Building a Supplier Management & Development Model That Gets Results

An escalating focus on cost reduction continues to drive medical device manufacturers toward outsourcing. Given the U.S. healthcarereform-generated medical device tax, along with other price pressures in the marketplace, original equipment manufacturers (OEMs) are grappling with how to capture more market share as margins decline. OEMs are reviewing their manufacturing cost structures and seeking cost-attractive alternatives through their supply chains. This will create a greater reliance by OEMs on low-cost suppliers that provide an increasingly broad portfolio of capabilities to meet the OEM appetites for increased capacity, lower cost, and improved delivery, quality, and innovation. Today, this appetite often is fed through acquisitions. As margins continue to erode and available capital tightens in the space, stronger partnerships with strategic suppliers will become more common in the medicaldevice landscape.

This article is the first in a series that will discuss best practices of a winning supplier management and development model. Whether you’re an OEM or large supplier, the model provides a framework through which to build your supplier management and development system. If you’re in the supply chain, the model provides a framework by which you can formulate your strategies and modify your business model to position for future growth.

Why build a robust supplier management system? Put simply, to drive increased shareholder value. A robust supplier management model (see graphic on page 20) can be segmented into five major areas: vision, supply chain strategy, desired results, processes, and enabling culture and systems. While none of these elements is mutually exclusive, there are a few distinct characteristics within each area.

An effective supplier management system begins with the vision of what the model should achieve. A robust supplier management model should contribute to and help drive increased shareholder value through decreased cost and increased value through the supply chain. Increased value in the supply chain is achieved by an OEM when that company becomes a customer of choice to their key strategic suppliers. Being the customer of choice provides an organization with a competitive advantage: decreased cost, increased quality and reduced quality risk, improved delivery and service-level performance, improved product commercialization and launch, increased customer satisfaction, and increased flow of innovation.

Quite frankly, many medical device companies have a long way to go toward building a robust supplier management system. Today, too many of the relationships are customer/vendor relationships. They’re transactional and driven by price and typically do not consider total cost or value. In working with a division of one OEM on its supply chain strategy and approach to supplier management, a telling statistic when we started was that the average “product” or “part” supplier to that OEM averaged less than $500,000 in annual spend.It is very difficult to be a customer of choice and derive the value from strategic suppliers if your average annual spend is $500,000.

Consider the following:

• The quality risk associated with a supplier with less than $500,000 per year in annual spend is not any less and could be greater than with a supplier with a higher spend;

• The cost of managing a supplier with a lower spend is not much different than managing a supplier with a higher spend;

• A diluted spend across a higher number of suppliers creates more risk, complexity, and cost in purchasing and supplier management activities;

• If a supplier is fairly large and its volume with a given OEM is relatively modest, the OEM customer will not be a priority relative to pricing, service, delivery, creativity and innovation, or marketplace intelligence-sharing and transparency; and

• If a supplier is smaller:

– The OEM likely incurs increased inspection cost, as smaller suppliers are less likely to have the resources to build and implement a robust quality system. If the supplier doesn’t have a robust quality system, there’s increased

quality risk;

– There’s a greater probability of increased risk of supply interruption and delivery risk due to the instability of supplier finances;

– The supplier will more likely be challenged to scale over time to be a strategic supplier;

– The supplier will be challenged to “flex” and absorb fluctuating volumes over a sustained period of time due to pressures on cash flow and limited resources; and

– There’s a decreased likelihood of process or product innovation being generated and developed from the supplier.

Becoming the customer of choice is important—but being the customer of choice with strategic suppliers is critical. To be a customer of choice with strategic suppliers, an organization must have a supply chain strategy that includes identifying and selecting strategic suppliers as well as a robust supplier management system to leverage and optimize those strategic supplier relationships.

The medical device supply chain landscape will change significantly over the next few years. Customers that develop and execute strategies to become the customer of choice with strategic suppliers will drive increased value for shareholders.

Jeff Jenkins is a partner at Plante & Moran, where he leads the Operations & Supply Chain Management practice. For the past 10 years, Jeff and his team have focused on helping medical device OEMs and suppliers in the areas of supply chain management including supplier development and low-cost country sourcing, product commercialization and launch, inventory management, manufacturing, lean, project management, problem solving, logistics and transportation, strategy, and quality systems.