7 Steps to Effectively Dual Source a Supply Chain for Medical Devices
Dual sourcing is considered a hassle by some traditional medical device manufacturers. After all, the procurement process is faster and more straightforward when you only have to issue purchase orders and receive components from one vendor. Adding a second supplier to your list of approved vendors takes time and creates additional work for your accounts payable staff.
In reality, dual sourcing can be accomplished efficiently and can be a win-win solution if you follow a few key measures. Below is a look at some of the benefits of dual sourcing and your seven-step guide to effectively dual sourcing a supply chain for medical devices.
How can dual sourcing benefit medical device manufacturers?
Before diving into the keys to dual sourcing, it is helpful to understand some of the many ways your organization can prosper if you decide to dual source. Here are three of the top benefits that dual sourcing can offer:
1) You are protected if one of your vendors has a manufacturing delay
Manufacturing delays are an unfortunate reality in the medical equipment industry. Shortages in critical materials, malfunctioning production devices, and a lack of skilled labor can all wreak havoc on supply chain activity. By using two or more sources, you can quickly turn to your second supplier for components, thereby enabling your medical device production to continue smoothly.
2) You have more leverage to negotiate pricing
Suppliers rarely proactively lower their prices on goods. But they will not hesitate to increase prices - sometimes on a regularly scheduled basis. If you have more than one supplier, you can purchase from the supplier offering a more attractive price point. At the same time, the other supplier will be more open to offering more attractive pricing to avoid losing business.
3) You are covered if one of your vendors ceases operations
Vendors can cease operations or close for good without warning. This can leave the medical device companies who depend on them stuck in quicksand until they find an alternative vendor. By having two trusted vendors, you can plan to turn up the volume with vendor B to avoid interruptions to your supply chain, should vendor A shutter its doors.
What steps can medical device manufacturers take to execute dual sourcing?
As outlined above, there are compelling reasons to implement dual sourcing. But implementing dual sourcing is sometimes easier said than done. Failure to roll out dual sourcing with care can lead to internal confusion and struggles. Fortunately, medical device manufacturers can boost their odds of successfully introducing dual sourcing by following the seven steps below.
Step One: Secure buy-in of stakeholders and your leadership team
The path to successful dual sourcing begins with supportive stakeholders and leaders. This is sometimes easier said than done - especially when some decision makers feel a sense of loyalty to a long-time vendor. The key to success with Step One is to show each leader "What's in it for them". For instance, when seeking support from your CFO, you could present data showing that your organization saved $25,000 by purchasing anesthesia vaporizers from a new second supplier.
Step Two: Make dual sourcing mandatory within your company
Now that your leadership team is on the same page regarding the benefits of dual sourcing, it is time to make it an internal requirement within your business operations. This is especially important for large organizations that have multiple teams working in procurement. Here are some steps you can take to standardizing dual sourcing within your medical device company:
- Teach detailed documentation practices during the on-boarding process, throughout training, and periodically afterward.
- Develop a feedback loop or check points to ensure that both suppliers have been contacted for pricing on device components.
- Reward procurement staff who are models of excellence in adhering to dual sourcing protocol.
Step Three: Reference your dual sourcing policy in your supply agreements
A clear, concise supplier agreement is the cornerstone of a smooth vendor relationship. By clearly referencing your dual sourcing policy in your supplier agreements, there will be no unexpected surprises for prospective vendors who accustomed to being the "one and only" supplier of EKG leads or blood pressure cuffs. Here are some tips to help you make your dual sourcing policy crystal clear:
- Identify your second source: Naming your alternative source shows your transparency while prompting prospects to offer competitive prices.
- Specify a minimum order volume: This approach works well for companies who still plan to purchase the majority of components from one vendor.
- Create a vendor hierarchy: Creating a vendor hierarchy helps to clarify supplier roles and prevent internal confusion.
Step Four: Strive for transparency
A strong supplier relationship requires transparency on both ends. While you cannot directly control a supplier's transparency, you can lead by example. For instance, you can sign a nondisclosure agreement and state that you intend to be transparent about your business. If a supplier fails to reciprocate, you may wish to re-evaluate your supplier relationship and consider another vendor. Here are some other points to emphasize:
- Changing requirements: If the FDA has recently banned the use of certain materials or agents, it is up to you to notify your suppliers right away.
- Sales forecasting: Do your best to make suppliers aware of your "peak seasons". For example, ventilator sales tend to increase during the winter.
- Quality control issues: Be sure to openly discuss any factors that could contribute to quality control problems.
Step Five: Ask for help from your suppliers
Once your supplier has a clear understanding of your dual sourcing initiative, it is up to you to eliminate any potential friction that may arise due to the presence of competition. The first way to do this is to require your sources to directly support your efforts. A second, more engaging way to achieve this goal is to simply ask your suppliers for their help and support. Here are three tips to help you start off on the right foot with this approach:
- Clearly describe why your organization has adopted dual sourcing. For instance, describe how your company lost 3 weeks of production time last year due to your past dependence on a single supplier for cases for your vital signs monitors.
- Do not assume your supplier will comply. You should have a fairly strong understanding of your value to your suppliers. Knowing this in advance before pressuring them to comply with your plan can help secure their support.
- Highlight the positive aspects of your policy. Outlining potential growth opportunities for suppliers is a great way to earn their support. For instance, if your company makes surgical microscopes, you could share your future plans to begin manufacturing laboratory microscopes. The prospect of additional business typically motivates suppliers to perform well and back your initiatives.
Step Six: Regularly engage with your second source
With the medical device industry expected to exceed $612 billion USD by 2025, prospective vendors are more eager than ever to become a trusted supplier for medical equipment companies. Being recognized as one of two key suppliers for a medical device producer is both an honor and an accomplishment - especially for vendors who are lucky enough to pair up with a successful device company in its formative years.
But while an official supplier "designation" is certainly a feather in a vendor's cap, most suppliers will not want to be "kept on the bench" or forgotten in your back pocket as a "just in case" alternative to a primary supplier. Here are some possible strategies to help ensure that some of your sources do not end up feeling forgotten and lose interest in you:
- Use each source for specific product types: For example, a ventilator manufacturer may use Source A for circuits and Source B for humidifiers.
- Split product volume evenly: For instance, an infusion pump manufacturer may buy 50% of their infusion sets from Source A and the rest from B.
- Skew product volume to favor Supplier A: In this type of arrangement, a company would knowingly buy 70% of their sets from A and 30% from B.
The ultimate goal of keeping both suppliers commercially engaged is to make sure that both of your suppliers remain interested in meeting your needs and your procurement deadlines. In addition to the strategies above, be sure to communicate regularly with your key contacts at both sources.
Step Seven: Periodically review and evaluate supplier performance
Dual sourcing does not occur in a vacuum. It should be a fluid, ongoing process that involves continued review and improvement. One of the best ways to achieve this objective is to allocate time once or twice each year to conduct a side-by-side assessment of your sources. As you evaluate both suppliers, ask yourself if one supplier consistently outperformed the other on key criteria. Some points to consider are as follows:
- Adherence to deadlines: Timeliness is a must in healthcare. Repeated failure to deliver in this area may warrant contract severing.
- Product quality: Defects, sub-par materials, and frequent warranty replacements are cause for concern for manufacturers of life-saving devices.
- Responsiveness: If your sources are not responding swiftly and professionally to your inquiries, then it might be time to consider a third source.
The Bottom Line
When undertaken carefully and strategically, dual sourcing can help OEMs save money and avoid production delays. By following the seven steps above, you can pave the way for a seamless move from single sourcing to dual sourcing.