Physio-Control pioneered the development of defibrillator technology and still has more than twice the market share of its nearest competitor. By John H. Sheridan At A Glance
- Pioneered the market for defibrillation equipment used by hospitals and emergency medical technicians.
- Manufacturing cycle times cut from 65 days to 6.5 days by world-class methods introduced in the 1980s; another 50% cut since then.
- Order-to-shipment leadtimes sliced by 75%.
- A pioneer in establishing "supportive work programs" intended to mainstream workers with moderate to severe disabilities; currently provides assembly employment for 12 people who are developmentally disabled and a 20-year veteran of the company who is blind.
- In 10 years, first-pass assembly defects reduced 97%.
- Since 1992, in-process defect rate slashed from 2,800 ppm to 710 ppm.
- Scrap rate trimmed by 50% -- to 0.33% of sales -- since 1993.
- On-time delivery rate at 98.7% in a build-to-order system.
- WIP inventory reduced 23% since 1991, on the heels of significant reductions in the1980s.
- Machine availability rate better than 99%.
- New-product development cycle compressed by 40%.
- Went public with an IPO in December 1995.
It's understandable why the 950 employees at Physio-Control Corp. exude an obvious sense of pride about what they do -- and how they do it. Over the years, the products they make have helped to save countless thousands of lives. When an emergency-medical-service unit arrives on the scene where someone is undergoing cardiac arrest, chances are that one of the medical technicians will be toting one of Physio-Control's portable heart monitor/defibrillator/pacemaker units. Anyone who has watched TV medical dramas such as "E.R." is familiar with the drill: after positioning two paddles on the patient's chest, a technician, fireman, or emergency-room doctor applies one or more electric shocks, restoring the patient's heartbeat to a normal rhythym. (In medical jargon, it's known as "termination of ventricular fibrillation.") Physio-Control -- whose manufacturing and corporate headquarters are located on the same suburban Seattle campus -- pioneered the development of defibrillator technology, invented in the 1950s by the company's founder, Dr. Karl William Edmark. Its early products were bulky and could be used only in a hospital setting. But in the mid-1960s, the firm developed lighter-weight portable units that forever changed the face of emergency medical service. Three decades later, Physio-Control is still the undisputed leader in the market it created, ranking No. 1 in every segment worldwide -- with a fiercely loyal customer base and a market share more than double that of its nearest competitor. In a market where product reliability is critical, the $170 million-a-year firm built its reputation on its ability to provide high-quality, durable products. "We know there are people alive today who wouldn't be if we weren't in business," says President and CEO Dick Martin. "If anybody in the world ought to be preoccupied with quality, it is this company." That's why Physio-Control has long emphasized designing quality into its products upfront -- and, as Les Tiffany, vice president for corporate quality improvement, puts it, on "building products to NASA standards." Its portable units -- such as the LIFEPAK 10 model -- have to be particularly rugged to withstand the harsh treatment they are often subjected to in the field. In product demonstrations, company sales representatives have been known to pick up the instruments (which contain sensitive electronic components) and heave them onto the floor as if they were bowling balls -- a maneuver known as "the salesmen's toss." As in the old Timex watch commercials, they then proceed to show that the products still work. But the real proof of durability is in the long-term field performance data. Mean time between failure (MTBF) for Physio-Control's devices- -- typically measured as mean time between warranty repair -- is now more than than 20 years, about triple what it was just five years ago. That statistic offers ample evidence that the company takes its continuous quality improvement (CQI) program seriously. Elements of the CQI effort include: Paying close attention to the "voice of the customer" early in the product-design process, through such practices as sponsoring user focus groups and participating in more than 30 medical, nursing, and paramedical conventions annually. Subjecting new products to intensive scrutiny. Prototypes undergo "an unbelievable amount of validation and testing," stresses Bob Guezuraga, executive vice president and chief operating officer. Using concurrent engineering practices that get manufacturing engineers and purchasing people involved early in the product-development cycle. "A core competency of this company is in purchasing," Guezuraga says. "Our purchasing people have the ability to work internally with our engineering organization. They become part of the product-development team -- and work with that team in identifying vendors who can meet our specifications." Emphasizing design for manufacturability/assembly (DFMA), which has contributed significantly to defect reduction as well as dramatic compression of factory cycle time. A Total Quality environment in which employees in empowered work teams have assumed personal responsibility for the quality of their work -- a primary reason for the 97% reduction in first-pass assembly defects during the last decade. Extensive quality-data tracking -- from the raw-material stage, through production and field performance -- coupled with a closed-loop corrective-action system. Besides capturing and trending the data, the system includes statistical "triggers" that determine when a closed-loop investigation is needed. The objective is to pinpoint the root cause of problems and fix them within prescribed time limits. "The time defaults ensure a sense of urgency," says Robert May, vice president-manufacturing. "For example, if on the shop floor we are in a condition where a trigger has been tripped, we have until the end of the second working day to get to a point where we can say, 'This is not a risk to our customers.' If we can't say that with confidence, we stop shipment." While its quality performance continues to improve, many of Physio-Control's most significant strides in manufacturing occurred in the late 1980s. Propelled by its Total Quality initiative, the company made quantum leaps toward world-class performance at a time when many manufacturers were still wondering whether the term "world-class" had any real meaning. Adopting a JIT/continuous-flow approach, the medical-device maker optimized its production layout -- creating assembly cells, eliminating work orders, and establishing a visual system based on kanban methods. In final assembly, it slashed lot sizes from 125 to just one, creating a one-piece-flow