Use Existing Inventory
to Maximize ROI

Outsourcing partners can help OEMs avoid costs and add millions to the bottom line.

Kelly Lucenti
Millstone
Medical
Outsourcing

Cost cutting—not an exciting topic, right? But if you turn the idea around and think of it as cost avoidance, it easily can translate into millions of dollars added to the bottom line—guaranteed. Now that’s exciting.

A flattening of yesterday’s orthopedic industry explosion coupled with pricing pressures makes avoiding costs increasingly critical to success today. For many medical device manufacturers, inventory management can be an afterthought. But savvy senior executives at major device companies are recognizing the value of programs that eliminate capital expenditures, slash costs, recapture inventory and improve operational efficiencies. With outsourcing partners who are experienced, established and nimble, medical device manufacturers can add millions to earnings—all without worrying about the success or failure of introducing a new product to the market.

Case in Point

For example, a leading orthopedic device maker spent more than $1 million to bring a new product system to market. The system, from the beginning, had a less than ideal chance of success because of pricing and customer adoption issues. Ultimately, the product failed. If the company had invested the same dollars in repackaging existing products that had been opened but not used, they would have been guaranteed a savings of millions.

Manufacturers long have overlooked back-end operations in the race to get new devices in the hands of the end users. The results are bloated inventories of devices and instruments, duplicative processes, enormous backlogs of open but unused product and half-hearted field logistical programs. More significant consequences can be a loss of quality control and a massive interruption of delivery when processes break down.

Partnering with an outsourcing company can help medical device manufacturers get a handle on critical back-end operations. Tapping into the outsource partner enables companies to leapfrog process development, dodge investments in expensive equipment and sidestep hiring personnel. As more medical device firms attain the operational and financial benefits of maximizing inventory management, programs designed to enhance operations and save money will become an industry norm.

Cost-Saving Advances

Medical device manufacturers are driven to focus on core competencies—research and development and product delivery. To maintain this focus without letting back-end operations slide out of control, device manufacturers need a partner to take charge of some functions and provide additional support for other functions. A variety of programs already are available to organize and streamline internal and external operations. The trick is identifying the right fit for a solution and the right outsource partner.

Field Inventory Auditing. Audit-ing inventory in the field is one of the most overlooked opportunities for avoiding duplicative costs. While the function can produce millions in savings, it requires a team of reliable auditors and a process that results in as little disruption to normal business activities as possible. That’s where an experienced and established partner can make a difference. Some outsourcing companies are able to deploy a team of professional auditors who count devices and instruments in the field and enable the OEM to track inventory and streamline distribution efforts. The benefits include accurate and objective controls; the ability to rigorously comply with requirements of Sarbanes-Oxley; the reclaiming of “lost” product and the prevention of duplicative expenditures; and an increase in sales and manufacturing efficiency.

An example of this service in action revolves around a major supplier of orthopedic and spinal implant devices that was in the midst of a complicated merger of companies and product lines. Bringing the entities together required painstaking accounting of inventory found in more than 100 sales territories. The outsourcing partner dispatched experienced and meticulous auditors to count, reconcile, record and communicate inventory results. The OEM reduced labor costs, its annual audit variance decreased dramatically and, perhaps most importantly, the company was able to keep the sales team focused on selling as the full-scale audit process occurred. The numbers tell the story best: the company’s variance rate improved by 12%, total labor cost decreased by 50% on an annual basis and the total value of product lost and/or written off decreased by $42 million during a three-year period.

Repackaging Open But Unused Product. Mountains of open but unused product, especially non-sterile packaged spinal and orthopedic trauma implants, are a familiar sight at many medical device companies. This backlog represents a significant opportunity to save money by avoiding additional expenditures, but only if the OEM efficiently and effectively can slog through the process of inspecting, packaging and redistributing the unused product. An outsourcing partner often is better equipped to repackage the returns because the service providers can offer the personnel and customized facilities to handle the job.

