SCM - Case Meditech Surgical

8/14/2019 SCM - Case Meditech Surgical

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"converting" a hospital to a new supplier often tookmonths of negotiation and convincing.Most endoscopic surgical instruments are smallenough to fit into the palm of a surgeon's hand.

They are mechanical in nature, typically having sev-eral intricate mechanisms to provide the requiredfunctionality. Materials used to produce the instru-ments include plastic injection-molded parts, metalblades, springs, and so forth. In all cases of use,surgeons use the instrument for one op~atiAD.-andtheruwme-diately dispose of it Instruments are neverresterilized and reused for another patient. All inall, the Meditech product line consists of over 200-ep~ate end-oLQd!lcts.DISTRIBUTIONMeditech distributes all its goods from a central ware-hou e sin wo rim channels-dome tic dealersand international affiliates-to distribute its pro uctstroiiithe central warehouse to end-customers (i.e.,hospitals). The first channel, for domestic sales only,uses domestic distributors, or dealers, to ship to hos-pitals. The dealers order and receive products frommultiple manufacturers, including Meditech, typi-cally stocking hundreds of different products. Stockedproducts range from commodity items, such as surgi~cal gloves and aspirin, to endoscopic surgical instru-ments. By using dealers to supply products, hospitalsdo not need to order directly from manufacturers fortheir diverse needs. Additionally, since dealers main-tain regional warehouses all over the United States, thedistance between dealer warehouses and most hospi-tals tends to be quite small. T~ short distance oermitsfrequent replenishments of hos ital inven ries; insome c s, c s from dealers drop off suppliesonce or twice per day. Hospitals enjoy the frequentrepleOlshments, which reduce hospital inventory and,consequently, reduce material costs.

The regional dealer warehouses act as indel2.eJ)dententitie. autonomously determining when to ordernew supplies and how much to order. Therefore, whileMeditech only uses four or five major distributioncompanies, it still receives orCJersfrmn, andsflips to,hilridreds of re ional, individually run warehouses.Each warehouse in tUrn s 1 s a ou a ozen ormore hospitals, resulting in thousands of hospitals thatreceive Meditech products.The distribution channel for international salesuses Largo Healthcare's interpational affiliates.

CHAPTER 1: INTRODUCTIONTO SUPPLYCHAIN MANAGEMENT 15International affiliates are wholly owned subsidiariesof Largo Healthcare residing outside of the UnitedStates. As with domestic dealers, affiliates distrib-ute to hospitals in their regional area. However, incontrast with domestic dealers, which may locatewithin just a few miles of customer hospitals, an affil-iate ships product throughout an entire country. FromMeditech's point of view, affiliates' orders essentiallylook no different than dealers' -international affil-iates submit orders to Meditech and Meditech fillsthem with available product.INTERNALOPERATIONSThe production processes to manufacture endo-scopic instruments are composed of three majorsteps: ~mbling of cI!!l!n~Dt parts.Jnto individ-ual or "bulk"'"lOstruments, packaging one or more

. bulk instruments into a packaged good, and steril-izing the packaged goods. Each of these steps isdescribed below.AssemblyThe assembly process is manually intensive. Compo-nent parts arrive into the assembly area from suppliersfollowing a brief inspection by Quality Assurance(QA). The parts are placed into inventory until readyfor use by one of several assembly lines. Each assem-bly line is run by a team of cross-trained productionworkers who can produce ahYof severalinstrumentswithin a product family. Line changeovers within afamily are quick and inexpensive, merely requiring awarning from the production team leader and a sup-ply of the appropriate component parts. The typicalcycle time for assembly of a batch of instruments-the time required to schedule assembly of a batch ofinstruments and then actually assemble them, assum-ing that component parts are available in componentparts inventory-is on the order of two weeks. Leadtime for component parts is on the order or ~weeks. Assembled instruments are moved from theassembly area into bulk instrument inventory, wherethey wait to be packaged.PackagingThe packaging process makes use of several largepackaging machines. The machines direct bulk instru-ments into plastic containers and then adhere a flexiblesheet of material over the top of the container. Theentire plastic container is then placed into a finished


