1. I am Calvin Lambert and today, I will present strategies to address the supply chain challenges faced by Medical Technologies Corporation (MTC). Our focus is on mitigating the impact of the 2.3% excise tax on revenues imposed by the Affordable Care Act while maintaining operational excellence and profitability.
2. To offset the excise tax impact and sustain MTC’s profitability, I propose streamlining supply chain operations and re-evaluating key cost drivers. The main actions include optimizing inventory management, leveraging technology for visibility and control, and revising the sales representative compensation model. These changes are expected to reduce costs significantly while maintaining competitive advantages. (Table 2).
The goal is to maintain net earnings at levels similar to the 2012 peak of $887.70M. From the income statement: Net Earnings = Earnings Before Income Taxes - Income Taxes Earnings Before Income Taxes = Operating Income + Other Income (-Expense) Operating income depends on Revenue, Cost of Goods Sold (COGS), and Operating Expenses (R&D, SG&A, Intangible Amortization, Other).
Adjusting revenue will directly impact our overall income and help offset any changes in costs or expenses. However, managing and optimizing income taxes effectively also plays a crucial role in maintaining net earnings, as it impacts the final amount retained after all expenses.
1. Targeting Net Earnings (with 2.3% Excise Tax)
The 2.3% excise tax directly impacts revenue and profitability. The target is to maintain net earnings of $887.70M, as achieved in 2012, despite the additional tax burden.
Step 1: Calculate the Revenue Impact
If revenue is subject to a 2.3% tax, the effective revenue after-tax would be reduced as follows:
Tax Impact on Revenue = Revenue×2.3%
For instance, in 2014: Excise Tax=$5,953.86×0.023=$136.94M
Step 2: Adjust Other Costs to Maintain Target Net Earnings
Given that the excise tax lowers net revenue, other costs must be reduced proportionally. Using 2014 as a baseline, the company’s net earnings were $663.96M, which is $223.74M below the target of $887.70M. To bridge this gap:
Eliminate inefficiencies in costs (focus on COGS, R&D, SG&A).
Prioritize profit-generating investments (e.g., R&D that leads to high-margin
products).
Optimize income tax strategies to mitigate the impact of reduced revenue.
3. Areas of Improvement 1. Inventory Management o Current issues: Excessive inventory levels (~6 months of supply), inefficient distribution models, and multiple touchpoints leading to delays. o Proposed action: Implement smart kiosks for surgical kit storage at hospital locations. This reduces transportation, provides last-mile visibility, and cuts excess inventory costs. o Expected outcome: A leaner inventory system aligned with real-time demand. 2. Sales Representative Model o Current issues: Sales commissions account for a substantial portion of SG&A expenses (~45% of revenue). o Proposed action: Shift to a hybrid compensation model with lower base salaries and outcome-based incentives, focusing on value addition during complex surgical procedures. o Expected outcome: Reduced operational costs while retaining sales effectiveness. 3. Sterilization Process Optimization o Current issues: Off-site sterilization adds 72 hours and additional costs to the supply chain. o Proposed action: Bring sterilization in-house or partner with distributors capable of handling sterilization directly. o Expected outcome: Faster turnaround times and reduced handling costs. 4. Distribution Network Adjustment o Current issues: Reliance on third-party distributors with less control over inventory and higher costs. o Proposed action: Transition to a direct-to-hospital model via 3PLs to improve control and margins. o Expected outcome: Increased revenue through retail pricing and streamlined operations. Suggestions for Improvement 1. Consolidate Sterilization Process • Change: Move sterilization in-house or integrate sterilization capabilities into the distribution network. • Improvement: Eliminates the need for additional transport steps (to/from sterilization). • Financial Outcomes: Saves on transportation costs and reduces handling delays, accelerating product flow. 2. Optimize Inventory Management • Change: Implement RFID tags at all stages for real-time inventory tracking. Transition to Just-in-Time (JIT) delivery systems to align supply with hospital demand. • Improvement: Reduces excess inventory in transit and storage. Enhances visibility into the supply chain. • Financial Outcomes: Reduces holding and wastage costs, improving operational efficiency. 3. Leverage Direct-to-Hospital Distribution • Change: Expand the use of 3PL services and reduce reliance on distributors. • Improvement: Allows for faster deliveries and reduces dependency on distributors. • Financial Outcomes: Captures higher margins by selling directly to hospitals, bypassing distributor markups. 4. Smart Kiosks at Hospitals • Change: Deploy smart kiosks for storing kits directly at hospitals, enabling self- checkout by surgical staff. • Improvement: Reduces the need for sales representatives to carry inventory into operating rooms. • Financial Outcomes: Cuts storage costs at hospitals and reduces dependence on high-cost sales representatives. 5. Streamline Return Logistics • Change: Use regional distribution centers to handle returns instead of routing everything back to the manufacturer. • Improvement: Speeds up the replenishment and redistribution of unused kits. • Financial Outcomes: Reduces transportation costs and shortens the return cycle.
