Northeastern University D. Light Design Case Study Questions:What are the consideration and constraints d.light needs to take into account in establishing

Northeastern University D. Light Design Case Study Questions:What are the consideration and constraints d.light needs to take into account in establishing a distribution channel structure in India?Discuss how the choice of different channels might affect rural consumers in India.What would you recommend to d.light for its distribution channel choice? Why?MS Word document using the Turnitin dropbox – Outside Source needs to be cited! 18
DESIGNING AND MANAGING THE SUPPLY CHAIN
8. Consider a firm selecting a supplier of transportation services? What are the
advantages to using a truckload carrier? A package delivery firm such as UPS?
9. What are the advantages to a firm of high inventory levels? What are the disadvantages? What are the advantages of low inventory levels? The disadvantages?
10. What are some ways that redundancy can be built into a supply chain? What are
the advantages and disadvantages of building redundancy into the supply chain?
11. Consider Figure 1-5. What are the reasons for the increase in transportation costs?
Inventory costs? Does one affect the other? How?
Meditech Surgical
Three years after Meditech was spun off from its
parent company, Meditech captured a majority of the
endoscopic surgical instrument market. Its primary
competitor, National Medical Corporation, had practically invented the $800 million market just over a
decade ago. But Meditech competed aggressively,
developing new, innovative instruments and selling
them through a first-class sales force. The combination paid off, and Meditech had become a phenomenal success in a short period of time. Despite
the success, Dan Franklin, manager of Customer
Service and Distribution, was concerned about
growing customer dissatisfaction. Meditech had
recently introduced several new products that were
central to the entire Meditech product line. New
product introductions, which were critical to
Meditech’s strategy of rapid product development,
needed to be introduced flawlessly to protect
Meditech’s reputation and sales of other products. But
Meditech consistently failed to keep up with demand
during the flood of initial orders. Production capacity
became strained as customers waited over six weeks
to have their orders delivered. Poor delivery service,
which is fatal in the health care industry, was jeopardizing Meditech’s reputation.
perform an operation. As a result, procedures using
endoscopic techniques often provide substantial
benefits for the patient both physically and
financially. The procedures often shorten patient
recovery, which can translate into reduced surgical
expenses overall. Despite the benefits and the multidecade history of endoscopic technology, the
procedures have only become popular in the last
10 years. Only three years ago, the market for
endoscopic surgical instruments was expected to
double its size in five years. Growth beyond five
years also looked promising. Largo Healthcare
Company, Meditech’s parent company, decided to
spin Meditech off as an independent company
focused solely on producing and selling endoscopic
surgical instruments. Largo management hoped that
the new company would prosper without the distractions of other Largo businesses and capture
market share of endoscopic instruments as quickly as
possible.
Since its inception just over six years ago,
Meditech has produced innovative, low-cost products.
New products were brought to the market quickly and
pushed by an aggressive sales force. Old products
were updated with innovative features and presented
to the market as new products. Consequently, the
competition between Meditech and National Medical
centered on the continuous development and introduction of new products by both companies. A dozen
or more new products would typically be introduced
by Meditech in any given year.
COMPANY BACKGROUND
Endoscopic surgical techniques fall under a class of
surgical procedures described as minimally invasive.
Minimally invasive surgery, as opposed to traditional
open surgery, requires only small incisions to
Source: Copyright © 1995 by Massachusetts Institute of Technology.
This case was prepared by LFM Fellow Bryan Gilpin under the
direction of Professor Stephen C. Graves as the basis for class
discussion.
CHAPTER 1: INTRODUCTION TO SUPPLY CHAIN MANAGEMENT
While the development strategies were similar, the
sales strategies differed dramatically. National Medical
concentrated on selling to surgeons. Meditech’s sales
force concentrated on selling to hospitals, material
managers as well as to surgeons. Material managers
tended to be more concerned with cost and delivery
performance. The surgeons, on the other hand, focused
on product features. As the pressures increased on
health care costs, the importance of the material
manager’s purchasing position also increased.
Meditech was well positioned to take advantage of
this important shift.