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16 DESIGNING AND MANAGING THE SUPPLY CHAINcardboard container and shipp~d immediately to thesterilizer. Capacity. at the packagmg area has-notr~ output.SterilizationThe sterilization process uses a large Cobalt radia-tlon steriJiz~r. After batches of packaged instruments(cardboard container, plastic container, and instru-ments) are placed into the sterilizer, the sterilizeris turned on for about an hour. The radiation pene-trates cardboard and plastic to destroy any potentiallyharmful contaminants. The sterilizer can sterilize asmuch product as will fit inside its four walls. Capac-ity limitations have not been a problem thus far.Sterilized instruments are immediately moved intofinished goods inventory.The Operations OrganizationThe entire operations organization reports up throughthe vice president of Operations, Kenneth Strangler(see Figure 1-3 for an organization chart for Opera-tions). Functions immediately reporting to Stranglerinclude several plant managers (one for each ofMeditech's four manufacturing facilities), a directorof supplier management, and a director of planning,distribution, and customer service. Other vice pres-id~~~n) ex~sLJormarketing and ~es,

product development, andJipl-n~. All vice presi-


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Distribution, Dan Franklin; the manager of CentralPlanning; the manager of Inventory; and a managerof Logistics. Customer Service deals with everythingfrom occasional customer complaints to establishingstrategies to improve delivery service to customers.Customer Service representatives work with dealersand affiliates to keep them updated on product deliv-ery schedules and problems. Often this responsibilityplaces the Customer Service representative in directc2iltact with hQSromlpe!sonne1. .While Customer Service handles issues concern-ing the movement of product out of finished goodsinventory, Central Planning ensures that adequatefinished goods are available to meet incoming orders.They develop monthly production...~afare usedby the business units to determine weekly and dailys~edul~ ~Charles Stout, the Inventory manager, determinesthe finished goods inventory policy and establishesparts and bulk inventory guidelines for the businessunits. When a mandate to reduce inventory is passeddown from higher levels of management, the Inven-tory manager must determine where inventory canbe reduced and then begin enforcing those reduc-tions. Through recent efforts, Stout had successfullYeliminated several milli


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18 DESIGNING ANDMANAGINGTHESUPPLYCHAIN!l. ~ lW~-Forecast Forecast -J II

1/,.. V-V' ~~FIGURE1.4 The Medite6h production process.Order point/Order quantity

~ d-.J",-..J ~? 1- ~~~

one week. The scheduling of packaging/sterilizationiSCrone an an order point/order quantity (OP/OQ)basis [i.e., when finished goods inventory drops belowthe predetennined order point (OP), a replenishmentorder for more packaged/sterilized product is initi-ated. The size of the order in tenns of number ofinstruments is always equal to the predetenninedorder quantity (OQ).] -Another way to view the scheduling process is tothink of material as being "pushed" through assem-bly into bulk instrument inventory and' as being"pulled" through packaging/sterilization into fin-ished goods inventory. The push through assembly isbased on the monthly forecast detennined before themonth's demand actually arrives. The pull throughpackaging/sterilization simply retlenishes what wassold fr~~nished goo~s~ ~tore.

NEWPRODUCT INTRODUCTIONS,HIGHLEVELSOF INVENTORY,AND POOR SERVICE LEVELOver the past several years, Meditech has introduceddozens of new products into the market, mostlyby updating existing products. Meditech plans tocontinue this strategy of continuously obsoletingits own products by constantly introducing inno-vations. While the innovative products have beenwell accepted by the marketplace, each new productintroduction has resulted in a nightmare of supplyproblems. Dan Franklin felt that customers werebeginning to tire of the poor service resulting fromeach introduction. Through many meetings with-

hospital material managers, Dan began to realizethe full scope of his customers' frustrations.Franklin could not fiure out why Meditechconsistently had shortages with each introduction.Forecasting had definitely been a problem, but deter-mining its extent was difficult. Data to measureforecast accuracy had not previously been tracked, -nor had forecasts and demand infonnation been kept.Data gathering requires a lengthy process of going

back through hard copies of prior monthly plans andentering the infonnation by hand into a computer.Even if a better methodology could be detennined,forecasts can only be improved by so much.In addition to new product introduction prob-lems, finished ~s inventory levels appeared tobe remarKably high.i\"-cunsiTIffiiiMlaurecently 6eenIllretllo stU~ditech's inventory. Her findingsindicated that overall inventory could be reduced byat least 40 ercent without an impact on the deliv-~!Y.service lev~l (see Igll~e -. esplte t e Ighlevels of inventory, the actual service level over thepast year was disappointing and below corporateobjectives. Management feared that reducing inven-tory would further damage the already subpar levelperfonnance.Another possible cause of the problem is "panicordering" from dealers and affiliates. Panic orderingoccurs when a dealer or affiliate is unsure of whetheror not ,product will be received in time and thereforeincreases the size of its orders ho ing that Medi chwill elver at least pari of the ord,g. The increasedorders would cause de~d to temporarily rise, help-ing to explain Meditech's problems with demandconsistently exceeding supply. Familiar with pastdelivery problems, dealers and affiliates had every

