New Supply Chain Models Shift Resources from Device Makers to 3PLs

Amidst tightened budgets and stiff competition in the orthopaedic industry, device manufacturers can outsource a variety of business functions to third party logistics (3PLs) providers to save time and money. 

Orthopaedic device manufacturers can benefit from outsourcing services such as inventory management, warehousing, order processing and shipping, thus freeing up internal resources to focus on R&D, manufacturing and sales.

BONEZONE spoke to several representatives from 3PL companies to gauge supply chain trends and the benefits of forming partnerships with logistics companies.

Participants included:
Geoffrey T. Marlatt, Senior Vice President, Manufacturer Services, Owens & Minor
Mark Ouellette, Vice President of Sales and Marketing, WebOps
Damon Peary, President and CEO, Summit Corporate Services
Craig Simon, President and CEO, FedEx Supply Chain and Kevin McPherson, President, Healthcare Logistics, GENCO (a reverse logistics company recently acquired by FedEx)

BONEZONE: In logistics, what trends are you seeing amongst your orthopaedic device company customers?

Geoff Marlatt_Crop
Geoffrey T. Marlatt:
The biggest shift is the desire of manufacturers to be more local vs. centralized, thereby achieving better access to the target market. For device manufacturers, that option would be costly if they were to build a network of warehouses themselves. So, the prohibitive cost is pushing device companies to look for alternatives.

Mark Ouellette_CropMark Ouellette: Many of our clients are mid- to small-sized manufacturers and they’re looking for regional loaner banks or a full outsourcing of warehousing, handling and customer service. Our platform helps to manage loaners that need to go into hospital sites where a specific type of surgery may happen less frequently—when they need to send a complex set of instruments and implants into a surgery. Instead of consigning it to the hospital, it goes in, comes back out, then needs to be put back on the shelf and replenished. Mid-market companies are interested in that. Pre-revenue and early-stage medical device companies just getting started don’t have a lot of distributors signed up. They need a central place to manage the inventory and send orders to their distributors. These are small U.S. domestic companies, as well as a growing number of international companies that get 510(k) clearance and need help setting up shop in the U.S. They need a place for the product to land, a central distribution facility, and then fulfill orders to their distributors.

Damon Peary_Crop
Damon Peary:
We’re seeing some device companies choosing to go abroad first to help fund their U.S. strategy due to time requirements of regulatory approvals and reimbursement issues. This relates to logistics becasue we’ve had to become experts at getting products through customs and keeping on top of the changing requirements in different countries.

Craig Simon_FedExKevin McPherson_Genco_CropSimon and McPherson: Medical device providers are focused on reducing global inventories, especially products in the field or consigned to hospitals. There are significant opportunities to improve cash positions and return on capital by managing down inventories outside of central stocking. The larger organizations seek to pool inventory as alternatives to “trunk” or “field office” stock, and provide transparency of that inventory to the network. When you couple this with advanced planning technologies, you can create an environment whereby you can reduce finished goods inventory without compromising service quality—this is the challenge before us. Small- to mid-sized organizations may have the advantage in the market as they have no legacy models to contend with. They are challenged, however, to penetrate and move market share, and this is where the 3PL can provide knowledge, experience and technologies that are not within the small- or mid-size manufacturer’s reach. 

BONEZONE: How can companies use logistics as a strategic advantage?

Marlatt: A device manufacturer that recognizes the advantages of outsourcing to a trusted 3PL partner can achieve cost savings, better tracking of inventory and better fill rates.

Access to local markets in a controlled, FDA-regulated environment is an attractive option in contrast to using the sales rep model, in which sales reps manage products out of their cars, home offices or storage lockers.

Learn how to strengthen your supply chain at OMTEC:

Related presentations include:
Strategies to Overcome Supply Chain Pain Points
Advantages to Optimizing Your Supplier Partners
Master Strategic Sourcing Execution

View all OMTEC Education here.



Ouellette: Small- to mid-sized manufacturers, instead of hiring and training new employees, can leverage staff that is already employed. Very quickly, our staff can come up to speed on the specifics of the client’s product. A lot of the time our operations staff will have up to 30 years of experience in spine or orthopaedics. They know how to chase purchase orders and follow up with sales people to get kits returned. The WebOps platform can recognize that reps will sit on a kit, meaning a kit went out for a surgery on Tuesday, it’s needed next week at another city, and come Thursday, the rep still hasn’t returned it from Tuesday’s surgery. It’s about understanding the management of all of this inventory, having complete visibility of these kits and getting them used optimally. Without the 3PL, these manufacturers will need more inventory to support the surgery that they’re covering. We can do it more effectively.

Peary: Companies utilizing 3PLs are able to tap into our proven systems and efficiencies. 3PLs like Summit that achieve ISO 13485 and 9001 Certification are committed to providing the highest levels of services, lending clients peace of mind and assurance that their products are handled with the utmost care. 3PLs are able to provide clients with highly discounted shipping rates through carriers, such as FedEx, allowing them to save as much as 60 percent on many domestic and international shipments. 3PLs are better experienced with processing the documentation required to get products cleared through customs. These requirements differ significantly among many countries and pose a challenge to companies that are not experienced with the process. Utilizing 3PLs will help ensure that products arrive on time and allow for better use of inventory dollars.

Simon and McPherson: They should look at their supply chains through a new lens. The models prevalent in the market today are decades old, and are a result of the “fear” of not having the right product at the point of care at the time of surgery. Inventory is still used as a hedge to compensate for antiquated planning, technology and sub-optimized distribution networks. This does not need to be the norm any longer. Time-sensitive demand signals coupled with effective planning tools can not only reduce inventories without compromising service levels, but can improve the overall efficiency of orthopaedic device sales professionals.

