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2012

As is the case in most industries, globalization has increased demand for medical technology around the world. Indeed, according to a new report by Axendia, a majority of executives expect their business to grow globally in the next three years. What’s more, they expect growth will be higher (88 percent) in emerging markets compared developing markets (69 percent).

As would be expected, the top two drivers of globalization are the need to support emerging markets with locally produced product (cited by 64 percent of the respondents) and improve the rate of innovation (cited by 63 percent).

But with this opportunity comes challenge. So as the business model shifts from selling products to providing integrated solutions, executives responding to the survey note that their companies must navigate three primary macro trends:

·                Manage sustainable global growth

·                Comply with tightening global regulatory environments

·                Support changing healthcare delivery models globally

The report, “Walking the Global Tightrope: Balancing the Risks and Rewards of Med-Tech Globalization,” summarizes the findings of an Axendia survey of 125 individuals from 89 different companies from 16 countries. Seventy nine percent of the respondents were decision makers with a title of Manger, Director, or Senior Executive. Over one third of the respondents represent large organizations with annual revenues exceeding $1 billion, and another third of the respondents were from midsize med-tech companies. The remaining respondents represent organizations with revenues below $25 million.

I’m always interested to see which issues are reported as “keeping executives up at night” when reading survey results. In this case, 60 percent of the executives cited the quality of products, raw materials, or services provided. The next frequently cited concern is the ability to maintain consistent quality standards across internal and external sites (noted by 59 percent of the respondents). Finally, 49 percent cited protecting the company’s intellectual property as an issue that keeps them from sleeping.

But I was most interested in supply chain challenges. As the report notes, seven out of 10 executives rated their level of risk as moderate to high based on their current lack of visibility into critical suppliers. Furthermore, 90 percent of the respondents indicated they would like access to real-time and on-demand data from critical suppliers and contract manufacturers.

This poor visibility, however, is not always due to a lack of technology systems. In fact, it’s due here to having too many ineffective systems. For example, to achieve global visibility, 50 percent of large organizations still rely on paper reports and homegrown systems.

Based on the results, authors of the study suggest that to mitigate risk and attain sustained benefits, medical technology companies will need to need to implement new strategies, processes, and technologies to proactively manage risk across the life-cycle of their products in a global and outsourced environment. These steps, according to the authors, should include the implementation of holistic control over governance, risk management, and compliance practices; enhanced visibility across the med-tech ecosystem; and improved collaboration with all constituents in the ecosystem.

So in the end, there’s growth, and the usual growing pains. It will be interesting to watch as the med-tech industry adapts to meet evolving demands driven by globalization.

You may have seen some interesting news recently regarding plans to use liquefied natural gas to fuel trucks. PRnewswire reported that Shell and its affiliates have signed a memorandum of understanding with TravelCenters of America (TA) to sell liquefied natural gas to heavy-duty road transport customers in the U.S. through TA’s existing nationwide network of full-service fueling centers.

This potential alliance with TA would enable Shell to deliver LNG fuel to customers who want a competitively priced fuel option to help meet increasingly stringent air-quality emission standards, says Elen Phillips, vice president, Shell Fuels Sales & Marketing North America, in the article.

But other news this week prompts the question: Will there be enough drivers for such trucks? That’s because, as a widely covered story notes, a worsening shortage of truck drivers makes it increasingly difficult to find drivers. A story carried by many sources, but which I saw on the DenverPost, notes that despite a national unemployment rate around 8 percent, trucking companies are struggling to recruit and retain enough drivers.

Aging drivers retire, says Charlie Gray, owner of Carolina Trucking Academy, Raleigh, N.C., says in the article. But for every driver that goes out the back door, there better be a driver coming in the front door. There aren’t a lot of people coming in the front door now, he says.

The shortage is good news for those looking for work in the industry. Companies desperate for quality drivers have begun offering sign-on bonuses, higher salaries, and safety bonuses. Yet there’s still a national shortage, conservatively estimated, of at least 200,000 workers, says David Heller, director of safety and policy at the Truckload Carriers Association.

