New Data from Industry Leaders Shines Light on Direct Materials Spend and Strategy

By Steven E. Afshar

Global medical device manufacturers spend ~$180B USD annually on Cost of Goods Sold (COGS), but not every spend component has been subject to equal scrutiny. While management has historically focused on direct labor and overhead costs that are considered relatively controllable, more than half of that spend (~$100B USD) is directed toward the often unpredictable and challenging acquisition of direct materials. Given this imbalance between spend and management focus, colleagues at Accel Management Group recognized a pressing need for in-depth analysis of current supply management trends and projections. Our MedTech Supply Management Benchmark Study compiles new and very specific data from some of the most successful medical device manufacturers in operation today. Whether you are one of those leaders keeping a keen eye on the industry landscape, an up-and-comer with sights set on growth, or a supplier trying to steady the ship in uncertain times, the results of this study offer actionable and sometimes surprising insight into a rapidly evolving and previously underexplored MedTech sector.

Benchmark Study Goals, Participants, and Design

Now more than ever, medical device manufacturers know that even one undelivered part can bring their lines to a grinding and costly halt. With so much at stake, lack of focus on supply management is short-sighted at best and can be catastrophic at worst. On the supplier side, many companies are struggling to stay afloat given cost squeezes, uncertain demand, and shifting expectations. To help manufacturers and suppliers alike better capitalize on opportunities and minimize exposures, we conducted a unique MedTech Supply Management Benchmark Study.

The objective of this study was to provide baseline data, trending information, and perspectives about the future from today’s leading medical device manufacturers on three broad topics:

• Supply Spend with a particular focus on key commodity areas
• Supplier Management Strategy
• Organizational Structure and Supplier Management Maturity

Study candidates were limited to companies based in the US or Europe with annual revenue >$2B USD and headcount >8,000 FTEs. Ultimately, study participants had a combined total of $60B+ USD in annual revenue – about 15% of the annual revenue generated by today’s entire MedTech industry. Long-standing relationships afforded us rare access to this elite group, some of the most innovative and visionary companies in the world.

Rather than rehash previous research that tended to cast a broader participant net and utilize more general enquiry, our study tapped industry leaders via 28 pointed questions about supply management. Information was gathered through surveys and follow-up interviews. Participant product segments spanned the MedTech market and included both original equipment manufacturers (OEMs) and contract manufacturers. The study was completed in Q4 2021 with data based on actual FY2021 performance and FY2024 projections.

Key Benchmark Study Findings

Our MedTech Supply Management Benchmark Study offers a compelling look into how many of the industry’s leading companies are finding success:

#1. Spend Analysis

Quick Take: Given current and projected trends, supplier focus on Metals, Plastics / Resins, or Packaging carries potential for reward.

• Study participants source more than half of COGS externally (57%).
• Metals and Plastics / Resins are the largest spend categories, together comprising more than half of today’s total spend (52%).
• Rapid YoY spend growth through FY2024 is expected in Metals (13%), Packaging (10%), and Plastics / Resins (8%).

Quick Take: The figurative (and sometimes literal) direct materials train is leaving the US and Europe. If perceived and real risks have to date prevented consideration of cost-advantaged country sourcing or supplier relocation, study findings suggest taking a second look. Device manufacturing leaders certainly have, and suppliers are increasingly expected to follow suit.

• Spend in the US and Europe is expected to decrease from 77% today to 68% by FY2024 (-9%).
• To support direct material cost-down goals, spend in more cost-advantaged countries is growing. By FY2024, study participants are expected to increase spend from 13% to 18% (+5%) in Central America and 8% to 13% (+5%) in Asia.

#2. Supplier Management Strategy

Quick Take: MedTech companies are aggressively moving business from transactional vendors to strategic suppliers in what amounts to a redefined, more win-win manufacturer / supplier relationship model.

Study findings reveal a seismic shift in the way suppliers are viewed and what is expected of them.

