Medical device supply chain managers will likely conclude that 2020 is a year best forgotten. After an early continuation of 2019’s strong sales, the arrival of COVID-19 crippled order books throughout the spring and summer. While few companies lost OEM customers, almost all organizations experienced supply delays or backlogs. At the start of the fall, orders began trickling in again but the damage is done. 2020 will see most supply chain players with revenues 10 percent to 20 percent below last year’s levels. Despite lower profits, however, long-term gains will return for medtech firms willing to learn from the pandemic-induced demand shock. The following four measures will benefit most any company.

Survive by Managing Cash and Inventory
Surprisingly, many otherwise hard-headed managers assumed the global pandemic slowdown would end fairly quickly. In May, most medtech executives believed the U.S. economy would be back on track by September, though few supported their optimism with facts. That confidence likely stemmed from a misguided but nevertheless widely-accepted belief about the device industry’s immunity to recession. Many U.S. firms took out Payroll Protection Plan (PPP) loans, assuming the funds would prove to be a windfall. Few companies took a hard look at cash management to ensure they could operate sustainably through hard times. Let’s face it—in the past they never had to.

The industry is now experiencing the consequences of failing to conserve cash. PPP loans are being used to cover payrolls, and both accounts receivable and payable days outstanding are trending up. Cuts in staff, capital purchases, and marketing budgets have begun. Non-critical repairs are being delayed as are long-term critical expenses like product launches. This process has largely transpired under the radar but has attracted notice recently because companies are running down cash balances and spending government grants.

Another unwise business strategy that companies have frequently deployed this year involves using idled staff to build future inventory. The approach makes sense only if a manufacturer knows for certain when the inventory will be sold. With the pandemic’s unpredictable timeline, suppliers may be unnecessarily burning much-needed cash to create inventory that may end up sitting on shelves due to low demand.

The lesson here is that cash is like blood. A person can lose blood and survive but his recovery is tied to the amount of blood lost. Suppliers that carefully conserving cash from the start of the pandemic will have more opportunities to take market share from competitors as demand returns to normal.

Avoid False Expectations
Medical device supply chain managers tend to be realists. Most come from engineering or business backgrounds, disciplines that favor hard facts over unfounded hope. Surprisingly, the early months of the pandemic saw remarkably rosy expectations of a return to booming business in the fall. No reasons were offered, it was just expected that progress would prevail. This “magical thinking” was not unique to the medical device industry. Everyone hoped the problem would go away. There was comfort in jointly pronouncing such pleasurable thoughts in a frightening, confusing time. Yet anyone who passed high school biology knows respiratory viruses are highly contagious. There is no clear explanation for why so many managers expected an early end to the problem despite evidence the virus is difficult to control. Looking forward, managers should recognize that a vaccine won’t quickly end the pandemic, as it will take at least a year to inoculate 70 percent of the population to avoid a large-scale resurgence of the disease. Thus, COVID-19 precautions will be necessary for many months to come.

Besides hopes for an early recovery in orders, mangers at several U.S. supply chain companies suggested the pandemic would lead to reshoring of medical manufacturing. Such hopeful thinking stood in contrast to the extent and depth of America’s contagion. Further, it did not address the cost advantage that originally prompted U.S. medtech manufacturers to outsource work to other countries. Certainly, COVID-19 has not altered the global labor arbitrage. Assuming the virus alone will spark massive reshoring efforts is unproductive.

Exceptional Communication is Necessary
The early days of COVID-19 in March saw confusing, contradictory, and often wrong information circulated by governments and media outlets. In crises, only a minority of people remain calm. Leaders of supply chain companies did not have the option of panicking. Their employees, suppliers, and customers turned to them for guidance in an unprecedented situation.

Most managers rose to the challenge. The initial focus was inside their facilities. Supply chain leaders instituted sanitary practices and communicated them clearly to their employees. As scientific understanding of the virus increased, managers did not hesitate to change their instructions. Most stayed in regular contact with their staffs and made themselves available one-on-one to calm the concerned or make accommodations for employees with special needs.

Less effective was the supply chain’s communications with constituencies outside their walls. Most company websites contained COVID-19 messages that relayed basic information, though executives at many firms reached out to customers and suppliers to explain their firms’ operational status. Yet few supply chain company managers used the chaotic situation as an opportunity to reinforce their firm’s resilience and dedication to customers, and to inquire how they could better support customers during the pandemic. Too often the discussions centered around, “yes, we are open” and “can you share the revised forecast, for whatever it may be worth?”

The chance for supply chain companies to set themselves apart from competitors through good communication still exists. OEMs continue to struggle with diminished revenues. Rather than seeking the usual information, supply chain managers would be well-served to question customers about their current pain points and how the supplier might relieve them. A particularly rich opportunity exists for companies capable of managing other supply chain partners to offer supplier management services to OEMs.

Retain and Train Staff
Prior to the pandemic, supply chain companies recognized that skilled staff was nearly impossible to find. High turnover was practically guaranteed due to quality problems, delays, and lost opportunities.

COVID-19, however, added a new challenge in staff management: Fear of being in the workplace, as well as child and elder care issues led to daily absenteeism exceeding 20 percent at some northeastern firms in March and April.

Supply chain company managers have generally done an excellent job retaining staff. Most firms have shown flexibility regarding hours and family leave. Layoffs and furloughs have been avoided even though 2020 profits will suffer. If “normal” levels of business return in the first half of 2021, supply chain firms will be rewarded with solid rosters of irreplaceable workers.

Keeping staff employed in hard times is a complex balancing act. Labor costs are manufacturers’ largest expense. With lower than expected order activity and declining cash balances, there will be justified temptation to reduce staff. But forward-looking supply chain firms should do all they can to resist layoffs for as long as possible.

Despite the challenges of the pandemic there is an opportunity for workforce improvement. In place of building inventories, this period may be used for training in new skills and capabilities. As consolidation increases competition between suppliers, a refreshed and/or reinforced set of manufacturing capabilities may be key to winning the next major customer or project. Supply chain firms should use the extra time they have now to build a more capable company for the future.

Balancing Reactive and Proactive Strategies
To date, medical device supply chain companies have survived the pandemic, as no bankruptcies have been reported. Additionally, the acquisitions market remains white-hot with historically high multiples testifying to investor confidence in the field. Much of the resilience seen in supply chain companies has resulted from how well management teams reacted in the spring. As previously. mentioned, few companies have attempted to capitalize on the challenges COVID-19 is creating for OEMs. The focus has been “We’re still here” rather than “We have a better way to do things now that we all face difficult times.” Prior to the pandemic, firms stressed nimbleness, quality, and a range of manufacturing services. During COVID-19’s reign, suppliers will benefit from describing resilient manufacturing strategies or offering to absorb OEM risk in exchange for control over more of the supply chain than just the customer’s component stream.

As supply chain managers judiciously react to new developments in the pandemic, some time should be spent looking for the opportunities created by disruptions in OEM business-as-usual polices and approaches. While possibly modest, they allow a contract manufacturer a better position in an increasingly competitive landscape.

In the meantime, stay healthy. 

---

Tony Freeman is the president of A. S. Freeman Advisors LLC, a mergers, acquisitions, and strategic consulting company focused the specialty materials and precision manufacturing industries. Questions or comments on this article can be addressed to tfreeman@asfreeman.com.