It seems the occupation doesn’t lure young people because long-haul-trucking careers often require drivers to be away from home for weeks at a time. Charles Clowdis, managing director of transportation industry services at IHS Global Insight, explains it this way in the Denver Post article: You’re away from home; and it’s somewhat of an unset schedule. You may leave on Monday, get somewhere Thursday, and Friday be sent in the total opposite direction, he says.

Another problem is that despite the current unemployment rate, many unemployed construction and factory workers simply can’t afford the $4,000 to $6,000 cost of a six-week driver-training course. Although most companies will reimburse drivers for that cost once they are hired, the drivers do need to pay the cost upfront—and many potential drivers cannot afford the cost or they can’t get student loans to cover the fee.

Other problems are that truck drivers must be at least 21, so many 18-year-old high school graduates who might consider trucking, instead choose to pursue other trades. Secondly, the government began publicizing the safety ratings of trucking companies 18 months ago, prompting some carriers to hire only drivers with unblemished records, which further narrows the pool of qualified applicants.

Finally, new government regulations that limit drivers’ hours and monitor drivers for safety violations have exacerbated the shortage, says Bob Costello, chief economist for the American Trucking Associations, which put the industry’s annual turnover rate at 88 percent in December. In the Denver Post story, Costello says the safety move will force companies to hire more drivers, which in turn, will create even more demand.

The result is that rising wages and truck prices—which have increased as much as 40 percent over the past few years due to modernized engines optimized to meet tougher emissions rules—are driving freight costs higher. The shortage of drivers itself effectively limits truck capacity and will help push up freight rates by 2 percent to 5 percent this year, says Benjamin Hartford, an analyst with research firm R.W. Baird, in a recent USAtoday article.

So this looks like a promising time for young—or even older--workers interested in a career driving trucks. On the other hand, it certainly appears freight costs will continue to rise steadily.

 

You have—by now—certainly heard about Microsoft’s announcement that it has developed a tablet called the Surface, which comes with a keyboard and other features designed to stand out in a market clearly dominated by Apple. In some respects, it doesn’t come as a surprise. However, there are some interesting implications to consider.

Give the success Apple has had, it’s a wonder there aren’t more tablets on the market. For instance, IDC reports that worldwide media tablet shipments into sales channels rose by 56.1 percent on a sequential basis in the fourth calendar quarter of 2011 to 28.2 million units worldwide. That represents an increase of 155 percent from the fourth quarter of 2010. Based on the markets’ strong 2011 finish, and the clear demand expected through 2012, IDC has increased its 2012 forecast to 106.1 million units, up from its previous forecast of 87.7 million units.

But as a recent story in the New York Times notes, the announcement shows just how much friction there may be between Microsoft and its PC hardware partners. This is, the article notes, the first time in Microsoft’s almost four-decade history that the company will sell its own computer hardware, and will therefore compete directly with the PC makers that are the biggest customers for the Windows operating system.

For hardware makers, the PC market has long been a struggle because Microsoft and Intel, maker of the microprocessors that power most computers, long extracted most of the spoils from the industry, which leaves slim profits for the companies that produce PCs, the article continues. Since manufacturers pay hefty fees to license Windows from Microsoft, it places significant pressure on them to make PCs as cheaply as possible using commodity parts.

That, in turn, has limited their ability to take the kinds of risks on hardware innovation that have helped define the iPad. Furthermore, with the iPad, Apple has proved that there are significant advantages to designing hardware and software together. When separate companies, each with its own priorities, handle those chores, integrating hardware and software can be more challenging.

But in addition to consequences in the PC market, by producing its own tablet, Microsoft also risks taking sales away from a coming crop of Windows-powered tablets from its own allies. Shira Ovide wrote in the Wall Street Journal recently that Microsoft traditionally has left the making of computers to partners such as Dell, Hewlett-Packard, and Lenovo Group. But that by treading on the hardware-makers’ turf, Microsoft now threatens to strain that long-standing business arrangement, Ovide wrote.

As the article further notes, the computer makers’ business is dependent on Microsoft, so they may not express annoyance publicly at Microsoft’s new product launch. But Ovide also reports that at least some hardware executives are fuming privately at Microsoft’s decision to launch the Surface tablet.

