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It’s no secret that the orthopedic industry is contending with global and economic headwinds that make product demand forecasting difficult. Uncertainty in the geopolitical and economic climate has only exacerbated the issue.
Plus, shrinking margins, rising labor and material costs are straining orthopedic manufacturers. “We’re seeing out-of-cycle RFQs requesting 50% price reductions almost every week,” said Kris Carter, Supply Chain Director at Total Joint Orthopedics (TJO). “It feels like we’re being squeezed from the cost side and the reimbursement side.”
Carter — whose daily focus involves implementing cost-reduction strategies, reducing lead times, increasing order flexibility, maintaining product quality and avoiding stockouts — pointed to the expense of carrying high inventory levels and fragmented, multi-tiered supply chains. “It’s really difficult to control costs that way,” he said.
Steve Rozow, General Manager of Mach Medical, said OEMs are pushing pricing pressure onto contract manufacturers, while the demand for new manufacturing technologies, material costs and inflationary dynamics hit from the other direction.
The current environment is demanding for both sides of the product development partnership, but OEMs and contract manufacturers can team up to make the best of a difficult situation.
Inventory Reduction
Drawing on historical analysis and industry connections, Rozow estimates that inventory costs conservatively cut into about 8% of a company’s total revenue. “That rivals what many orthopedic OEMs are spending on R&D,” he said. “It really puts into perspective just how significant the hidden costs of inventory can be.”
According to Rozow, surgical set configuration and circulation requirements are key drivers of this burden, compounded on the manufacturing side by long lead times and economic order size constraints.
Rozow described how OEM inventory is typically segmented into three categories: high-running SKUs, which usually generate about 60% of revenue and turn at a healthy, competitive rate; mid-running SKUs, which account for about 30% of revenue; and outlier SKUs, which generate 5% to 10% of revenue and often make up the bulk of the inventory burden for OEMs.
“Ideally, the mix of inventory to revenue contribution would be balanced across all three groups,” he said. “The goal is to build a manufacturing system, and eventually a larger supply chain, that moves toward that model. Reducing excess inventory and aligning costs with revenue can significantly relieve the burden that OEMs face.”
Rozow explained the not-so-obvious costs that are associated with maintaining inventory levels. “We all understand what standard cost is in our COGS,” he said. “But when you roll up the cost to carry that inventory, that’s where you uncover the hidden costs of tying up capital over time.”
He pointed to the example of a knee femur implant where traditional batch production requires large amounts of stock sitting in warehouses and sets: “We’re all chasing $5 or $10 in savings on a per-piece basis, but the real value is locked up in attacking this inventory challenge.”
Rozow talked about taking that approach one step further by aligning manufacturing output directly with surgical plans.
“If you can supply the inventory needed for a single case and build it for that surgery, you’ve really unlocked value,” Rozow said. “In the case of a femur, that could mean as much as $400 in savings.
“Shorter lead times and flexible lot sizes reduce not only warehouse stock, but also the inventory locked up in sets,” he continued. “That creates huge value beyond competing on piece cost alone and helps customers tremendously.”
Inventory optimization is clearly a critical lever. “Using inventory that is already in your network is the most effective way to drive success, and it doesn’t require spending additional money,” Carter said. “Working with suppliers that stock forgings, castings and semi-finished materials also helps. When demand changes, you can respond quickly, faster than the standard 16- to 20-week lead time.”
Continually monitoring and adjusting safety stock strategies is also helpful. “The market changes so quickly. Something that was a fast mover one week might not be the next,” Carter said. “Making sure your safety stock aligns with the sales velocity of product families is essential to avoiding overstocking or understocking.”
Carter segmented TJO’s inventory and said about 50% of the company’s sales came from six products. That information helped him determine where to invest his time and energy to optimize field and consignment inventories.
“It was easier said than done,” Carter acknowledged. “You won’t always be as successful as you want to be, but the principle remains the same. Put inventory in the right place so it can be sold instead of sitting unused.”
Time to Market
While the industry’s long product lifecycles allow for some flexibility, Rozow emphasized the importance of speed. “The sooner a company can reach the peak of the product life cycle — where revenue and profitability are maximized — the stronger the impact on their P&L,” he noted. “Whatever we can do on the manufacturing end to compress that timeline is enormously beneficial to our customers.”
Rozow believes contract manufacturers can help OEMs achieve faster market entry while reducing inventory demands. “A manufacturing platform that helps companies get to market quickly, without locking them into high-inventory dynamics, can have a significant impact on relieving that profit margin squeeze,” he said.
Long manufacturing lead times create another challenge. “If it takes 20 weeks to build something, you’re relying on the accuracy of a forecast that far out,” Rozow said. “Often, those forecasts simply aren’t good, or even close to accurate, especially for outlier SKUs.”
According to Rozow, contract manufacturers should offer lean manufacturing techniques that support short lead times and flexible lot sizes, including efforts to reduce machine tool changeover times and standardizing fixturing approaches and product flow throughout the facility.
That balance allows Mach Medical to deliver cost-per-piece efficiencies while also addressing other areas of a customer’s P&L. “We don’t ignore the work it takes to achieve cost benefits per unit,” Rozow said. “But we’re equally focused on helping customers contain costs across their entire business.”
Establishing shorter lead times is also important, Carter noted. “Things can change in a second. We’ve seen inventory skyrocket unexpectedly,” he said. “Having a three-, six- or eight-week lead time allows us to respond and support sales with available inventory.”
Strategic Partnerships
Carter said engaging contract manufacturers in DFM and value engineering, such as tolerancing or refining inspection criteria, allowed TJO to make small adjustments on non-critical implant or instrument features, ultimately helping to drive down costs.
He also identified the RFQ process as a strategic lever for cost reduction rather than a race to the bottom for the lowest price.
“It’s about total value — cost, quality, lead time and flexibility,” Carter said. “OEMs need to partner with contract manufacturers that allow them to be flexible, so they don’t need to forecast six or eight months out.”
For Carter, strategic fit and shared values are more important than the lowest price. “We’ve found success with vertically integrated suppliers that sourced raw materials, performed machining and consolidated different product families to reduce costs,” he said.
Rozow believes suppliers and OEMs should discuss manufacturing pricing and cost trends at least annually and ahead of annual budgetary meetings so the figures can be baked into standard cost benefits for P&Ls.
Still, Rozow tries to avoid creating unnecessary noise for customers. “I don’t react immediately to every price increase or decrease — you don’t want to constantly chase those ghosts,” he said. “Share general trends, explain your mitigation strategies and discuss the specifics quarterly or annually so you can take action as needed.”
