Originally Published MD&DI
Inventory Collaboration: An Untapped Opportunity
Automated, Web-based inventory collaboration lets manufacturers strike a balance between having sufficient products available and minimizing inventory carrying costs.
Alex Thompson and Bill Buckley
Web-based inventory collaboration unites buyers and suppliers and can improve efficiency.
In the current economic environment, medical device manufacturers are looking for low-cost, low-risk initiatives that are quick to implement, and have a proven return on investment (ROI). Web-based inventory collaboration is one of the few methods that meet these strict criteria. It involves automation of a company’s replenishment processes. The methods also connects buyer and supplier communities with real-time forecast, inventory on hand, and shipment information to reduce inventory and eliminate unnecessary expenses. While inventory collaboration has been widely adopted in industries where economic factors have driven automation, such as automotive and general manufacturing, there are still many companies in the medical device industry that have not taken advantage of this type of system.
This article discusses the basic components of inventory collaboration software and provides examples of how medical device companies can benefit from implementing these products.
Short- and Long-Term Opportunities
Although the current economic recession has caused some analysts to revise industry growth rates down from around 10% to an annual compound rate of 4% through 2013, medical device manufacturers face bright long-term prospects.1 Beyond 2013, healthcare is expected to grow at a faster rate than overall GDP, as it has consistently grown since 1965.2 Supporting this optimism are trends such as aging populations in the United States and other developed economies, significant government expenditures focused on improving healthcare systems, new product development from emerging technologies, and global opportunities for low-cost sourcing and revenue generation from emerging markets such as India, China, and Brazil.
While these macrolevel trends take effect, there are opportunities for device manufacturers to improve their bottom line in the short term. One specific area is Web-based inventory collaboration networks that unite buyers and suppliers. These networks have not been implemented comprehensively within healthcare industry supply chains and therefore present a potential significant upside.
Healthcare Versus Automotive: Unique Replenishment Needs
Other industries, such as automotive, have made significant investments in just-in-time systems and lean manufacturing operations. These investments were often made in the United States and Europe in response to the quality revolution and the competitive threat from Japanese manufacturers. As a result, many automotive manufacturers and suppliers at multiple tiers of the supply chain have implemented Web-based, collaborative inventory management products that became available in the early 2000s.
In contrast, a report from the Massachusetts Institute of Technology (Cambridge, MA) published in 2008 points out that “healthcare has not witnessed technology-driven cost reduction in general.”3 More broadly, medical device manufacturers and healthcare supply chains have not been subjected to the same pressures as the automotive sector. With greater regulation, higher margins, high-quality requirements, and more stringent requirements for product availability, medical device manufacturers have carried relatively high inventory levels.
The inventory replenishment needs of medical equipment versus the automotive industry are reflected in a comparison of inventory levels between the two industries. The average days of inventory outstanding (DIO) among the top companies in the automotive components sector was 31 in 2007. This number is more desirable than the 46 average DIO for the top companies in the healthcare equipment and supplies industry.4
With automated, Web-based inventory collaboration tools and processes, materials managers and supply chain executives in healthcare can strike the right balance between the requirements for high product availability and the desire for the lowest possible inventory carrying costs. Such systems also help medical device manufacturers automate their supply chains, and therefore support compliance with government mandates such as 21 CFR Part 11, which stipulates requirements for electronic record keeping.
Materials managers seek to minimize inventory levels to keep carrying costs down. At the same time, they must meet production schedules and customer demand. They must also manage these competing priorities while minimizing delivery timing and quantity and quality errors—without incurring undue administrative costs. In short, they strive to achieve the supply chain’s holy grail of delivering the right product to the right place at the right time.
Figure 1. (click to enlarge
) Disparate channels can complicate communications for suppliers.
However, many medical device manufacturers now spend excessive time and resources managing orders to their suppliers (see Figure 1). The labor-intensive processes of tracking disparate forecast and consumption spreadsheets, e-mails, and faxes result in unreliable parts availability. The resulting mismatch disrupts production, causes inventory levels to rise, and ultimately raises costs. The supplier is also negatively affected and bears high administrative and expediting costs as well as quality issues from striving to keep up with constantly changing customer schedules. In response to these problems, the supplier also raises its inventory levels to compensate for the increased risk.
Automated, Web-Based, Collaborative Inventory Management
With collaborative inventory management, manufacturers don’t need to create and e-mail unique delivery schedules or orders to their suppliers. Instead, manufacturers post the desired and actual minimum and maximum (min/max) levels for each part they buy on a secure Web site (see Figure 2). The supplier monitors this site regularly to find out its customer’s current inventory levels. Suggested delivery quantities on the Web site assist in finding the appropriate quantity for the next shipments. The supplier then determines when and how much product to ship to keep inventory within acceptable limits. The supplier also checks the Web site for its buyer’s long-term forecasts. If the long-range forecast isn’t provided, the supplier can still review the readily available consumption history to predict future demand.