The success of Meditech’s strategy quickly
became evident. Within six years, Meditech had
captured the leading share in the endoscopic surgical
instrument market. This was no small feat by any
market’s standards, but with surgical instruments this
was especially impressive. Market share changes in
the professional health care industry tended to take
place gradually. Surgeons and doctors often held onto
preferred manufacturers. Hospitals frequently used
group purchasing organizations (GP0s) that took
advantage of extended contracts with suppliers. The
process of “converting” a hospital to a new supplier
often took months of negotiation and convincing.
Most endoscopic surgical instruments are small
enough to fit into the palm of a surgeon’s hand.
They are mechanical in nature, typically having
several intricate mechanisms to provide the required
functionality. Materials used to produce the instruments include plastic injection—molded parts, metal
blades, springs, and so forth. In all cases of use,
surgeons use the instrument for one operation and
then immediately dispose of it. Instruments are never
resterilized and reused for another patient. All in all,
the Meditech product line consists of over 200
separate end-products.
DISTRIBUTION
Meditech distributes all its goods from a central
warehouse, using two primary channels—domestic
dealers and international affiliates—to distribute its
products from the central warehouse to endcustomers (i.e., hospitals). The first channel, for
domestic sales only, uses domestic distributors, or
dealers, to ship to hospitals. The dealers order and
receive products from multiple manufacturers,
including Meditech, typically stocking hundreds of
different products. Stocked products range from
19
commodity items, such as surgical gloves and
aspirin, to endoscopic surgical instruments. By using
dealers to supply products, hospitals do not need to
order directly from manufacturers for their diverse
needs. Additionally, since dealers maintain regional
warehouses all over the United States, the distance
between dealer warehouses and most hospitals tends
to be quite small. The short distance permits frequent
replenishments of hospital inventories; in some
cases, trucks from dealers drop off supplies once or
twice per day. Hospitals enjoy the frequent replenishments, which reduce hospital inventory and, consequently, reduce material costs.
The regional dealer warehouses act as independent
entities, autonomously determining when to order
new supplies and how much to order. Therefore,
while Meditech uses only four or five major distribution companies, it still receives orders from, and
ships to, hundreds of regional, individually run
warehouses. Each warehouse in turn ships to about a
dozen or more hospitals, resulting in thousands of
hospitals that receive Meditech products.
The distribution channel for international sales
uses Largo Healthcare’s international affiliates.
International affiliates are wholly owned subsidiaries
of Largo Healthcare residing outside of the United
States. As with domestic dealers, affiliates distribute
to hospitals in their regional area. However, in
contrast with domestic dealers, which may locate
within just a few miles of customer hospitals, an
affiliate ships product throughout an entire country.
From Meditech’s point of view, affiliates’ orders
essentially look no different than dealers’—international affiliates submit orders to Meditech and
Meditech fills them with available product.
INTERNAL OPERATIONS
The production processes to manufacture endoscopic
instruments are composed of three major steps:
assembling of component parts into individual or
“bulk” instruments, packaging one or more bulk
instruments into a packaged good, and sterilizing the
packaged goods. Each of these steps is described
below.
Assembly
The assembly process is manually intensive.
Component parts arrive into the assembly area from
suppliers following a brief inspection by Quality
20
DESIGNING AND MANAGING THE SUPPLY CHAIN
Assurance (QA). The parts are placed into inventory Sterilization
until ready for use by one of several assembly lines. The sterilization process uses a large Cobalt
Each assembly line is run by a team of cross- radiation sterilizer. After batches of packaged
trained production workers who can produce any of instruments (cardboard container, plastic container,
several instruments within a product family. Line and instruments) are placed into the sterilizer, the
changeovers within a family are quick and inex- sterilizer is turned on for about an hour. The
pensive, merely requiring a warning from the pro- radiation penetrates cardboard and plastic to destroy
duction team leader and a supply of the appropriate any potentially harmful contaminants. The sterilizer
component parts. The typical cycle time for assembly can sterilize as much product as will fit inside its four
of a batch of instruments—the time required to walls. Capacity limitations have not been a problem
schedule assembly of a batch of instruments and then thus far. Sterilized instruments are immediately
actually assemble them, assuming that component moved into finished goods inventory.
