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Making the Cut

A globalized market and cost-conscious OEMs are forcing vendors to find innovative ways of remaining on their customers’ shrinking list of preferred suppliers or Approved Vendors List.

Michael Barbella
Managing Editor

Much of the Western Hemisphere was sound asleep when the sea floor began to tremble, then shift as it slipped beneath the North American tectonic plate in the western Pacific Ocean. As millions lay dreaming, a historic 9.0-magnitude earthquake off Japan’s northeastern coast was creating a disaster of biblical proportions on the opposite side of the world, turning bridges and buildings into piles of rubble, triggering deadly tsunamis that wiped out whole villages and precipitating the world’s worst nuclear accident in nearly 25 years.

By the time dawn broke on the Western World on March 11, the catastrophe was unfolding, almost in real time, through 24-hour cable television networks (CNN, MSNBC and Fox News) as well as the pervasive social media outlets ofYouTube, cellphone videos, Facebook, Twitter and live blogs. Through the Internet, the world experienced virtually every moment of Japan’s trifecta of tragedies, from the heart-pounding race to prevent a nuclear meltdown at the country’s crippled Fukushima power plant; to the heartwarming rescue of an 80-year-old grandmother and her teenage grandson who were buried beneath rubble for nine days; and the heartbreaking search by 9-year-old Toshihito Aisawa for the family he last saw swept away by the tsunami that slammed into his hometown of Ishinomaki.

Aisawa’s hometown was among the dozens of cities and coastal villages flattened by the monstrous waves that crashed ashore after the undersea quake. While most of the damage was confined to areas near the epicenter (45 miles east of the Tohoku peninsula at an underwater depth of 19.9 miles), the titanic temblor still could be felt as far away as Ichihara, Chiba Prefecture, 189 miles to the southwest, where the disaster sparked an oil refinery fire; and Tokyo, 231 miles to the southwest, where rolling blackouts, runs on food and massive evacuation attempts thrust the capitol into chaos, an unusual characteristic for a city that considers itself an orderly, technologically savvy, even futuristic metropolis.

It is this (usual) devotion to order as well as the cosmopolitan flavor of the city that has attracted some of the world’s largest medical device manufacturers to Tokyo over the last 20 years. Companies such as Abbott Laboratories, B. Braun Group, Covidien plc, Hospira Inc. and Medtronic Inc., among others, have opened branch offices or built manufacturing and distribution centers to take advantage of the city’s strategic location in the lucrative Asian market.

Upon learning of the quake and tsunami, executives at most of these device firms reached out to their counterparts in Japan to assess damage at their facilities and assess the potential impact to their supply chains. Some companies, such as Abbott, Hospira and Medtronic, were fortunate—their facilities suffered little or no damage and their distribution channels were not significantly impacted. Even Covidien got a lucky break: Though the quake damaged the buildings of several of its suppliers, the company had enough raw materials on hand to meet local demand. Others, however, were not as fortunate. Becton Dickinson and Company shut its plant in Fukushima to repair quake and tsunami damage and minimize employees’ exposure to dangerously high radiation levels. The company had restarted some manufacturing lines by April 5, but its facility still was not fully functional. “BD’s plant in Fukushima has now restarted some manufacturing lines, and repairs to other lines and areas of the facility are underway,” a statement on the company’s website read. “BD sources certain component parts and finished products from third-party suppliers in Japan, and continues to believe that inventories of these items will be sufficient to meet global demand for BD products.”

Misfortune also struck PartnerTech, a Swedish contract manufacturing firm serving the medical technology, defense and maritime, information technology and industrial sectors. Executives there expect the quake to impact the ability of about a dozen suppliers to distribute products or components to the firm. PartnerTech informed its customers of the potential disruption via a note on its website, but was vague about specifics—it did not identify the products that could be affected or estimate the amount of time it might take to resolve the broken supply chain link.

“About a dozen suppliers are directly affected by the earthquake and subsequent tsunami,” the note read. “In the near term, it is expected that these suppliers will have difficulties supplying components to PartnerTech as well as to other companies in the market. The situation in the longer term is difficult to predict at this time.”