INote on replenishment assumption: For simplicity, this chart assumes that finished goods (FG) inventory is replenished once per week witha lead time of one week. At the beginning of each week, enough product is "ordered" so that the "pipeline" plus FG inventory equals 2~demand-weeks of product. The pipeline in this case refers to in-process product that has not yet reached FG inventory. On average, one week sworth of demand will reside in the pipeline. This leaves, again on average, 2~ - I = I~ demand-weeks in FG inventory at the beginning ofeach week.


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CHAPTER 1: INTRODUCTIONTO SUPPLYCHAIN MANAGEMENT 19

4500 Current inventory policy - 3-/ demand-weeks40003500 Need this much inventory (-2240 sales units=Hdemand-weeks) at the beginning of/ each week to remain out of back orderI30002500

..............................................................................................................................................2000

1500

1000

500 Weekly demand Average weeklydemand04-Jun 18-Jun 2-Jul 16-Jul 30-Jul

Date 13-Aug 27-Aug lO-Sep 24-SepFIGURE 1.5 Weeklydemand pattern for a representative stable productdemonstrating current levels of inventory versus consultant's recommendedinventory policy.

Weekly Net Orders for a New Product

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DESIGNING AND MANAGING THE SUPPLY CHAIN

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(4) Production decreases output(2) Production increases output -, J(1) Increased demand causes back order \ ,,' 1\ ", . \ ,~ " ,~ ,'"-- '"'- ~ -'" , , ,, " , '\'- ,,-.,', \" .- I " ,\ ,

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.,. '\c,, " I '-/ - -', , ,,'./ ', ... ," ,,' ,, \ 5) (Beginning of), " " Steady state,,- ',,/ (3) FG inventory shoots up,

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-2000 Month "M~t:)th Month ,Month, ,0 1', 2,' 3" ,'tt'Month4 Month5 Month6

-4000-0- Net Orders ---*- Planned Production - -D-- FG Inventory

FIGURE 1.7 Production reaction to a new product introduction. The product wasintroduced in the last 2 weeks of Month o.

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,,,,,,,p',,,. , IMonth 2-" Month 3 Month 4 Month 5 ,Month 6 Month 7 Month 8 Month 9, ,, ," ,1J.. '" ," ,"1J.. ', ," ," ,"d

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-2000-3000-4000 --0- Net Orders ---*- Actual Assembly - -0-- FG InventoryFIGURE 1.8 Production reaction to unexpectedly high demand (not a new productintroduction). The unexpected demand occurred during Month 3, Month4, and Month 5.Note that only monthly assembly autw!!J..sshown; packaging/sterilization output was notobtained. ....


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Dan asked one of his staff members to investigatethe new product introduction problem and inven-tory/service level paradox. The staff member spentseveral months compiling information on demandpatterns, production rates, and forecasts. Consistentwith Meditech's decentralized nature, the informationexi~on m!!!lydifferent systems in sev~ral differ:~ntareas o(the organization. There was no routine way tosee incoming demand, inventory, or production ratesfor a particular instrument. Developing a commonfQrmat for the data had also been difficult. Some datawere expressed in terms of calendar months, otherdata in terms of w~ks, and.m:jlIOth~r.datain teIIDtilftoe corporate financial calend&.(alternating 4-week,4-.weeK,and 5-week onth0. Once put together, theinformation conveyed the following:- New product demand after an introduction fol-lowed a consistent pattern of reaching a high peakduring the first few weeks, but becoming relativelystable immediately afterward (see Figure 1-6).

CHAPTER 1: INTRODUCTION TO SUPPLYCHAIN MANAGEMENT 21

It- Variation in production schedules often exceededJ variation in demand (see Figures 1-7 and 1-8).- Monthly forecasting could be improved substan-tially using a simple statistical method: generatinga linear regression through past data.With this information in mind, Dan Franklin

began thinking about how to fix Meditech's deliveryproblems.

CASE DISCUSSION QUESTIONS1. What are Meditech's problems in introducing newproducts? In manufacturing ALL products?2. What is driving these problems, both systemicallyand organizationally?3. Why is the customer service ,manager the firstperson to recognize the major issues?4. How would you fix these problems?

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SCM - Case Meditech Surgical