Figure 2. (click to enlarge
) Collaborative inventory management creates a single, uniform channel for all suppliers.
With such a system, trading partners improve the efficiency of their supply chains by avoiding duplication of efforts. Though this may seem a small point to a casual observer, it is important. In noncollaborative systems, each partner tries to correct the other partner, only to create further over- and under-shipment quantity errors due to each partner’s attempt to predict the actions of the other.
How Inventory Collaboration Works
Suppliers using inventory collaboration are provided with a real-time view of the factors necessary to keep inventory at the desired level. This includes a customer’s inventory on hand, desired min/max levels by part, usage history, in-transit shipments, receipts, and forecasts.
Collaborative inventory management generally involves electronic messages synchronized from buyer enterprise resource planning (ERP) systems for data such as inventory on hand, consumption, receipts, and forecasts. Inventory levels are compared with desired min/max settings or kanban loop sizes, and alerts are automatically triggered and sent via e-mail when inventory falls outside desired levels.
After reviewing part-level inventory on hand or receiving a traditional signal, suppliers can send advance shipping notices (ASNs) using the Web site or send ASNs via traditional electronic data interchange (EDI) transactions. This enables OEMs to work with smaller or less technologically sophisticated suppliers as well as large suppliers. Visibility of inventory in transit enables reduction of safety stocks.
Support for Multiple Replenishment Strategies
Inventory collaboration enable users to employ multiple replenishment strategies. Because each company and its community of suppliers evolve over time, inventory collaboration must support at least the following three main replenishment methods:
• Pull-based min/max. Suppliers send shipments based on pull signals from buyers, within min/max inventory levels established by the buyer.
• Kanban. Suppliers send shipments based on pull signals from buyers, based on specific order amounts, as represented by Kanban cards.
• Discrete order fulfillment. Buyers send individual purchase orders to suppliers, defining an exact quantity to be shipped.
The customer should be able to choose the replenishment strategy by part number. Flexibility enables a customer to manage all of the parts on a single platform for each supplier, including repetitive parts and parts that are ordered on a one-off basis through discrete purchase orders, which may be applicable at the end of a part’s life cycle or for infrequently ordered items.
Buyers spend much of their time providing suppliers with updated forecasts. Review of the forecast and the accurate, timely communication of this information is a time-consuming, error-prone task. Inventory collaboration enables buyers to communicate these data through automated business rules, workflow, and traditional EDI transactions. The supply base has instant, Web-based access to daily and weekly forecasts and can compare forecast versus actual consumption patterns.
Dynamic Min/Max Business Rules and What-if Scenario Analyses. Once customers have initiated a basic inventory collaboration product, they can move to more-advanced stages of inventory management by dynamically managing their min/max levels. A dynamic min/max system uses business rules to automatically notify customers when critical changes have occurred in their supply chain, such as forecast increases or decreases for a given part. Business-rules-driven optimization enables customers to maintain optimal inventory levels at all times.
The system enables companies to run what-if scenarios, changing key parameters and analyzing the effect on their inventory levels. For example, a buyer could analyze the opportunity that might arise by changing a given supplier from shipping once per week to daily.
Lean Logistics. Another advanced-level aspect of inventory collaboration is to link internal pull replenishment systems with just-in-time transportation routing systems. Advanced inventory collaboration enables users to record snapshots of pull inventory signals at a given time so that the carriers can plan efficient and timely routes. This optimization improves operations for transportation carriers such as less-than-truckload carriers and reduces overall shipping costs. The system also allows customers to measure customer and carrier performance based on exact promise dates, ship quantities, and ship dates.
Balanced Scorecarding. Many companies have implemented scorecards to monitor their business operations and their overall business value chains, including external partners. A challenge that companies often encounter is the inability to obtain reliable, actionable data to measure performance. Inventory collaboration captures the key information for many of the standard metrics created by groups such as the Supply Chain Operational Reference-Model (SCOR), which has been adopted across many industries. Advanced inventory replenishment systems are able to prepackage metrics in the SCOR format so that clients can track items such as perfect order fulfillment, inaccurate shipment and receipt quantities, and late pickups and deliveries. By measuring such critical items, buyers and suppliers can collaborate to improve their operations over time.
Benefits of Inventory Collaboration
Unlike large scale, unwieldy ERP implementations that can cost millions of dollars, take years to implement, and lack a clear ROI, Web-based inventory collaboration delivers benefits to manufacturers and distributors swiftly, in a measurable manner. The key categories of benefits for medical device manufacturers includes low inventory levels, low administrative costs, smooth production operations, and high plant use.
