MIT Leaders for Manufacturing Program Meditech Surgical Three years after Meditech was spun off from its parent company,Meditech captured a majority of the endoscopic surgical instrument market.Its primary competitor,National Medical Corporation,had practically invented the $800 million market just over a decade ago.But Meditech competed aggressively, developing new,innovative instruments and selling them through a first-class sales force.The combination paid off,and Meditech had become a phenomenal success in a short period of time. Despite the success,Dan Franklin,Manager of Customer Service and Distribution,was concerned about growing customer dissatisfaction.Meditech had recently introduced several new products that were central to the entire Meditech product line.New product introductions,which were critical to Meditech's strategy of rapid product development,needed to be introduced flawlessly to protect Meditech's reputation and sales of other products.But Meditech consistently failed to keep up with demand during the flood of initial orders.Production capacity became strained as customers waited over six weeks to have their orders delivered.Poor delivery service,which is fatal in the health care industry,was jeopardizing Meditech's reputation. Company Background Endoscopic surgical techniques fall under a class of surgical procedures described as minimally invasive.Minimally invasive surgery,as opposed to traditional open surgery,requires only small incisions are required to perform an operation.As a result,procedures using endoscopic techniques often provide substantial benefits for the patient both physically and financially.The procedures often shorten patient recovery,which can translate into reduced surgical expenses overall.Despite the benefits and the multi-decade history of endoscopic technology,the procedures have only become popular in the last ten years. Only three years ago,the market for endoscopic surgical instruments was expected to double its size in five years.Growth beyond five years also looked promising.Largo Healthcare Company,Meditech's parent company,decided to spin Meditech off as an independent Copyright1995 Massachusetts Institute of Technology.This case was prepared by LFM Fellow Bryan Gilpin under the direction of Professor Stephen C.Graves as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.The case is based on the author's thesis,"Management of the Supply Chain in a Rapid Product Development Environment," supervised by Professor Rebecca M.Henderson and Professor Alvin W.Drake,from an LFM internship during July-Dec.,1994
MIT Leaders for Manufacturing Program Meditech Surgical1 Three years after Meditech was spun off from its parent company, Meditech captured a majority of the endoscopic surgical instrument market. Its primary competitor, National Medical Corporation, had practically invented the $800 million market just over a decade ago. But Meditech competed aggressively, developing new, innovative instruments and selling them through a first-class sales force. The combination paid off, and Meditech had become a phenomenal success in a short period of time. Despite the success, Dan Franklin, Manager of Customer Service and Distribution, was concerned about growing customer dissatisfaction. Meditech had recently introduced several new products that were central to the entire Meditech product line. New product introductions, which were critical to Meditech’s strategy of rapid product development, needed to be introduced flawlessly to protect Meditech’s reputation and sales of other products. But Meditech consistently failed to keep up with demand during the flood of initial orders. Production capacity became strained as customers waited over six weeks to have their orders delivered. Poor delivery service, which is fatal in the health care industry, was jeopardizing Meditech’s reputation. Company Background Endoscopic surgical techniques fall under a class of surgical procedures described as minimally invasive. Minimally invasive surgery, as opposed to traditional open surgery, requires only small incisions are required to perform an operation. As a result, procedures using endoscopic techniques often provide substantial benefits for the patient both physically and financially. The procedures often shorten patient recovery, which can translate into reduced surgical expenses overall. Despite the benefits and the multi-decade history of endoscopic technology, the procedures have only become popular in the last ten years. Only three years ago, the market for endoscopic surgical instruments was expected to double its size in five years. Growth beyond five years also looked promising. Largo Healthcare Company, Meditech’s parent company, decided to spin Meditech off as an independent 1 Copyright � 1995 Massachusetts Institute of Technology. This case was prepared by LFM Fellow Bryan Gilpin under the direction of Professor Stephen C. Graves as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case is based on the author’s thesis, “Management of the Supply Chain in a Rapid Product Development Environment,” supervised by Professor Rebecca M. Henderson and Professor Alvin W. Drake, fr om an LFM internship during July-Dec., 1994
