Think about the number of items you use in your daily life that are more than 20 years old. Most likely, your car, mobile devices and home appliances are all less than 20 years old. In sharp contrast, many devices used in the medical industry, items that are meant to ensure people’s health and save lives, utilize 20-year-old technology. It’s time to transform the healthcare supply chain.
Compared with other markets, like the high-tech industry, change has been gradual in the medical device field. Technology does not drive the medical device industry, proven therapy does.
Therapy, paired with the requirements of a regulated industry, creates a pace of change that is inconsistent with the technology that exists in their products. The conservative approach to product development and launch constructed by regulating bodies like the U.S. Food and Drug Administration influence the pace of change and new releases to the market. This rigorous approval process is something we all can be thankful for.
Significant cost for recertification and the sheer complexity of both the products and the process has discouraged manufacturers from reevaluating the healthcare supply chain. The Medical Device Industry and the Life Science Diagnostic Industry are like razor and razorblade industries. While you may continue to enhance the razor blades, this does not mean that you need to redesign the razor itself. The same thinking applies to healthcare.
Redesigning existing products or launching new ones are not priorities if they are not needed in the market. Recertification risk, return on new product design investment and patient safety drive the extended product lifecycles to be at 10-15 years as commonplace.
Unfortunately, that is no longer a luxury that can be afforded by the healthcare supply chain. Electronic component market conditions and corresponding shortages are affecting all types of industries — from mobile technology to aerospace and defense— and are starting to take a toll on the healthcare industry.
Although these component families are commonly associated with the tech industry, they have played a prominent role in the medical market over the past decade. Ten years ago, Livemint predicted that medical devices would be the next big market for semiconductors, and other component devices, forecasting 12 percent annual growth. Two years later, ECN touted that semiconductor demands by the healthcare industry for diagnostic and monitoring devices were influencing semiconductor research.
Now, everything from pacemakers to blood pressure monitors and other critical products rely on semiconductors along with other electronic components. This requirement will only grow with the focus on personalized medicine, the change in the point of care and connected health.
Some of these components, which may cost as little as a few pennies a piece and rarely seemed worth a product redesign to future-proof them are now slowing and even shutting down production lines across industries due to low supply.
As component supplier’s prices were driven down following the last recession, many suppliers focused their investment and growth plans on newer, high-growth and high-margin components. Due to this transition and a few other factors, the supply of older generation products is not keeping up with demand, resulting in a supply shortage. Lead times for some of these products can stretch as long as a year, and in some cases, healthcare manufacturers cannot acquire the parts necessary to support production requirements.
A New Healthcare Supply Chain Reality: The Past Can’t Dictate the Future
Component shortages are not a new challenge for the healthcare industry. In the past, healthcare manufacturers have opted to simply pay higher premiums for parts or buy them in bulk and hold them on their balance sheets. However, the problem with this severe and unprecedented shortage is that there are fewer parts left to buy and hold in inventory and suppliers are driving old technology packages into end-of-life.
This point tends to perplex some of our healthcare customers. They’ll quickly point out that they clearly communicate their product needs in advance, so it is frustrating that component suppliers cannot deliver on some of these older generation product families. That may well be true, but the problem is that healthcare manufacturers are used to working with legacy parts, however, in the current environment some of these components will be harder and harder to procure.
In large part it is basic economics. Industries such as automotive, mobility and network infrastructure drive a very large percentage of the overall electronics pie. In fact, a large percentage of the product’s cost of goods in automotive is electronics. Healthcare and diagnostic products are generally much lower volume in comparison and electronics are a much smaller percentage of the overall product’s cost of goods.
Connected Health is Transforming the Healthcare Supply Chain
There hasn’t been excessive need for products to be redesigned at a pace consistent with technology in the past, but connected health is changing the healthcare supply chain. This point is even more salient when you consider how fast products move in an Internet of Things (IoT) world. Big data and other emerging technologies are changing how patients are seen, where they experience care, how their information is managed, all while shortening the development and approval of new healthcare products.
A few years ago, there were only a few connected health devices on the market. Today, there are hundreds. Healthcare is going through a transformation, which is lowering healthcare costs. The collision of proven therapies with the industry-driven need for new technology is driving healthcare manufacturers to reinvent how they defend current markets, capture new emerging markets and secure their commitments to shareholders.
Healthcare manufacturers must drive a cultural change to include speed and technology as major drivers to their product strategies. This process becomes more complex when brands are incredibly committed and connected to patient safety.
