Case: Meditech Surgical

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Case Meditech Surgical

• Designing Managing the Supply Chain
• Chapter 1
• Byung-Hyun Ha
• bhha_at_pusan.ac.kr

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Case Overview

• Intent diagnosis of supply chain
• Business overview
• Supply chain
• Production planning
• Whats wrong?
• How to fix it?

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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 80s, 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

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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

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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 Meditechs point
  of view

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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

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Operation Organization
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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

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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)

Packaging Sterilization
Parts Inventory
Assembly
Bulk Inventory
FG Inventory
2 16 weeks
2 weeks
1 week
push
pull
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High Inventory Level of Finished Goods

• In case of representative stable product

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Var. in Production vs. Var. in Demand

• Variation in production schedules often exceeded
  variation in demand

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New Product Introduction

• Poor service level
• Poor forecasting?
• Panic ordering?
• And high FG inventory

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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

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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