Improving Supply Chain Agility of a Medical Device

Improving Supply Chain Agility of a Medical Device Manufacturer Authors: Xinye Bai and Yaniv Rosenberg Advisor: Dr. Daniel Steeneck MIT SCM Research Fest May 21, 2015

Agenda • • • Introduction Motivation Instruments Supply Chain Analysis findings Results - What hinders the Agility? Recommendations

The Sponsor Company • Johnson & Johnson (J&J) – Global healthcare company divided into three sectors: Consumer Products, Pharmaceutical and Medical Devices & Diagnostics – 2014 Annual sales of $74. 3 b • Depuy Orthopaedics, Inc. , a franchise of J&J, manufactures orthopedic surgical implants. Consumer; $ 14. 5 MD&D; $ 27. 5 Pharmaceuticals; $ 32. 3

Motivation Surgical instrument SKU proliferation – 12, 000 Long lead time from suppliers – 10 weeks Short Lead Time to distributors – 48 hours Inaccurate forecast – MAPE = 65% High inventory levels, Costs – 5 times the annual cycle Supplier Strategies Distribution Strategies Inventory Strategies Agile Supply Chain Short Lead Times Low inventory Fast Response

Agility – Definition The ability to quickly respond to customers’ dynamic demand while keeping inventory levels and cost low. Virtual Demand Sensitive Agile Supply Chain Network Based Process Integration

Instrument Supply Chain Information Flow Ma ke to Ord e r Material Flow

Problem / Opportunity Statement Current Situations Lead time Inventory Cost Symptoms Goal Average 8 -12 weeks $250 Million 65% SKUs >one year of inventory 8, 000 7, 000 Backorders 17% of slow mover 34% of fast mover 6, 000 5, 000 34 4, 000 3, 000 2, 000 1, 000 - Slow Moving SKUs Fast Moving SKUs 7

Instrument Supply Chain Manufacturing Stage 8

Key Findings: Long Lead Time on Manufacturing process 10 Components …… Order Schedule Setup 1 Day -5 Week Assemble Manufacture 1 Day -10 Week • Capacity constraints • SKU manufacturing knowledge barrier • Minimum of quantity (MOQ) requirements 9

Finding: Ordering Discrete Purchase Order: Orders are based on need. Lead time not in contract. Vendor Management Inventory (VMI) (70% of SKUs): Annual order. Forecast and current inventory levels are shared. • De. Puy don’t know when they receive the products. • Suppliers don’t have commitment from De. Puy on future orders, can’t plan allocate capacity. 10

Instrument Supply Chain Planning Stage 11

Finding: Order Management PO and VMI are not Well Managed: VMI conditions not enforced. Order strategy is not aligned with SKU demand. Monthly Orders 450 400 350 300 250 200 150 100 50 0 0 -5 5 -10 10 -20 VMI Order 20 -50 Discrete PO 50 -100 100 -200

Finding: Inaccurate Forecast 250, 000 Actual vs. Forecast 200, 000 Over forecasting 150, 000 100, 000 Sum of Actual Sum of Forecast 50, 000 - 4/1/2014 5/1/2014 6/1/2014 7/1/2014 MIT SCM Research. Fest May 22, 2014 8/1/2014 13

Finding: Data Barrier No history data: New Products accounts for 50% budget 2015 Instruments Budget Others(custom) Legacy 1% 15% New Product 47% Converssion 19% Full Set Orders 19% Hard to Predict: 77% of 12, 000 SKUs are legacy products. 77% SKUs

Findings – Ordering Practices Back Order 8, 000 7, 000 17% 6, 000 • Reuse of existing POs – cannot capture lead time. • Delay of orders to reach MOQ/discount thresholds. 5, 000 4, 000 3, 000 1, 000 - MIT SCM Research. Fest May 22, 2014 34% 2, 000 Slow Fast Moving SKUs 15

Instrument Supply Chain Demand Stage 16

Finding: High demand variation High share of slow movers: 59% of SKUs are <5 units per month Orders pattern uncertainty: orders flow in a volatile manner Information Barrier: No Communications between Distributors; No visibility to inventory at distributors’ warehouses.

