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Case Study #2 (SC): Supply Chain Restructure - Deselect CM PDF Print E-mail
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Supply Chain Restructure - Medium Sized Medical Diagnostic Device Company

Lessons Illustrated

  • Contract Manufacturer Selection: The selection of a contract manufacturer (CM) should start by developing an outline of the needs of the Supply Chain requirements in detail. The Company should match these needs with the capabilities of the CM during the selection process.

  • 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.

  • Contract Manufacturer Selection based on Price: Selecting a CM on price alone can easily result in some long term problems where quality, delivery reliability and reporting needs are important.

  • Contract Manufacturer De-selection: When a CM is selected and that CM demonstrates that it does not have the capabilities to meet the requirements, the CM needs to be deselected and another CM chosen.

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:

  1. 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.

  2. 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.
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