During the worldwide financial crisis, some financial institutions in the United States were considered “too big to fail” (remember Bear Sterns and Lehman Brothers?). The same principle now can be applied to the global supply chain, with certain Japanese suppliers having become too big to do without. Mitsubishi Gas Chemical and Hitachi Chemical, for instance, control about 90 percent of the market for a specialty resin that is used to bond parts of microchips used in smartphones and other devices. The quake damaged both companies’ production plants, as well as one owned by Kureha Corporation, which holds about 70 percent of the market for a polymer used to make the compact battery in Apple’s iPods. Similarly, German pharmaceutical, chemical and life-sciences conglomerate Merck KGaA owns the world’s only factory that supplies automakers with Xirallic, an enhanced aluminum oxide that is added to pigments to give them their metallic glow. The facility is located 28 miles from the battered Fukushima nuclear power plant, which experienced a partial meltdown after the quake and has been leaking radioactive material into the surrounding air, soil and water. As a result, the world’s major automobile manufacturers are being forced to find different kinds of paints for their vehicles or scrap certain colors altogether.

The scramble to find alternative sourcing channels in the wake of Japan’s deadly disaster illustrates the key role the supply chain now plays in the global market. It also shows how little some companies (and industries) know about their suppliers’ suppliers and those even further down the sourcing chain.

“A tremendous amount of quality resources are required to keep up with the global supply chain,” noted Gerard J. Pearce, executive vice president of SQA Services Inc., a Los Angeles, Calif.-based firm that specializes in global supplier quality management. “It’s one thing to source from around the world, but when your sourcing outpaces your supplier quality function, that leaves you open to risk. Larger companies have thousands of suppliers. They need to be selective in how they structure and apply their supplier quality resources and where they get most of their supplies from so they can minimize wasted time and interruptions in supply. When your supply chain becomes global, applying the same kinds of evaluation and controls to [offshore] suppliers that you apply to those closer to home becomes a lot harder to do.”

Glitches to Supply Chain Globalization

In his 2009 book, Dynamic Supply Chain Alignment: A New Business Model for Peak Performance in Enterprise Supply Chains Across All Geographies, supply chain guru John Gattorna, Ph.D., advises companies to adopt a new business model for their vendor networks. He claims that current approaches to supply chain design are flawed because they are based on traditional models and principles that fail to understand customers’ wishes and needs.

Companies that align themselves with their suppliers to meet customer needs will increase both their market share and total revenue, Gattorna insists in his book. In order to achieve such symmetry, however, companies must end their obsessions with cost reduction and focus more on the human aspect of sourcing. “Supply chains may seem like uncontrollable, inanimate beasts,” Gattorna notes, “but they are, in fact, living systems propelled by humans and their behavior.”

Human behavior, though, is flawed. And for companies attempting to globalize their supply chains to ensure future growth, human imperfections can be particularly challenging to overcome. Communication is one of the most common problems facing companies that establish overseas operations and supply bases in foreign countries. Language barriers can make it difficult for organizations to effectively communicate with suppliers, industry experts told Medical Product Outsourcing. Corrective actions are a prime example. Foreign regulatory agencies might require an offshore supplier to undertake a corrective action; however, the requirements for that corrective action procedure may be written in the regulatory agency’s native tongue. China’s State Food and Drug Administration, for instance, may issue a corrective action notice in Chinese, or the Brazilian National Health Surveillance Agency could require a supplier to respond to its corrective action request in Portugese. Companies that cannot overcome these kinds of communication gaps will have a difficult time creating a new supply chain link in another country.

Regulations can become another major hurdle in establishing a global supply chain. Statutes governing the manufacture and sale of components or materials vary between countries, making it nearly impossible to sell the same finished product in different markets.

“Where is the component or material manufactured and what regulations do we have to meet where we’re producing it?” asked Marty Gahman, associate director of strategic purchasing for B. Braun Medical Inc., a Bethlehem, Pa.-based manufacturer of infusion therapy and pain management products. “Despite talk about globalization, you can’t sell the same material or component or finished product to anyone in the world. They all have different regulations, and the more complex the product, the more difficult it is.”

Geography also makes it difficult to establish a global supply base, experts said. Most companies frequently visit suppliers to conduct audits, assess compatibility and ensure their corporate culture aligns with that of the larger organization. Suppliers located on the other side of the planet can be difficult to visit on a regular basis.

“Communication becomes more of a challenge as the supplier gets further away from you geographically,” Pearce explained. “Getting around to visit a supplier that is far away can eat into your ability as a company to manage that supplier and maintain a meaningful relationship. Aside from the time and expense, other factors such as language and cultural barriers can impact the effectiveness of such interactions with global suppliers. The on-site evaluation of a supplier, in addition to meeting regulatory requirements, can also provide additional benefits, such as better understanding a supplier’s capability and capacity, or elaborating on the customer’s interpretation of a standard. The further away these suppliers are, the harder it is to realize these benefits. Also, it’s one thing to conduct an evaluation of a supplier, but in many cases, the evaluation isn’t over until the last corrective action has been implemented. And verifying some corrective action is hard to do unless you fly out to the supplier again before your next audit. That is a big challenge.”