It creates an opportunity to innovate not only in therapy and devices but in the innovation process. New products must include plans for securing the healthcare supply chain. It’s time for the healthcare supply chain to move from being a technology laggard to a technology leader – or at least be somewhere in the middle.
The Opportunity Cost of Delaying the Healthcare Supply Chain
Given the nature of the industry up until now, today’s turbulent environment is foreign to healthcare manufacturers. Times aren’t changing, they have changed. Their strategies must not only include safe therapy and product development but must include how to manage the misalignment in product and technology lifecycles.
In combination with the continued pressure on cost and the global growth in the need for affordable healthcare, there must be a plan for global manufacturing and supply chain.
Healthcare manufacturers have lamented how expensive a redesign is, especially considering that it typically takes 18 months on average to bring a product to market. Unfortunately, this is the cost of doing business today. Every day we review the revenue impact to our customers, based on the impact of legacy technology shortages. In these conversations, focusing on the cost and risk of revenue and profit streams generally lead to a very simple answer.
When coaching healthcare customers through this process, we try to help them quantify the value of a redesign or the opportunity cost of not doing a redesign. We discuss factors such as:
- the component lifecycle analysis and exposure
- impact from a perspective of immediacy and revenue loss
- how long they can manufacture with available components
- how much revenue they will miss based on the probable failures in the product’s supply pipelines
- the cost and time to redesign a product and secure the proper regulatory approvals before production can begin again
- the capabilities available or required for success
During these discussions, we illustrate to customers that once the company runs out of its secured parts inventory, a manufacturing line that generates $10 million a week will be down for 20 weeks. Or, put another way, a shortage or an outage of a 10-cent part will cost the company $200 million in missed revenue throughout the next year. However, if the company invests $200,000 in a redesign now — a thousandth of the potential revenue loss — the company could continue manufacturing the redesigned product for another 10 years.
When you consider the problem in terms of dollar value, the case for a proactive redesign becomes much more compelling, doesn’t it? Every day you delay in redesign equates to millions of dollars in lost revenue, let alone the risk of unavailable therapy. You simply can’t buy your way out of this market.
Six Tips to Modernizing the Healthcare Supply Chain
Once a company has decided to make product redesign an ongoing supply chain process, there are a few points engineers should consider:
- Act today. Immediately perform a lifecycle analysis of your products and begin the design process to secure your revenue pipeline. In our healthcare portfolio, there is not one customer unaffected by the current market conditions.
- Do not choose a new component or set a project timeline without listening to your supply base. The electronics market moves faster and is more dynamic than most others. To ensure success, link your product development teams with supply chain teams. Make market conditions, supplier performance and preference as well as the technology roadmap a regular part of the discussion. Map your technology roadmaps against product lifecycles. These are foundational for success.
- Stay ahead of the technology curve. Don’t be tempted and opt for slightly older, lower cost parts. If, for example, you choose a Wi-Fi component that is five or seven years into its lifecycle, that component will be seven or nine years old by the time your product goes to market. In addition to offering outdated technology in your product, you’ll likely be putting your product at risk since that part may soon become obsolete.
- Consider modular design. The FDA approval process certainly lengthens the redesign project timeline. To shorten this, opt for a modular design where possible. This may allow you to keep up with technology and only need to change the affected module. It won’t change the form fit or function of the product and will reduce or eliminate the regulatory requirement.
- Secure your future relevancy within the supply chain. It is no longer enough to have a working product, you must also have an effective and efficient healthcare supply chain. To remain relevant in the future you must continue to make investments that create speed and efficiency for both your customers and your suppliers. This requires continued development of a strong digital backbone. Relevancy is not simply tied to technology or digital infrastructure, it is also strongly tied to managing geographic cost and complexity. The world is a much smaller and more technologically capable place compared to 20 years ago. If you are buying raw printed circuit boards, capacitors or even metal machining that are manufactured in the United States, you are likely utilizing a more expensive opportunity from a supply chain that likely has not kept pace with some of the leading geographies.
- Follow the simple economic theory of “opportunity cost.” Is it more valuable for you to continue to invest in the development of new manufacturing and supply chain solutions to remain relevant and efficient, or is it better for you to invest in developing and expanding your brand?
Technological and geographical changes for healthcare brands will only get faster. Keeping up will require significant infrastructure and access to competing industries. Healthcare manufacturers can no longer sit and wait for the market to push them to change. Decisions must be made with broad sets of multi-industry, multi-brand data. The healthcare supply chain depends on it.
Written by Joe McBeth, Vice President, Global Supply Chain, Nypro Healthcare, A Jabil Company.
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