THE FUTURE OF GLOBAL SUPPLY CHAINS 1

The Future of Global Supply Chains

Trends and Implications for the Medical Device Industry and Healthcare Markets Dipak Patil

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Table of Contents
INTRODUCTION RESEARCH OVERVIEW ASSESSMENT FORCES IMPACTING THE SUPPLY CHAINS OF MEDICAL DEVICE COMPANIES ECONOMIC. SOCIAL GOVERNMENTAL RISKS AND CHALLENGES IN THE EMERGING MARKET LIMITED INTERNAL KNOWLEDGE OF MARKET IP RISK LEVEL OF LOCAL COMPETITION REGULATORY/REIMBURSEMENT UNCERTAINTY LACK OF AVAILABILITY OF QUALIFIED LOCAL PARTNERS (JV, 3PL, ETC.) MARKET DYNAMICS FOR MAJOR PRIORITY MARKETS CHINA BRAZIL INDIA RECOMMENDATIONS IMPROVED IT IMPROVED PROCESSES WITHIN SUPPLY CHAIN ORGANIZATIONS PEOPLE EVOLVING MANUFACTURING OPERATIONS EVOLVING DISTRIBUTION MODEL SUPPLY CHAIN RISK MANAGEMENT COLLABORATION CONCLUSION 3 4 6 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 10 10 10 11 11 11 11 12

EMERGING MARKETS ARE AN IMPORTANT GROWTH AREA FOR MEDICAL DEVICE COMPANIES 12 THE PRIMARY RISKS AND CHALLENGES VARY FROM MARKET TO MARKET AND PRESENT A COMPLEX PLAYING FIELD FOR SUPPLY CHAIN EXECUTIVES 12 EXHIBIT 1 13 EXHIBIT 2 MEDICAL DEVICE COMPANIES FEEL ECONOMIC PRESSURE 13 REFERENCE 15

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Introduction
From MRI machines to pacemakers to syringes, the medical devices field is varied and diverse, presenting a wide range of supply chain challenges from company to company, and product to product. Many hi-tech medical device companies have excelled in supply chain efficiency, by borrowing strategy and best practice from the hitech and electronics field. Other medical device manufacturers are more aligned with traditional pharmaceutical companies in terms of their supply chain, lagging slightly behind the cutting edge of operational excellence. So far most of the Medical Device companies were focused on the markets from region viz. North America, Europe. But these markets are getting matured due to the slow growth rate and growing reimbursement pressure. The five-year medical device CAGR in mature markets is estimated to be 7.5% vs. an emerging markets rate of 15%. Also BRIC five year CAGR is forecasted to be around 20%.1 Due to this most of Medical Device companies are increasingly turning to emerging markets to accelerate their growth. But these emerging markets have different structures, regulations and different models that control the demand for medical devices. So together these emerging markets represents the complex playground for the supply chain executives. Therefor in this research paper we set out to explore the implications of emerging market expansion on supply chains by finding answers to following questions How important is emerging market growth for medical device companies? How are companies managing emerging market supply chains? Which countries/regions are the highest priorities?

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THE FUTURE OF GLOBAL SUPPLY CHAINS 4 What are the current operating models deployed (distributors, JVs, mfg. in region, etc.) and what changes are being considered in key emerging markets? What are the primary risks, concerns in each market?

Research Overview
As seen earlier, The Medical Device companies are continually seeking to reduce the costs and devise new strategies for profitable growth. With huge potential growth opportunities in global markets, most of the Companies are getting increasingly concerned about their supply networks and the financial impacts of globalization. The major challenges before Medical device companies in achieving their goal are Moving products over long supply chains to meet risky forecasts Manage tighter supply chains in order to maintain or increase operating margins Challenges created by the transportation and logistics with global supply chains Diversified and complex healthcare markets

Factors adding complexity to Supply Chains of Medical Device Companies in conquering the growing markets are The companies are progressively adopting the source, build, sell anywhere model Globalization is driving Structural Changes Horizontal expansion

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THE FUTURE OF GLOBAL SUPPLY CHAINS 5 Lower cost manufacturing objectives for Emerging markets will mean more strategic sourcing Decrease in piece cost and increase in supply chain costs

In this research paper the main sources of information were the different Journals, Surveys, papers published and The World Medical Fact Book 2011 etc.. These sources gave the comprehensive insights of the market statistics for medical sector specially from the emerging markets. There are very few consultancies like PwC's PRTM Management Consulting services, who are putting there efforts to help out companies in emerging market to use their every available capability to maximize profits, streamline operations, and increase delivery reliability.

So, in this research we are going to see how the emerging markets present important growth opportunity. Also the primary risks and challenges that companies have to face that vary from region to region. The paper will also address importance of knowledge about the in and out of these emerging markets to leverage the supply chain for competitive advantage.

