Priorities for med device manufacturers to enhance inventory management

Yearly revenue for medical devices is expected to surpass $580 billion by 2027 as industry advancements and demand continues to grow. Despite this growth, it’s no longer viable to merely manufacture and distribute medical devices without careful consideration into the who, what, where, when, and why relative to the end user—considering supply chain management constitutes the second largest healthcare expenditure.

Between downward pricing pressures as payers look to reduce costs, a purchasing shift from clinical to economic buyers, and an ever-changing regulatory landscape, medical device manufacturers must now evaluate their distribution network to ensure proper placement and production levels to balance patient care against optimal inventory positioning.

Addressing these challenges is nuanced. To ensure high quality patient care, a medical device must move through warehouses, sales reps’ trunks, and hospital closets—and each of these locations has its own practices, policies, and systems. Discrepancies and inefficiencies in and around all these points have significant downstream effects—higher cost of goods and an overall decrease in quality of care, all stemming from a lack of proper inventory management.

To address all these factors—reducing costs, increasing customer satisfaction, improving care—while maximizing market opportunity, medical device manufacturers must prioritize inventory optimization tactics. 

In what follows, we’ll explore the challenges of adopting inventory optimization for medical device manufacturing, how these challenges impact each healthcare player from patient to payers, and explore solutions that reduce cost and improve patient care. 

Challenges 

Inventory optimization is critical—but there are a number of factors that can inhibit that reality: 

Lack of visibility 

• Lack of/immature integrated solutions between manufacturers and third-party distributors to track consumption, obsolescence, and movement prohibiting real-time inventory visibility 
• Supply chain technology is not seen as a source of competitive advantage and is often out of date or unmaintained 
• Sales reps lack proper field service management systems that are needed to properly track inventory at any given point—especially in cases of inventory consignment where the manufacturer assumes risk for products held at hospitals and are not paid until the product is used 

Provider preferences 

• Providers are people, and people have preferences—in this case of one item over another, often leading to excesses holding costs through inventory bloat 
• Provider preferences also generate a larger variety of products, which causes challenges around economies of scale and makes products untransferable between physicians
• Conflicting incentives between purchasers and physicians lead to opposing inventory preferences 

Predicting demand and managing inventory: Right product, right place, right time 

• Product demand is unpredictable and difficult to allocate across stakeholders 
• To accommodate unpredictable demand, the hospital supply chain requires large levels of inventory or needs to transform to become more just-in-time 
• The need to ensure high quality patient care manifests carrying a myriad of similar devices across brands and sizes at many locations in large volumes; the excess can turn to waste through expiration, obsolescence, and poor planning. 

Fragmented distribution channels 

• A medical device can live between warehouses, sales representatives’ trunks, and hospitals at any given time—making it difficult to understand what product is where and in what condition it’s in 

Incomplete data 

• Cycle counts are not being regularly conducted—and those that are conducted are often manual counts; accurate data is not being transmitted, precluding accurate inventory counts and ability to predict demand 
• Consumption is either not being tracked or not being tracked in real-time and/or lagging at time of use, preventing insights into historical demand 

Lack of buy-in from hospital leadership 

• Leadership understanding and support of the benefit of investing in clinical supply chain management and inventory optimization remains a barrier to cost containment, efficiency, and the widespread adoption of inventory optimization—in one sample, only 80% of hospitals had a SCM executive above a purchasing or materials manager 

Impacts 

Supply chain management, already constituting the second largest pool of expenditure in healthcare, becomes even more costly with mismanaged inventory.  

• Shortages leads to lost revenue, lost customer opportunity, longer lead times, lower customer satisfaction, and potentially the loss of customers and damage to reputation for manufacturers 
• When abundances occur, manufacturers suffer increased cost of inventory management and storage facilities, reducing their market competitiveness when compared to more cost-effective manufacturers; this also increases the likelihood of products expiring or becoming obsolete on the shelf 

Providers: Less care value provided 

Increased lead times result in delays in care. Any time cost is not contained, it may negatively impact care delivery due to inefficient and ineffective use of resources, resulting in poorer patient experience. Increases in cost and time of care result in a less equitable and efficient healthcare system—the impacts of which are felt most acutely by the most vulnerable patient populations. 

