Conquering Global Supply Chain Management:

Transcription

1 Conquering Global Supply Chain Management: What Every Medical Device Company Should Know The verdict is in: Globalization has taken hold of the medical device industry, and there is no turning back. This represents a seismic shift from even the fairly recent past, when medtech companies sold their products primarily in their home market or in a limited number of international markets. Moreover, those markets functioned in a generally familiar and uniform way. Country-specific regulations varied of course, but the prevailing approach to business was consistent, established and well defined. Today, this is no longer the case. Now companies must be prepared to source and sell in a wide range of distant and disparate markets as a strategy to achieve long-term success. This white paper will explore the logistical, financial, regulatory and brand-management challenges faced by medical device companies as they pursue commercial efforts around the globe. The white paper will also discuss strategies to mitigate risk and position a medtech company for success when managing a global supply chain. Going Global The trends affecting international growth in the medical device industry parallel many of those that are driving globalization overall. First, manufacturing is becoming more globally sourced. This is especially true in the developing world, where labor and cost of goods are much cheaper than in industrialized countries. Equally if not more important for the medtech sector is the rapidly growing middle class in emerging markets. Demand for health care better care and more of it is one the first changes that occur as socioeconomic status rises in a population. The numbers show just how dynamic the global health care market is. In the most recent Pain in the (Supply) Chain survey, conducted annually by UPS, 70% of health care companies surveyed reported that they tapped new markets over the past 18 months in an effort to expand their customer base and become more competitive. 1 Looking ahead, 81% of these companies plan to move into new markets in the next 3 to 5 years. Official trade administration figures support these findings: The US Department of Commerce reports that exports of medical devices in 2010 increased 6% overall and as much as 10-15% in major markets in Asia and South America. 2 (Table 1) It is now estimated that nearly 60% of the demand for medical devices lies outside North America. Interestingly, small- to medium-sized medical device companies seem to be making the greatest push into global markets. Analysis of US Shipper s Export Declarations indicates that such companies account for more than half of such filings, and for just under one-third of physical export volume out of the United States. 3 Although these companies have obviously embraced the need to expand internationally, they face much greater challenges than their larger counterparts, as they lack the infrastructure and resources to effectively manage the many facets of global supply chain management. Maze of Complexities As every medtech company knows, managing suppliers, distributors and other contract services can be very challenging even when dealing with vendors across town. The complexities of managing such relationships increase exponentially when that business takes place across continents and cultures. Table Increase in Medical Device Exports to Major Growth Markets Japan 10.4% China 16.0% Brazil 15.6% Singapore 12.2% Source: US Dept of Commerce, International Trade Administration Dataweb Analysis A UPS-sponsored Whitepaper 1

2 When must product be available? Here considerations include how much product needs to be moved and stored to maintain a continuous supply to the customer or patient. Is weeks-long ocean transport adequate or must product arrive more quickly? Must product be warehoused regionally for expeditious delivery or can the demand be met with rapid delivery via air transport? What is the best balance to strike between inventory and transportation expense? Why will customers purchase the product? Customer motivation is an important driver in establishing a supply chain that is aligned with purchasing criteria. If, for example, customers choose the product because of its flexibility or because it meets a rapidly changing need, this speaks to the importance of a more reactive, more agile approach to delivering product. How, then, should medical device companies evaluate their global supply chain needs? They should begin with five basic questions: Who are our customers? Companies must consider not only their existing customer base but also the total addressable market that is open to them. In addition, companies should look ahead to the changing characteristics of their customer base. How will the market look in 3 years, in 5 years? Such forward-looking analysis will enable them to adopt policies now that will be advantageous in the coming business cycles. What is required to reach customers? When companies consider movement of products internationally, they generally focus first on the basic issue of physical transport, i.e., how do we get our products to their final location? But this is only a small part of the picture. Equally important is an understanding of the myriad requirements -- regulatory, trade, informational -- that govern international operations. This is a much more daunting challenge than merely arranging for the transfer of boxes from point A to point B. From where should material be sourced and where should products be distributed? The increasingly global medtech marketplace creates far more options for companies to create business value by tying together new production geographies and foreign customers. Where should materials be produced to derive the best combination of efficiency and effectiveness? Which markets are best served from which supply points? And what routing modes link them together best? How will we distribute? Finally, companies must look to the broader picture and consider distribution strategies and practices that will position them for sustainable and continuing growth. This may include factors that are not immediately apparent. For example, many medical device companies sell not only equipment, but also service contracts. Sometimes this requires returning product to the manufacturer; other times it requires dispatching local repair personnel. Or consider after-sale requirements, such as those in some countries that place responsibility for compliance with local waste management regulations on the producer. In both of these situations, a company must have global channels that allow product to flow in both directions and must have in-market processes to direct manpower as well as goods. Geography Matters When it comes to supply chain management, all countries are not created equal. Consider the varying challenges of managing a supply chain in the four markets identified by Pain in the Chain respondents as priority global targets in the next 5 years. In India, logistical challenges dominate, as the infrastructure to efficiently move product can vary widely by region, and can be subject to periodic disruption. China, by contrast, has excellent infrastructure but an exceedingly complex regulatory climate, one in which regulations frequently differ among the 20 federally designated economic zones. Furthermore, intellectual property protection requires careful management. Japan also has a complex regulatory environment, but even more challenging are payment and reimbursement processes. In the very different political and economic climate of Brazil, where protectionist trade policies prevail, the primary challenges relate to currency and tariff management, and the associated challenge of reliably determining true costs to operate. To implement a successful global supply chain, medi- 2 A UPS-sponsored Whitepaper mddionline.com

