CASE: Meditech Surgical

CASE: Meditech Surgical

• Intent – diagnosis of supply chain
• Business overview
• Supply chain
• Production planning
• What’s wrong?
• How to fix it?
Points to consider
• The Case describes a scenario with typical symptoms – inventories
are too high and customer service is poor.
• Initial explanation is that the problems are due to poor forecasting of
customer demand. There’s a perception that demand is highly
variable and unpredictable, possibly due to irrational customer
behavior, for instance, panic ordering. … if only Meditech could
forecast what the customers will order, then they could improve
customer service and reduce inventories….
Endoscopic Surgical Instruments
• Permits minimally invasive surgery
• Market created in early 80’s, rapidly growing
• Old products continually updated and replaced with new product
introductions
Points to consider
• Meditech, 6 years old, spun off from Largo, produces endoscopic
surgical instruments.

• Market doubling every 5 years; continual innovation as products get

smaller and products created for more applications
Business Overview
• National and Meditech split the market
• Compete based on product innovations, customer service, cost
• National sells to Physicians; Meditech sells to Materials Managers
• Customer preferences change slowly
Points to consider
• How does Meditech compete?
• How does Meditech differ from National?
• What factors are important to customers?

• Meditech has majority of market.

• Physicians concerned with product features; Materials Managers concerned
about cost and delivery.

• Physicians get accustomed to the feel of a product and won’t change easily.
• Hospitals/Materials Managers set up long term supply contracts to lock in
supplier at a good price (also impact of GPO’s, group procurement organizations?)
 External Supply Chain

Hospitals

Domestic
Dealers

Part Meditech Meditech

suppliers Assembly Warehouse
Hospitals

International
Meditech
Affiliates
Points to consider
• 4 Meditech assembly plants
• 4 or 5 domestic dealers, each operates with many autonomous
regional warehouses
• Each regional warehouse stocks many different products, so as to
provide full service to hospitals
• Regional warehouses order directly to Meditech
• International Meditech affiliates operate like the domestic dealers.

• What purpose do the dealers fill?

Internal Supply Chain

Parts Inventory Assembly Bulk Inventory Packaging &

Sterilization FG Inventory

2 - 16 2 1
weeks weeks week
Points to consider
• Assembly organized into multiple flexible lines, manual
• Packaging and sterilization have adequate capacity

• How much bulk inventory would you expect? Not clear how much bulk
inventory they keep – from the way they plan (push each month), might
expect 2 weeks inventory here on average.

• In finished goods (FG) they target 3 weeks inventory

• Note – they seem to maintain 3 inventories. Might always ask – why? For
what purpose?
 Production Planning
Annual
Forecast

Monthly
Revision

Transfer
Requirements

Monthly
Plan

MRP

Parts Weekly
Procurement Assembly
Plan Schedule
Points to consider
• Annual forecast determined by marketing and
finance
• Revision done at beginning of month by marketing
and central planning
• Transfer requirements = forecast – FG inventory +
safety stock (3 weeks of demand), done by central
planning
• Transfer requirements = the imputed demand on the
bulk inventory, that is, how much to transfer from
bulk inventory to FG inventory
• Monthly plan agreed to by organization, 1 – 2 weeks
into month
• Monthly plan sent to business units, who input it
into MRP to get material plans and assembly
schedules
• MRP re-run several times in month to update
schedules…
 Monthly
Production Planning
Plan

MRP

Order point;
Material
Order quantity
Plan

Parts Inventory Assembly Bulk Inventory Packaging & FG inventory

Sterilization
Points to consider
• Another way of looking at production planning --- focusing on
information flows.

• Note that assembly and material plans are ‘push’ to meet forecast
and monthly plan.
• Packaging and assembly are ‘pull’

• Not clear how order point (OP), or order quantity (OQ) are set, other
than 3 weeks of safety stock
What’s Wrong?
• Poor service for new product introductions
• Poor forecasting?
• Panic ordering?
• And high FG inventory
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
Points to consider
• What causes the spikes?

• See overshoot in production, and see production variation exceeds

demand variation
• Planners misinterpret the demand spike as an increase in demand
rate.

• However, there is no panic ordering.

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
Points to consider
• No one had looked at the data – not easy to get at;
also monthly buckets obscures a lot of what is going
on.

• Transfer requirements = month forecast + 3 weeks of

demand (safety stock) – FG inventory

• Suppose monthly forecast = 100, and FG inv = 75; then

• Transfer requirements = 100 + 75 – 75 = 100

• But what if monthly forecast increases to 150?

• Transfer requirements = 150 + 113 – 75 = 188
• Thus, forecast increase by 50%, leads to increase of
88% in TRs
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
Points to consider
• Not clear why there is a bulk inventory – what is its
purpose?
• Safety stock may also be too high at 3 weeks of
demand??
• Try to get visibility of hospital demand

• Wrap Up: Case illustrates a supply chain challenge

– understand why Meditech has poor customer
service and high inventory, particularly for new
products. Context is characterized by lack of data
and a somewhat archaic, albeit typical, planning
system that obscures the problem.

• Need to do diagnosis of what is happening and why;

this then leads to remedies.