please rewrite answers without plagerising

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.

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 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.

_______________
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.

Page 19While 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 (GPOs) 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 end-customers (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 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 Page 20Assurance (QA). The parts are placed into inventory until ready for use by one of several assembly lines. Each assembly line is run by a team of cross-trained production workers who can produce any of several instruments within a product family. Line changeovers within a family are quick and inexpensive, merely requiring a warning from the production team leader and a supply of the appropriate component parts. The typical cycle time for assembly of a batch of instruments—the time required to schedule assembly of a batch of instruments and then actually assemble them, assuming that component parts are available in component parts inventory—is on the order of two weeks. Lead time for component parts is on the order of 2–16 weeks. Assembled instruments are moved from the assembly area into bulk instrument inventory, where they wait to be packaged.

Packaging

The packaging process makes use of several large packaging machines. The machines direct bulk instruments into plastic containers and then adhere a flexible sheet of material over the top of the container. The entire plastic container is then placed into a finished 16-cardboard container and shipped immediately to the sterilizer. Capacity at the packaging area has not restricted output.

Sterilization

The sterilization process uses a large Cobalt radiation sterilizer. After batches of packaged instruments (cardboard container, plastic container, and instruments) are placed into the sterilizer, the sterilizer is turned on for about an hour. The radiation penetrates cardboard and plastic to destroy any potentially harmful contaminants. The sterilizer can sterilize as much product as will fit inside its four walls. Capacity limitations have not been a problem thus far. Sterilized instruments are immediately moved into finished goods inventory.

The Operations Organization

The entire operations organization reports up through the vice president of Operations, Kenneth Strangler (see Figure 1-6 for an organization chart for Operations). Functions immediately reporting to Strangler include several plant managers (one for each of Meditech’s four manufacturing facilities), a director of supplier management, and a director of planning, distribution, and customer service. Other vice presidents (not shown) exist for marketing and sales, product development, and finance. All vice presidents report to the highest officer in the company, the president of Meditech. The plant managers in the organization have responsibility for production personnel, engineering 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.

FIGURE 1-6 The Meditech organization chart for operations.