Alvarez & Marsal (A&M) has successfully worked with medical technology (Med Tech) manufacturers to overcome the impact of COVID-19 on their financial health by making rapid changes to their operations.
Many companies are still experiencing challenges as we move into a post-pandemic world. The cost of distribution has increased substantially, working capital has exploded, service levels have deteriorated and profitability has suffered. In this article we set out approaches to adapt to the new environment, and achieve up to 3-5 percentage points improvement of EBITDA.
A key sector of Med Tech — the medical device industry — has accomplished 5 percent average annual growth in recent years with average operating margins in the 20-25 percent range. After a dip due to the pandemic most observers agree that the historic growth rate will continue for the coming years.
However, companies will no longer be able to earn premium margins by selling clinical features and new devices into established markets. Companies that historically had gross margins of 70-80 percent are now seeing 40-50 percent, driven by pricing pressure, technological disruption and competition from companies in emerging markets. This trend will continue with unit prices on track to drop 5-10 percent during 2020-2022. This damper on profitability makes it difficult to invest in new products and technologies. With a global market expected to be at least $100 billion larger in five years than today, established players might need to reconsider their business models, a process that takes significant time and effort.
To get quicker results, Med Tech players need to look at operational value levers — domains of actions that directly impact cost and cash flow. The end-to-end supply chain in Med Tech is increasingly costly and must be managed more closely than before. The supply chain can be a key differentiator in areas such as service, spare parts and refurbishment, adding extra revenue and locking in customers.
In our experience, a few key operational value levers can drive substantial improvement in an
Operations Rapid Performance Improvement Programme:
• Planning
• Procurement Excellence and Category Management
• Production LEAN Six-Sigma for Med Tech
• Distribution and Transportation.
Below, we discuss each lever and explain how upgrading key performance indicator (KPI) metrics can help track and manage performance.
Operations Rapid Performance Improvement Can Help Companies Improve EBITDA
Planning
We recommend focusing on the detailed planning underpinning planning processes to get quick wins while leveraging what already works well. There are three high-impact areas:
- Secure demand and supply reviews: Make sure monthly meetings to review supply and demand work effectively with adequate data and information.
- Demand planning: Improve demand planning through regular meetings, fact-based decision-making and improved analysis, to immediately achieve an increase in service levels and reductions of both working capital and scrap and obsolescence costs.
- Hands-on support in planning: Planning is complex and few dedicated people in the organisation have sufficient understanding of both the techniques and the concepts to effectively plan, so the organisation can benefit from third-party support.
In our experience, companies can quickly improve planning and make material contributions to EBIDTA performance, while benefitting from our hands-on client team training for sustainability.
Procurement Excellence and Category Management
Few would challenge the impact of procurement and category optimisation on the bottom-line, and yet businesses struggle to dedicate sufficient skilled resources to drive targeted savings. The key areas to deliver bottom-line savings in a rapid performance improvement programme are:
- Supplier prioritisation based on value: Impact the bottom line quickly by prioritising suppliers based on contract status and the procured value they represent, supported by a ‘supplier day’ approach — jointly aiming at reducing total cost and generating momentum.
- Fact-based negotiations with prioritised suppliers: Use cost-value analysis, open book, best of bench cost and other suitable techniques for leverage in supplier negotiations.
- Establish optimal product categories: Define these categories based on commonality, value and organisational setup.
- Roles and Responsibilities: In parallel with supplier management and categorisation, companies should seize the opportunity to improve the organisational structure.
We have helped clients prepare and conduct hands-on supplier negotiations, providing cost-value analysis and ‘supplier days’ to build momentum and accelerate savings. Negotiations pertaining to contract manufacturing and outsourcing are also important, where we have our own proprietary tool to diagnose and optimise days inventory outstanding (DIO) and inventory.
Production LEAN Six-Sigma for Med Tech
In the context of adapting to the post-pandemic environment, LEAN Six-Sigma should be used to drive rapid results. These methods are not new, but certain barriers in Med Tech, such as regulation and quality management systems (QMS) resulted in a slow uptake. Based on A&M’s experience of applying LEAN Six-Sigma in Med Tech, we have demonstrated that focusing on variation reduction, product quality and shorter lead times are efficient approaches to production improvement. It also resonates with the workforce, so being explicit about this initiative tends to mobilise staff and presents initial quick-win opportunities. Relevant examples of actions with quick impact include:
- Increase relevant data measurements: Gain immediate benefits by expanding the amount of data your company measures to promote fact-based discussions.
- Address overall equipment effectiveness (OEE) up front: Improve the company’s production ability and reduce waste, leveraging on OEE’s comprehensive nature (Availability / Performance / Quality).
- Use appropriate LEAN tools: Reduce variation by applying 5S, SMED, the DMAIC method, value stream mapping, line balancing, error proofing, trainings, and so forth.
- Drive product quality and improve compliance: Reduce deviations, repeat deviations and CAPA numbers, applying robust RCA methods, investigations and countermeasures.
- Reduce lead times: Take any opportunity to trim manufacturing lead times as long as it does not imply significant costs.
We have highly experienced LEAN Six-Sigma professionals with a pragmatic approach focused on prioritising methods that produce the quickest impact rather than focusing on a comprehensive cultural change.
