5 tips to survive the supplier consolidation as related to the MedTech market consolidation

Given the recent MedTech trend of increasing consolidation at the OEM level, it is only natural for the trickle-down effect to affect suppliers as well. Large suppliers are purchasing the smaller suppliers for both increased capacity and differentiation of services offered, but also to eliminate competition. Additionally, many of the mom-and-pop single component or service suppliers are being phased out, as the large OEM conglomerates are facing market and investor pressure to consolidate supply chains, for increased value spending leading to decreased costs.

The consolidation effect to suppliers is directly related to the OEM consolidation, similar to the Aerospace consolidation that occurred years ago. Once the OEM’s merge, suppliers are forced to merge in order to gain economies of scale, pricing advantages, depth of services, and capital availability to invest in technology.

The only suppliers that are able to survive are the mid-size suppliers who offer a wide range of services including several vertical capabilities and heightened customer service, the suppliers who are so specialized that they are the “only game in town”, or the suppliers who have the largest footprint so that their prices are the most competitive yet suffer in customer service responsiveness. Each have their place in the consolidated MedTech market and offer value to the OEM depending on their core principles and mission.

Matt Jordan, VP/GM of Operations at Providien LCC, indicates that “After 12–18 months of organizational integration and strategic planning, the ‘new OEM’s’ are now positioned to reduce COGS via the supply base. The supplier consolidation process is underway — which means that single-production line, single-portfolio outsourced operations are getting bundled together and auctioned off as larger opportunities. In the end, the winners will be mid-sized contract manufacturers that have a strong quality system, a diverse & vertically integrated offering, and an ability to leverage capital for cost-reducing solutions.”

In order to best survive this consolidation market, the following are imperative:

1. Robust Quality system: ISO 9001 is mandatory, and ISO 13485 is highly suggested and demonstrates that as a supplier you take your business seriously, are a solid force in the medical device space, and have higher than average quality standards. It also shows that you monitor the effectiveness of your supply chain, which is increasingly important to large OEM’s as their supply chains are consolidated and they are less in control of them, and that the traceability related to the regulation of material and finished devices is in place, as to comply with FDA scrutiny.

2. Value-added capabilities: In addition to creating singular components, providing a service that creates value for the OEM that is above what they can obtain in-house at their own facility increases your value to them. Additional assembly capabilities, inventory management, testing capability, and quality inspection have become standard requirements from OEM’s to suppliers. They are no longer optional. Invest in the time, training, and equipment required to add those offerings, and you will be competitive in today’s marketplace. The OEM’s want to do less and continue to pay less, and will only partner with a supplier who can help them save time, resources, and money above what they can do themselves.

3. Responsive Customer service: A key differentiator between large and mid-size suppliers is their level of customer service. As the consolidated OEM’s continue to get larger, their demand for customer service increases. Large contract manufacturers and suppliers might be responsive to their top 2 customers, but what happens to the remaining? They get lost in the shuffle and are treated like second-class citizens. Mid-size suppliers value all of their customers, as each one is a larger percentage of the business. Providing excellent problem solving and responsiveness will ultimately lead to an increase in business. Issues happen regardless of where manufacturing occurs, and it’s most importantly about how you deal with it and communicate it back to the OEM that matters, which in a mid-size supplier will be more collaborative and pro-active than in a large bureaucratic supplier.

4. Breadth of scope: In the age of this market consolidation, the supply chain must also consolidate, including the types of capabilities at each supplier. Compressing a supply chain to one company with 4 verticals is easier to for the OEM to manage and justify than 4 distinct smaller-spend suppliers. Increasing your offerings and capabilities through either supplier consolidations or investment in additional technology, or both, positions a supplier to be more of an attractive option and a valuable partner, than a sole-technology supplier. Multiple verticals allows a supplier to leverage their own in-house capabilities and assets to continue to reduce costs for the OEM’s, which will continue to be the ultimate goal of the consolidations.

5. Relationships with key strategy and decision makers: Regardless of technology offered and costs, relationships are still one of the most valuable assets in this age of consolidation. The movement of executives and decision makers is fluid as a result of the consolidations, so your relationships are with both the company and the decision makers, as they are often moved around very quickly in this market. Continuing relationships based on trust and quality will serve your company for the long run, and continue the cycle of new business as a result of these changes. You never know where someone will be tomorrow.

A supplier who has positioned themselves with the abovementioned imperatives, will be more profitable with increased market share and new business, regardless of when the market shifts into the opposite direction. Having certifications related to Quality and diversification of the business is a best practice positioning tool that will serve future growth and success.

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