Be that as it may, Microsoft clearly has its work cut out in the tablet market. It’s no secret that Apple uses its considerable cash and investments to strategic advantage. For instance, the company has substantially increased its capital expenditures on its supply chain, including increasing its prepayments to key suppliers. The tactic ensures product availability and low prices for Apple—and sometimes limits the options for competitors. When manufacturers are busy filling Apple orders for touch screens, for example, there just aren’t enough for everyone else.

These will be interesting times to watch the tablet and PC markets, as well as Apple, Microsoft, and their supply chains.

As companies continue to target emerging markets as a key area for growth, one of the challenges they encounter is that the result of quickly increasing demand for resources and supplies of many raw materials means that they become more difficult to secure. Indeed, commodity prices are volatile and will continue to rise. Manufacturers see the impact on their operations and bottom lines, and these challenges will most likely grow.

 

However, an article from McKinsey Quarterly, the business journal of McKinsey & Company, explains that companies taking steps to increase resource productivity can unlock significant value, minimize costs, and establish greater operational stability. By the way, thanks to SupplyChainBrain for pointing me to the article. The authors (Stephan Mohr, an associate principal in McKinsey’s Munich office; Ken Somers, a consultant in the Antwerp office; Steven Swartz, a principal in the Chicago office; and Helga Vanthournout, a consultant in the Geneva office) write that their experience suggests manufacturers can reduce the amount of energy they use in production by 20 to 30 percent. They also can design products to reduce material use by 30 percent while increasing the potential for recycling and reuse.

 

Manufacturers are likely to achieve the quickest impact if they start by focusing on their areas of core competency. But to secure the full value of their efforts, companies must optimize operations for resource productivity in four broad areas: production, product design, value recovery, and supply-circle management. The authors believe that by taking a comprehensive approach to resource productivity, companies can improve their economics while strengthening their value propositions to customers and benefiting society as a whole.

 

While there are thought-provoking ideas about the other areas, the topic I was most interested in was supply-circle management. As the authors point out, many of the activities that impact resource productivity and sustainability—such as acquiring and transporting raw materials, assembling parts used in manufacturing, and using and disposing of final products—take place outside the walls of manufacturers’ facilities. Although companies do not have exclusive control over these activities, they can exercise their influence to increase the productivity of their supply chains.

 

What that means then, is that companies can transform their supply chains into supply circles. Whereas the phrase “supply chain” may evoke an image in which materials are collected in one place and ultimately disposed of in another, the phrase “supply circles” emphasizes that materials can be looped back into the production process after they have fulfilled their utility over the life of a product, the article explains.

 

Companies striving to make this shift should first develop a complete understanding of their supply footprint. This involves considering not only which materials are used and in what volumes, but also how much energy is required to use them and what impact they have on the environment, the authors note. The analysis enables companies to identify areas for improvement in internal, as well as supplier, operations. The authors further explain that companies can use the analysis to manage suppliers, reduce costs, and mitigate the risks posed by potential regulatory changes, supply scarcity, and volatile commodity prices—and to help initiate conversations with suppliers that may result in strategic relationships that enhance the capabilities of each party.

 

There’s no doubt that supplies of various natural resources and commodities are now more expensive and subject to price volatility, which increases manufacturers’ costs and risks. But that also creates opportunities. The McKinsey team explains that companies now need to dedicate as much effort to optimizing resources as they did to implementing lean and other improvement initiatives. At the same time, they must rethink their business models to capture the value residing in resource ownership. However, if they do that correctly, the article’s authors believe the effort will enable those companies to increase the stability of supply and manage their costs while developing new products— and even lines of business—that generate sustainable bottom-line value.

One of the concerns for companies in the high-tech and electronics industry is determining how to cut costs without negatively effecting product quality, time to market, or customer service. However, in an EBNonline article I saw on SupplyChainBrain, Jim Gerard, who manages the design and execution of UPS’s marketing plans for growing global forwarding, logistics, and transportation revenues in the high-tech and electronics vertical, wrote that many electronics companies are turning to less conventional means such as reverse logistics to not only reduce costs but also improve operations and overall business practices.

Gerard notes that a recent whitepaper, “Recovering Lost Profits by Improving Reverse Logistics,” by Curtis Greve and Jerry Davis of Greve-Davis, which was commissioned by UPS, found that when effectively managed, reverse logistics can uncover hidden profits, reduce liability, and improve customer satisfaction.