Distribution and Transportation
COVID-19 disrupted schedules and raised the cost of distribution and transportation for Med Tech businesses. Since distribution and transportation as a share of sales varies significantly in Med Tech — by as much as 5 to 20 percent — it also indicates appealing potential. A&M has worked with the following immediate improvement opportunities:
- Centralisation of local services, including transportation: Review the highest costs and those that are easiest to centralise, to leverage on economies of scale.
- Negotiate with service providers centrally: Using a single point of contact with the right capabilities makes negotiations more effective and efficient for the organisation.
- Optimisation of the supply network: Look for ways to streamline the network with focus on reducing complexity, total lead times and total cost.
- Distribution Centre improvements: Apply best practice and hands-on support to quickly improve distribution centre KPIs such as on-time, in-full (OTIF), quality, capacity utilisation and cost metrics.
In this process, we help clients test and assess the distribution and transportation services, while achieving economies of scale. We have extensive experience negotiating on behalf of clients and supporting analysis and implementation to get results, including relocation and closure of facilities.
Analytics and KPI upgrade
KPIs underpin the whole effort to rapidly improve operations performance. Improving KPIs is challenging, but presenting incorrect KPIs in board meetings can jeopardize somebody’s career. Upgrade doesn’t necessarily mean to introduce more complicated and more KPIs overall but can also imply simplifying or reducing current KPI complexity if it doesn’t support a business. Key steps are:
- Define and Refine: Build the KPIs from the top and be precise about the definitions.
- Align: KPIs should match business objectives while ensuring they provide insights along the end-to-end supply chain, considering quality, cost and delivery. Quality and accuracy of measurement tops quantity of KPIs
- Visualise: Define and regularly adopt uniform scorecards and dashboards.
- Automate: Use business intelligence tools to make the calculation and presentation of KPIs automatic.
- Deploy: Dig out the relevant data from the client while simultaneously deploying the KPIs.
Time for action
The conditions are right to optimise Med Tech operations, so now is the time to act. The A&M Operations Rapid Performance Improvement Programme in Med Tech, using well proven operational value levers, will typically deliver 3 to 5 percentage points EBITDA improvement in three to six months.
Start with a rapid diagnostic to identify the levers and gaps, and size potential improvements. It doesn’t have to be end-to-end from the start, as long as you focus on areas that impact supply chain and operational value creation the most. Our approach is relevant to private equity-owned businesses, as well as corporates, where actions rather than reports are needed. During an unprecedented time of disruption globally, postponing improvements to cash flow is more expensive to your organisation than ever.
A&M: Leadership. Action. Results.
A&M’s Healthcare & Life Sciences practice combines deep expertise across life sciences, including pharmaceuticals, medical technology and healthcare systems (payers and providers), as well as private equity stakeholders. If you have any questions regarding the content covered in this article, please contact one of our experts.
SOURCES
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Source: https://www.thebusinessresearchcompany.com/report/medical-devices-market
The global medical devices market reached a value of nearly $456.8 billion in 2020, having increased at a compound annual growth rate (CAGR) of 3.5% since 2015. The market is expected to grow from $456.8 billion in 2020 to $620.0 billion in 2025 at a rate of 7.7%. The medical devices market is then expected to grow at a CAGR of 5.5% from 2025 and reach $863.2.4 billion in 2030.
SSV comment: I triangulated the market size numbers with the MedPac report to Congress, and other sources below, and they are feasible. I assume ~5% growth until, including 2019, and then a dip in 2020, and then ~5% continues from 2020 to 2021 and onwards.
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Source: Unclear
The global medical devices market reached a value of nearly $456.9 billion in 2019, having increased at a compound annual growth rate (CAGR) of 4.4% since 2015. The market is expected to decline from $456.9 billion in 2019 to $442.5 billion in 2020 at a rate of -3.2%.
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Source: https://www.fortunebusinessinsights.com/industry-reports/medical-devices-market-100085
The global medical devices market is projected to grow from $455.34 billion in 2021 to $657.98 billion in 2028 at a CAGR of 5.4% in forecast period, 2021-2028. The sudden rise in CAGR is attributable to this market's demand and growth, returning to pre-pandemic levels once the pandemic is over.
SSV comment: The article indicates that 5,4% growth was the pre-pandemic level.
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The medical devices market was estimated to be USD 504.85 billion in 2020 and is expected to witness a CAGR of around 5.71% over the forecast period to reach USD 629.40 billion in the year 2026. The COVID-19 pandemic is expected to have a mixed impact on the market. Currently, countries are facing the huge threat of the COVID-19 pandemic. There is a shortage of treatment available against this type of disease and most of the pharmaceutical and biotechnological companies are focusing their research and development departments in identifying new molecules or leads for the treatment of this disease. The supply chain disruption caused due to Covid-19 has led to shortages of critical medical devices across the globe. Therefore, many countries have taken definite measurements in order to ease the shortages by importing equipment such as domestic manufacturing of medical devices.
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The global medical devices market size is expected to reach USD 657.98 billion by 2028, exhibiting a CAGR of 5.4% during the forecast period.
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The European medical device market has been growing on average by 4,3% per annum over the past 10 years.