Case Study #2 (SC): Supply Chain Restructure - Deselect CM |
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Supply Chain Restructure - Medium Sized Medical Diagnostic Device Company
Lessons Illustrated
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Systems Importance:
Many CMs have minimal systems (Quality, ERP, Cost, Reporting, etc.) or
do not have the personnel or the management to make the systems work to
automate necessary processes. If systems automation is an
important part of the Supply Chain requirement, make that a major part
of the CM selection criteria.
Company Description: A medium sized
Medical Company provides a diagnostic service for home testing and
evaluation of Sleep Disordered Breathing, which includes the diagnosis
of Obstructive Sleep Apnea (OSA). This home diagnostic system is
delivered to customers via an innovative service delivery model where
it is shipped to the customer for use for three days and then returned
to the Medical Company for data uploads and refurbishment.
The Problem:
The Company had out sourced both the manufacturing of the diagnostic
unit and the fulfillment operation to the same USA based contract
manufacturer (CM) located over 400 miles away from Company
headquarters. There were significant problems: quality of the
finished products, delivery of products to the schedule, fulfillment
delivery inaccuracies, records not adequate for FDA audits, and cost
increases above the contracted amount. The Medical Company was
also spending an unacceptable amount of management and employee time at
the contract manufacturer managing the process and fixing
problems. The Medical Company was paying salary, travel and
lodging expenses for four employees to work at the CM.
The Analysis: The
supply chain analysis showed the following:
- The capabilities of the CM did not
match up with the strategic needs of the Medical Company. The CM
was selected because it had medical certification credentials and a low
cost bid for the product. However, the CM did not have the
quality systems, the ERP systems, internet knowledge and systems for
on-line communication, purchasing capability, engineering and
specifically the program management capabilities to manage the home
diagnostic testing program. The CM had an antiquated ERP system
with a hierarchical database which the CM was not capable of using on
the program. The result was a “paper” based system that was
inadequate at medium volumes and would be swamped by a large volume
ramp-up. Cost data was not available except by tedious paper
based reports.
- In addition the Medical Company was still working
out product problems, so the product was not stable. This
miss-match caused problems for both parties. Although it was a
painful finding, the analysis showed that the obvious solution was for
the Medical Company to deselect the CM and either find another CM or
produce the product internally.
The Solution: The
solution for the Medical Company was a CM located within 15 minutes of
the Medical Company. This CM had a world class ERP system built
on a relational database and also had the management personnel to apply
the capabilities of this system to the unique fulfillment operation.
All of the product material was moved to the new CM, the new CM
placed the Diagnostic device and fulfillment service under program
management and over a period of six months the system was running
smoothly. The close proximity allowed for weekly project
management meetings to be held at the new CM at a low cost to the
Medical Company. The new CM took over full responsibility for the
program and eliminated the need for the four Medical Company employees
at a cost savings to the Medical Company of over $400,000 per
year. The new contract maintained the earlier low unit price and
had incentive clauses to reduce the price further when volume
efficiencies were obtained. The new CM automated all of the
routine aspects of the program, so that all relevant data was
retrievable in easy to understand web-based report formats.
This
automated infrastructure allowed the CM and the Medical Company to
easily meet the ramp up in volume without any major problems.
Without the CM change the Medical Company would not have solved the
quality problems and the paper tracking system would have crumbled
under the volume increase. |