But as Gerard explains, to identify areas of cost savings within the reverse supply chain, a company must first understand reverse logistics--the process by which previously consumed products are received and processed to recapture value or ensure proper disposal. When thought of this way, companies can review their returns processes from a more strategic standpoint and determine the areas of improvement most beneficial to their business.

As discussed in the whitepaper, three key areas of high-tech industry reverse logistics are: resale, regulatory compliance, and repairs. Depending on the company, the product, and the consumer base, each of these three areas can be of varying importance when structuring a positive reverse logistics strategy. What I found most interesting though, isn’t the readily apparent savings, but instead, those that become evident on further review.

For instance, cellphones contain copper, silver, gold, and palladium that can be reclaimed, reused, and resold to manufacturers across industries. But not all companies can reclaim rare materials, and many of them have focused their resale operations on the secondary market—reselling refurbished products back to retailers and consumers. Indeed, Gerard writes, an electronics manufacturer could see more than $20 million in added revenue if the company were to resell as few as 250,000 of its returned phones.

Secondly, obviously, there are a number of regulations in the high-tech industry, and having a well-defined reverse logistics process in place can help a company avoid thousands—and, potentially, millions—of dollars in fines and penalties. However, in addition to recalls, proper product disposal is a growing concern. More than 35 states now have regulations concerning the proper disposal of electronics, and 11 have banned the disposal of personal computers in their landfills, Gerard explains. By proactively addressing these issues with a well thought-out returns process, companies can avoid unnecessary fines, sustain customer satisfaction, protect their bottom line, and build their corporate reputation through minimizing e-waste, he says.

Finally, warranty claims and repairs are a significant part of the reverse logistics process, requiring plans for receiving, tracking, processing, repairing, and ultimately redelivering the product to the consumer. Over the years, the level of high-tech returns has grown considerably, resulting in a new $19 billion sub-industry dedicated to electronic repairs, Gerard notes. Recognizing this trend, many high-tech companies have implemented highly efficient reverse logistics operations to process and redistribute repaired products back to their customers in a timely and cost effective manner, he says.

Many companies have overlooked and under-acknowledged the reverse logistics process as a key component of business success. In today’s business climate, high-tech and electronics companies may find that a reverse logistics process can not only reduce costs, but also add strategic value and operational efficiency.

 

Manufacturing executives say innovation and value-added services for existing products will fuel growth at their companies in the next two years, according to a survey released Monday by KPMG International, and reported in many places, but which I saw first on Industryweek.

Three-fourths of the respondents said they’re optimistic about business over in the next two years. Tellingly, 62 percent of respondents say their companies are doing what is typically done in low-growth periods: improving process efficiency and refocusing the business on its core offerings and capabilities. But what I found most interesting is that of the 241 senior manufacturing executives responding to the survey, 44 percent of U.S. executives and 36 percent of global respondents said they plan to increase investment in innovation and research and development over the next year to two years.

The results of KPMG’s 2012 Global Manufacturing Outlook: Fostering Growth through Innovation survey show that despite their optimism, executives, particularly those based in the U.S., identify top-line growth (58 percent U.S. compared to 41 percent global) and bottom-line growth (62 percent in the U.S. compared to 43 percent global) as main priorities for their organizations.

So manufacturers may be optimistic about the business environment over the next few years, but they are challenged with continued price volatility on cost inputs, risk in the supply chain, and uncertain demand, says Jeff Dobbs, KPMG’s global head of Diversified Industrials and a partner in the US firm. That means companies must continue to seek opportunities to optimize business operations and squeeze costs out of the process to maximize revenue and profits, he says.

In fact, Dobbs adds that after several years spent cutting costs, many manufacturers realize that they can’t afford to sit back and wait. Instead, they must deploy capital to develop products that can give them a competitive advantage, he says.

Innovation, however, isn’t going to happen in isolation according to the survey findings, but increasingly, will come as a result of collaborative arrangements with suppliers, customers, and partner companies over the next 12-24 months. Just over 60 percent of respondents globally say they will work with customers for customized product development and with suppliers for product design.