company focused solely on producing and selling endoscopic surgical instruments.Largo management hoped that the new company would prosper without the distractions of other Largo businesses and capture market share of endoscopic instruments as quickly as possible. Since its inception just over six years ago,Meditech produced innovative,low-cost products. New products were brought to the market quickly and pushed by an aggressive sales force. Old products were updated with innovative features and presented to the market as new products.Consequently,the competition between Meditech and National Medical centered on the continuous development and introduction of new products by both companies.A dozen or more new products would typically be introduced by Meditech in any given year. While the development strategies were similar,the sales strategies differed dramatically National Medical concentrated on selling to surgeons.Meditech's sales force concentrated on selling to hospitals material managers as well as to surgeons.Material managers tended to be more concerned with cost and delivery performance.The surgeons,on the other hand,focused on product features.As the pressures increased on health care costs,the importance of the material manager's purchasing position also increased.Meditech was well positioned to take advantage of this important shift. The success of Meditech's strategy quickly became evident.Within six years,Meditech had captured the leading share in the endoscopic surgical instrument market.This was no small feat by any market's standards,but with surgical instruments this was especially impressive.Market share changes in the professional health care industry tended to take place gradually.Surgeons and doctors often held onto preferred manufacturers.Hospitals frequently used group purchasing organizations(GPOs)which took advantage of extended contracts with suppliers. The process of"converting"a hospital to a new supplier often took months of negotiation and convincing. Most endoscopic surgical instruments are small enough to fit into the palm of a surgeon's hand They are mechanical in nature,typically having several intricate mechanisms to provide the required functionality.Materials used to produce the instruments include plastic injection molded parts,metal blades,springs,etc.In all cases of use,surgeons use the instrument for one operation and then immediately dispose of it.Instruments are never re-sterilized and re-used for another patient.All in all,the Meditech product line consists of over 200 separate end- products. Distribution Meditech distributes all its goods from a central warehouse,using two primary channels, domestic dealers and international affiliates,to distribute its products from the central warehouse to end-customers (i.e.,hospitals).The first channel,for domestic sales only,uses domestic distributors,or dealers,to ship to hospitals.The dealers order and receive products from multiple manufacturers,including Meditech,typically stocking hundreds of different products. Stocked products range from commodity items,such as surgical gloves and aspirin,to endoscopic surgical instruments.By using dealers to supply products,hospitals do not need to order directly from manufacturers for their diverse needs.Additionally,since dealers maintain 2
company focused solely on producing and selling endoscopic surgical instruments. Largo management hoped that the new company would prosper without the distractions of other Largo businesses and capture market share of endoscopic instruments as quickly as possible. Since its inception just over six years ago, Meditech produced innovative, low-cost products. New products were brought to the market quickly and pushed by an aggressive sales force. Old products were updated with innovative features and presented to the market as new products. Consequently, the competition between Meditech and National Medical centered on the continuous development and introduction of new products by both companies. A dozen or more new products would typically be introduced by Meditech in any given year. While the development strategies were similar, the sales strategies differed dramatically. National Medical concentrated on selling to surgeons. Meditech's sales force concentrated on selling to hospitals material managers as well as to surgeons. Material managers tended to be more concerned with cost and delivery performance. The surgeons, on the other hand, focused on product features. As the pressures increased on health care costs, the importance of the material manager's purchasing position also increased. Meditech was well positioned to take advantage of this important shift. The success of Meditech’s strategy quickly became evident. Within six years, Meditech had captured the leading share in the endoscopic surgical instrument market. This was no small feat by any market’s standards, but with surgical instruments this was especially impressive. Market share changes in the professional health care industry tended to take place gradually. Surgeons and doctors often held onto preferred manufacturers. Hospitals frequently used group purchasing organizations (GPOs) which took advantage of extended contracts with suppliers. The process of “converting” a