parts are available in component parts inventory—is
on the order of two weeks. Lead time for component The Operations Organization
parts is on the order of 2-16 weeks. Assembled The entire operations organization reports up
instruments are moved from the assembly area into through the vice president of Operations, Kenneth
bulk instrument inventory, where they wait to be Strangler (see Figure 1-6 for an organization chart
packaged.
for Operations). Functions immediately reporting to
Strangler include several plant managers (one
Packaging
for each of Meditech’s four manufacturing
The packaging process makes use of several large facilities), a director of supplier management, and a
packaging machines. The machines direct bulk director of planning, distribution, and customer
instruments into plastic containers and then adhere a service. Other vice presidents (not shown) exist for
flexible sheet of material over the top of the container. marketing and sales, product development, and
The entire plastic container is then placed into a finance. All vice presidents report to the highest
finished 16-cardboard container and shipped imme- officer in the company, the president of Meditech.
diately to the sterilizer. Capacity at the packaging area The plant managers in the organization have responhas not restricted output.
sibility for production personnel, engineering
V.P. Operations,
(K. Strangler)
Plant Manager #1
Plant Manager #2
Director
Supplier
Management
Director
Planning, Distribution, and
Customer Service
Business
Unit
Business
Unit
Central Planning
(J. Bolbrede)
Customer Service
and Distribution
(D. Franklin)
Quality
Support
Svcs.
Material
FIGURE 1-6 The Meditech organization chart for operations.
Inventory
(C. Stout)
Logistics
(B. Slokoski)
CHAPTER 1: INTRODUCTION TO SUPPLY CHAIN MANAGEMENT
technicians, quality assurance, support services, and
material supply for their respective facilities.
Reporting directly to the plant managers are
several business units. Each business unit has full
responsibility either for the assembly of a particular product family or, in the case of packaging
and sterilization, for an entire production process.
The most important job of each assembly business
unit is to meet the production schedule every week.
Meeting the schedule ensures a constant supply of
bulk instruments to the packaging/sterilization
process. The process of determining assembly and
packaging/sterilization schedules will be discussed
below.
Also reporting to the vice president of Operations
are Supplier Management and Planning, Distribution,
and Customer Service. Supplier Management works
on relationships with suppliers, including establishing purchasing contracts and finding new
suppliers if necessary. The Planning, Distribution,
and Customer Service department does everything it
can to ensure that customers receive product when
needed. The positions within the Customer Service
department include the manager of Customer
Service and Distribution, Dan Franklin; the manager
of Central Planning; the manager of Inventory; and
a manager of Logistics. Customer Service deals
with everything from occasional customer complaints to establishing strategies to improve delivery
service to customers. Customer Service representatives work with dealers and affiliates to keep them
updated on product delivery schedules and
problems. Often this responsibility places the
Customer Service representative in direct contact
with hospital personnel.
While Customer Service handles issues concerning
the movement of product out of finished goods
inventory, Central Planning ensures that adequate
finished goods are available to meet incoming orders.
They develop monthly production plans that are used
by the business units to determine weekly and daily
schedules.
Charles Stout, the Inventory manager, determines
the finished goods inventory policy and establishes
parts “and bulk inventory guidelines for the business
units. When a mandate to reduce inventory is passed
down from higher levels of management, the Inventory
manager must determine where inventory can be
reduced and then begin enforcing those reductions.
Through recent efforts, Stout had successfully
21
eliminated several million dollars of obsolete and
slow-moving inventory.
PRODUCTION PLANNING AND SCHEDULING
The production planning and scheduling process is
broken down into two parts: planning, based on
monthly forecasts, of assembly and component parts
orders and daily scheduling of packaging and sterilization based on finished goods inventory levels.
During the fourth quarter of each fiscal year, the
marketing and finance organizations determine an
annual forecast. The annual forecast is then broken
down proportionately, based on the number of weeks
in the month, into monthly forecasts. As the year progresses, the Central Planners work with the Marketing
organization to make forecast adjustments according
to market trends and events. At the beginning of each
month, the month’s forecasts are adjusted and agreed
upon by the Marketing organization and the Central
Planners.
The planning of assembly for a particular
instrument begins with the monthly demand forecasts.
