Access to cash is critically important for medtech companies. Cash allows medtech leaders to acquire emerging technologies and develop their own new products, which in turn drives the kind of innovation that improves patient outcomes and boosts shareholder value. But many medtech organizations have too much of their cash tied up in excess inventory on shelves in too many locations. Typically, medtech companies hold as much as three times more inventory than companies in sectors such as consumer packaged goods and electronics (exhibit).
It’s not just about cash flow, though. Aside from tying up capital that could be deployed elsewhere, outdated inventory practices create additional warehousing and logistics costs and exacerbate the risk of inventory write-offs. In today’s expensive capital environment, this issue has become all the more urgent for medtech leaders.
In the past, medtech companies have tended to hold inventory as a bulwark against stockouts. And as companies have grown through acquisitions, they have added more physical sites to their footprints. This has created buffers on top of buffers, inflating excess inventory. For example, one leading medtech company consistently planned its production without full visibility into inventory it had consigned to hospitals. This led to inventory buildup and product availability issues, seriously limiting the company’s ability to optimize its cash position.
Updating inventory management practices offers medtechs the opportunity to transform stock from a burden into an asset, freeing up cash to fuel innovation and generate value. There is significant value on the table: We have seen companies reduce inventories by 10 to 30 percent through these practices. Here, we propose several strategies for medtechs looking to go beyond basic supply chain best practices to rightsize their inventories and create more efficient cash flow.
Operational improvements
Organizations looking to optimize their inventory management can focus on three critical operational improvements: demand planning at the SKU level, establishing granular visibility into inventory, and specifying product mix requirements in contracts with internal manufacturing divisions.
Accurate demand planning at the SKU level is critical to inventory health. In our experience, many medtechs plan for demand and peg forecast bias at a global level. But this bird’s-eye view can obscure large SKU-level forecasting errors, which often drive inventory buildup for both finished goods and raw materials. Leading medtechs have developed the capabilities to forecast outcomes at both market and SKU levels. The emergence of digital and AI tools can facilitate these capabilities.
When it comes to inventory—as with any other aspect of business—you can’t manage what you can’t measure. Many medtechs, somewhat surprisingly, lack granular visibility into their full available inventory (including products, components, and raw materials). Many issues stand in the way, from siloed data systems to earmarking some inventory for preferred customers or markets, and can lead to compounding problems of overordering, overmanufacturing, and product buildup. When developing production plans, medtechs should prioritize comprehensive visibility of inventory across all storage locations and ensure they can pull accurate, detailed accounting of inventory on demand (by SKU, product segment, facility, and so on). Any strategic inventory buffers should be consolidated and held in one upstream location, and associated costs should be clearly understood.
Finally, medtechs should make incentives for internal manufacturing divisions much more specific. Frequently, manufacturing plants are primarily incentivized to produce a total number of units at a certain cost, rather than a specific mix of products. This can result in site managers choosing to meet their aggregate numbers rather than a specific product mix, which can lead to a shortage of some products and a surplus of others.
Structural improvements
Inventory optimization is rarely considered in product development, consignment inventory models, or the design of the supply chain network. Closer integration could mean a material impact on an organization’s cash flow. In product development, a forward-looking view can help avoid issues including surplus inventory, distribution costs, and high obsolescence. For example, standard surgical sets are designed to include rarely used components, such as outlier sizes for implants, along with frequently used components. This means medtechs build up several years’ worth of surplus of rarely used SKUs consigned to hospitals.
Medtechs should also aspire to create flexible consignment inventory models tailored to specific business conditions. In the past, medtech companies have relied on a “consign and overstock” inventory model at surgeries to minimize the possibility that stockouts have adverse consequences on a patient’s health. As we’ve seen, this consignment model leads to inventory inflation and increases the possibility of obsolescence.
In our experience, however, it’s possible for medtechs to prioritize patient health while also tailoring their consignment inventory models to be more efficient. The ideal fulfillment model is based on the specifics of customer need and surgery type. For instance, in the case of certain elective surgeries, planned well in advance, inventory can be held centrally and orders fulfilled just ahead of the surgery.
As medtech supply chains become more complex, often through acquisitions, there’s an increasing number of nodes through which each product travels before reaching the customer. This means each node increases the total inventory carried by the organization. Greater supply chain efficiency, with fewer total nodes, can help organizations pursue optimized inventory value. Organizations can also rework their inventory stock holding policies to ensure the majority of strategic safety stock is held centrally while maintaining high levels of service in the network.
Maximizing value from planning systems
Optimized data management and global stakeholder buy-in can also have positive effects on medtech inventory optimization.
Software has a role to play, but—as always—it’s not a panacea. Many medtechs have deployed advanced planning systems to optimize their supply chains in recent years. These systems can coordinate tasks including advanced forecasting, demand planning, supplier collaboration, material planning, order management, and more. But in our experience, very few have derived full potential value from inventory improvements with these systems.
There are two reasons for this. First, many organizations are not undertaking the kind of transformation necessary for these systems to deliver maximum value. New systems don’t solve problems by themselves. Organizations that bring in new technology but retain their same old ways of working are essentially using a Ferrari like a bicycle. Another common problem we’ve seen is poor data hygiene and system design choices. When advanced planning systems are fed data sets with inaccuracies or designed in a way that doesn’t mimic real-world situations, they produce inaccurate results, which in turn require further manipulation outside the system, reducing efficiency.
Better governance can make a difference, too. As with any large project, successful inventory optimization requires support from a cross-functional group of stakeholders. Medtechs serious about inventory management should convene a cross-functional team to drive the effort. The group should review monthly projections across all inventory categories and should set targets to track progress and impact. Representatives from finance, manufacturing, supply chain, procurement, and commercial/field operations should be included.
How to get started
In our view, any inventory optimization journey should start with a granular, SKU-level view of the overall inventory on the balance sheet. Once this is done, companies can use an inventory health map to understand where the excesses and deficits lie across the different nodes in the network—for instance, consignment hospitals, distribution centers, and others.
With this tool, leaders can identify the root causes driving excesses and deficits. Then, a set of interventions can be systematically executed. This approach avoids the “whack-a-mole” strategy that addresses effects but not causes. It also ensures that any reductions achieved can be sustained over time.
By implementing the strategies detailed above, medtechs can reduce inventory levels, improve their supply chain performance, and free up their cash. Of course, how these strategies are applied will depend on a medtech’s specific business model. But regardless of the specifics, a more proactive approach to inventory management will inform leaders’ decisions and can increase shareholder value.
