Case: Meditech Surgical Designing & Managing the Supply Chain Chapter 1 Byung-Hyun Ha

Case Overview  Intent – diagnosis of supply chain  Business overview  Supply chain  Production planning  What’s wrong?  How to fix it?

Meditech Surgical  Background  Endoscopic surgical instrument maker Minimally invasive surgery  Parent company: Largo Healthcare Company Spun off 3 years ago  Primary competitor: National Medical Corporation Market created in early 80’s, rapidly growing National sells to physicians Meditech sells to material managers as well as physicians Customer preferences change slowly  Old products continually updated Replaced with new product introductions  Compete based on product innovations, customer service, cost

Meditech Surgical  Problems  New production introduction needs to be flawless  Consistently fail to keep up with demand during initial order  Customers wait over six weeks to have orders delivered  Dan Franklin, manager of Customer Service & Dist.  Recognizing growing customer dissatisfaction

Distribution  Central warehouse  Two primary channels to hospitals  Domestic dealers Order and receive products from multiple manufacturers Independent and autonomous entities  International affiliates Subsidiaries of Largo Healthcare Similar to domestic dealers from Meditech’s point of view

Internal Operations  Assembly  Manually intensive  Using component parts in inventory  Assembly line with a tem of cross-trained production workers  Cycle time for assembly of a batch of instruments 2 weeks  Lead time for component parts 2-16 weeks  Packaging  Using machine  Sterilization  Cobalt radiation sterilizer, about 1 hour

Operation Organization

Production Planning & Scheduling  Broken down two parts  Assembly & component parts order based on monthly forecast  Packaging & sterilization based on finished goods inventory level  Forecast  Annual: during the fourth quarter of each fiscal year  Monthly: using annual forecast broken down proportionately At the beginning of each month: adjustments of forecast  Planning of assembly  Using monthly demand forecasts  transfer req. = month forecast – finished goods inventory + safety stock  Approved throughout the organization after 1 to 2 weeks

Production Planning & Scheduling  MRP systems  Planning assembly schedules and parts order  Calculation may be run several times each week Notification of change at least 1 weeks before  Packaging & sterilization process  Order point/order quantity (OP/OQ) Parts Inventory Assembly Bulk InventoryFG Inventory Packaging & Sterilization 2 – 16 weeks2 weeks1 week pushpull

High Inventory Level of Finished Goods  In case of representative stable product

Var. in Production vs. Var. in Demand  Variation in production schedules often exceeded variation in demand

New Product Introduction  Poor service level  Poor forecasting?  Panic ordering?  And high FG inventory

Poor Service Level  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  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

Poor Service Level  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