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PRTM Medical Device &
Diagnostics (MDD) Direct
Material Sourcing Benchmark
UPDATE FOR MEDICAL DEVICE SCC
May 27, 2010
Where Innovation Operates
Management
Consultants
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 2
Study Background: Exploring Direct Material Sourcing
Cost Trends & Performance Specific to MDD Industry
The PRTM MDD Direct Material Sourcing Benchmark study is aimed at
filling key gaps in available industry procurement information:
1Address a lack of sourcing analysis specific to the Medical Device &
Diagnostic industry
2Assess sustainable cost reduction performance and targets rather than
one time savings driven by intense, project specific efforts
3Develop benchmarks that procurement professionals can use when
establishing annual cost reduction targets
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 3
Study Background: Annual Direct Material Cost
Reduction Potential is a Function of Sourcing Maturity
Annual Cost Reduction Efficient Frontier
0% 15% 30% 45% 60%
$0.1 $0.3 $1 $3 $5
Stage1 Stage 4
High Optimized
An
nu
al
Co
st
Red
uc
tio
n %
LCC Sourcing %
Spend per Supplier $M
Complexity (P&Ls, Sites, PNs, etc.)
Sourcing/DFx Practices Maturity
Sourcing Maturity
MDD Companies ???
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 4
Study Background: The Direct Material Sourcing Survey
Studied Several Key Factors and Trends
Level of year-over-year direct material cost reductions being achieved across the Medical Device &
Diagnostics industry
Impact of proprietary, sole sourced technology on direct material sourcing
Current and future use of low cost country sourcing as a mechanism for cost reduction in the industry
Sourcing levers that are providing the greatest benefit in reducing direct material costs
Most significant constraints to achieving direct material cost reduction targets
Actual and
Target Annual
Cost Reductions
Cost Reduction
Drivers (LCC
Sourcing, Sustaining
Engineering, etc.
Sourcing Effectiveness
(labor productivity,
supply base
management, etc.)Severity of
Constraints
L&OH Cost
Reductions
Direct Material
Cost Reduction
Overall Product
Cost Reductions
Benchmarking Focus
CONFIDENTIAL | 5PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary
Direct Material Sourcing
Survey Results
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 6
The Number of Participants has Doubled Since
December, Primarily by Adding Device Manufacturers
CIBA VISION® J&J MD&DStryker
Endoscopy
Boston
Scientific
Abbott
Laboratories
Edwards
Lifesciences
Alcon
Laboratoriesev3
Cardinal Health
– Medical Mfg
ConMedAdvanced
BionicsConvaTec
Stryker
Orthopaedics
Stryker
MedicalSybron Dental
Philips
HealthcareBD Biosciences
Bausch &
Lomb
Carestream
HealthVarian Medical Unnamed
DateDevice
Participants
Equipment
Participants
Dec. 2009 6 5
May 2010 15 6
25%
55%
20%
Annual Direct Material Spend
< $100M $100M to $500M > $500M
Participants
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 7
Commodity Spend Levels Vary as You Might Expect
Between Device Companies and Equipment Companies
11.74%
10.81%
15.61%
27.58%
14.35%
4.59%
3.03%
3.46%
2.57%
6.27%
2.96%
13.75%
7.31%
31.92%
0.39%
9.13%
11.26%
14.80%
1.42%
7.06%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%
Specialty Material
Electronics
Plastics
Mechanical
Packaging
OEM Equipment
Subsystems
Service and Supplies
Logistics
All Other
% Spend by Category
Device Companies Equipment Companies
New commodity categories
agreed at our previous meeting
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 8
Median Actual Performance Far Exceeded Cost
Reduction Targets in 2009
Overall MDD Companies
Benchmark Population Metrics Median Best in Class
Direct Material
Sourcing Cost
Reduction
Targets and
Performance
2008 Target 3.0% 5.5%
2008 Actual 2.5% 5.6%
2009 Target 3.2% 5.8%
2009 Actual 4.4% 6.9%
Expected Long-Term Average % 4.0% 6.0%
In 2010 the window may be rapidly closing for achieving cost reductions
driven by excess supplier capacity and lower raw material costs
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 9
Medical Device Companies Achieved Greater Levels of
Cost Reduction in 2009
Medical Device Medical Equipment
Benchmark Population
MetricsMedian Best in Class Median Best in Class
So
urc
ing
Co
st
Red
ucti
on
Targ
ets
an
d P
erf
orm
an
ce 2008 Target 3.1% 5.5% 2.9% 5.2%
2008 Actual 2.3% 5.9% 2.7% 5.3%
2009 Target 3.0% 5.8% 3.9% 5.8%
2009 Actual 4.7% 7.1% 3.7% 6.5%
Expected Long-Term
Average3.8% 5.0% 5.0% 6.5%
The impact of size is bimodal: Companies with spend between $100M - $500M fare
worse in every metric than both smaller and larger companies
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 10
Sectors Achieving Savings Through Different Levers
56%
17%
13%
7%6%
2%
Reported Sources of 2009 Cost Reductions
Medical Device Companies
Price Negotiation
Commodity Price Movements, Hedging, FX
LCC Sourcing
Supplier Process / Quality Inputs
Product Design / Spec Rationalization
Other
35%
4%27%
10%
23%
Reported Sources of 2009 Cost Reductions
Medical Equipment Companies
Price Negotiation
Commodity Price Movements, Hedging, FX
LCC Sourcing
Supplier Process / Quality Inputs
Product Design / Spec Rationalization
Other
Device Company Achieving Savings Primarily Through Price Negotiation Lever
While Equipment Companies Also Using LCC Sourcing and Product Design
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 11
Benchmarks For Sourcing Practices Show Mixed
Relative Performance by Industry Sector
Medical Device Medical Equipment