3 Conquering the Global Supply Chain: When to Partner What kind of medtech company can benefit from partnering with a global supply chain manager? One that has examined its existing practices and concluded that it needs to do any of the following: Jumpstart growth or become more competitive by tapping international markets Streamline customs processing to reduce delays, fees and fines Reduce capital commitment to the supply chain and redirect these resources to core expertise Ensure uninterrupted supply in a range of international markets and do so reliably and cost-effectively Guarantee compliance in a heterogeneous, rapidly changing regulatory environment Improve customer relations through better information about where shipments are and when delivery is expected Maintain control over product integrity through real-time monitoring and the ability to address problems while in transit Protect brand image by preventing product tampering, theft or intellectual piracy cal device companies must understand, or work with a partner that understands, the unique set of challenges and requirements of doing business in each target market. The Financial Picture Maintaining an efficient global supply chain is always complex and often costly. But failing to maintain an efficient supply chain is equally costly: Numerous studies over the past 5 years have shown that companies that experience a significant disruption in their supply chain have a high propensity to underperform their market competitors for several years afterwards. When considering the cost and risks of a global supply, medtech companies generally focus on physical transport. But this is just one link in the chain. Regulatory compliance is now every bit as important. Analysis of data from US Customs and Border Protection indicates that nearly 10% of international shipments have at least one compliance error, and more than 3% of import shipments are held at customs. 4 This points to one of the most significant challenges facing medical device companies as they build a global supply chain, namely, understanding true landed cost. Whether for imported parts or exported devices, true landed cost comprises the full complement of logistical and administrative expenses to move and maintain products across borders. The greatest contributors to true landed cost are: Cost of transportation itself. Transportation costs to move product internationally typically account for 1% of the cost of goods, and may be as much as 3%. Effective control of these costs requires companies to continually evaluate both the best modes and the best routes of transport. Inventory management. Companies must consider the cost to physically warehouse products as well as the cost to carry inventory. This will vary based on volume of product to be inventoried, duration of warehousing, and number of locations. Mode of transportation and routing also may influence these costs. Trade costs. Duties and tariffs can add significantly to the true cost of moving product internationally, as can penalties assessed for errors in shipment filings and classification. The latter can be especially vexing in the post-9/11 environment. In the past 10 years, the United States has instituted more than 25 new regulations for inbound shipments, including the Import Security Filing (ISF), which requires an importer to submit detailed data to U.S. Customs and Border Protection before the shipment has left the point of origin. Information technology. The informational requirements for managing an international supply chain are vast and varied. They include those related to cross-border operations (harmonized code classification, security filings, other customs requirements); regulatory compliance (chain of control, denied party screening and document filings), and trade administration (tariff management and currency conversion). Increasingly these must conform to precise technical specifications such as document portability. Information infrastructure is also needed to manage supplier relationships, such as materials acquisition, order processing and local financing. A company can buy or develop this capability, generally at significant cost. For many companies, however, the more the cost-effective solution is to outsource it to a supply chain expert. Controlling true landed cost is not merely a matter of finding ways to save money in one narrow area, such as transportation cost. Rather, it requires careful alignment A UPS-sponsored Whitepaper 3

