Medical device industry isexperiencing a new era of healthcare transformation (Frost & Sullivan, 2017). The pressure toreduce healthcare expenditures, intensification of competition, andconsolidation of hospitals and health systems are part of the major changes forthe industry. These dynamics in the market are impacting companies theirtraditional way of doing business because it requires business models thatsupport creation of value proposition for customers, rapid response to customerneeds and innovation of products and services. DePuy Synthes, one of the Johnson& Johnson Family of Companies, is part of the Medical Device industry.
Itoffers a wide portfolio of orthopaedic and neuro products and its differentfranchises offer services for joints reconstruction, trauma, spine, sportsmedicine, cranio-maxillofacial, power tools and biomaterials (DePuy Synthes, 2017). For years, DePuySynthes has been the leader in the market of the products and services itoffers, as per its constantly innovations in the industry. However, an increasein the number of competitors that offer innovative solutions to customers, in afaster and agile way, is becoming a threat to the current business. Without achange in the strategy and correct execution, the tendency shows that DePuySynthes remains with its current customers, as it is a great investment forhospitals to change their current assets, but will lose market share as themarket continues to grow, looking for better, faster, and cheaper alternatives.For this reason, the goal of the company is to create and deliver greatercustomer value than all other offerings; and in order to achieve it, it mustimprove the operational effectiveness and execute a winning strategy (Medical Devices J&J, 2017).To improve operation effectiveness,the company is highly engaged in assessing internal manufacturing plants, asthey represent 80% of the business portfolio, and finding solutions to reducemanufacturing lead time while keeping the same quality standards. On theopposite, there has been no similar initiatives for finished goods that areproduced by external suppliers. Therefore, the scope of this thesis is tohighlight the importance of external suppliers in the business, in terms ofcost reduction and agility increase through a reduction of end-to-end leadtime.
The case study is based on the main external supplier for finished goods,Flextronics LTD. The companies work together since end2015, when DePuy Synthes decided to outsource the production of medical cases. Theportfolio has a high variety and customized products for almost every orthopaedicsurgery for trauma, spine and craniomaxillofacial issues; and the offering ischeaper than other manufacturers of similar products. The demand of these goodsdepends 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 thereis no need to be replenished, as opposed to implants. However, to meet thedemand of a business expansion or tender of a country, medical cases must beavailable as it is mandatory to have the case for every set. The advantages of this transfer werethe reduction in fixed and raw material inventory costs at DePuy Synthes.
However,the transfer was not execute as planned, as a consequence backorders increase atprimary hub level increased by 400%. To address this problem and reducebackorder levels, both companies agreed on establishing a standard planningprocess that creates a schedule of assembling finished goods, with a frozenperiod of three months. Freezing the schedule allowed companies to plan inadvance the ordering of finished goods and raw materials, production anddelivery of products; thus, enabling the entire supply chain to minimizeinventory and maximize production efficiency.
This process reduced indeed the high level of backorders of functionalproducts, which represents approximately 80% of the portfolio, but increasedthe overall lead time of all the products. The increase in the lead time was nota primary issue for the first year of operations, as both companiesconcentrated their efforts on decreasing backorders at primary hub. However, asbackorders are now at a reasonable but stable level, the main concern is therecurrent level of backorders caused mainly by a lack of flexibility; speciallyfor products with high demand volatility.The first objective of the thesis isto evaluate the impact of lead time reduction, by estimating and comparing themismatch cost arising from demand volatility exposure. We refer lead time asthe time placing an order of finish goods until it is delivered from theprimary hub (Suri, 2010). The mismatch costrepresents how much DePuy Synthes is willing to pay to reduce lead time and isa guide to compare the cost increase proposed by Flextronics and decide forwhich products is it worth to invest. Flextronics is currently executing amake-to-order strategy for raw components replenishment.
As a consequence, rawcomponents production represents the 75% of the total lead time of thissupplier. Therefore, the second objective of the thesis is to propose amake-to-stock policy for raw components, starting for finished goods that havethe highest mismatch costs, as they benefit the most from lead-time reductionpolicies. Further recommendation to seniormanagement is having strong commitment on reducing lead time. As demonstrated bySuri (2010), the largest benefits in terms of cost come from cutting lead timenear to when demand happens.
Therefore, the third objective of the thesis is tohelp reducing the 15% left of lead time by proposing a change of mind of bothcompanies that is aligned with time-based mindset. We use the Star Modelproposed by (Galbraith, 1995), to align strategy withprocesses, structure, rewards systems, and people-management. This work goes along with the currentsupply chain strategy for medical devices companies inside Johnson &Johnson (Appelo, 2016). It intends tostrengthen core priorities of the organization, while driving transformativechange throughout our suppliers. Core priorities are to deliver better servicelevels, ensuring the right products in the right place at the right time forevery hospital, patient and procedure. The transformative change is evaluatedthrough a reduction of inventory levels in the supply chain, a development of astronger partnership with one of the main suppliers and an improvement ofagility of the business for long-term growth. Thisthesis is divided into five chapters.
Second chapter provides a literaturereview. Third chapter defines the methodology used to evaluate mismatch cost.Fourth chapter introduces the results of cost evaluation and the fifth chapterproposes a new organizational model to support time-based strategy. The finalchapter shows the conclusion of the work and further analysis.