In a sense, the orthopaedic industry has always used a form of outsourced logistics to gain strategic advantages. Consigned and field inventories were early “outsource” examples that helped provide near 100 percent service levels for hospitals. This provided assurances of product availability as surgeries were scheduled. These programs are still common practice for most major orthopaedic device providers. But these programs are costly and lock up inventory without an offset to the cost to carry added inventory. Products consumed are typically replaced on a daily basis, either by delivery from a local office or direct shipment from the central warehouse. Orthopaedic and other medical device companies seek “just in time” solutions that maintain hospital client confidence and reduce field inventories without driving up supply chain costs. Device manufacturers risk increased costs of loss, damage or obsolescence for inventory outside of their direct control. 

Emerging and start-up organizations find that contracting with 3PL providers allows them to preserve precious capital and focus their limited resources on manufacturing, product development, regulatory compliance and expanding sales and marketing activities while still delivering a “world-class” distribution option. “Pay-by-the-procedure” is a very efficient model for companies with limited capital or those in a rapid growth phase.   


10 Questions to Ask a 3PL

Forming partnerships with new service providers requires an assessment of each company’s
values, needs and expectations.

When seeking to hire a 3PL, the experts who
weighed in on this topic recommend

you ask potential candidates these questions.

1. What cost savings will you provide me vs. doing
these services in-house?

2. What do you know about my company and the markets we serve?

3. Do you understand the processes that take place at the point of care and what matters most to my sales representatives and their surgeons?

4. Can you precisely follow my instructions for stock rotation and data capture?

“Most clients follow strict FIFO or FEFO, yet some shipments may require LEFO. Device companies need to determine how a potential partner is prepared to address any non-standard practices,”
says Simon and McPherson.

5. What ERP system do you use for inventory management and product traceability?

“Are they able to provide timely up-to-date data on
sales and inventory levels? Do they track products and proactively get involved with notifying recipients of possible delays and addressing issues quickly when they arise?” says Peary.

6. Who is my point of contact if I have an issue to be addressed?

7. How do you train staff on the handling of my products and addressing my needs?

8. What expedite options can you provide?

9. What presence do you have in the markets I serve?

“Unlike other industries, such as automotive,
electronic, there are some unique barriers to entry in healthcare that very few 3PLs can satisfy,” says Marlatt.

10. What quality certifications have you achieved?

“A lot of times, manufacturers have unique capabilities and requests, the instruments need to be inspected a certain way or they need to be refurbished in certain cycles. The instruments need to be washed and kept clean and sterile. All of those things are important,”
says Ouellette.


BONEZONE: How are you able to save companies cost and time to market?

Ouellette: Speed to market. On Monday, we receive the product. We set up the WebOps Platform, shelve the product and we’re doing cases by Thursday. It can turn around very quickly. This frees up the manufacturer to focus on sales, marketing and engineering, because everything else is being handled by our company.

The cost difference is that we’re doing things for more companies than just theirs. There is a shipping savings, human work effort savings and overhead savings in the form of storage. There’s overhead in medical device storage— you can leverage economies of scale by sharing the initial and ongoing compliance costs across clients. The overhead that we do for one company is shared across all of our clients.

At AAOS, we met with international companies that had recent 510(k) clearance and desperately need help: how do we find the right sales channel? Who is the right distributor for us? How do we properly get the product into the U.S.? How do we store it? How do we track it once it’s in the U.S.? They’re interested in not just the 3PL, but the WebOps Logistics software. They see the U.S. as a very lucrative market for them because the procedures are still reimbursing fairly high, as opposed to reimbursements in Europe, which are significantly lower than the U.S. They see the U.S. as a critical market and seek for partners to help them exploit the market at a good price point.

Peary: Utilizing a good 3PL firm will significantly lower your capital costs for warehouse space, employees, software, hardware, and upgrades etc. because those investments are already in place and the costs are spread out over a number of clients over an extended period of time. Utilizing a 3PL that specializes in the medical device industry gives start-ups a turn-key solution to implementing a fully operational inventory management and distribution center, one with a professional customer service team that is trained and knowledgeable with handling complex products like medical devices. A customized and dedicated ERP database, inventory management system and customer service center can be set up and operational in days as opposed to months, while greatly reducing the capital costs needed to hire and train in-house staff, setting up phones, developing SOPs and securing the facility to warehouse products. A good 3PL firm will provide flexibility to get you started with a minimum investment, and will grow in depth as your business evolves and expands. A knowledgeable 3PL firm can advise you on things to avoid and can direct you to implement processes that will ensure efficiencies, streamline your operations and maximize your reliability and customer satisfaction.

Simon and McPherson: Controlling costs and offering “speed to market” are essentially the charter of 3PL providers. There will always be varying degrees of savings, or even slight cost increases, as companies optimize their supply chains. In a multi-client environment, the ability to share a pool of employees, technologies and many regulatory costs enables the 3PL provider to blend many costs across their client base. As an example, orthopaedic companies experience an increasing number of products or materials requiring special temperature controlled and monitored storage conditions. 3PLs with a cross-section of device clients generally have these facilities available, and enough flexibility to quickly bring on new clients assuming some space availability. System redundancy and monitors provide the protection and documentation needed to demonstrate “good distribution practices.” Flexibility across the space means that your new product release needing 20,000 square feet prior to launch is just a planning exercise rather than a request for capital. Seasonality is generally not an issue for most orthopaedic products, but if you have inventory peaks, they are easier to accommodate in a multi-client facility.

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Photo Courtesy of WebOps.