Some companies address this challenge by establishing regional hubs around the world to manage supplier quality in those areas. Of course, these hubs can present challenges of their own, namely, a lack of collaboration among the regional organizations as well as a reluctance to share data (including such basics as official company name, address and phone number, Pearce noted).

A number of other firms are bridging the communication gap through regionally configured supply chains, according to a survey by global management consultant firm PRTM Management Consultants titled, “Global Supply Chain Trends 2010-2012.” Regionally configured chains, the survey states, serve local customers according to their requirements, while bundling supply chain partners, manufacturing facilities, and distribution centers as much as is economically possible. As a result, these regionally configured vendors serve international customers with a cost-effective network while maintaining maximum flexibility.

In addition to enhancing communication, regionally configured vendors can help manufacturing firms overcome other obstacles to globalizing the supply chain, including one of the most troubling for companies—managing a supplier network that is becoming increasingly complex due to an increase in customers or customer locations, high fluctuations in customer orders, an increase in strategic suppliers, and growth in both the number of manufacturing facilities as well as distribution centers/inventory locations.

The increase in customers is one of the top drivers of supply chain complexity, according to PRTM’s survey. Most of the 350 manufacturing and service organizations that participated in the study expect future growth to come primarily from new international customers and customized products. As a result, more than 85 percent of companies expect the complexity of their supply chains to grow significantly by 2012. Specifically, more than three-fourths (79 percent) of respondents expect an increase in the number of international customer locations, and more than two-thirds (67 percent) anticipate that a higher number of products or variants will be required to fulfill customer expectations and counter shrinking revenue, the survey indicates.

Such a dependency on international markets and customers, however, is certain to complicate companies’ efforts to manage their supply chain. Finding and winning new international business can be difficult without a thorough knowledge of foreign markets. Iran, for example, imports 97.7 percent of its medical products despite the local manufacture of basic consumable items such as syringes, needles, catheters, dental instruments and orthopedic devices. Imported medical products were valued at $597.8 million in 2008, with Germany and the United Kingdom being the leading suppliers. However, the country apparently lacks a coherent regulatory framework, and Iranian buyers are very thorough in evaluating products for purchase. As a result, foreign medical device manufacturers would be wise to find a local supplier with knowledge of the most relevant procedures.

“A hospital bed that Stryker or Hil-Rom designs for and makes in the United States won’t necessarily sell in China. The patients there like a much firmer bed,” said Dave Busch, vice president, marketing, for OnCore Manufacturing Services LLC, a contract electronics manufacturer. “You have to regionalize your supply base to fit the requirements of your end market. Also, no one supply chain fits all products. A China-only supply chain will not be optimal for a wide range of products. Johnson & Johnson makes a wide range of products, from blood glucose meters to sedation monitoring systems. You need to splinter your supply chain to optimize by product.”

When those products are proprietary, finding a supplier can become particularly difficult, experts told MPO. Many large medical device manufacturers with “unique” products usually are reluctant to enter emerging markets due to the lack of strong intellectual property (IP) protection and patent protection laws. China often is singled out for its inability to control product copycats with stringent anti-piracy laws, even though the country has strengthened its legal framework in recent years and amended its IP protection regulations to comply with the World Trade Organization agreement on Trade-Related Aspects of Intellectual Property Rights.

IP protection laws, however, vary between countries. Some of the more developed nations such as Singapore and South Korea have maintained a better reputation for protecting trade secrets. Many countries also have taken bold steps to prevent pilfering—at some Asian facilities, armed guards patrol prototyping and manufacturing areas to prevent proprietary goods from being stolen by employees.

Trade secrets are not exclusive to manufacturers, however. Proprietary content occasionally is found among suppliers as well; experts claim the discovery can add yet another layer of complexity to an already intricate sourcing chain.

“One of the things we’ve run into with a few clients is supply proprietary content. When you look to globalize the supply chain you find big pieces of product that are stuck in a country or region because of certain supplier capabilities or proprietary content,” explained Linda Meloro, principal at PRTM. “People perceive this as a huge challenge because you might have to engineer around things and if you engineer around things, then you have to go through all the regulatory hurdles. Even if a company moves a product to a different market or dual produces it in another geography, it still has to get that component from the high-cost country and ship it to the low-cost country for assembly. There’s issues like that where people will just throw up their hands and say ‘I’m just going to stay local to that supplier because they constitute such a large percentage of my product.’ There’s some stickiness that comes from that.”