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Assessment
Forces Impacting the Supply Chains of Medical Device companies
Economic. Sluggish economy and a revamped reimbursement model are slowing down the growth for Medical device companies in North America. Five-year medical device compound annual growth rate (CAGR) in mature markets is estimated to be 7.5% vs. an emerging markets rate of 15%. (Exhibit 2) Social Medical Device makers are suffering as consumers defer non-urgent healthcare amid high levels of unemployment and ongoing healthcare benefit plan design changes that are pushing a larger portion of healthcare costs onto patients.2 The greater percentage of elderly population in emerging market represents a major catalyst for demand of medical devices. Governmental Medical device companies must also contend with a new medical device tax in 2013 that's part of the 2010 healthcare reform legislation. Governments from emerging market regions are spending growing percentage of there GDP on healthcare facilities, which is good sign for Device Industry.

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Risks and Challenges in The Emerging Market

Following areas represent the greatest risks and challenges in emerging market for Medical Device companies. (Exhibit 2) Limited internal knowledge of market Most of the Device companies have limited knowledge about the emerging markets. The market in each country has its own structure. E.g. In India, market has a complex landscape with significant regional variations, 24 major languages, and multi-tier health care system. Also, no of large hospitals are less and Hospitals dont have direct control on the equipment purchased which challenges marketing, sales and distribution. IP risk Device Companies spend millions of dollars on R&D to come up with the new and innovative products. But with the new markets there is risk for its Intellectual Property (IP). In some countries, there are some patent laws, which makes patent litigation tougher to enforce. Also, there are many instances in which it is found that many cheap copycat versions of many devices is available in the market by local companies. So Device companies need to make sure they take appropriate steps for securing their IP when they are using build locally sell locally model. Level of local competition For countries like Brazil there is already a noticeable level local competition particularly in low-tech products present. So Device company needs to come up with the products that will be having competitive prices and better quality.

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THE FUTURE OF GLOBAL SUPPLY CHAINS 8 Regulatory/reimbursement uncertainty Inefficient regulation and registration processes in many regions create significant market entry barriers. Many times regulated medical devices must undergo a lengthy, and highly variable, registration and licensing process. Opaque and complex tendering processes often raise suppliers selling expense and cycle time Many times local suppliers can have significant influence on technical panel experts and decision makers in tendering process. Pricing controls under consideration would negatively impact profitability of imported products Lack of availability of qualified local partners (JV, 3PL, etc.) In countries like India due to few local partnership options many major global device firms have to operate fully owned subsidiaries. Some have to choose to create joint ventures with similarly large local players (GE/Wipro). Complexity of market often requires multiple distributor partners, but most of distributors lack full market reach

Market Dynamics for Major Priority Markets3

China 13.6% projected five-year CAGR for medical devices Three-year $124B government investment in health care reformwill primarily benefit mass market equipment and consumables Reform provision to Buy China gives preference to domestic suppliers MNCs dominate high-end market but domestic companies are increasing investment Slow registration process and China-specific standards protocols SCHM 6212: Executive Roundtable in Supply Chain Management

THE FUTURE OF GLOBAL SUPPLY CHAINS 9 Brazil 6.1% projected five-year CAGR for medical devices (significant slowdown from 27% CAGR in previous five years) Strong domestic production from MNCs and local competitors geared toward the local market, limited exports Distribution infrastructure struggling to keep pace with increasing access to health care outside of major cities Highly complex and changing regulatory environment (ANVISA) India 15.6% projected five-year CAGR for medical devices Domestic production growth is surging to fulfill domestic demandgrowing at 17% CAGR Infrastructure for manufacturing and R&D facilities is still in the early stages of implementation Uncertain, evolving regulatory environment Local distributors/agents play significant role as hospitals do not purchase direct from manufacturers

Recommendations
Medical device Companies have started feeling the heat of thinning margins due to a sluggish economy and reimbursement pressures in North American markets. Hence, companies are turning to emerging markets to accelerate the growth. But as we saw SCHM 6212: Executive Roundtable in Supply Chain Management

THE FUTURE OF GLOBAL SUPPLY CHAINS 10 each of these emerging markets have there own risks and challenges. So Medical Device Companies needs to plan their strategy very deliberately to enhance the market share in these markets. Here are some recommendations that we have inferred from the analysis:

Improved IT
With the global operations, Device companies should use the improved IT to enable supply chain effectiveness. Companies can opt for the supply chain software like i2, Manhattan, Manugistics, etc. in addition to ERP packages like SAP and Oracle.

Improved Processes within supply chain organizations

80% of manufacturing companies are outsourcing some logistics processes as well as information technology, financial functions, or call centers. So Device companies need to standardize their processes around the world. Also the supply chain organizations needs to work closely within themselves to avoid the different views on the issues like scope of control, role on the executive agendas, and ability to foster collaboration both within the business and with trading partners.

People
The company should plan the people working in global supply chain so that there are no talent gaps. The other key challenge associated with global markets is working with people from different background with communications barrier or cultural misunderstandings. The companies should work in association with local partners to SCHM 6212: Executive Roundtable in Supply Chain Management

THE FUTURE OF GLOBAL SUPPLY CHAINS 11 carry out the communications in better way. There should be standards defined for carrying out the tasks.