Inventory Reduction. Inventory reduction is the most direct and significant benefit of collaborative inventory management. With such systems in place, added visibility of in-transit inventory allows buyers to set low safety stock levels. In addition, automated business rules and alert systems act as an inventory monitor that significantly streamline processes for the buyer, enabling inventory minimum levels to be set lower than if an automated system wasn’t in place. The systems also prevent inventory from breaching the maximum threshold.
This contrasts with manual programs in which both buyers and suppliers maintain high inventory levels due to information uncertainty. The manual practice ties up capital in both the inventory and the associated carrying costs.
The typical inventory reduction, as seen by medical device manufacturers using inventory collaboration in North America and Europe, ranges from 20 to 70%. The average inventory reduction is 30%.5
Administrative Time Savings. Manufacturers that use inventory collaboration typically see a significant reduction in the amount of time required to manage their suppliers. This reduction is due to several factors as follows:
• Suppliers do not need to call buyers to ask for forecast information to be e-mailed.
• Buyers have all suppliers helping to manage their inventory.
• Buyers are able to see inventory in transit.
• Buyers have one place to view all inventory.
Carrying Costs. Typical inventory carrying costs include the cost of borrowing money, insurance on the value of inventory, cost of obsolescence, material handling costs, and storage space costs. The annual percent cost is estimated between 15% and 40%, and therefore has a significant effect on overal costs.6
Premium Freight. Due to the high value of their products, many medical device manufacturers send their products via express freight. As a result, manufacturers do not have a distinction between premium, or expedited freight, versus standard freight. However, for those companies that do have a distinction between standard and premium freight, the number of premium freight occurrences can be dramatically reduced through inventory collaboration. The reducation can range between 50 and 90%, based on experience from software providers with thousands of customers, primarily driven by the increased visibility and the automated alerts that such systems provide.
Implementing Inventory Collaboration. Web-based inventory collaboration systems are typically implemented on a plant-by-plant basis. A plant and its base of suppliers are brought online over a period of a few months. Materials managers can then plan the rollout of additional plants and suppliers in waves. They typically start with high-volume plants and suppliers to maximize time-to-value.
During implementation, fees are assessed on a time and materials basis. Most of the work is performed by the software provider. However, there is some work required of the manufacturer to perform message integration for transactions such as inventory and forecast updates. As software-as-a-service systems are hosted by the software provider, buyers and suppliers do not need to maintain their own hardware and software licenses on an ongoing basis.
Following implementation, the systems operate on a monthly subscription basis, with transactions, users, or revenue serving as the basis for variable fees.
Inventory Collaboration with Hospital Supply Chains
Just as there is opportunity for medical device manufacturers and their suppliers, there is also a significant opportunity between manufacturers and hospitals. To date, technology and process improvements have not been applied to their full potential in this leg of the supply chain. Going forward, spurred by greater government investment and global competitive pressures, hospital supply-chain executives will likely begin to implement systems like inventory collaboration. Medical device OEMs that are already familiar with such systems will likely be seen as a desirable partner by hospitals as they make the transition.
Due to the unique dynamics and requirements of the healthcare industry, many medical device manufacturers have not taken advantage of inventory collaboration. However, the system has proven benefits for supply chains that can be implemented relatively quickly, with low cost and clear ROI. Even in normal economic environments, such projects make sense; in an economic downturn, they should be even more attractive.
1. Medical Supplies and Devices Industry Forecast, [online] (College Park, MD: Interindustry Economic Research Fund Inc., December 2008), available from Internet: www.hoovers.com.
2. National Health Expenditures—Historical and Projections, 1965–2018, [online] (Baltimore: CMS, Office of the Actuary, National Health Expenditure Accounts, 2006); available from Internet: www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp.
3. M Singh and K Thomas, “MIT Efficient Healthcare Delivery Research Project,” Medical Device Industry Supply Chain Council, 2008; available from Internet: www.medsupplychain.org/pdfs/MIT_Presentation.pdf.
4. Europe Working Capital Scorecard, [online] (CFO Magazine, 2008); available from Internet: www.cfo.com/media/pdf/CFO_Europe_Working_Capital_Scorecard_2008_Full.xls.
5. David Blanchard, “Stryker’s 4-Step Inventory Reduction Process,” Industry Week, (2007); available from Internet: www.industryweek.com/articles/strykers_4-step_inventory_reduction_process_13719.aspx.
6. Lisa Harrington, “Inventory Report,” Industry Week, (2000); available from Internet: www.industryweek.com/articles/inventory_report_1928.aspx.
Alex Thompson is chief architect and vice president of market strategy at TradeBeam Inc. (San Mateo, CA). Bill Buckley is director of professional services at the company.
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