MedTech companies are struggling like most industries due to inflationary trends, however, the problem is further amplified for companies with a predominantly commoditized product portfolio. The sector is already facing a shortage of electronics components ever since the outset of the pandemic and struggling to keep material costs under control. Now with rising inflation adding to the already chaotic supply chains, companies are being forced to reconsider their prices or sell at reduced margins.
Impact of inflation
Medtechdive explains in a post how inflation may impact large MedTech manufacturers, and while the overall situation seems manageable, the impact may vary within the industry. Companies with more innovative product lines or with a higher degree of tech installed within the product portfolio may be able to weather the storm with comparative ease to those making commodity products like those in the orthopedic segment.
As per the data proffered by the post, Consumer Price Index posted an annual gain of 7.5%, which is the highest since 1982 in the U.S. MedTech manufacturers are highlighting increased production cost as being a direct result of higher material cost and an unstable and at times unreliable supply chain. Most large companies have contracts in place with their top component suppliers to shield them from inflationary trends, but when the suppliers aren’t able to meet demands, companies buy from brokers at a 40-60X cost, which is not at all sustainable.
Companies that manufacture hip, knee, spine, and stent-type devices and products are the worst hit, and are having to consider a reduction in margins as passing on the cost to their customers is extremely difficult given the nature of their products. Reduced margins further damage the company’s shareholder perception and force companies to cut costs internally often leading to cuts that may affect the company’s ability to compete in the future.
So, how do MedTech companies get a better handle on their production costs and better deal with inflation without drastically reduced margins or increased product prices?
Dealing with inflation
In order to effectively deal with material prices, the first thing MedTech manufacturers need is visibility into their production costs. Understanding the impact of inflation on actual production costs, in real time can help companies better strategize and deal with the uncertain supply chain and material prices in a more emphatic manner.
Most companies monitor their overall consumption patterns and even have an MIS-based reporting on material trends in terms of consumption and costs, generated over a period of a few months or quarters. However, these reports may fail to portray anything beyond the obvious (i.e., increasing costs), or provide gross figures not necessarily providing the deep insight which comes from product-wise, component-wise, and production line-wise analysis of daily consumption. Without having a clear picture of the costs incurred, companies either end up overstocking material from brokers which might deeply impact their margins, or negotiate sub-optimal deals with existing long-term vendors.
If, however, MedTech companies could review their production costs live and the component costs as they are consumed in a given process, while comparing them with inventory levels and re-examining their contracts and deals with third parties, they would have a better chance of keeping costs under control and at the same time drive higher margins through a more rational buying approach. In a market where long-term contracts are failing and consumers aren’t willing to spend more, making the right decisions in the present becomes more important than ever.
Companies need to look at their real-time consumption and costs, especially when dealing with brokers for shortages and inflated/uncertain demands. This is where the role of an MES becomes extremely critical.
Beat inflation with MES
In order to fully discern the way material and component costs impact margins, MedTech companies need to look at costs as they are incurred and use this data to create a more viable purchase strategy that considers all the factors of the present market and consumption patterns. Modern MES applications are composable, highly integrated applications that are capable of not only punctuating the process but also able to present actionable insights to decision-makers, even in terms of production and process costs.
At a minimum, the MES should be able to provide real-time absorption of material costs, while maintaining clarity on step and resource-defined cost structures. The MES should also provide insight into material cost history and product cost forecast. Cost of all maintenance activities and setups should also be identified and allocated as they are incurred. Cost parameters recorded should be integrated with Material Tracking and Labor Management functions within the application.
Source: Critical Manufacturing
Figure 1 shows how a detailed costing module within the MES allows MedTech manufacturers can have clarity on their process costs and material consumption patterns. With such real-time intel, it becomes easier for process owners to predict production and consumption trends, check the interchangeability of components or other material inputs, and negotiate purchase orders with data to support their conditions.
The MES can be a strategic tool in beating inflation as it provides insights not previously available to MedTech companies, for example with the data the application provides, process owners might realize that their perception about the quality of a certain component and its suppliers was wrong and that the cheaper source has better or at par performance levels in their assembled products. When such insights are used to close deals, they can not only neutralize the effect of inflation but help generate higher margins for the company, while competitors struggle to keep their margins from deteriorating.
The MES provides facts and analytics-based forecasting both better than perceptions based on past experience and educated guesses which are still employed to make purchasing decisions even in the most modern MedTech companies. Inflationary periods will come and go, but with an MES providing real-time insights and highly accurate forecasts, the ability to sustain profitability and better margins would remain unchanged.
Choose the right MES in these uncertain times, gain definitive insights into product and material costs, and beat inflation through more informed buying.
