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The Importance of Supplier Diversification


Published on February 13, 2020

Innovations in medical device technology, materials and manufacturing capabilities continue to affect how we, as suppliers, work with our MDMs. Ever-tightening and deepening regulatory requirements and global markets also affect how MDMs must produce their packaged medical devices. Amid those opportunities and constraints, those in procurement must coordinate all the details involved across the entire span of the global supply chain. A dynamic environment, to say the least.



Single sourcing of suppliers has held favorable status by providing economies of scale and reducing complexity over the years. Yet, a good portion of that status may have resulted from an urgent response to a specific condition that arose in 2012: a hyper-focus on reducing production costs.

A look at history can shed some light. In 2012, the Affordable Care Act implemented a 2.3-percent medical device excise tax on all medical devices sold in the US. This wallop caused a legitimate scramble, as MDMs looked for every possible avenue to offset the tax.

The mindset, as explained in this 2013 industry newsletter article, was clear: 

One practical way manufacturers can achieve these goals is to consolidate their supplier base. Part of the high cost of bringing product to market can be attributed to outsourcing component manufacturing from multiple…suppliers.

 

In addition to the component costs, single sourcing also pointed to the cost of "managing these complex relationships…" and how the same "slows production time" as further support for single sourcing. If you were in the field during that time, you probably recall how heavily the tax impact influenced strategic decision-making.

The 2015 moratorium on the excise tax relieved MDMs of a significant financial burden. Forbes reported in December that 2020 will likely see its permanent repeal. Removal of this costly obligation sets the stage for makers to reconsider the value add of supplier diversification in agility, security and risk.

An MDM’s supplier diversity initiative typically seeks to mitigate two concerns: business continuity and leverage.

From a business continuity perspective, having a diverse set of suppliers reduces the risk of any one supplier experiencing supply-side issues (i.e., resin shortage, facility impact, labor issues, etc.). The challenge remains for the devices aligned with the packaging components impacted by that supplier, but at least the risk is contained.

From a leverage perspective, MDMs seek to develop and maintain multiple partners for like product, creating incentive within the supply base to price at competitive levels. The threat of shifting volume between suppliers provides negotiation power and opens opportunity for productivity gains while mitigating non-essential increases.  

How is your team approaching supplier diversity? Whether in the wake of tax relief or as part of your company’s strategic plans and rationale, we’d love to have you join the conversation about where supply chain and procurement are headed in the new decade.

Brad McNett
Director of Global Procurement

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