• Strategic suppliers are considered technology leaders and expected to:
  
  • demonstrate exceptional and broad technical capabilities
  • deliver upside capacity
  • maintain the highest levels of quality and performance utilizing well-defined processes
  • uphold cost reduction targets and advance financial stability
  • reduce enterprise risks and
  • enhance end-to-end supply chain speed and flexibility.
• Strategic suppliers become involved up front in product design and have input at all stages of development.
• Strategic supplier contracts are long term, affording both parties the breathing room to focus on more than cost.

Device manufacturers are moving from dependence on hundreds if not thousands of suppliers to working closely with a much smaller group of strategic suppliers that function more as collaborative partners. Replacing previous laser focus on cost, many of today’s manufacturers and suppliers have begun to share not only ideas but also rewards and risks as they work together toward the better / faster / cheaper ideal.

Quick Take: Even those who predicted this trend may be surprised at its speed. Almost half of the study participant supply base is expected to be strategic (or have that potential) in the next three years.

• Suppliers are now being categorized as (1) Strategic (2) High Potential (3) Maintain or (4) Exit.

High potential suppliers have demonstrated the ability to become strategic, maintain suppliers lack that ability but are of continued viability as transactional vendors given their niche commodity, and exit suppliers do not meet (and are not expected to meet) either the strategic or niche commodity needs of manufacturers.

• By FY2024, strategic and high potential suppliers are expected to represent 43% of the study participant supply base and 72% of its total spend.
• Study participants expect new business awarded to strategic suppliers to increase from 36% to 56% (+20%) by FY 2024 with a corresponding reduction for maintain suppliers from 34% to 14% (-20%).

Quick Take: Conventional price pounding is giving way to more promising and diversified cost-down strategies.

• Direct material cost-down strategies will become less reliant on negotiation with an expected decrease from 53% to 35% (-18%) by FY2024 and shifts toward value engineering (+9%), cost-advantaged country sourcing (+4%), vertical integration (+3%), and strategic suppliers (+2%).
• Vertical integration is viewed as reducing disruptions in the supply chain (lowering risk and cost) while creating internal manufacturing competencies. 83% of study participants plan to vertically integrate in the next three years.
• Less than half of direct material spend is currently through corporate and master supply agreements. An increase to 70% by FY2024 is expected as MedTech companies look to reduce cost, minimize risk, improve supply visibility, and streamline administration.

#3. Organizational Structure and Supplier Management Maturity

Quick Take: Maturity is increasing via a move from decentralization to more centralized sourcing structures, strategies, and decisions.

Study findings indicate that sourcing organizations are migrating toward hybrid / centralized models (featuring local and global roles) with procurement increasingly coordinated by a dedicated group at corporate headquarters.

• Most study participants use a hybrid model today, but the trend is toward centralization of global procurement and category management. Sourcing organizations are currently 60% hybrid (regionalized local purchasing and plant procurement) and 40% centralized (global procurement and category management).
• Key elements of sourcing strategies include Global Reach, Category Management, Risk Identification, and Tools / Analytics.
• By FY2024, study participants are expected to be highly mature and largely driven from the center.

Clear Trends and Projections Offer Encouraging Roadmap Forward

The COVID pandemic has created a greater sense of urgency around supply chain management issues, yet many companies have struggled to recalibrate. The eye-opening results of our MedTech Supply Management Benchmark Study will help. This new data has far-reaching implications for medical device manufacturers and suppliers – and potentially for other industries also intent on building more reliable, resilient, and cost-effective supply chains.

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About the Author

Steven E. Afshar has more than 30 years of domestic and international experience throughout the life sciences and high-technology industries. His accomplishments include the successful development and implementation of leading operations strategies and high-performance manufacturing techniques. Before co-founding Accel Management Group, he was a principal with PRTM. His previous experience includes a variety of operating positions with IVAC Corporation (BD). Mr. Afshar graduated with honors from the University of Michigan with BSE, MSE, and MBA degrees. He is CPIM and CQE certified.