their peers.

Similarly, the use of 3PLs can speed up transformations as well as help unlock productivity benefits in warehousing. Many medtech companies lack sophisticated digital systems and tools for warehouse management and still rely on manually intensive, paper based processes. That is hardly surprising in a sector in which distribution has seldom been a source of competitive advantage. But it does mean that medtech companies have the opportunity to leapfrog several generations of technological and lean improvements by partnering with the right logistics service providers.

Despite all the benefits of outsourcing, though, companies face risks if they underestimate the challenges. They could lose intellectual property; suffer regulatory, quality, and delivery issues; and end up with higher, not lower, costs. Success rests on having the right talent, processes, and performance management mechanisms to manage an ecosystem of third party partners.