Based on the month’s forecast, the Central Planners
determine the amount of product that needs to be
transferred from bulk inventory into finished goods
inventory to “meet” the expected demand. This
amount, termed the finished goods “transfer requirement,” is determined by subtracting the current
finished goods inventory level from (1) the demand
forecast for the month plus (2) the required safety
stock. (The current safety stock policy is to maintain
three weeks’ worth of demand).
The transfer requirements, once completed for all
200-plus product codes, are passed throughout the
organization for approval. This process typically
takes place one to two weeks into the current month.
While not actually used to schedule assembly or to
alter the packaging and sterilization processes, the
transfer requirements provide an estimate of the
required overall production for the month. Any
problems in being able to deliver to the plan can then
be identified and resolved.
Assembly schedules and replenishment orders for
parts are based on the monthly demand forecasts
and current inventory levels. By mid-month, the
completed monthly plans, which contain the monthly
forecasts, are sent to the assembly business units. A
planner in the business unit plugs the forecasts into a
Materials Requirement Planning (MRP) system,
22
DESIGNING AND MANAGING THE SUPPLY CHAIN
which determines weekly production schedules and
component parts orders for each finished product.
The MRP system determines assembly schedules
and parts orders based on (1) the monthly forecasts;
(2) the lead times for assembly, packaging, and sterilization; and (3) current parts, bulk, and finished
goods inventory levels. Although the MRP calculation may be run several times each week, the
planner is careful not to change weekly production
schedules with less than a week’s notice. (A
schedule change often requires rescheduling workers
and procuring more component parts. One week’s
notice for responding to scheduling changes,
therefore, has been deemed adequate by the business
unit managers.)
In contrast to the forecast-based scheduling of
the assembly operation, the packaging and sterilization operations are scheduled based on asneeded replenishment of finished goods inventory.
For purposes of scheduling, the packaging and sterilization operations are considered one operation
because bulk instruments flow through packaging,
into the sterilizer, and into finished goods without
being inventoried. (See Figure 1-7 for a diagram of
the entire production process.) The entire
packaging/sterilization process can be completed
for a batch of instruments in about one week. The
scheduling of packaging/sterilization is done on an
order point/order quantity (OP/0Q) basis (i.e.,
when finished goods inventory drops below the predetermined order point, OP, a replenishment order
for more packaged/sterilized product is initiated;
the size of the order in terms of number of
instruments is always equal to the pfedetermined
order quantity, OQ).
Another way to view the scheduling process is
to think of material as being “pushed” through
assembly into bulk instrument inventory and as
being “pulled” through packaging/sterilization
into finished goods inventory. The push through
assembly is based on the monthly forecast
determined before the month’s demand actually
arrives. The pull through packaging/sterilization
simply replenishes what was sold from finished
goods the day before.
NEW PRODUCT INTRODUCTIONS, HIGH LEVELS
OF INVENTORY, AND POOR SERVICE LEVEL
Over the past several years, Meditech has introduced
dozens of new products into the market, mostly by
updating existing products. Meditech plans to
continue this strategy of continuously obsoleting its
own products by constantly introducing innovations.
While the innovative products have been well
accepted by the marketplace, each new product
introduction has resulted in a nightmare of supply
problems. Dan Franklin felt that customers were
beginning to tire of the poor service resulting from
each introduction. Through many meetings with
hospital material managers, Dan began to realize the
full scope of his customers’ frustrations.
Franklin could not figure out why Meditech consistently had shortages with each introduction.
Forecasting had definitely been a problem, but
determining its extent was difficult. Data to measure
forecast accuracy had not previously been tracked,
nor had forecasts and demand information been
kept. Data gathering requires a lengthy process of
going back through hard copies of prior monthly
plans and entering the information by hand into a
computer. Even if a better methodology could be
determined, forecasts can only be improved by
so much.
In addition to new product introduction problems,
finished goods inventory levels appeared to be
remarkably high. A consultant had recently been
hired to study Meditech’s inventory. Her findings
indicated that overall inventory could be reduced by
at least 40 percent without an impact on the delivery
Assembly
Packaging
sterilization
Order point/
Order quantity
FIGURE 1-7 The Meditech production…
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