• When shortages occur, it leads to canceled or delayed procedures and a lessened ability to accommodate physician preferences which, in turn, results in poorer clinician experience, reduced patient satisfaction, and a less efficient healthcare system overall 
  • Shortages of preferred or necessary devices force physicians to either provide no care or provide care with inadequate equipment—24% of hospital staff members have seen or heard that a recalled or expired product was used on a patient 
  • Added time burden is placed on health care professionals who must track down the right equipment, taking time away from patient care
• When abundances occur, providers must also increase time, labor, and funding for inventory management, again taking valuable resources away from patient care—especially when considering that health spending in the U.S. is already drastically increasing year over year 

Payers: Increase in Cost 

• When shortages occur, the cancelation or delay of medically necessary procedures may lead to increased health complications, contributing to an increase in claims due to an overall less healthy population, costing payers more in the near and long term 

Solutions 

Inventory-associated losses are accepted as the cost—often the largest—of business for manufacturers. But it doesn’t have to be this way; efficiencies in inventory management can provide robust positive impacts to manufacturer’s bottom line and to the operations and experiences of those organizations and individuals who depend on medical devices. Realizing these impacts involves managing third parties, adhering to regulations, and always placing care delivery as the top priority. 

1. Digitize and integrate systems to improve inventory visibility

Between sales representatives, healthcare providers, and manufacturers, a multitude of systems exist. From this, dissonance arises about what inventory is where and in what condition, preventing proper inventory management and leading to waste through shrink and obsolescence. Inventory data is also often lacking or nonexistent. For a fix, manufacturers must digitize and integrate these disparate systems to provide a single source of truth that leverages inventory data. Doing so can be as simple as providing sales representatives with comprehensive field management solutions and labeling medical devices with QR codes that are connected to your ERP for use by medical professionals. 

2. Use advanced technology and analytics to manage demand 

Demand for medical devices is anything but predictable, and existing inventory visibility issues complicate an already difficult problem; demand planning. But with advancements in artificial intelligence and machine learning, demand sensing offers a proactive, real-time method to identify demand and react accordingly, like RFID. For medical device manufacturers, this will allow for less field inventory and tighter JIT windows. 

3. Manage inventory with the solution that increases stakeholder visibility and use an incentive model

By developing a multi-pillar, stakeholder visibility solution to manage inventory, manufacturers may make more informed decisions by leveraging data. Using an incentive model and metrics that prove the value of inventory optimization to all stakeholders, manufactures can show the benefit of proper inventory management for all parties and gain cross-functional buy-in from hospital administrators and clinicians.  

4. Optimize distribution network to localize product nearest to its demand

A consistent challenge in dealing with medical devices is ensuring that any action taken does not interfere with patient care, a consideration that is at the heart of many medical device inventory issues. As a result, medical devices are everywhere to ensure low to no lead times. However, in doing so medical devices are in places where they do not have to be, creating additional costs and waste. To resolve this, utilize network analysis to identify demand of a given product nearest its point of consumption to match inventory needs to demand impulses and transportation constraints. 

While proper inventory management of medical devices is a delicate balance requiring focused attention and concerted efforts, using core supply chain principles and new technologies can alleviate what has for too long been accepted as the norm. Improving the efficiency and cost-effectiveness of the healthcare system is the responsibility of each healthcare player, and inventory optimization is an important aspect of that system’s effective functioning. 

Medical device manufacturers are in position to not only help their businesses thrive but to make meaningful improvements to the overall healthcare system. Achieving this comes down to integrating systems to provide a single source of truth, leveraging demand sensing to enable better predictability, increasing visibility and encouraging better decision-making with metrics and incentives, and ensuring lower lead times.