Medical device industry is
experiencing a new era of healthcare transformation (Frost & Sullivan, 2017). The pressure to
reduce healthcare expenditures, intensification of competition, and
consolidation of hospitals and health systems are part of the major changes for
the industry. These dynamics in the market are impacting companies their
traditional way of doing business because it requires business models that
support creation of value proposition for customers, rapid response to customer
needs and innovation of products and services.
DePuy Synthes, one of the Johnson
& Johnson Family of Companies, is part of the Medical Device industry. It
offers a wide portfolio of orthopaedic and neuro products and its different
franchises offer services for joints reconstruction, trauma, spine, sports
medicine, cranio-maxillofacial, power tools and biomaterials (DePuy Synthes, 2017). For years, DePuy
Synthes has been the leader in the market of the products and services it
offers, as per its constantly innovations in the industry. However, an increase
in the number of competitors that offer innovative solutions to customers, in a
faster and agile way, is becoming a threat to the current business. Without a
change in the strategy and correct execution, the tendency shows that DePuy
Synthes remains with its current customers, as it is a great investment for
hospitals to change their current assets, but will lose market share as the
market continues to grow, looking for better, faster, and cheaper alternatives.
For this reason, the goal of the company is to create and deliver greater
customer value than all other offerings; and in order to achieve it, it must
improve the operational effectiveness and execute a winning strategy (Medical Devices
To improve operation effectiveness,
the company is highly engaged in assessing internal manufacturing plants, as
they represent 80% of the business portfolio, and finding solutions to reduce
manufacturing lead time while keeping the same quality standards. On the
opposite, there has been no similar initiatives for finished goods that are
produced by external suppliers. Therefore, the scope of this thesis is to
highlight the importance of external suppliers in the business, in terms of
cost reduction and agility increase through a reduction of end-to-end lead
time. The case study is based on the main external supplier for finished goods,
The companies work together since end
2015, when DePuy Synthes decided to outsource the production of medical cases. The
portfolio has a high variety and customized products for almost every orthopaedic
surgery for trauma, spine and craniomaxillofacial issues; and the offering is
cheaper than other manufacturers of similar products. The demand of these goods
depends mainly on the new expansions and possible tenders around the world.
Once a hospital has a case, this can be reused in similar surgeries and there
is no need to be replenished, as opposed to implants. However, to meet the
demand of a business expansion or tender of a country, medical cases must be
available as it is mandatory to have the case for every set.
The advantages of this transfer were
the reduction in fixed and raw material inventory costs at DePuy Synthes. However,
the transfer was not execute as planned, as a consequence backorders increase at
primary hub level increased by 400%. To address this problem and reduce
backorder levels, both companies agreed on establishing a standard planning
process that creates a schedule of assembling finished goods, with a frozen
period of three months. Freezing the schedule allowed companies to plan in
advance the ordering of finished goods and raw materials, production and
delivery of products; thus, enabling the entire supply chain to minimize
inventory and maximize production efficiency.
This process reduced indeed the high level of backorders of functional
products, which represents approximately 80% of the portfolio, but increased
the overall lead time of all the products.
The increase in the lead time was not
a primary issue for the first year of operations, as both companies
concentrated their efforts on decreasing backorders at primary hub. However, as
backorders are now at a reasonable but stable level, the main concern is the
recurrent level of backorders caused mainly by a lack of flexibility; specially
for products with high demand volatility.
The first objective of the thesis is
to evaluate the impact of lead time reduction, by estimating and comparing the
mismatch cost arising from demand volatility exposure. We refer lead time as
the time placing an order of finish goods until it is delivered from the
primary hub (Suri, 2010). The mismatch cost
represents how much DePuy Synthes is willing to pay to reduce lead time and is
a guide to compare the cost increase proposed by Flextronics and decide for
which products is it worth to invest.
Flextronics is currently executing a
make-to-order strategy for raw components replenishment. As a consequence, raw
components production represents the 75% of the total lead time of this
supplier. Therefore, the second objective of the thesis is to propose a
make-to-stock policy for raw components, starting for finished goods that have
the highest mismatch costs, as they benefit the most from lead-time reduction
Further recommendation to senior
management is having strong commitment on reducing lead time. As demonstrated by
Suri (2010), the largest benefits in terms of cost come from cutting lead time
near to when demand happens. Therefore, the third objective of the thesis is to
help reducing the 15% left of lead time by proposing a change of mind of both
companies that is aligned with time-based mindset. We use the Star Model
proposed by (Galbraith, 1995), to align strategy with
processes, structure, rewards systems, and people-management.
This work goes along with the current
supply chain strategy for medical devices companies inside Johnson &
Johnson (Appelo, 2016). It intends to
strengthen core priorities of the organization, while driving transformative
change throughout our suppliers. Core priorities are to deliver better service
levels, ensuring the right products in the right place at the right time for
every hospital, patient and procedure. The transformative change is evaluated
through a reduction of inventory levels in the supply chain, a development of a
stronger partnership with one of the main suppliers and an improvement of
agility of the business for long-term growth.
thesis is divided into five chapters. Second chapter provides a literature
review. Third chapter defines the methodology used to evaluate mismatch cost.
Fourth chapter introduces the results of cost evaluation and the fifth chapter
proposes a new organizational model to support time-based strategy. The final
chapter shows the conclusion of the work and further analysis.