Research Paper Structure Guidelines

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THE FUTURE OF GLOBAL SUPPLY CHAINS 1

SCHM 6212: Executive Roundtable in Supply Chain Management

The Future of Global Supply ChainsTrends and Implications for the Medical Device Industry and

Healthcare MarketsDipak Patil


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Table of Contents

INTRODUCTION 3

RESEARCH OVERVIEW 4

ASSESSMENT 6

FORCES IMPACTING THE SUPPLYCHAINS OF MEDICAL DEVICE COMPANIES 6ECONOMIC. 6SOCIAL 6GOVERNMENTAL 6RISKS AND CHALLENGES IN THE EMERGING MARKET 7LIMITED INTERNAL KNOWLEDGE OF MARKET 7IP RISK 7LEVEL OF LOCAL COMPETITION 7REGULATORY/REIMBURSEMENT UNCERTAINTY 8LACK OF AVAILABILITY OF QUALIFIED LOCAL PARTNERS (JV,3PL, ETC.) 8MARKET DYNAMICS FOR MAJOR PRIORITYMARKETS 8CHINA 8BRAZIL 9INDIA 9

RECOMMENDATIONS 9

IMPROVED IT 10IMPROVED PROCESSES WITHIN SUPPLY CHAIN ORGANIZATIONS 10PEOPLE 10EVOLVING MANUFACTURING OPERATIONS 11EVOLVING DISTRIBUTION MODEL 11

SUPPLYCHAIN RISKMANAGEMENT 11COLLABORATION 11

CONCLUSION 12

EMERGING MARKETS ARE AN IMPORTANT GROWTH AREA FOR MEDICAL DEVICE COMPANIES 12THE PRIMARY RISKS AND CHALLENGES VARY FROM MARKET TO MARKET AND PRESENT A COMPLEX

PLAYING FIELD FOR SUPPLY CHAIN EXECUTIVES 12EXHIBIT 1 13EXHIBIT 2MEDICAL DEVICE COMPANIES FEEL ECONOMIC PRESSURE 13

REFERENCE 15


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Introduction

From MRI machines to pacemakers to syringes, the medical devices field is varied

and diverse, presenting a wide range of supply chain challenges from company to

company, and product to product. Many hi-tech medical device companies have

excelled in supply chain efficiency, by borrowing strategy and best practice from the hi-

tech and electronics field. Other medical device manufacturers are more aligned with

traditional pharmaceutical companies in terms of their supply chain, lagging slightly

behind the cutting edge of operational excellence.

So far most of the Medical Device companies were focused on the markets from

region viz. North America, Europe. But these markets are getting matured due to the

slow growth rate and growing reimbursement pressure. The five-year medical device

CAGR in mature markets is estimated to be 7.5% vs. an emerging markets rate of 15%.

Also BRIC five year CAGR is forecasted to be around 20%.1

Due to this most of Medical

Device companies are increasingly turning to emerging markets to accelerate their

growth. But these emerging markets have different structures, regulations and different

models that control the demand for medical devices. So together these emerging

markets represents the complex playground for the supply chain executives. Therefor in

this research paper we set out to explore the implications of emerging market

expansion on supply chains by finding answers to following questions

How important is emerging market growth for medical device companies?How are companies managing emerging market supply chains?Which countries/regions are the highest priorities?


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What are the current operating models deployed (distributors, JVs, mfg. in region,etc.) and what changes are being considered in key emerging markets?

What are the primary risks, concerns in each market?

Research Overview

As seen earlier, The Medical Device companies are continually seeking to reduce the

costs and devise new strategies for profitable growth. With huge potential growth

opportunities in global markets, most of the Companies are getting increasingly

concerned about their supply networks and the financial impacts of globalization. The

major challenges before Medical device companies in achieving their goal are

Moving products over long supply chains to meet risky forecasts Manage tighter supply chains in order to maintain or increase operating margins Challenges created by the transportation and logistics with global supply chains Diversified and complex healthcare markets

Factors adding complexity to Supply Chains of Medical Device Companies in conquering

the growing markets are

The companies are progressively adopting the source, build, sell anywheremodel

Globalization is driving Structural Changes Horizontal expansion


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Lower cost manufacturing objectives for Emerging markets will mean morestrategic sourcing

Decrease in piece cost and increase in supply chain costs

In this research paper the main sources of information were the different Journals,

Surveys, papers published and The World Medical Fact Book 2011 etc.. These sources

gave the comprehensive insights of the market statistics for medical sector specially

from the emerging markets. There are very few consultancies like PwC's PRTM

Management Consulting services, who are putting there efforts to help out companies

in emerging market to use their every available capability to maximize profits,

streamline operations, and increase delivery reliability.