4 of end-to-end logistics processes to maximize efficiencies, minimize errors and eliminate lost opportunity. Successful global supply chain management, therefore, requires companies to look beyond just cost containment, and focus instead on the following triad of value creation goals: Align with market demand and ensure that product is available where and when customers need it, as a means to improve service and drive revenue Contain total distribution cost of delivering product from the point of production to the end-user Reduce total capital needs The medical device companies that focus on these objectives and put in place the tools and services to achieve them will best position themselves for success in international markets. Partnering for Global Supply Chain Success When seeking a service partner with expertise in global supply chain management, leading business analysts recommend that medical device companies evaluate the following six factors: 1. Scope and breadth of network Does a provider s footprint align with your commercialization and marketing strategies, so that they can provide coverage where you need it today, but also where you ll need it tomorrow? 2. Single-source solution When moving product across borders, most problems arise in the shifting of accountability between links in the chain. An integrated, full-service provider one that offers not merely all forms of physical transport but also regulatory coordination, trade and brokerage services, information infrastructure and supplier oversight -- greatly reduces the risk that bad things will happen. 3. Economies of scale A partner with its own vast network gives clients access to the cost efficiencies associated with large transport volume. This is especially relevant for more moderately sized medtech companies that do not have the commercial clout to command discounts on their own. 4. Commitment to brand/service Is the provider known for service and customer care? Many medical device companies rarely interact with local suppliers, customers or patients. Therefore, it is essential that a supply chain partner be a good ambassador of the brand. 5. Visibility platform Effective supply chain management cannot be achieved without effective information management. A medical device company should seek a partner with the infrastructure to command and control information in real-time and to seamlessly transfer information among all business and governmental parties. 6. Financial stability This issue has taken on increased importance since the economic downturn, which saw the failure of a number of small transportation/trade management providers to maintain uninterrupted operation. Given the high value and relative vulnerability of medical devices, it is critical to work with a provider with solid financial standing and the ability to guarantee reliable, continuous service. A seventh criterion worth mentioning is the provider s business philosophy. Does the provider primarily view its role in a narrow context, for example, as a mover of shipments, or is supply chain management, with all of its component functions, itself a strong core capability? Furthermore, is the provider philosophically aligned Table 2. Key barriers to global expansion and the number of respondent companies that view these as high or extreme concerns. Country regulations 42% Intellectual property protection 31% Quality of products produced in-country 29% Product security 26% Limited infrastructure 24% Managing multiple logistics providers 13% Managing global suppliers 13% Source: 4th annual UPS Pain in the (Supply) Chain survey, conducted among senior-level decision makers at nearly 250 pharmaceutical, biotech and medical device companies in the US, Europe and Asia. 4 A UPS-sponsored Whitepaper mddionline.com

5 Table 3. UPS s Global Healthcare Network is designed to meet the specialized needs of medical device companies. 30 UPS healthcare facilities around the world with more than 4 million square feet of dedicated healthcare distribution space Country-specific regulatory expertise, including FDA (Food and Drug Administration), DEA (Drug Enforcement Agency), Homeland Security, Health Canada, EMA (European Medicines Agency), HSA (Health Sciences Agency) and VAWD (Verified Accredited Wholesale Distributor) PDMA- (Prescription Drug Marketing Act) and cgmp- (current Good Manufacturing Practice) compliant distribution space with temperature and humidity controlled environments Advanced information services, such as Flex Global View and UPS Proactive Response, which provide real-time tracking and proactive monitoring of shipment location and environmental (temperature, humidity, light, etc) status with the goals and commitment of health care businesses? Medical companies face a wide range of concerns in pursuing global operations. (Table 2) They are best served by a partner that strives to be an important link in the health care chain. UPS s Global Healthcare Network Recognizing the growing global demand for medical devices and the unique requirements faced by medicalproducts companies, UPS has created a dedicated health care network providing end-to-end transportation, distribution, and trade management optimized for medical devices and life-sciences materials. UPS has invested in an integrated global portfolio that manages all facets of the international supply chain from the moment that a client contracts with a vendor until product is delivered to the end-user or patient, and even beyond. The UPS network gives medtech producers access to a scalable, turn-key international health care business platform to import from suppliers, distribute globally, deliver to point of care, and, where applicable, recover for repair or refurbishment. As part of its total healthcare package, UPS provides expertise to distribute medical products across borders. (Table 3) UPS employs experts in health care compliance and trade regulation around the world, and is often called on not only to ensure compliance with regulatory requirements in the host country but also to ensure compliance with US Food and Drug Administration requirements for international suppliers. As part of its regulatory capability, UPS has instituted a highest common denominator global standard of processes and procedures to ensure compliance in all markets in which a client operates. In addition, UPS has 4 million square feet of healthcarededicated warehousing facilities around the world, a full portfolio of package and freight transportation services as well as proprietary systems for real-time tracking and environmental shipment monitoring. Leveraging UPS s global health care services frees a medical device company to devote more time and resources to its core capabilities in research, marketing and product innovation. Conclusion The addressable market for medical technology is rapidly becoming a global one. Even small- to mid-sized medical device manufacturers are turning to international markets to increase competitiveness and expand their customer base. Increasingly, companies operate in non-western markets where local regulations and cultural norms may be perplexing and difficult to navigate. A successful global supply chain requires companies to manage a host of complex and interrelated issues, including regulatory compliance, customs and trade management, financing and information systems. This can be especially daunting for more moderately sized companies with limited capital and human resources. Whether outsourcing manufacturing or marketing outside the United States, medical device companies of all sizes can benefit by partnering with a global supply chain manager with a dedicated commitment to health care business and the proven network and knowledge to meet the specialized needs of this industry. References UPS Pain in the (Supply) Chain Survey US Dept of Commerce, International Trade Administration Dataweb Analysis US Census Bureau, Bureau of Export Administration US Customs and Border Protection. Delivered to you by: A UPS-sponsored Whitepaper 5