Quality and efficiency18 November 2022
Depending on what they’re assigned to make, the modern-day contract manufacturer must be prepared to produce highly-customised single units or high numbers of the same product with repeatable quality. In order to achieve this level of predictability, they employ numerous digital and physical tools. Jim Banks speaks to supply chain expert Dan Dodd to better understand how contract manufacturers instil operational excellence throughout the production process.
The global market for medical devices is set to keep on growing. According to KPMG, annual sales could increase by more than 5% each year, reaching $800bn by 2030. In a high-margin market that means business is good, but is that level of profitability getting in the way of improving manufacturing processes? So far, the industry has lagged behind other sectors in its approach to modernisation and the implementation of best practices. Automotive manufacturing, for example, has pressed ahead with efficiency gains and technological innovation and it is reaping the benefits. Now, it is time for the medical device industry to catch up by prioritising agility in its manufacturing cycle.
“Agility is particularly important in medical devices,” says supply chain expert Dan Dodd, who has been handling supply chain issues in the industry for the last 25 years. “I wanted to be Thomas Edison not Henry Ford, hence my involvement in many start-ups, but you don’t learn about operational excellence in the medical device industry, where the focus is on sales.”
“You learn about operational excellence in the car industry, for example, where margins are much smaller,” he adds. “Contract manufacturers often do car manufacturing, too, but they like medical devices because the margins are higher.”
Dodd points out that the difference between the medical device industry and other sectors is the greater emphasis on efficiency in the high-volume car manufacturing sector, for instance, compared to many low-volume orders for medical devices.
“Also, this industry has a higher regulatory burden, so there is a lot more paperwork,” Dodd continues. “The quality has to be good, but it is not built in through the supply chain as it is in the automotive industry. Everything comes down to inspection. Everything has to be measured from every angle, but in automotive the manufacturing process itself is measured, looking for when the line is going out of control.” By contrast, Dodd argues that in the medical device industry, the focus is often placed on the end product at the expense of the process required to create it. “In medical devices, there is a sense that people don’t care how you build it, only how it measures up at the end,” he says. “QA needs to be strict for something you put in the body, but that process is wasteful and there is no evidence that it produces higher quality.”
A keen eye on manufacturing
Based in Illinois, Dodd has held numerous operational excellence positions with high-ranking medical device companies and has developed a profound knowledge of synergies between production processes and technology. He is currently working with five start-ups, some of which he co-owns.
He is, for example, co-founder of Lung Healing Technologies Inc, which is commercialising patents by the chief of thoracic surgery at Northwestern that monitor the CO2 and O2 in a chest drain. He also co-founded Ignis, which has developed and evaluated a business plan with a local hospital and surgeon for generic knees and hips.
For Dodd, there are many key components to the supply chain excellence that contract manufacturers in the medical device sector should consider. He places particular emphasis on analytics, believing that you cannot manage what you cannot measure.
“The criteria I use to judge operational excellence are 75% lean manufacturing and six sigma principles to instil agility, and 25% sales and operation planning to give a forward-looking dimension,” he remarks. “The supply chain must respond to the customer and lead times mean you need careful planning.”
Inventory turnover – or inventory turn – is a key metric for any improvement in the manufacturing cycle. It compares the number of units sold to the number of units on hand to give an indication of how well a company is managing inventory and generating sales from it. It is a vital component of effective supply chain management in many industries, but it is a measure by which the medical device sector often performs poorly.
“Inventory turns of two or three are pretty common in medical devices, but in other industries you would be out of business with that kind of stat,” Dodd explains. “It represents how long an item sits in your inventory. What is done with medical devices could not be done with cars.”
“A lot of inventory means a lot of problems,” he adds. “Inventory is a key metric, so is quality. But cost and margins are so good in the medical device sector – if you sell straight to a hospital the margin can be 80% and potentially 40% for contract manufacturers – that there is little incentive to change.”
Despite the barriers to change, however, the industry is being dragged in the wake of best practices elsewhere and it seems that the dynamics of the supply chain are starting to change. Reducing inventory can help to reduce overhead costs and, therefore, improve profitability. That is a benefit that few would shun.
Introducing systems that provide a real-time and accurate overview of inventory is an essential starting point to create efficiencies in even the most complex supply chains. It enables more detailed planning and can ensure production is managed in a more flexible and agile way with contract manufacturers. Time-to-market can be improved, even though regulations may slow the process down.
“All factors are equally important in optimising the supply chain,” says Dodd. “Quality control is important in medical devices, which needs to move more towards the kind of QA processes seen in other industries rather than measuring each product with a microscope once it is complete. It is behind the other industries in that regard.”
“But in terms of time-to-market, a lot of my work is done on a just-in-time basis and I have the supplier hold the inventory,” he adds. “That gets lead times down. I do a lot of purchase orders with contract manufacturers and I set up kanban systems with them.”
Kanban is a lean workflow management method for defining, managing and improving processes to deliver maximum efficiency. For Dodd, there is a need for constant improvement in contract manufacturing processes, though this seems to go against the grain of established practices.
“It is mainly about mindset and culture,” he remarks. “The tools are great and they are moving forward throughout the industry. For example, IoT is helping measure processes across the supply chain and providing data. But I have to pay contract manufacturers to put in place systems to capture data along the way that reveal the likelihood that a bad part was built at some point.”
“I think that kind of data capture and analysis is something they should do themselves,” he adds. “It will come in time. It is part of doing business. As a contract manufacturer, if I want to be good at building stuff I should be getting that data for myself.”
Breaking the chain
Progress towards a leaner and more agile manufacturing cycle has been accelerated by the Covid-19 pandemic, which emphasised the need for agility and, above all, faster time-to-market for medical devices.
According to KPMG, changes in the regulatory environment – typified by the European Medical Device Regulation implemented in 2020 and Chinese regulations designed to encourage local innovation – will start to chip away at margins for medical device companies that rely on major investments in R&D. So, too, will the influx of new players from other industries that are used to harnessing data to gain market share and deliver highly efficient manufacturing processes.
For established players in the medical device sector, there is a clear need to have a transparent view of the supply chain to improve planning, head off potential problems before they emerge, and speed up innovation. Improving data gathering and analytics will soon become a priority for medical device companies and their partners in the manufacturing cycle.
For Dodd, a key component will be changing how medical devices are sold to end users.
“The sales rep gets 30% of the sale price, so their relationship with doctors and hospitals is important,” he remarks. “That relationship pushes up costs. The focus in this industry is not on operational excellence in the same way as in the car industry, as you won’t go out of business if you don’t maximise efficiency, so why bother focusing on efficiency and lead times rather than just getting the minimum regulators require?”
“I’ve worked hard at a couple of start-ups and found that even if my medical device might be cheaper and better it does not change the doctor’s mind,” he adds. “At Ignis, we focused on very short lead times for knees and hips, which means people get quality and cost advantages, but the relationship between sales rep and doctor is really tight and it is hard to get in.”
Nevertheless, Dodd feels that the tide is turning. It is becoming easier to capture data on inventory, deliveries, quality control and much more. As governments – which are major purchasers of medical devices through public health institutions – increasingly relate quality to cost, the need for better and cheaper medical devices will increase. That will inevitably make device manufacturers thirsty for efficiency.