Medical Device Link.

Originally Published MX January/February 2004

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

A regular, systematic review of its operations strategy will enable a company to improve competitiveness and efficiency in a changing business environment.

Lawrence I. Strauss

The medical technology industry is undergoing major structural change. Almost 300 acquisitions worth more than $16 billion have been concluded in the sector in the years 2001 and 2002 alone.¹ While medtech companies struggle to bring more new products to market faster, their margins are being squeezed by product-line aging and by managed healthcare. Moreover, FDA scrutiny has meanwhile increased, forcing companies to commit more resources to management of quality assurance and regulatory affairs.

Despite these significant industrywide developments, many companies have failed to review their operations strategies--even though the foundations upon which these strategies were built have shifted. A company that has not rethought an out-of-date operations strategy risks missing out on emerging opportunities and can be blindsided by competitors.

An operations strategy can become outdated as a result of the company's failure to respond to large-scale trends such as the aging of the population or stepped-up regulatory enforcement. Or, an immediate trigger event such as an acquisition or leap forward in technology can leave the inattentive firm lagging. Staying on course with all these crosswinds requires constant compass checking and large and small heading corrections.

In a dynamic sector such as medical technology, top executives should revisit their operations strategies on a regular basis to make sure they can still position the company for competitive advantage. The most successful companies reevaluate their strategy at least as often as every two or three years, and, based on the new evaluation, make the necessary course adjustments.

Avoiding Strategy Obsolescence

It may not be obvious to company leaders that their operations strategy is obsolete. Sometimes there are indicators--decreasing margins, increasing customer complaints, and shrinking market share--but not always.

But in many cases, a specific corporate event makes a new operations strategy necessary. Company executives might decide to outsource manufacturing for one of the firm's products, for instance. They would then need to consider which manufacturing technologies and management functions to keep in-house and which to transfer to the contract manufacturer. The process of making these decisions might involve redefining part of the company's operations strategy.

In another example, a company might adopt a new product technology or change a manufacturing process, thereby significantly increasing production costs, inventory holding costs, and cycle times. Responding to these effects, the company might compensate by holding finished- goods inventory in fewer locations, adopting a postponement strategy, or otherwise adjusting its distribution plan. Any change in circumstances that affects any element of an organization's operations strategy--including its technology strategy, manufacturing network configuration, supply-chain strategy, and outsourcing strategy--ought to trigger management reevaluation of the overall operations strategy.

The events that cause executives to reassess the operations strategy may be internal or external triggers. Internal triggers are changes that the company initiates itself. These could be the acquisition of another company, introduction of a new product, or some innovation that results in a major increase in sales volume. External triggers are changes in circumstance brought about by competitors, suppliers, partners, or customers. Such outside influences can render an operations strategy obsolete--generally speaking, less competitive--even though the operations haven't changed at all.

For example, a competitor might decide to introduce a low-cost version of the company's product to the market. Company leaders will need to decide whether to respond by lowering the price of their existing product, by launching a new product, or by trying to maintain market share through offering a wider variety of product features or support services. Any of these possible moves will require that the company realign its supply-chain operations to plan, source, make, and deliver a lower-cost or more complex product, or even an entirely new product. And its managers will need to revise the company operations strategy in order to support the new operating goals.

Appraising the Operations Strategy

Once company leaders have determined that their operations strategy needs revising, they next need to focus on high-level requirements that a new strategy must meet. The overall company business strategy should specify these requirements, which typically relate to cost, quality, time-to-market, innovation, or customer service objectives. The executives must determine how the operations strategy must be altered to support the requirements. They need to consider:

• Whether all the components of the operations strategy are clearly defined and realistic.
• How well the components support one another and the company's overall business strategy.
• What changes in operations are needed to execute the strategy now.

Take the case of a large medical device company that has recently acquired a niche-product manufacturer and is now trying to integrate the operations of its new division. The acquiring company will need to determine whether its own quality system will support the acquisition's sourcing strategy, whether its own sourcing operations and the combined manufacturing network will support the acquisition's technology strategy, and a range of other issues of that type.

Working through such issues is the core process of developing or refreshing an operations strategy. Given the number of operational elements that must be reevaluated, the various constraints that must be taken into account, and the many different options to consider, it can be hard to know where to start--and hard to know what a good strategy is. An execution framework consisting of five levers has been conceived to simplify matters for executives facing this challenge.

Revising an Operations Strategy

To succeed, an operations strategy must be made up of elements that are both realistic and mutually supportive. If not so constituted, the strategy will fail no matter how hard company managers try to make it work. Elements of the strategy are realistic when they are achievable within a given time frame and environment with available resources. Mutually supportive elements work together--or at the least do not undermine each other. A negative example is an operations strategy that aims both to improve supply-chain responsiveness and to implement new manufacturing technologies that require long, high-volume production runs. That strategy will likely fail because the two goals are mutually exclusive.

Once corporate managers have decided on a company operations strategy, they need to execute it. Five operational levers are available to them for implementing a strategy successfully (see Table I). Which levers they choose and how they use them will depend on the firm's particular circumstances. The five levers are:

• Supply-chain configuration.
• Management practices.
• Strategic relationships.
• Organization.
• Information technology.

