1. CASE: Meditech Surgical
Intent – diagnosis of supply chain
Business overview
Supply chain
Production planning
What’s wrong?
How to fix it?
I lead discussion with more direction than usual – due to time and level (?) of preparation.
Case based project Bryan did in 94 for LFM internship
Case describes a scenario with typical symptoms – inventories are too high and customer service is poor.
Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….

2. Endoscopic Surgical Instruments
Permits minimally invasive surgery
Market created in early 80’s, rapidly growing
Old products continually updated and replaced with new product introductions
Meditech, 6 years old, spun off from Largo, produces endoscopic surgical instruments.
Market doubling every 5 years; continual innovation as products get smaller and products created for more applications

3. Business Overview National and Meditech split the market
Compete based on product innovations, customer service, cost
National sells to physicians; Meditech sells to material managers
Customer preferences change slowly
How does meditech compete?
How does meditech differ from national?
What factors are important to customers?
Meditech has majority of market .
Physicians concerned with product features; materials managers concerned about cost and delivery.
Physicians get accustomed to the feel of a product and won’t change easily.
Hospitals/mat’ls managers set up long term supply contracts to lock in supplier at a good price (also impact of GPO’s, group procurement organizations?)

4. External Supply Chain Hospitals Hospitals Domestic Dealers
Part suppliers
Meditech Assembly
Meditech
Warehouse
4 Meditech assembly plants
4 or 5 domestic dealers, each operates with many autonomous regional warehouses
Each regional warehouse stocks many different products, so as to provide full service to hospitals
Regional warehouses order directly on Meditech
Int’l Meditech affiliates operate like the domestic dealers.
What purpose do the dealers fill?
Hospitals
Int’l Meditech
Affiliates

5. Internal Supply Chain Packaging & Sterilization Parts Inventory
Assembly
Bulk Inventory
FG Inventory
Assembly organized into multiple flexible lines, manual
Packaging and sterilization have adequate capacity
How much bulk inventory would you expect? Not clear how much bulk inventory they keep – from the way they plan (push each month), might expect 2 weeks inventory here on average.
In finished goods they target 3 weeks inventory
Note – they seem to maintain 3 inventories. Might always ask – why? For what purpose?
2 - 16
weeks 1
week 2
weeks

6. Production Planning Annual Forecast Monthly Revision Transfer
Requirements
Monthly
Plan
MRP
Annual forecast determined by marketing and finance
Revision done at beginning of month by marketing and central planning
Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning
Transfer requirements = the imputed demand on the bulk inventory, i. e., how much to transfer from bulk to to FGs
Monthly plan agreed to by organization, 1 – 2 weeks into month
Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules
MRP re-run several times in month to update schedules…
Parts
Procurement
Plan
Weekly
Assembly
Schedule

7. Production Planning Monthly Plan MRP Order point; Order quantity
Material
Plan
Another way of looking at production planning --- focusing on information flows.
Note assembly and material plan are ‘push’ to meet forecast and monthly plan.
Packaging and assembly are ‘pull’
Not clear how OP, or OQ are set, other than 3 weeks of safety stock
Packaging &
Sterilization
Parts Inventory
Assembly
Bulk Inventory
FG inventory

8. What’s Wrong? Poor service for new product introductions
Poor forecasting?
Panic ordering?
And high FG inventory
Look at exhibit 3
What are the symptoms? Poor service; poor forecasts; high FGs; more variable production

9. What Is Going On? Demand is quite predictable
Usage in hospitals is quite stable
Market share moves slowly over time
With each new product, dealer must build inventory to fill pipeline
What causes the spikes? Look at exhibit 2.
Look again at exhibit 3 – see overshoot in production, and see production variation exceeds demand variation
Planners misinterpret the demand spike as an increase in demand rate.
Look at exhibits 6 and 7 (not in case)
There is no panic ordering.

10. Why Did Meditech Think Demand Was Unpredictable?
Poor information systems
No one looked at demand
No one had responsibility for forecast errors
Tendency to shift the blame
Built-in delays and monthly buckets in planning system
Amplifier in planning system
No one had looked at the data – not easy to get at; also monthly buckets obscures a lot of what is going on.
Transfer req’s = month forecast + 3 weeks of demand – FG inventory
Suppose month forecast = 100, and FG inv = 75; then
Transfer req’s = – 75 = 100
But what if forecast increases to 150:
Transfer req’s = – 75 = 188
Thus, forecast increase by 50%, leads to increase of 88% in TRs

11. What to Do? Recognize that demand is stable and predictable
Establish accountability for forecast
Eliminate planning delays and/or reduce time bucket
Alternatively, put assembly within pull system and eliminate bulk inventory
Not clear why there is a bulk inventory – what is its purpose?
ROP may also be too high at 3 weeks of demand??
Try to get visibility of hospital demand
Wrap Up: Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem.
Need do diagnosis of what is happenings and why; this then leads to remedies.