Evolving Manufacturing Operations

Currently limited manufacturing is done in the emerging market so medical device companies should adopt the Regional build and sell with global parts sourcing for the parts which have IP risk. For low cost high demand Parts, Company can adopt regional build and sell model which will reduce the supply chain cost as % of total cost for given product.

Evolving Distribution Model

Distributors are most common supply chain strategy in emerging markets but Device Companies should try employing 3PLs. In addition to 3PL company can also try the self owned or managed sales and distribution

Supply Chain Risk Management

With new markets, results security issues which is major concern working in a new region. SC risk management involves many factors physical, people, information, cash, infrastructure, weather ,and others. So Device company should define the management structure to identify, plan, avoid, mitigate, and solve risks.

Collaboration

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THE FUTURE OF GLOBAL SUPPLY CHAINS 12 The value proposition for increased collaboration among trading partners across the different regions is understood but the implementation is slow. There are many reasons, So company should find the barrier and clear it for a better collaboration.

Conclusion
Emerging markets are an important growth area for medical device companies
China, Brazil, and India are the primary areas of focus

The primary risks and challenges vary from market to market and present a complex playing field for supply chain executives
Companies that lack a well-thought-out, proactive emerging market supply chain strategy are at risk of ending up with a sub-optimal supply chain that limits growth and profitability

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Exhibit 14

Exhibit 2 Medical device companies feel economic pressure

Published on Healthcare Finance News (http://www.healthcarefinancenews.com)

Medical device companies feel economic pressure, see record M&A levels
By Rene Letourneau, Editor
NEW YORK CITY Medical device manufacturers are feeling the effects of a sluggish economy and a revamped reimbursement model, which are leading to slow growth and record levels of mergers and acquisitions activity. Ongoing financial pressure on U.S. for-profit hospitals is affecting the medical device sector, according to Moody's Investors Service. Moody's stable outlook for the U.S. for-profit hospital sector reflects the expectation that same-facility aggregate EBITDA growth will remain in the low-single digits in percentage terms over the next 12 to 18 months as weak patient volumes continue and pricing pressures mount. Moody's sees a similar trend in the medical products and devices sector with aggregate EBITDA growth likely to remain around 1 to 4 percent through 2012, a key factor supporting its stable outlook for the sector. U.S. hospitals are key customers for device companies. In its report, "U.S. Medical Products and Devices: Profits to Rise Modestly; Cost Cuts Will Offset Weak Sales, Moody's notes that U.S. hospitals and device makers are suffering as consumers defer non-urgent healthcare amid high

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levels of unemployment and ongoing healthcare benefit plan design changes that are pushing a larger portion of healthcare costs onto patients. Moody's also notes that rising reimbursement rates will support hospitals' EBITDA growth this year, but payment rates will be much less certain beyond 2012 as Medicare cuts take effect and states struggle with budget shortfalls. Hospitals will continue to push for lower prices on medical devices as reimbursement pressures mount. Device makers will also face ongoing regulatory scrutiny and challenges in obtaining reimbursement coverage because payers will increasingly focus on product cost-effectiveness. Medical device companies must also contend with a new medical device tax in 2013 that's part of the 2010 healthcare reform legislation. Moody's expects most companies will offset their tax payments with additional cost-savings initiatives. Additionally, device companies' increased focus on emerging markets, including China and India, will help to counter sluggish U.S. and European growth as well as support EBITDA growth. The near-term impact will be limited, however, as emerging markets represent a small portion of the sector's overall sales. In this difficult financial environment, the strong are devouring the weak. January 2012 was a record month for healthcare M&A volume and among the individual sectors, medical devices led the pack with 21 deals worth $6.9 billion representing 22 percent of the transactions, reported Irving Levin Associates, whose Deal Search Online database also noted that medical device M&A activity has increased in terms of dollar value in the later part of the last 10 years reaching a total of $320.4 billion in the past decade. Sanford Steever, PhD, editor of Irving Levines publications, The Health Care M&A Monthly and The Health Care M&A Report said the brisk market is being driven in part by low interest rates and a desire to squeeze excess cost out of the healthcare delivery network. He expects the fast pace of M&A activity to continue. The only things that could slow it down are election-year jitters over the continued future of healthcare reform (companies will still undertake deals, but will have a longer due diligence period), Steever told Healthcare Finance News in February. More peripherally, another economic downturn, which is increasingly remote, could also slow down, but not stop, healthcare M&A.

Exhibit 3 Greatest risks and challenges in emerging market for Medical Device companies.

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Reference
1 2

The World Medical Markets Fact Book, 2010

http://www.healthcarefinancenews.com/news/medical-device-companies-feel-economic-pressure-see-record-malevels 3 Medistat Outlook China Report; Medistat Outlook Brazil Report; Medistat Outlook India Report
4

PRTM Medical Device Emerging Market Survey

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