hospital to a new supplier often took months of negotiation and convincing. Most endoscopic surgical instruments are small enough to fit into the palm of a surgeon's hand. They are mechanical in nature, typically having several intricate mechanisms to provide the required functionality. Materials used to produce the instruments include plastic injectionmolded parts, metal blades, springs, etc. In all cases of use, surgeons use the instrument for one operation and then immediately dispose of it. Instruments are never re-sterilized and re-used for another patient. All in all, the Meditech product line consists of over 200 separate endproducts. Distribution Meditech distributes all its goods from a central warehouse, using two primary channels, domestic dealers and international affiliates, to distribute its products from the central warehouse to end-customers (i.e., hospitals). The first channel, for domestic sales only, uses domestic distributors, or dealers, to ship to hospitals. The dealers order and receive products from multiple manufacturers, including Meditech, typically stocking hundreds of different products. Stocked products range from commodity items, such as surgical gloves and aspirin, to endoscopic surgical instruments. By using dealers to supply products, hospitals do not need to order directly from manufacturers for their diverse needs. Additionally, since dealers maintain 2
regional warehouses all over the United States,the distance between dealer warehouses and most hospitals tends to be quite small.The short distance permits frequent replenishments of hospital inventories;in some cases,trucks from dealers drop off supplies once or twice per day. Hospitals enjoy the frequent replenishments,which reduce hospital inventory and,consequently, reduce material costs. The regional dealer warehouses act as independent entities,autonomously determining when to order new supplies and how much to order.Therefore,while Meditech only uses four or five major distribution companies,it still receives orders from,and ship to,hundreds of regional, individually-run warehouses.The warehouses in turn each ship to about a dozen or more hospitals,resulting in thousands of hospitals that receive Meditech products. The distribution channel for international sales uses Largo Healthcare's international affiliates. International affiliates are wholly-owned subsidiaries of Largo Healthcare residing outside of the United States.As with domestic dealers,affiliates distribute to hospitals in their regional area. However,in contrast with domestic dealers,which may locate within just a few miles of customer hospitals,an affiliate ships product throughout an entire country.From Meditech's point of view,affiliates'orders essentially look no different than dealers--intemational affiliates submit orders to Meditech and Meditech fills them with available product. Internal Operations The production processes to manufacture endoscopic instruments are composed of three major steps--assembling of component parts into individual orbulk"instruments,packaging one or more bulk instruments into a packaged good,and sterilizing the packaged goods.Each of these steps is described below: Assembly--the assembly process is manually intensive.Component parts arrive into the assembly area from suppliers following a brief inspection by Quality Assurance(QA).The parts are placed into inventory until ready for use by one of several assembly lines.Each assembly line is run by a team of cross-trained production workers who can produce any of several instruments within a product family.Line changeovers within a family are quick and inexpensive,merely requiring a warning from the production team leader and a supply of the appropriate component parts.The typical cycle time for assembly of a batch of instruments-- the time required to schedule assembly of a batch of instrument and then actually assemble them,assuming that component parts are available in component parts inventory--is on the order of two weeks.Lead time for component parts is on the order of 2-16 weeks. Assembled instruments are moved from the assembly area into bulk instrument inventory where they wait to be packaged. Packaging--the packaging process makes use of several large packaging machines.The machines direct bulk instruments into plastic containers and then adhere a flexible sheet of material over the top of the container.The entire plastic container is then placed into a finished cardboard container and shipped immediately to the sterilizer.Capacity at the packaging area has not restricted output. 3