Companies can address such viscous situations by identifying supplier proprietary content and working to systematically design out such components in future product iterations. “If you know where your biggest exposures are, then, with future product generations, you can focus engineering efforts on designing the risky, proprietary high-cost components. I had one client that had something like this,” Meloro recalled. “The client had to get a certain component from a particular supplier. It was high cost but this supplier was the only one that could supply it because it was their design. Well, the supplier went bankrupt and it took the engineers three months to redesign and resource that particular component. So it wasn’t quite as proprietary as everybody thought.”

Keep the Partners, Dump the Order-Takers

Several years ago, executives at Command Medical Products Inc. were reviewing feedback from the company’s annual customer survey, and they made a disturbing discovery: The Ormond Beach, Fla.-based contract manufacturer had begun to lose its inimitability with clients. The company was slipping toward a precipice it knew would endanger its ability to remain on customers’ preferred vendor lists.

“It’s critical to not go into a customer maintenance/customer service mode with your clients and simply become order-takers because that’s the death toll,” said Stephanie McGee, Command Medical’s sales and marketing director. “At that point, you’re not going to know what the customer’s needs are and the customer is not necessarily going to remember what you do outside of the product or service you are providing them at the time. That was feedback that we got several years ago, we found we were falling into that [order-taker] trap somewhat. [Customers] didn’t really remember all the things that we do at Command so when they are looking at consolidating their supplier base are we being put down as a bag supplier or are we being put down as a full contract manufacturer?”

Companies that constantly resell their capabilities are more apt to remain on their customers’ preferred supplier lists. Over the last several years, OEMs and other large medical device manufacturerssteadily have been trimming their vendor lists in order to cut costs and improve visibility (and accountability) in the supply chain. The trend has forced contract manufacturers and outsourcing providers to find innovative ways of staying in their customers’ good graces.

Many of the tips for staying on a preferred vendor list are basic and follow good manufacturing practices: communicate openly and honestly, respond quickly and positively to requests for improvement, contain costs, integrate quality throughout the organization and the product development life cycle, be financially sound and demonstrate expertise in serving the medical device industry (most of these pointers also can double as vendor evaluation tools).

Some companies, however, go a step further to win long-term approval by making upfront investments to secure a contract, filling a market niche, or as OnCore’s Busch suggests, “act like a service company.”

“Products are tangible and hard and real and we think that’s what the value is. But services are intangible and amorphous,” he noted. “Lots of industries have had a hard time with this concept. Look at the airline industry. For years it was run by airplane guys who thought of themselves as an airplane company that carried people around rather than a transportation company that oh, by the way, just happens to use airplanes to take people around. If you could move from one space to another safely and less expensively, would you care if it was an airplane or an angel? No. Most people wouldn’t care. Companies have to think in terms of the service the customer wants and not necessarily how it is delivered. Those that do, separate themselves from everyone else.”

Other ways suppliers can separate themselves from other vendors in the chain is by meeting customer needs that are not verbalized in a formal contract. Or, by acting as an extension of their OEM customer.

“From robust quality practices to proactive approaches to reducing costs, today’s suppliers must operate as an extension of the OEM customer,” said Jim Reed, vice president of sales and business development at Accellent Inc., a Wilmington, Mass.-based provider of outsourced medical device manufacturing services. “In years past suppliers would often tout their ISO or FDA registrations as a differentiator and perhaps as a means to win new business. In today’s highly sensitized regulatory environment, these registrations are simply a game stake. Our customers expect for Accellent’s quality practices to be the same or even better than their own internal practices.”

* * *

The globalization of the medical device market has increased the complexity of the industry’s supply chain sector during the last decade. Many manufacturers now look to foreign markets for long-term growth and increasingly are establishing operations in other countries to secure the financial viability of both their organizations and their products. But to ensure future growth, companies must be able to address various supply chain challenges, including demand volatility, increasing complexity and globalization, greater cost pressures and more extensive sourcing risks.

Consequently, suppliers must be willing to grow with their OEM partners and adapt to their changing needs. Those that become an extension of their clients, anticipate unspoken desires and are willing to make both a financial and strategic investment in the relationship stand the best chance of retaining their “preferred vendor” title. Accordingly, those that fail to deliver the best cost, on-time delivery and do little to foster their relationships with clients most likely will be released from their contracts. There is still hope, though, for the former favorites who want to rekindle their relationships with OEMs. Industry experts claim the fix is simple—determine the reason for the dismissal and create a plan to correct the deficiency. Or, follow Busch’s advice: Don’t end up there in the first place.

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