Medical Device Industry 2006-2015: A Look at Performance, Improvement and Value

Globalization. Compliance. Risk Management. Corporate Social Responsibility (CSR). Patient outcomes. Over the last decade, the number and variety of supply chain initiatives exploded for the medical device leader. As a result, the supply chain group, and the related business imperatives, grew in importance.

Overall, the medical device supply chain fared better through the decade than other industries despite the fact that they are smaller, more focused companies trying to become global. On average the industry performance on operating margin and inventory turns was better in 2006 than 2015. The reason? The medical device supply chain entered the decade as a supply chain laggard. Through, focused supply chain programs, they were able to focus and catch up to the level of other industries.

Table 1. Industry Snapshot of Performance

We provide this data to help companies understand what is possible, and how supply chain metrics drive value. In the medical device industry, we find most companies to be stuck. They have either regressed in supply chain performance or they are at the same point as they were a decade ago. For many supply chain leaders that attend conferences, this may seem unfathomable. There is an industry belief that companies have implemented new technologies and evolved processes and driven improved balance sheet results. The goal of this report is to enable benchmarking and to spark a new conversation on the definition of supply chain excellence.

The Race for Growth

Growth rates for the medical device companies were faster early in the decade than the last part of the decade. The overall growth for the period of 2006-2015 is 6%. As shown in Table 1, note that companies posting higher growth rates are also in the top half of the Supply Chain Index (measurement of supply chain improvement) for the periods of 2006-2015 and 2010-2015. These companies are Becton Dickinson and Edwards LifeSciences. Conversely, Boston Scientific growth slowed and their supply chain performance stalled. We find across industries that companies with the highest growth rates also drive the fastest rates on supply chain improvement. This is often counter-intuitive. Many supply chain leaders don’t believe it is possible to grow and manage the Supply Chain Metrics That Matter simultaneously.  

Table 2. Industry Growth Rates in the Medical Device Industry Over the Last Decade with a Comparison to the Supply Chain Index

What Is Value?

As noted in Table 3, companies outperforming in market capitalization may not outperform in Price to Book, or Price to Tangible Book Value. Also note the trend between PTBV and the Supply Chain Index. While a company like C.R. Bard is outperforming on many metrics, the supply chain performance levels are declining (as measured by the Supply Chain Index) with a falling Price to Tangible Book valuation.

Table 3. Comparison of Market Capitalization, Market-To-Book Value and Market-To-Tangible Book Value

Judging Supply Chain Performance

When it comes to overall supply chain performance, Becton Dickinson is the clear winner. Medtronic Smith & Nephew and Zimmer have struggled to deliver on inventory performance, and Medtronic and Zimmer fail to perform higher than the industry averages for ROIC. Boston Scientific is performing the worst in the analysis.

Table 4 Comparison of Performance and Improvement for the Periods of 2006-2009, 2010-2005 and 2006-2015

Managing Cycles

When comes to managing cash-to-cash cycles, a small number is better. The question in the boardroom is “How small can supply chain cycles be managed before we put the supply chain at risk?” To understand the management of cycles in the medical device industry we evaluated them in three time periods: pre-recession, during the recession and post-recession. We wanted to understand how the components of cash-to-cash cycles had changed across competitors over time.

Cash-to-cash is a composite metric of receivables, inventory and payables. As can be seen through the charts, the greatest improvement in supply chains in the last decade has been made in payables—i.e. lengthening payment terms to supplies—while inventory levels and receivables have been more constant. This is true for most industries that we study.

Table 5. Comparison of Cash-to-Cash Components: Medical Device Industry During 2006-2009 and 2010-2015

Companies like Smith & Nephew PLC and Coloplast A/S are pushing cash-to-cash through extreme manipulation of Days of Payables. This is dangerous. With issues of supplier viability, each of these companies should view this as a risk management issue. especially true in the medical device industry where there is a critical dependence on suppliers and contract manufacturers.

Figure 1. Cash-To-Cash Cycles for Major Medical Device Companies for the Period 2006-2009

Figure 2. Cash-To-Cash Cycles for Major Medical Device Companies for the Period of 2010-2015

We find that the supply chain leaders who are making the most progress on the Effective Frontier, and have the tightest resiliency on orbit charts (at the intersection of inventory turns and operating margins), usually have lower payables in the 30- to 120-day range.

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