So, in this research we are going to see how the emerging markets present important

growth opportunity. Also the primary risks and challenges that companies have to face

that vary from region to region. The paper will also address importance of knowledge

about the in and out of these emerging markets to leverage the supply chain for

competitive advantage.


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Assessment

Forces Impacting the Supply Chains of Medical Device companies

Economic.

Sluggish economy and a revamped reimbursement model are slowing down thegrowth for Medical device companies in North America.

Five-year medical device compound annual growth rate (CAGR) in maturemarkets is estimated to be 7.5% vs. an emerging markets rate of 15%. (Exhibit 2)

Social

Medical Device makers are suffering as consumers defer non-urgent healthcareamid high levels of unemployment and ongoing healthcare benefit plan design

changes that are pushing a larger portion of healthcare costs onto patients.2

The greater percentage of elderly population in emerging market represents amajor catalyst for demand of medical devices.

Governmental

Medical device companies must also contend with a new medical device tax in2013 that's part of the 2010 healthcare reform legislation.

Governments from emerging market regions are spending growing percentageof there GDP on healthcare facilities, which is good sign for Device Industry.


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Risks and Challenges in The Emerging Market

Following areas represent the greatest risks and challenges in emerging market for

Medical Device companies. (Exhibit 2)

Limited internal knowledge of market

Most of the Device companies have limited knowledge about the emerging markets.

The market in each country has its own structure. E.g. In India, market has a complex

landscape with significant regional variations, 24 major languages, and multi-tier health

care system. Also, no of large hospitals are less and Hospitals dont have direct control

on the equipment purchased which challenges marketing, sales and distribution.

IP risk

Device Companies spend millions of dollars on R&D to come up with the new and

innovative products. But with the new markets there is risk for its Intellectual Property

(IP). In some countries, there are some patent laws, which makes patent litigation

tougher to enforce. Also, there are many instances in which it is found that many cheap

copycat versions of many devices is available in the market by local companies. So

Device companies need to make sure they take appropriate steps for securing their IP

when they are using build locally sell locally model.

Level of local competition

For countries like Brazil there is already a noticeable level local competition particularly

in low-tech products present. So Device company needs to come up with the products

that will be having competitive prices and better quality.


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Regulatory/reimbursement uncertainty

Inefficient regulation and registration processes in many regions create significant

market entry barriers. Many times regulated medical devices must undergo a lengthy,

and highly variable, registration and licensing process. Opaque and complex tendering

processes often raise suppliers selling expense and cycle time Many times local

suppliers can have significant influence on technical panel experts and decision makers

in tendering process. Pricing controls under consideration would negatively impact

profitability of imported products

Lack of availability of qualified local partners (JV, 3PL, etc.)

In countries like India due to few local partnership options many major global device

firms have to operate fully owned subsidiaries. Some have to choose to create joint

ventures with similarly large local players (GE/Wipro). Complexity of market often

requires multiple distributor partners, but most of distributors lack full market reach

Market Dynamics for Major Priority Markets3

China

13.6% projected five-year CAGR for medical devicesThree-year $124B government investment in health care reformwill primarily

benefit mass market equipment and consumables

Reform provision to Buy China gives preference to domestic suppliersMNCs dominate high-end market but domestic companies are increasing

investment

Slow registration process and China-specific standards protocols


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Brazil

6.1% projected five-year CAGR for medical devices (significant slowdown from27% CAGR in previous five years)

Strong domestic production from MNCs and local competitors geared toward thelocal market, limited exports

Distribution infrastructure struggling to keep pace with increasing access to healthcare outside of major cities

Highly complex and changing regulatory environment (ANVISA)India

15.6% projected five-year CAGR for medical devicesDomestic production growth is surging to fulfill domestic demandgrowing at

17% CAGR

Infrastructure for manufacturing and R&D facilities is still in the early stages ofimplementation

Uncertain, evolving regulatory environmentLocal distributors/agents play significant role as hospitals do not purchase direct

from manufacturers

Recommendations

Medical device Companies have started feeling the heat of thinning margins due to a

sluggish economy and reimbursement pressures in North American markets. Hence,

companies are turning to emerging markets to accelerate the growth. But as we saw


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each of these emerging markets have there own risks and challenges. So Medical Device

Companies needs to plan their strategy very deliberately to enhance the market share in

these markets. Here are some recommendations that we have inferred from the

analysis:

Improved IT

With the global operations, Device companies should use the improved IT to enable

supply chain effectiveness. Companies can opt for the supply chain software like i2,

Manhattan, Manugistics, etc. in addition to ERP packages like SAP and Oracle.

