Case: Meditech Surgical

Designing & Managing the Supply Chain

Chapter 1

Byung-Hyun Ha

bhha@pusan.ac.kr

Case Overview

Intent – diagnosis of supply chain

Business overview

Supply chain

Production planning

What’s wrong?

How to fix it?

Meditech Surgical

Background Endoscopic surgical instrument maker

• Minimally invasive surgery

Parent company: Largo Healthcare Company• Spun off 3 years ago

Primary competitor: National Medical Corporation• Market created in early 80’s, rapidly growing

• National sells to physicians

• Meditech sells to material managers as well as physicians

• Customer preferences change slowly

Old products continually updated• Replaced with new product introductions

Compete based on product innovations, customer service, cost

Meditech Surgical

Problems New production introduction needs to be flawless Consistently fail to keep up with demand during initial order Customers wait over six weeks to have orders delivered

Dan Franklin, manager of Customer Service & Dist. Recognizing growing customer dissatisfaction

Distribution

Central warehouse

Two primary channels to hospitals Domestic dealers

• Order and receive products from multiple manufacturers

• Independent and autonomous entities

International affiliates• Subsidiaries of Largo Healthcare

• Similar to domestic dealers from Meditech’s point of view

Internal Operations

Assembly Manually intensive Using component parts in inventory Assembly line with a tem of cross-trained production workers Cycle time for assembly of a batch of instruments

• 2 weeks

Lead time for component parts• 2-16 weeks

Packaging Using machine

Sterilization Cobalt radiation sterilizer, about 1 hour

Operation Organization

Production Planning & Scheduling

Broken down two parts Assembly & component parts order based on monthly forecast Packaging & sterilization based on finished goods inventory level

Forecast Annual: during the fourth quarter of each fiscal year Monthly: using annual forecast broken down proportionately

• At the beginning of each month: adjustments of forecast

Planning of assembly Using monthly demand forecasts transfer req. =

month forecast – finished goods inventory + safety stock

Approved throughout the organization after 1 to 2 weeks

Production Planning & Scheduling

MRP systems Planning assembly schedules and parts order Calculation may be run several times each week

• Notification of change at least 1 weeks before

Packaging & sterilization process Order point/order quantity (OP/OQ)

Parts Inventory Assembly Bulk Inventory FG InventoryPackaging &Sterilization

2 – 16 weeks 2 weeks 1 weekpush pull

High Inventory Level of Finished Goods

In case of representative stable product

Var. in Production vs. Var. in Demand

Variation in production schedules often exceeded variation in demand

New Product Introduction

Poor service level Poor forecasting? Panic ordering? And high FG inventory

Poor Service Level

What is going on? Demand is quite predictable Usage in hospitals is quite stable Market share moves slowly over time With each new product, dealer must build inventory to fill pipelin

e

Why did Meditech think demand was unpredictable? Poor information systems No one looked at demand No one had responsibility for forecast errors Tendency to shift the blame Built-in delays and monthly buckets in planning system Amplifier in planning system

Poor Service Level

What to do? Recognize that demand is stable and predictable Establish accountability for forecast Eliminate planning delays and/or reduce time bucket Alternatively, put assembly within pull system and eliminate bulk

inventory