regional warehouses all over the United States, the distance between dealer warehouses and most hospitals tends to be quite small. The short distance permits frequent replenishments of hospital inventories; in some cases, trucks from dealers drop off supplies once or twice per day. Hospitals enjoy the frequent replenishments, which reduce hospital inventory and, consequently, reduce material costs. The regional dealer warehouses act as independent entities, autonomously determining when to order new supplies and how much to order. Therefore, while Meditech only uses four or five major distribution companies, it still receives orders from, and ship to, hundreds of regional, individually-run warehouses. The warehouses in turn each ship to about a dozen or more hospitals, resulting in thousands of hospitals that receive Meditech products. The distribution channel for international sales uses Largo Healthcare’s international affiliates. International affiliates are wholly-owned subsidiaries of Largo Healthcare residing outside of the United States. As with domestic dealers, affiliates distribute to hospitals in their regional area. However, in contrast with domestic dealers, which may locate within just a few miles of customer hospitals, an affiliate ships product throughout an entire country. From Meditech's point of view, affiliates’ orders essentially look no different than dealers -- international affiliates submit orders to Meditech and Meditech fills them with available product. Internal Operations The production processes to manufacture endoscopic instruments are composed of three major steps -- assembling of component parts into individual or “bulk” instruments, packaging one or more bulk instruments into a packaged good, and sterilizing the packaged goods. Each of these steps is described below: Assembly -- the assembly process is manually intensive. Component parts arrive into the assembly area from suppliers following a brief inspection by Quality Assurance (QA). The parts are placed into inventory until ready for use by one of several assembly lines. Each assembly line is run by a team of cross-trained production workers who can produce any of several instruments within a product family. Line changeovers within a family are quick and inexpensive, merely requiring a warning from the production team leader and a supply of the appropriate component parts. The typical cycle time for assembly of a batch of instruments - the time required to schedule assembly of a batch of instrument and then actually assemble them, assuming that component parts are available in component parts inventory -- is on the order of two weeks. Lead time for component parts is on the order of 2-16 weeks. Assembled instruments are moved from the assembly area into bulk instrument inventory where they wait to be packaged. Packaging -- the packaging process makes use of several large packaging machines. The machines direct bulk instruments into plastic containers and then adhere a flexible sheet of material over the top of the container. The entire plastic container is then placed into a finished cardboard container and shipped immediately to the sterilizer. Capacity at the packaging area has not restricted output. 3
Sterilization--the sterilization process uses a large Cobalt radiation sterilizer.After batches of packaged instruments(cardboard container,plastic container,and instruments)are placed into the sterilizer,the sterilizer is turned on for about an hour.The radiation penetrates cardboard and plastic to destroy any potentially harmful contaminants.The sterilizer can sterilize as much product as will fit inside its four walls.Capacity limitations have not been a problem thus far. Sterilized instrument are immediately moved into finished goods inventory. The Operations Organization The entire operations organization reports up through the Vice President of Operations, Kenneth Strangler(see Exhibit 1 for an organization chart of operations).Functions immediately reporting to Strangler include several plant managers (one for each of Meditech's four manufacturing facilities),a director of supplier management,and a director of planning, distribution,and customer service.Other vice presidents(not shown)exist for marketing and sales,product development,and finance.All vice presidents report to the highest officer in the company,the President of Meditech.The plant managers in the organization have responsibility for production personnel,engineering technicians,quality assurance,support services,and material supply for their respective facilities.Reporting directly to the plant managers are several business units.Each business unit has full responsibility for either the assembly of a particular product family or,in the case of packaging and sterilization,for an entire production process.The most important job of each assembly business unit is to meet the production schedule every week.Meeting the schedule ensures a constant supply of bulk instruments to the packaging/sterilization process.The process of determining assembly and packaging/ sterilization schedules will be discussed below. Also reporting to the Vice President of Operations are Supplier Management and Planning, Distribution,and Customer Service.Supplier Management works on relationships with suppliers,including establishing purchasing contracts and finding new suppliers if necessary.The Planning,Distribution,and Customer Service department does everything it can to ensure that customers receive product when needed.The positions within the Customer Service department include the Manager of Customer Service and Distribution,Dan Franklin,the Manager of Central Planning,the Manager of Inventory,and a Manager of Logistics.Customer Service deals with everything from occasional customer complaints to establishing strategies to improve delivery service to customers.Customer Service representatives work with dealers and affiliates to keep them updated on product delivery schedules and problems.Often this responsibility places the Customer Service representative in direct contact with hospital personnel. While Customer Service handles issues concerning the movement of product out of finished goods inventory,Central Planning ensures that adequate finished goods are available to meet incoming orders.They develop monthly production plans that are used by the business units to determine weekly and daily schedules. Charles Stout,the Inventory Manager,determines the finished goods inventory policy and establishes parts and bulk inventory guidelines for the business units.When a mandate to reduce inventory is passed down from higher levels of management,the Inventory Manager