Improved Processes within supply chain organizations

80% of manufacturing companies are outsourcing some logistics processes as well as

information technology, financial functions, or call centers. So Device companies need

to standardize their processes around the world. Also the supply chain organizations

needs to work closely within themselves to avoid the different views on the issues like

scope of control, role on the executive agendas, and ability to foster collaboration both

within the business and with trading partners.

People

The company should plan the people working in global supply chain so that there are no

talent gaps. The other key challenge associated with global markets is working with

people from different background with communications barrier or cultural

misunderstandings. The companies should work in association with local partners to


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carry out the communications in better way. There should be standards defined for

carrying out the tasks.

Evolving Manufacturing Operations

Currently limited manufacturing is done in the emerging market so medical device

companies should adopt the Regional build and sell with global parts sourcing for the

parts which have IP risk. For low cost high demand Parts, Company can adopt regional

build and sell model which will reduce the supply chain cost as % of total cost for given

product.

Evolving Distribution Model

Distributors are most common supply chain strategy in emerging markets but Device

Companies should try employing 3PLs. In addition to 3PL company can also try the self

owned or managed sales and distribution

Supply Chain Risk Management

With new markets, results security issues which is major concern working in a new

region. SC risk management involves many factors physical, people, information, cash,

infrastructure, weather ,and others. So Device company should define the management

structure to identify, plan, avoid, mitigate, and solve risks.

Collaboration


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The value proposition for increased collaboration among trading partners across the

different regions is understood but the implementation is slow. There are many reasons,

So company should find the barrier and clear it for a better collaboration.

Conclusion

Emerging markets are an important growth area for medical device companies

China, Brazil, and India are the primary areas of focus

The primary risks and challenges vary from market to market and present a

complex playing field for supply chain executives

Companies that lack a well-thought-out, proactive emerging market supply chain

strategy are at risk of ending up with a sub-optimal supply chain that limits

growth and profitability


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Exhibit 14

Exhibit 2 Medical device companies feel economic pressure

Published onHealthcare Finance News(http://www.healthcarefinancenews.com)

Medical device companies feel economic pressure, see record M&A levelsByRene Letourneau, Editor

NEW YORK CITYMedical device manufacturers are feeling the effects of a sluggish economy and a revampedreimbursement model, which are leading to slow growth and record levels of mergers and acquisitions activity.

Ongoing financial pressure on U.S. for-profit hospitals is affecting the medical device sector, according to Moody'sInvestors Service.

Moody's stable outlook for the U.S. for-profit hospital sector reflects the expectation that same-facility aggregateEBITDA growth will remain in the low-single digits in percentage terms over the next 12 to 18 months as weak patientvolumes continue and pricing pressures mount.

Moody's sees a similar trend in the medical products and devices sector with aggregate EBITDA growth likely toremain around 1 to 4 percent through 2012, a key factor supporting its stable outlook for the sector. U.S. hospitals arekey customers for device companies.

In its report, "U.S. Medical Products and Devices: Profits to Rise Modestly; Cost Cuts Will Offset Weak Sales,Moody's notes that U.S. hospitals and device makers are suffering as consumers defer non-urgent healthcare amid high
http://www.healthcarefinancenews.com/http://www.healthcarefinancenews.com/http://www.healthcarefinancenews.com/http://www.healthcarefinancenews.com/


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Reference

1The World Medical Markets Fact Book, 2010

2http://www.healthcarefinancenews.com/news/medical-device-companies-feel-economic-pressure-see-record-ma-

levels3Medistat Outlook China Report; Medistat Outlook Brazil Report; Medistat Outlook India Report4PRTM Medical Device Emerging Market Survey
http://www.healthcarefinancenews.com/news/medical-device-companies-feel-economic-pressure-see-record-ma-http://www.healthcarefinancenews.com/news/medical-device-companies-feel-economic-pressure-see-record-ma-http://www.healthcarefinancenews.com/news/medical-device-companies-feel-economic-pressure-see-record-ma-

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