Instrument Supply Chain Inventory and Delivery Stage 18

Finding: Drivers of High Levels of Inventory 65% of the SKUs are with more than a year worth of supply • • • Inaccurate forecast Minimum Order Quantity (MOQ)required by suppliers Lack of transshipment between distributors Lack of visibility across the supply chain Long lead time 19

Results – What Hinders Agility? Information Barriers • No visibility across partners • No standard inventory management • Communications Virtual • No sales feedback • Inaccurate forecast Agile Supply Chain Demand Sensitive Process Integration • Volatile order flow • VMI not managed Network Based • No knowledge sharing • No inventory sharing Material Flow Barriers

Recommendations Distribution Channel De. Puy Practices Suppliers Management

Recommendations Distribution Channel De. Puy Practices Suppliers Management

Recommendations Distribution Channel De. Puy Practices Suppliers Management A. Build a Database of inventory at Distributors D 1 D 2 D 3 D 4 ? ? De. Puy

Recommendations Distribution Channel De. Puy Practices Suppliers Management A. Build a Database of inventory at Distributors Benefits A. Close monitor of real time usage. B. Advice Distributors on inventory management – orchestrate the supply chain. C. Validate orders D 1 D 2 D 3 D 4 Suppliers v Extend the visibility to all players De. Puy

Recommendations Distribution Channel De. Puy Practices Suppliers Management A. Build a Database of inventory at Distributors B. Transshipment – Replenishments between distributors I. One network vs. independent warehouses. Benefits: 1. Second source of supply D 1 D 2 D 3 D 4 2. Reduced safety stock 3. Fast response, high LOS 4. Less inventory De. Puy Yale T. Herer, Michal Tzur, Enver Yucesan (2002)

Recommendations Distribution Channel De. Puy Practices Suppliers Management A. Build a Database of inventory at Distributors B. Transshipment – Replenishments between distributors C. Slow movers managed by De. Puy Benefit: 1. No need for 37 safety stocks D 1 D 2 D 3 of 7, 000 instruments. De. Puy D 4

Recommendations Distribution Channel De. Puy Practices Suppliers Management A. Build a Database of inventory at Distributors Build a Database of inventory B. Transshipment – Replenishments between distributors Replenishments between B. distributors C. Slow movers managed by De. Puy C. Slow movers managed by Benefit: De. Puy 1. No need for 37 safety stocks D 1 D 2 D 3 of 7, 000 instruments. De. Puy D 4

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory B. Replenishments between distributors C. Slow movers managed by De. Puy D 1 D 2 D 3 De. Puy D 4 Suppliers Management A. Order instruments in product families Suppliers to identify families to minimize setup times Benefit: I. Reducing MOQ, will be applied at the group level II. Better forecast III. Lower inventory levels •

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory B. Replenishments between distributors C. Slow movers managed by De. Puy D 1 D 2 D 3 De. Puy D 4 Suppliers Management A. Order instruments in product families

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory B. Replenishments between distributors C. Slow movers managed by A. Order instruments in product families B. Dedicated capacity Benefits: I. Gain back in-house flexibilities II. Reduced lead time • De. Puy D 1 Suppliers Management No capacity competition III. Lower unit cost D 2 D 3 De. Puy D 4 How? I. Commitment on minimum order II. Smooth ordering flow

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory B. Replenishments between distributors C. Slow movers managed by De. Puy D 1 D 2 D 3 De. Puy D 4 Suppliers Management A. Order instruments in product families B. Dedicated capacity C. Work with suppliers to eliminate/reduce MOQ D. Avoid working with one instrument suppliers

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory B. Replenishments between distributors C. Slow movers managed by De. Puy D 1 D 2 D 3 De. Puy D 4 Suppliers Management A. A. Order instruments in product families B. Dedicated capacity Benefits: I. Gain back in-house flexibilities C. Eliminate/Reduce MOQ II. Reduced lead time No capacity competition D. • Avoid working with one III. Lower unit cost (15%) instrument supplier How? I. Commitment on minimum order II. Smooth ordering flow

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory A. SKU Rationalization B. Replenishments between • distributors C. Slow movers managed by De. Puy D 1 D 2 D 3 De. Puy D 4 12, 000 SKUs only in joint reconstruction. 14, 000 in spine. Benefits: I. Reduced complexity II. Improved forecast III. Lower inventory How? I. Incentivize designers for fewer new instruments. II. End of life process – charge for ‘exotic’ instruments Suppliers Management A. Order instruments in product families B. Dedicated capacity C. Eliminate/Reduce MOQ D. Avoid working with one instrument supplier

Recommendations Distribution Channel De. Puy Practices A. Build a Database of inventory A. SKU Rationalization B. Replenishments between B. Better management of instruments under VMI distributors C. Slow movers managed by C. Consider relaxing LOS when servicing distributors De. Puy D. Simplify the process of D 1 D 2 D 3 D 4 opening PO E. Manage legacy and base instruments differently De. Puy Suppliers Management A. Order instruments in product families B. Dedicated capacity C. Eliminate/Reduce MOQ D. Avoid working with one instrument supplier

Questions? MIT SCM Research. Fest May 21, 2015 35