Alternative Approaches 1. Transition to Smart Kiosks at Hospitals: • Replace trunk stock with strategically located kiosks or storage units at hospital locations. • These kiosks would hold pre-approved inventory for immediate use, reducing dependency on sales reps. 2. Centralized Inventory Management with Improved Logistics: • Consolidate inventory at regional hubs or distribution centers with rapid delivery capabilities. • Use real-time tracking systems (e.g., RFID) to provide transparency and align supply with demand. 3. Hybrid Approach for Strategic Locations: • Maintain trunk stock only for regions or clients where emergency demand is frequent and logistical infrastructure is weak. • In other regions, rely on centralized storage or 3PL partners for direct delivery. Financial Implications 1. Cost Savings: • Eliminating trunk stock reduces holding costs, obsolescence, and redundancy. • Smart kiosks provide a more controlled and accountable inventory system. 2. Revenue Impact: • Improved logistics through centralized or regionalized distribution ensures reliable delivery without overstocking. • Sales representatives can focus more on selling, increasing revenue potential. 3. Customer Satisfaction: • Reliable and faster inventory replenishment through kiosks or optimized distribution ensures hospitals remain stocked without incurring high costs. The current practice of holding trunk stock should not continue as the default approach for MTC due to its inefficiencies and high costs. However, maintaining a hybrid approach, where trunk stock is retained in high-need or remote locations, can address logistical challenges without burdening the entire supply chain. Transitioning to smart kiosks and centralized inventory systems will streamline operations, reduce costs, and improve financial performance. Changing forecast methodology 1. Methodology Differences
The main difference lies in the simplicity and focus of my approach compared to what MTC initially used.
• MTC's Methodology: o A reliance on a generalized approach like cumulative averaging, which does not account for the inherent seasonality of the data. o A lack of alignment between the forecast and the actual monthly variations in demand. o Their method did not sufficiently capture recurring patterns or trends, leading to large forecast errors. • My Approach: o I used a naive forecasting method, which assumes that the demand for each month can be accurately forecasted using the demand from the same month of the previous year. This approach worked well because it inherently accounts for seasonality, which is a dominant pattern in the data. o No additional adjustments, such as growth factors or smoothing, were applied. The simplicity of this method allowed it to align closely with historical patterns without overcomplicating the forecast. 2. Results Comparison
• Accuracy: o My forecast achieved a MAPE of 3%, a dramatic improvement over MTC's 114%. This shows that my method closely reflects actual demand patterns and provides a highly reliable basis for planning. • Predictive Power: o My forecast is directly tied to historical demand patterns, making it intuitive and better suited to capture recurring trends. 3. Improvements and Practical Impact
• Significant Reduction in Error:
o The low MAPE means my method provides highly accurate predictions, reducing the risks of underestimating or overestimating demand. • Enhanced Planning and Operational Efficiency: o Inventory Management: Avoiding overstocking or stockouts. o Production Scheduling: Aligning production levels more closely with actual demand. o Cost Efficiency: Minimizing costs associated with inaccurate forecasts. • Simplicity and Practicality: o My method is straightforward and easy to implement, requiring minimal data manipulation while delivering excellent results. In Summary
My forecast differs from MTC’s in its ability to focus on seasonality, leveraging the same- month demand from the previous year to predict future demand with high accuracy. This simple yet effective approach led to significant improvements in accuracy, as evidenced by the reduction in MAPE from 114% to just 3%. The improvement ensures more reliable demand forecasting, enabling better decision-making and operational outcomes.
4. Resources Needed • Technology: Implementation of RFID systems for inventory tracking and smart kiosks at hospital locations. • Personnel: Training staff in lean supply chain principles and new inventory management systems. • Budget: Initial investment for infrastructure upgrades, including in-house sterilization facilities and smart kiosks. • Partnerships: Collaborate with logistics providers for efficient 3PL services.
5. Risks and Contingencies
1. Resistance to Change o Risk: Pushback from sales teams and hospital partners. o Mitigation: Transparent communication of benefits and pilot programs to demonstrate effectiveness. 2. Budget Overruns o Risk: Higher-than-expected costs during the transition phase. o Mitigation: Develop a phased implementation plan and include a contingency fund. 3. Operational Disruptions o Risk: Short-term delays during process changes. o Mitigation: Execute changes during low-demand periods and ensure buffer stock availability. 4. Adoption of Technology o Risk: Hospitals and staff might be slow to adopt new systems. o Mitigation: Provide training and dedicated support during the rollout phase.
Conclusion This proposal balances cost savings with operational efficiency and positions MTC to navigate the evolving healthcare environment successfully. I look forward to your feedback and any questions you may have.