An illustration of this is a major manufacturer of spinal implant pathologies overwhelmed by hundreds of thousands of units in accumulated unpackaged returned product. In addition to the cost of storage and maintenance, the shelved product was a roadblock to efficiency for the company and its clients. After working with an outsourcing partner, the company was able to convert more than 150,000 units into re-saleable product and significantly reduce its lead times for new orders. The net savings for the company was more than $8 million at standard cost in just one year.

Instrument Recycling. An expensive idiosyncrasy of the orthopedic and spinal portion of the medical device industry is the need for instruments to accompany implants used in surgeries, which often cost leading OEMs tens of millions of dollars. OEMs can’t sell their devices if the surgeons don’t have the instruments they need to complete procedures. The instruments themselves, however, have little intrinsic value except to the OEM. Recycling these surgical instruments offers another avenue for avoiding costs and enhancing the sales process. For recycling to pay off, the OEM must have a plan for redeploying instruments after they have been cleaned and returned to inventory.

A sophisticated outsourcing partner can recapture instruments from the field sales office and have them back in circulation within days. First, instruments are collected and shipped to the partner’s facility. Items are sorted and logged into a state-of-the-art Web-based inventory management system. The instruments are cleaned and inspected against current versions of product drawings. Accepted parts are repackaged and relabeled. Labeled parts are warehoused and tracked, and salespeople around the world are able to use the online system to order the reclaimed parts. In one instance, an instrument recycling process delivered to a leading OEM a savings of more than $9 million through the redistribution of approximately 10,000 orthopedic instruments during a three-year period, which allowed the OEM to maximize its return on investment from existing instrument inventory.
 
Loaner Expedite Programs. A similar industry-wide dilemma exists with surgical kits used by surgeons in orthopedic and spinal operations. The difference is that sales personnel usually are put in the position of handling and replenishing kits, even though it is not their primary responsibility and they should be spending their time selling. While a relatively new innovation, some medical device manufacturers are tapping into their outsourcing partner’s nationwide network of skilled expeditors and online tracking system to decrease inventory investment, reduce shipping costs, increase sales revenue and provide quality oversight.

Here’s how it works. The outsourcing company installs professional loaner expeditors in strategic locations around the country. When a sales representative is finished with a kit, he or she calls the local expeditor, who picks up the used surgical kit at the hospital. At this point, the salesperson is removed from the equation and is free to get back to selling. The expeditor inspects and replenishes the kit and logs it into the online tracking system. The kit then is available for shipment to the next surgery. The cycle comes full circle when the salesperson’s customer service representative orders the surgical kit from the expeditor for the next surgery. At this time, the expeditor ships the kit directly to the next salesperson without first having to ship the kit back to the home office. This process can allow for as much as a 40% reduction in inventory carried and an average 50% reduction to kit turn time.  

As the Industry Turns

Up until now, medical device manufacturers have been in a race to market. Their mantra: deliver new product, deliver new product. Therefore, manufacturers previously focused on research and development, manufacturing and distribution to the exclusion of other priorities. Back-end operations took a backseat and sometimes became disjointed or inflated.

A subtle shift has occurred in the industry, from boom to continued growth. Investors are demanding more from the industry darlings. This change is creating a new concentration on building earnings to demonstrate sustainability. What better way to contribute to earnings than evading capital expenditures, reducing costs and establishing efficiencies?

As companies grow in size and complexity, however, they find it tough to lead in more than one direction. But inventory management cannot come at the price of research and development or product delivery. The answer is fast becoming a greater reliance on partnerships with outsourcing companies that are adept at developing processes that address critical operational issues without interrupting crucial business activities. Medical device manufacturers no longer are alone under the intense pressure to perform. Their partners, outsourcing companies offering a variety of solutions, are in the hot seat with the same opportunity to fail or succeed through innovation. v  

Kelly Lucenti is president of Millstone Medical Outsourcing. Prior to Millstone, he served in a variety of capacities in the Orthopaedics and Codman divisions of Johnson & Johnson. Millstone Medical, outsource partner to leading orthopedic companies, is a provider of aftermarket services, start-up solutions and contract packaging services for medical device manufacturers worldwide. For more information, visit www.millstonemedical.com or call (508)-679-8384.