Is distribution a core competency for your company?
My guess is that you answered “no.” Most medical device manufacturers would cite R&D, design, production, or even sales and marketing as points of strength in the value chain. Far fewer, I’d venture to say, would claim outbound logistics as a strategic advantage — which is completely understandable.
Supply chain management for medical device manufacturers is no longer a matter of simply moving products from point A to point B. Consolidation among provider networks has ushered in an era of downward price pressure, decreased tolerance for inventory on hand, and a shift in control toward the customer. The level of compliance and pedigree required by regulators (for safety and security) has reached an all-time high. And the promise of emerging markets has thrust medical device companies quite literally into foreign territory, where the customs are unfamiliar and the infrastructure is uneven at best.
For emerging and established markets alike, device makers are increasingly turning to third-party supply chain partners to help simplify an increasingly complex international logistics landscape — and to deliver products more quickly, efficiently, and inexpensively to the healthcare professionals and patients who need them.
In an effort to get a clearer picture of this transformation in the global medtech supply chain and the ways in which manufacturers are outsourcing for success, I sat down with the Craig Simon, president and CEO of FedEx SupplyChain. He said that more medical device manufacturers have been approaching FedEx in recent years, seeking to uncover new opportunities for optimization and asking the company to develop new technologies and services tailored to the international healthcare sector.
"Going back 10 years ago, there wasn’t as much concern about the cost of healthcare as there is today. As pricing pressures have increased, one of the levers to improve cost base is supply chain,” Simon explained. “However, it’s not just about cost, but also about providing some differentiating services. Over the past five years, medical device manufacturers and healthcare providers have started saying, ‘You need to do more.’ Just getting it there as fast as you can is not good enough anymore.”
During the course of our conversation, Simon provided several examples of how medical device companies are creatively working with logistics providers like FedEx to enter new markets, remove cost from the system, and improve the overall efficiency of operations. What follows are three potential ways to turn your supply chain into a strategic advantage.
Eliminate The International Middle Man
One big opportunity in outbound logistics, according to Simon, is for medical device companies to go directly to the healthcare provider networks, rather than working through distributors.
“Distributors own the customer, they own inventory, they control that last piece of the supply chain for the manufacturers,” he said.
But thanks to advancements in global communications, medical device companies can take more direct control and eliminate the distributor, even in emerging markets. Doing so enables device makers to focus on critical sales and marketing efforts, and the customer relationship, while leaving the complexities of the logistics piece to a third-party provider.
Simon pointed out that while primarily large manufacturers have leveraged this approach to date, small and midsize companies now stand to benefit from the groundwork their bigger brethren have laid.
“I think the smaller companies will be able to take advantage of this trend faster than the larger companies could, because large companies are paving the way,” he said. Third-party logistics providers have spent years establishing infrastructure in these countries, setting up warehouses and domestic transportation networks similar to those you would find in the U.S. Today, FedEx has extensive delivery networks in India, Brazil, China, the U.K., Poland, France, Colombia, and other countries.
“Think about India, where getting something from Mumbai or Delhi to any other area of the country is still a pretty complex effort,” Simon told me. “Our networks were created not only to handle the customer’s product on an import/export basis, but also to handle it once it gets inside the country.”
As an example, Simon brought up a larger, “household name” medical device company that had grown significantly through mergers and acquisitions over the past 10 years. While the manufacturer had done a good job of consolidating its U.S. operations, its international shipping was still distributed.
“They were still shipping from each of their individual manufacturing plants to individual distributors in Asia, and they wanted to go with the direct model,” he explained. “What we did is set up a cross-dock for them, so that all their shipments from the U.S. now come into our super-hub in Memphis, get consolidated, and are sent internationally in a more efficient fashion.”
Initially, FedEx set up four distribution centers for the manufacturer in four countries, and today that number has grown to seven. Depending on how quickly a product needs to be delivered, it may either be routed through FedEx’s Singapore logistics hub or sent directly to the destination country. The efficiency gains from consolidating transportation made it much easier for the device maker to eliminate their distributors in those countries and go direct.
On the other hand, this technique doesn’t apply in every situation.
“In smaller countries, we are still shipping the product to their distributors,” Simon said. “There are still some economies of scale. If you are just starting out into a new country, you probably need to go into a distributorship.”
Relocate Distribution To Accommodate Growth
Another reason device makers are outsourcing logistics is to free up facility space for expansion.
Many small medical device companies initially conduct manufacturing and shipping activities out of the same location. As they grow, they need to increase their manufacturing space. One solution Simon mentioned is to move finished goods distribution away from the plant and use the vacated area to expand manufacturing operations.
“If they transfer distribution to places like Memphis or Indianapolis, where we have hubs, they can significantly reduce their cost of transportation,” he said. “Shipping everything from San Diego or San Francisco, for example, is more expensive than shipping everything from Memphis.”
In addition, FedEx also has global distribution centers in these cities — the largest, in Memphis, is 500,000 square feet — that will handle all aspects of fulfillment for manufacturers. Going this route not only spares companies the expense and hassle of having to set up new physical facilities, it also speeds delivery of their products to customers.
“They can come right into it without investing in the capital equipment or the people or the management structure,” Simon remarked. “And if they are headquartered in California, they typically will have to get their shipments out by about 6:00 pm for next-day delivery. In Memphis, we can take orders up to 11:30 pm local time and still deliver to all major markets by 8:00 am the next morning.”
This can be critical when shipping items like reagents for diagnostic testing. Plus, it allows companies to easily accept orders into the evening, lowering overall costs and/or providing a potential competitive advantage.
Meet Increasingly Stringent Regulatory Requirements
Entering new markets brings with it an increased regulatory burden, and meeting the unique demands of each country can feel like trying to hit a moving target.
“In many senses, the regulatory environment remains unpredictable,” Simon said. “And it varies on a state-by-state basis, not just in the U.S., but also across the 20+ states in India and Brazil, for example. While each region has its own specific regulations, what’s consistent is that the requirements for safety and security are ever-growing.”
As a result, it is becoming increasingly important for medical device manufacturers to ensure that their product has been maintained with adequate controls in place. This is another area where third-party logistics providers can help.
For instance, FedEx had developed a sensor-based logistics technology for critical shipments called SenseAware. A small device incorporating a host of environmental sensors is placed inside the box, on the pallet, or elsewhere on the shipment (depending on where the customer needs it). During transit, this device continuously communicates critical, near real-time information about the shipment back to FedEx, including location, temperature, barometric pressure, light exposure, relative humidity, and vibration exposure. The customer can then keep tabs on the shipment via a web application.