Terumo Cardiovascular Systems (Terumo CVS), unwilling to play a game of chance or rely on pure luck when it came to managing its supply chain, cut out $1 million -- in one year -- by reducing its inventory by 36%. They achieved this cost savings through increased visibility into their supply chain.
Between cost of money, variable storage fees and obsolescence, inventory carrying costs can range from 15% to 25% of total inventory on an annual basis. Having the right product in the right place at the right time is one of the only ways companies can reduce costs and increase sales simultaneously.
Terumo CVS, a global manufacturer and distributor of a wide spectrum of products for the medical industry, has more than 1,500 finished good SKUS comprised of hardware such as heart-lung machines, disposables including blood oxygenators, and a steady flow of custom tubing pack orders. Given the delicate nature of the industry, every product manufactured is required to undergo strict quality testing and sterilization. In addition, Terumo CVS' added level of precaution to ensure the safety of its end user calls for a vigilant supply chain.
For instance, a single tubing pack, which is used during open-heart surgery, is manufactured in Ashland, Massachusetts and then shipped to New York for sterilization. Once completed, the tubing pack travels to Maryland and is incorporated with other components, packaged and transferred to one of the companys five distribution centers. Finally the finished product is shipped from the distribution center to the hospital and used on a patient undergoing open-heart surgery.
With so many product variations and indispensable steps in its supply chain mixed with seasonal demand, it is easy to comprehend the challenges inherent in Terumo CVS' supply and demand planning. Although the company had a forecasting system in place, it was not capable of tracking the numerous plants and distribution centers, making it unable to accurately account for the seasonality of its products.
"Believe it or not, even medical products are seasonal," says Kevin Doughty, Director of Supply Chain Management for Terumo. "Our three biggest sales months are October, January and March because people avoid having surgery during the holiday season."
In order to increase visibility into its multiple plants and distribution centers and to forecast the unique seasonality of its products, Terumo CVS implemented Demand Solutions Forecast Management and Requirements Planning in 2006.
The increased visibility into its supply and demand streams empowered the company to reduce its inventory by more than a third in one fiscal year -- a $1 million savings. In addition, Terumo CVS increased its inventory turns from 3.1 to 4.1. The companys fill rates were good before -- 97.5% in fiscal year 2006 -- but escalated to 99% for fiscal year 2007.
By implementing supply chain planning tools developed with the underlying philosophy that people are smarter than software, Terumo CVS has the ability to manage by exception using statistical formulas along with gut instinct. This allows for more accurate forecasts.
Terumo CVS' executives hold monthly Sales & Operations Planning meetings to make strategic decisions based on the forecasts. Since implementing the supply chain management software, Terumo CVS has the reliable information necessary to make top line decisions.
Bill Macdonald is Executive Vice President of Demand Solutions. The company provides supply management software for small and midsized enterprises. www.demandsolutions.com
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