environment. The results were impressive. For example, between 1987 and 1991, manufacturing cycle time was compressed from 65 days to a mere 6.5 days, and first-pass yields in final assembly climbed from 86% to 98.5%. "By 1988 no company in the Greater Seattle area or in our industry was close to us in our pursuit of world-class manufacturing," recalls Tiffany. Gurus such as Richard Schonberger cited Physio-Control as a model of advanced manufacturing. The American Electronics Assn. named it the 1980s "Manufacturer of the Decade" in the Northwest. A few years later, the company's real mettle was tested when, following a "routine" Federal Drug Administration (FDA) inspection, it received a "notice of findings" that indicated the firm was not in compliance with certain agency standards for documentation and controls -- although the citation did not reflect the field performance of its products. The FDA notice, issued in May 1992, came as a jolt out of the blue. The federal agency had adopted a get-tough posture in response to Congressional criticism about its regulatory-enforcement policy. To little avail, customers -- and even competitors -- came to Physio-Control's defense. With backing from Eli Lilly & Co. -- its parent company prior to a leveraged management buyout in 1994 -- Physio-Control opted to cease operations until the FDA's concerns could be resolved. "There we were," recalls Tiffany, "the worldwide market leader in the industry we had pioneered in the 1960s, with an installed base of over 100,000 units in the U.S. alone, a benchmark for continuous quality improvement -- and out of business." It would be almost a full year before Physio-Control began shipping products again to its U.S. customers, although export approvals were received within a few months. The shutdown was "a voluntary gesture on our part . . . to show just how serious we were about meeting [the FDA] requirements," says Mike Willingham, VP for quality and regulatory affairs. "We never envisioned that it would last more than a few days or weeks." But formulating a plan that would fully satisfy the FDA took much longer than expected. Although the shutdown was costly, it produced amazing reassurance about the company's position in the minds of those who depend on its products. Incredibly, 80% of the customers with products on order chose to wait for Physio-Control to get back into business rather than switch to competing products. When it finally began shipping again, it had $70 million in back orders. Some customers waited as long as two years. "I would have expected some level of loyalty," says Martin, who had joined the company not long before the FDA incident, "but never to that degree." In a sense, that loyalty was the payoff for years of paying close attention to customer needs and putting the customer first. Over the years, Physio-Control has provided accredited training programs, at no charge, for nearly 20,000 paramedics, nurses, and other emergency-care providers. Its field-service organization is geared for quick response. If a LIFEPAK unit goes down, a replacement is provided within 24 hours -- even though this requires a substantial investment in inventory. Despite the financial and psychological pain of the FDA-related shutdown, the company demonstrated a talent for capitalizing on adversity. It is stronger today because of that experience, Willingham believes. "There were definitely areas where we needed to improve," he says. "And we did that. We took a very critical look at ourselves and put together a very aggressive improvement plan for all of our quality systems." During the production hiatus, the company identified every area where product data could be captured, from receipt of material to retirement of products from service, and then adopted measures to ensure that the information is funneled into an integrated database that supports its closed-loop corrective-action system. Other advances during the last five years have included structural changes, such as the introduction of multifunctional teams in a focused-factory configuration. For example, the LIFEPAK 9 team includes an electrical engineer, a mechanical engineer, a test engineer, and a material expeditor who report to the team leader. "This avoids a lot of the waste that comes with cross-functional squabbling over resources and priorities," says May. "And it tends to drive accountability down to the people who actually do the work." The plant now has five production teams that are responsible for their own production scheduling. "If a team has a parts shortage and falls behind schedule, they determine how they will get back on schedule -- whether they'll work overtime, work on Saturday, or whatever," May notes. At daily team "huddles" or weekly team meetings, workers have a voice in solving problems or upgrading operations. "We'll throw out ideas on how to improve the line," says Terry Carney, now an assembler on the LIFEPAK 11 team. A while back, he worked in the LIFEPAK 9 section. "We fine-tuned that area to perfection," he says with a wide grin. On one occasion, team members recommended outsourcing assembly of cathode-ray tubes, which shortened assembly cycle time by 20 minutes. In a strategic move that recognizes the improved capabilities of its supplier-partners, Physio-Control has turned to outsourcing for an increasing amount of its component production -- including injection-molded items and printed circuit boards (PCBs) -- while adopting a vendor-managed inventory strategy. Its in-house PCB line, which includes two-sided surface-mount (SMT) equipment, is being phased out. Part of the rationale for outsourcing is to gain access to state-of-the-art production facilities, as well as to take advantage of cost savings associated with contract vendors' larger-volume purchases of components. Moreover, with SMT technology becoming more and more expensive, "We couldn't justify the expenditure to stay in the technology game," May points out. "We want to do the things we are uniquely qualified to do. And this isn't one of them." The outsourcing strategy is tightly coupled to vendor-managed inventories. For example, PCB suppliers, who will be integrated into Physio-Control's master production schedule via EDI, will be required to keep about two weeks' worth of inventory on consignment in the Redmond plant. "Their job is to manage the safety stock in conjunction with both planned MRP and actual consumption," May explains. The vendors are paid after their components are consumed in production and "backflushing" of the MRP system adjusts inventory records. The backflush triggers an invoice for the components. As Physio-Control continues to fine-tune its operations, perhaps it shouldn't be surprising that employees have a great deal of confidence in the future. When it went public with an IPO in December 1995, approximately 40% of the workforce bought stock in the company.