Their application is equally effective whether the company needs to make minor adjustments to one element of its operations strategy or major changes to the entire strategy (see sidebar).

Supply-Chain Configuration. The first lever to examine is supply- chain configuration, which involves decisions about what products are manufactured and stored in which facilities, where those facilities are to be located, and which operations to outsource. Those activities and assets evaluated as being, or having the potential to become, strategic differentiators, such as core manufacturing technologies, are the ones to keep in-house. Nonstrategic supply-chain activities such as distribution could be outsourced. Supply-chain configuration also includes the planning and sourcing processes necessary to support manufacturing and customer order fulfillment.

Executives evaluating whether the company's operations strategy is still valid often find it helpful to start with a blank sheet of paper. On it they design the ideal supply-chain configuration for the company. The next step is to compare the scheme developed by means of that exercise with the company's actual supply-chain configuration and to estimate the benefits, in terms of improved customer service, lower costs, and so on, that would result from reconfiguring the existing supply chain to conform with the ideal.

Benchmarking can help in this analysis. For example, a company's suppliers might be widely scattered instead of being located efficiently near its manufacturing plants. A comparative analysis of the company's sourcing performance vis-à-vis that of other, similar companies will provide some perspective on how much the company is being penalized, if at all, by its present arrangement. With results of the analysis in hand, managers can then decide whether the benefits of rearranging the supply chain warrant the costs of doing so.

Management Practices. Management practices include the policies and procedures by which a company operates. Deep understanding of the practices currently in use is critical to company leaders who will have to determine whether these practices will support a new operations strategy as they had the old. If effective support is unlikely, then the executives must identify which practices need to change and decide how to enact the necessary changes.

For example, a medical device company that manufactures all of its products according to a make-to-stock model might decide to produce certain items on a configure-to-order basis. Company leaders would then have to not only establish procedures for the new configure-to-order process but also alter management practices relating to materials sourcing, production planning, inventory, order handling, and distribution in order to properly support the new operations.

Strategic Relationships. Strategic relationships are the partnerships between a company and its suppliers, contract manufacturers, and customers in which, as appropriate, both parties share risk and reward. The key issues for company executives to consider here are how these connections will change and whether or not a new operations strategy will require strategic relationships with new partners.

If they have decided that improving product quality means improving supplier quality, they may want to work closely with certain suppliers to identify and fix manufacturing-process problems. This approach works best when both parties commit to a long-term relationship that would justify the investment in the process improvements.

If company leaders decide that some strategic relationships need to be changed, or that new ones should be initiated, they must take into account not only the incentives for each partner to enter into such a relationship, but also the risks and exposure that each will bear.

Organization. The organization lever involves focusing on who has responsibility for various supply-chain activities. When a company's organizational structure does not support a new operations strategy, it will be difficult if not impossible to make changes--especially if no single person is ultimately accountable for a necessary change. For example, should executives decide to centralize finished-goods inventory to reduce total supply-chain costs, then they must also centralize the responsibility for managing those inventories. If they do not, the organization's structure and incentive systems may not be aligned with its goals. Managers need to know that some specific person is responsible for each element of corporate operations and each key performance metric.

Information Technology. The final lever is information technology (IT). Effective strategy execution depends on timely, appropriate information that can be used to make good decisions. Timeliness and appropriateness are key: what is critical is not what IT systems a company has, but rather the usefulness and applicability of the information those systems deliver. Computers are wonderful for collecting and reporting information, but a simple query from a data warehouse is not going to provide true insight into operational performance.

Information certainly can optimize an operations strategy. Manufacturers that share customer order data with their suppliers, for example, give these suppliers greater insight into the probable upcoming demand for their components, thereby ultimately enabling them to better serve the manufacturer. Being able to determine who needs what information when is important. Once a company identifies the proper information flow, its managers can begin to figure out how to deliver the right information to the right people at the right time so they can use it to make executable decisions.

Conclusion

Today's challenging business environment makes operational excellence more critical than ever. Medtech companies now have to exploit their supply chains strategically as well as tactically. Changes in internal and external circumstances continually present the business enterprise with new opportunities and threats.

If company leaders do not revisit their operations strategy regularly and refresh it as needed, the strategy may fall out of sync with business realities. An outdated strategy could sabotage the company's pursuit of its objectives rather than drive it forward. An operations strategy might need a tune-up or an overhaul. In either case, the five-lever framework can be a valuable tool for restoring smooth running.

By regularly monitoring the business environment and adjusting their operations strategy as needed, company leaders can stay focused on what matters--today's goals, not yesterday's needs.

Reference

1. The Health Care M&A Year in Review, 8th ed. (New Canaan, CT: Irving Levin Associates, 2003).

Lawrence I. Strauss is a principal in the global life sciences practice of the international management consulting firm PRTM. He is based in the firm's Waltham, MA, office.

Illustration by JONATHAN EVANS/Artville

Copyright ©2004 MX