Benchmark Population Metrics Median Best in Class Median Best in Class
Spend/Supplier $429 k $2,380 k $222 k $1,266 k
% of Suppliers Constituting 80%
of spend16.4% 12.0% 4.3% 1.7%
LCC Sourcing 9.0% 22.5% 17.0% 27.9%
% Proprietary/Sole-Sourced
Spend25.0% 3.0% 26.0% 21.0%
Spend/Sourcing FTE $21.0 M $82.9 M $16.2 M $20.7 M
Spend volume matters: In every metric except % Proprietary/Sole Source Spend,
performance correlates closely with spend volume
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 12
FDA Requirements are the Biggest Constraint for Device
Companies
1.4
2.0
2.1
2.4
3.1
3.5
3.7
4.1
0 1 2 3 4 5
New parts or ECNs not covered by contracts
Suppliers failing to comply with contracts due to Production, Quality, or Delivery issues
Volume decrease due to current economic downturn
Rising supplier raw material cost
Lack of cross-functional / Business Unit support
Sole source proprietary suppliers designed in
Implementation slippage due to insufficient resources
Difficult FDA driven re-validation requirements
Degree of Impact
Medical Device
1.5
2.0
2.0
2.3
2.5
2.8
3.2
3.2
0 1 2 3 4 5
New parts or ECNs not covered by contracts
Suppliers failing to comply with contracts due to Production, Quality, or Delivery issues
Rising supplier raw material cost
Lack of cross-functional / Business Unit support
Difficult FDA driven re-validation requirements
Volume decrease due to current economic downturn
Sole source proprietary suppliers designed in
Implementation slippage due to insufficient resources
Degree of Impact
Medical Equipment
Greatest constraints to realizing 2009 cost reduction targets
(1 = Not a Constraint, 5 = Severe Constraint) (1 = Not a Constraint, 5 = Severe Constraint)
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 13
This Survey is Still Open for Additional Participants
Rick HooleDirector
T +1 781 434 1211
F +1 781 647 2804
M+1 978 771 8201
rhoole@prtm.com
77 Fourth Avenue
Waltham, MA 02451
U.S.A.
www.prtm.com
Bernie StudentDirector
T +1 781 434 1236
F +1 781 647 2804
M+1 617 901 5785
bstudent@prtm.com
77 Fourth Avenue
Waltham, MA 02451
U.S.A.
www.prtm.com
PRTM Contacts
In addition, we plan to update the survey data in its entirety in late 2010
and we hope all participants will participate
CONFIDENTIAL | 14PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary
PRTM RAPID ASSESSMENT
Appendix:
Understanding the Value
Potential of Strategic
Sourcing
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 15
Establishing Goals for Sustainable Sourcing Cost
Reduction
Achieving World Class Purchasing ExcellenceValidate that profit objectives are
supported by a competitive, realizable and appropriately risk
managed global sourcing strategy that optimizes cost reduction
opportunities and has full executive management support
Goals & Objectives
Provide detailed procurement best practices
and performance for comparable companies
Baseline current purchasing functions across all product
teams and commodities
Validate strengths and identify gaps to “best practices”
as defined above
Have quantitative data to back up qualitative evaluations
of the sourcing organization, processes, tools, training,
etc.
1Develop a quantitative assessment and plan
of attack to achieve cost reduction targets
Baseline commodity cost reduction performance over
the past several years
Validate current plans and identify any incremental cost
deflation opportunities
Quantify what additional resources might be required to
obtain a specific incremental savings level
2
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 16
PRTM Rapid Spend Assessment Categorizes Sourcing
Maturity and Identifies Potential Areas of Opportunity
Benchmark Procurement Performance
Profile Spend
Review past strategic sourcing
analysis and results
Collect and analyze past 12 month
spend cube (spend by category,
supplier, and BU)
Review key contracts
Organization
and practice
maturity
assessment
Initial savings
estimates and
category
prioritization
OutputsRapid Spend Analysis
2 – 4 weeks
Collect and review appropriate supply
market intelligence (leveraging PRTM
knowledgebase)
Develop initial savings estimates
based on category profiles and PRTM
experience
Identify high potential categories
warranting in-depth analysis
PRTM MDD Direct Material Sourcing Benchmark—May 2010 | © 2010 PRTM Proprietary CONFIDENTIAL | 17
Sourcing Breakthroughs Are Achieved by Evaluating the
Complete Portfolio of Strategic Options and Levers
Pool volume across units
Globalize sourcing
Combine volume from different
commodity categories
Use market basket approaches
Estimate capacity utilization
Leverage industry cyclicality
Identify industry capital inflows
Manipulate supplier incentives
Evaluate make vs. buy
Engage contract manufacturers
and original design
manufacturers
Contract with sub-tier suppliers
Standardize specifications
Re-engineer product
Evaluate design tradeoffs
Implement design to target cost
Model should-be costs
Conduct best BOM analysis
Analyze total cost of ownership
Create preferred parts lists
Implement demand
management policies
Manage product EOL
transitions
Drive supplier business process
improvements
Share productivity gains
Reengineer joint processes
Deploy vendor-managed
inventory
Source from low-cost regions
Induct new suppliers
Eliminate underperforming/niche suppliers
Develop mega suppliers
Tiered supply base structure
Manage
Demand
Consolidate
Volumes
Redesign
Supply
Chain
Rationalize
Product
Specifications
Exploit
Industry
Trends
Analyze
Costs
Optimize
Supply
Base
Drive Process
Improvements
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