Sterilization -- the sterilization process uses a large Cobalt radiation sterilizer. After batches of packaged instruments (cardboard container, plastic container, and instruments) are placed into the sterilizer, the sterilizer is turned on for about an hour. The radiation penetrates cardboard and plastic to destroy any potentially harmful contaminants. The sterilizer can sterilize as much product as will fit inside its four walls. Capacity limitations have not been a problem thus far. Sterilized instrument are immediately moved into finished goods inventory. The Operations Organization The entire operations organization reports up through the Vice President of Operations, Kenneth Strangler (see Exhibit 1 for an organization chart of operations). Functions immediately reporting to Strangler include several plant managers (one for each of Meditech’s four manufacturing facilities), a director of supplier management, and a director of planning, distribution, and customer service. Other vice presidents (not shown) exist for marketing and sales, product development, and finance. All vice presidents report to the highest officer in the company, the President of Meditech. The plant managers in the organization have responsibility for production personnel, engineering technicians, quality assurance, support services, and material supply for their respective facilities. Reporting directly to the plant managers are several business units. Each business unit has full responsibility for either the assembly of a particular product family or, in the case of packaging and sterilization, for an entire production process. The most important job of each assembly business unit is to meet the production schedule every week. Meeting the schedule ensures a constant supply of bulk instruments to the packaging / sterilization process. The process of determining assembly and packaging / sterilization schedules will be discussed below. Also reporting to the Vice President of Operations are Supplier Management and Planning, Distribution, and Customer Service. Supplier Management works on relationships with suppliers, including establishing purchasing contracts and finding new suppliers if necessary. The Planning, Distribution, and Customer Service department does everything it can to ensure that customers receive product when needed. The positions within the Customer Service department include the Manager of Customer Service and Distribution, Dan Franklin, the Manager of Central Planning, the Manager of Inventory, and a Manager of Logistics. Customer Service deals with everything from occasional customer complaints to establishing strategies to improve delivery service to customers. Customer Service representatives work with dealers and affiliates to keep them updated on product delivery schedules and problems. Often this responsibility places the Customer Service representative in direct contact with hospital personnel. While Customer Service handles issues concerning the movement of product out of finished goods inventory, Central Planning ensures that adequate finished goods are available to meet incoming orders. They develop monthly production plans that are used by the business units to determine weekly and daily schedules. Charles Stout, the Inventory Manager, determines the finished goods inventory policy and establishes parts and bulk inventory guidelines for the business units. When a mandate to reduce inventory is passed down from higher levels of management, the Inventory Manager 4
must determine where inventory can be reduced and then begin enforcing those reductions Through recent efforts,Stout had successfully eliminated several million dollars of obsolete and slow-moving inventory. Production Planning and Scheduling The production planning and scheduling process is broken down into two parts--planning based on monthly forecasts,of assembly and component parts orders;and daily scheduling of packaging and sterilization based on finished goods inventory levels. During the fourth quarter of each fiscal year,the marketing and finance organizations determine an annual forecast.The annual forecast is then broken down proportionately,based on the number of weeks in the month,into monthly forecasts.As the year progresses,the Central Planners work with the Marketing organization to make forecast adjustments according to market trends and events.At the beginning of each month,the month's forecasts are adjusted and agreed upon by the Marketing organization and the Central Planners The planning of assembly for a particular instrument begins with the monthly demand forecasts Based on the month's forecast,the Central Planners determine the amount of product that needs to be transferred from bulk inventory into finished goods inventory to"meet"'the expected demand.This amount,termed the finished goods"transfer requirement",is determined by subtracting the current finished goods inventory level from(1)the demand forecast for the month plus(2)the required safety stock.