Case: Meditech Surgical

1. Case: Meditech Surgical Designing & Managing the Supply Chain Chapter 1 Byung-Hyun Ha bhha@pusan.ac.kr

2. Case Overview • Intent – diagnosis of supply chain • Business overview • Supply chain • Production planning • What’s wrong? • How to fix it?

3. Meditech Surgical • Background • Endoscopic surgical instrument maker • Minimally invasive surgery • Parent company: Largo Healthcare Company • Spun off 3 years ago • Primary competitor: National Medical Corporation • Market created in early 80’s, rapidly growing • National sells to physicians • Meditech sells to material managers as well as physicians • Customer preferences change slowly • Old products continually updated • Replaced with new product introductions • Compete based on product innovations, customer service, cost

4. Meditech Surgical • Problems • New production introduction needs to be flawless • Consistently fail to keep up with demand during initial order • Customers wait over six weeks to have orders delivered • Dan Franklin, manager of Customer Service & Dist. • Recognizing growing customer dissatisfaction

5. Distribution • Central warehouse • Two primary channels to hospitals • Domestic dealers • Order and receive products from multiple manufacturers • Independent and autonomous entities • International affiliates • Subsidiaries of Largo Healthcare • Similar to domestic dealers from Meditech’s point of view

6. Internal Operations • Assembly • Manually intensive • Using component parts in inventory • Assembly line with a tem of cross-trained production workers • Cycle time for assembly of a batch of instruments • 2 weeks • Lead time for component parts • 2-16 weeks • Packaging • Using machine • Sterilization • Cobalt radiation sterilizer, about 1 hour

7. Operation Organization

8. Production Planning & Scheduling • Broken down two parts • Assembly & component parts order based on monthly forecast • Packaging & sterilization based on finished goods inventory level • Forecast • Annual: during the fourth quarter of each fiscal year • Monthly: using annual forecast broken down proportionately • At the beginning of each month: adjustments of forecast • Planning of assembly • Using monthly demand forecasts • transfer req. = month forecast – finished goods inventory + safety stock • Approved throughout the organization after 1 to 2 weeks

9. Production Planning & Scheduling • MRP systems • Planning assembly schedules and parts order • Calculation may be run several times each week • Notification of change at least 1 weeks before • Packaging & sterilization process • Order point/order quantity (OP/OQ) Packaging & Sterilization Assembly Parts Inventory Bulk Inventory FG Inventory 2 – 16 weeks 2 weeks 1 week push pull

10. High Inventory Level of Finished Goods • In case of representative stable product

11. Var. in Production vs. Var. in Demand • Variation in production schedules often exceeded variation in demand

12. New Product Introduction • Poor service level • Poor forecasting? • Panic ordering? • And high FG inventory

14. Poor Service Level • 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 • 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

15. Poor Service Level • 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