Customer and supplier collaboration in the earliest stages of product development allows for cost and risk sharing, and enables manufacturers to focus on what they do best by leveraging the expertise of external partners to accelerate speed to market, Dobbs says. One example, Dobbs offers. Is GE partnering with Microsoft to launch a joint venture aimed at global healthcare system transformation.

That focus on innovation reminds me of another article I saw in Industryweek recently, in which the author, Robert Brands, founder and president of Brands & Co. LLC, wrote that one of the keys to 3M’s success is its continued focus on innovation. To foster this growth, 3M emphasizes the importance of R&D, to which the company dedicates six percent of its yearly revenue. The company takes a long-term approach to the new-product-development process by creating a culture of innovation that encourages risk-taking, tolerates mistakes made along the way, and rewards achievement, Brands says.

For example, Brands notes that in 2008, 3M began strategically investing in startups with long-term benefit to the company, resulting in collaborations and increased technological development. 3M also draws upon innovative technologies from its portfolio of 55,000 products to create new solutions, such as using dental technology applied to car parts.

Not all companies have such an extensive product and technology portfolio from which to draw on. Even so, I look forward to reading about the results of a focus on innovation and renewed R&D efforts.

 

Doctors who treat cancer say a shortage of oncology drugs has eased, though shortages remain for some chemotherapy drugs that form the crux of treatment for breast, colon, lung, and some other cancers, reports a blog post from The Wall Street Journal.

Hospitals have been struggling with shortages of mostly older, generic drugs for cancer and other ailments for about two years. There were a record 250 shortages in 2011, and late last year and early this year, the situation concerning some cancer drugs became fairly bleak.

To address the situation, the American Society of Clinical Oncology (ASCO), which is currently holding its annual meeting in Chicago, and other medical groups have been lobbying Congress and federal officials. Yesterday, ASCO held a press conference to provide an update on the issue. Richard Schilsky, head of ASCO’s government relations committee and the deputy director of the University of Chicago Comprehensive Cancer Care Center, says the good news is that the frequency of drug shortages has begun to decline.

While progress is being made concerning availability of cancer drugs, the overall drug shortage problem is far from being fully resolved. But in other news from ASCO’s annual meeting, doctors said on Monday that a critical shortage of generic drugs in the U.S. could be curbed with legislation now being hammered out by the U.S. House and Senate, an Industryweek article reports.

The law would require generic drug makers to pay user fees to federal regulators for the first time—a payment that pharmaceutical companies already make for brand-name drugs—in exchange for the promise of faster drug approval. It would also require manufacturers to notify the U.S. Food and Drug Administration six months in advance of any potential shortage. However, a provision to impose cash penalties on companies that don’t comply has gained little traction on Capitol Hill, and furthermore, is not likely to be included, says Richard Schilsky, chair of ASCO’s government relations committee, in that article.

“We have concerns about the fact that if there are no teeth in that legislation some companies may decide not to report as required,” Schilsky, a medical oncologist at the University of Chicago says.

But Schilsky also noted that the addition of generic drug user fees for the first time would likely bring about $1.5 billion to the FDA in additional resources over the next several years. That should reduce the review time for a new drug application to market a generic drug from about 30 months to 10 months or less, which would be a huge step forward in terms of getting new manufacturers into the game and getting drugs onto the market, Schilsky continues in the Industryweek article.

While the shortage situation has improved slightly in recent months, industry experts say the market remains volatile due to economic concerns and manufacturing and quality issues that can suddenly remove a much-needed drug from the U.S. market.

Last fall, President Barack Obama signed an executive order that instructs the Food and Drug Administration to increase staff dedicated to addressing drug shortages, and to press drug manufacturers to be more forthcoming about expected production delays that may lead to drug shortages. That increases FDA’s power to predict and tackle potential shortages of prescription drugs. The order also requires the agency to give the Department of Justice information so it can investigate claims of price gouging for short-supply drugs, which is another serious concern.

Although it can be argued that the measure has prevented more than 150 drug shortages, there still are significant concerns regarding current and potential drug shortages.

In fact, Dr. Michael Link from the Stanford University School of Medicine and president of ASCO, said at the group’s meeting that “We are not out of the woods yet by any measure,” the Industryweek article reports. Dr. Link went on to say in the article that ASCO seeks long-term solutions to ensure shortages are no longer a threat to patients.