(The current safety stock policy is to maintain three weeks'worth of demand). The transfer requirements,once completed for all 200-plus product codes,are passed throughout the organization for approval.This process typically takes place one to two weeks into the current month.While not actually used to schedule assembly or to alter the packaging and sterilization processes,the transfer requirements provide an estimate of the required overall production for the month.Any problems in being able to deliver to the plan can then be identified and resolved. Assembly schedules and replenishment orders for parts are based on the monthly demand forecasts and current inventory levels.By mid-month,the completed monthly plans,which contain the monthly forecasts,are sent to the assembly business units.A planner in the business unit plugs the forecasts into a Materials Requirement Planning(MRP)system,which determines weekly production schedules and component parts orders for each finished product.The MRP system determines assembly schedules and parts orders based on(1)the monthly forecasts,(2) the lead times for assembly,packaging,and sterilization,and (3)current parts,bulk,and finished goods inventory levels.Although the MRP calculation may be run several times each week,the planner is careful not to change weekly production schedules with less than a week's notice.(A schedule change often requires rescheduling workers and procuring more component parts. One week's notice for responding to scheduling changes,therefore,has been deemed adequate by the business unit managers.) 5
must determine where inventory can be reduced and then begin enforcing those reductions. Through recent efforts, Stout had successfully eliminated several million dollars of obsolete and slow-moving inventory. Production Planning and Scheduling The production planning and scheduling process is broken down into two parts -- planning, based on monthly forecasts, of assembly and component parts orders; and daily scheduling of packaging and sterilization based on finished goods inventory levels. During the fourth quarter of each fiscal year, the marketing and finance organizations determine an annual forecast. The annual forecast is then broken down proportionately, based on the number of weeks in the month, into monthly forecasts. As the year progresses, the Central Planners work with the Marketing organization to make forecast adjustments according to market trends and events. At the beginning of each month, the month’s forecasts are adjusted and agreed upon by the Marketing organization and the Central Planners. The planning of assembly for a particular instrument begins with the monthly demand forecasts. Based on the month’s forecast, the Central Planners determine the amount of product that needs to be transferred from bulk inventory into finished goods inventory to “meet” the expected demand. This amount, termed the finished goods “transfer requirement”, is determined by subtracting the current finished goods inventory level from (1) the demand forecast for the month plus (2) the required safety stock. (The current safety stock policy is to maintain three weeks’ worth of demand). The transfer requirements, once completed for all 200-plus product codes, are passed throughout the organization for approval. This process typically takes place one to two weeks into the current month. While not actually used to schedule assembly or to alter the packaging and sterilization processes, the transfer requirements provide an estimate of the required overall production for the month. Any problems in being able to deliver to the plan can then be identified and resolved. Assembly schedules and replenishment orders for parts are based on the monthly demand forecasts and current inventory levels. By mid-month, the completed monthly plans, which contain the monthly forecasts, are sent to the assembly business units. A planner in the business unit plugs the forecasts into a Materials Requirement Planning (MRP) system, which determines weekly production schedules and component parts orders for each finished product. The MRP system determines assembly schedules and parts orders based on (1) the monthly forecasts, (2) the lead times for assembly, packaging, and sterilization, and (3) current parts, bulk, and finished goods inventory levels. Although the MRP calculation may be run several times each week, the planner is careful not to change weekly production schedules with less than a week's notice. (A schedule change often requires rescheduling workers and procuring more component parts. One week's notice for responding to scheduling changes, therefore, has been deemed adequate by the business unit managers.) 5