Our client employs more than 50,000 people on five continents and has an annual revenue of more than $50 billion.
They develop, manufacture, and market products for patient drug-delivery technologies, distribute pharmaceuticals, medical, surgical and laboratory supplies, and offer consulting that improves quality and efficiency in health care. The target of Tefen’s efforts was the company’s Custom Sterile division.. The products are assembled at four different sites that include McGaw Park IL, Fort Mill NC, Juarez Mexico and Ontario CA.
Leading the industry with a 55% market share, the client has in recent year’s experienced strong competition that has targeted their own inefficiencies in delivering cost effective products to market.
These inefficiencies are driven by established internal operating practices that have convoluted how costs are addressed and applied. The Custom Sterile Cost-to-Serve (CTS) Initiative focused on addressing the various operational costs associated with the highly customized sterile kitting operation.
Partnered with Tefen, the client undertook a phased and focused initiative to gain a thorough understanding of the costs associated with servicing their customers. In the initial scoping, Tefen collaborated with client staff to perform a high level review of their McGaw Park Custom Sterile operation to identify major areas of opportunity.
The client’s Senior Management then chose three areas to focus on: Cost Model, Product Standardization & Simplification, and Engineering Change Notice (ECN) processes.
With the support and oversight of client staff, this Diagnostic resulted in a detailed report identifying and quantifying the specific opportunities and benefits achievable by the client after the implementation
Issues Identified during Initial Assessment included:
How Tefen Helped
After the scoping, Tefen identified several opportunities for improvements in Product Change/ECN Process and Component Segmentation and Simplification. Working side by side with the client’s senior management, Tefen assisted in the additional analysis necessary in order to implement 3 key findings presented as part of the Diagnostic: Cost Model Development, Component Segmentation Development and the Design and Implementation of a New Component Set-up process:
Component Segmentation introduces a methodology to differentiate components based on their operational impact and costs.
This methodology provides a qualitative means of grading components based on a relative scale from “A” to “D” (Low Effort to High Effort).
Additionally, depending on a component’s grade, subsequent cost burdens (“E”) or bonuses (“A+”) can be added using the cost model to influence behavior and drive the business towards components which are operationally favorable.
New Component Set-up Process
The New Component Setup Process provides a qualitative and quantitative methodology to analyze requests for new components to be added to the existing catalogue.
Historically, this process has been inconsistently applied and ineffective in evaluating the business case for adding a new component.
In fact, the database frequently has acceptable alternatives that are already available in the component catalogue.
This revised process provides a robust and systemic approach to evaluating the need to set up new components.
It includes a set of tools and defined roles for analyzing all requests for new component setups.
The cost model modifications made during this project reflect a shift in how overhead costs and inbound freight will be allocated.
Historically, the cost model blended all overhead costs and applied it proportionately to each kit based on labor hours.
Additionally, inbound freight costs were only captured for pre-paid items and therefore do not reflect all in-bound freight costs. This portion of the CTS project focused on using Activity Based Costing methodologies to adjust and reallocate overhead based on the level of activities individual components drive within operations and adding missing inbound freight costs.
Performance Excellence Delivered
Segmentation Attributes & Adjustment Factors
Based on the component catalog and the information available for each component, the following attributes and adjustments were established.
All components will be given an initial score) based on the scoring methodology. The attributes and adjustment factors provide a quantitative method for assessing the operational effort associated with the component. Attributes: Supply chain characteristics which reflect operational impact.
New Component Set-up Process
The New Component Setup Process provides a qualitative and quantitative methodology to analyze requests for new components to be added to the existing catalogue. While it is often necessary and important for Custom Sterile to add new components, historically this process has been inconsistently applied and ineffective in evaluating the business case for adding a new component. In fact, the database frequently has acceptable alternatives that are already available in the component catalogue. This revised process provides a robust and systemic approach to evaluating the need to set up new components. It includes a set of tools and defined roles for analyzing all requests for new component setups.
Assumptions & Rules
Gatekeeper Roles and Responsibilities: This role must provide a centralized point of control for the component catalogue. By working closely with Central Purchasing, Marketing, Sales, and Operations, the Gate Keeper will have access to the information required to make decisions about the management of the component catalogue in relation to business and customer needs.
Using a ratio established by the number of components in the product catalog and the number of pics associated to each one the changes to the cost model applied this ratio per Kit according to the product Mix in each particular Kit.
Each line item in the Kit would be associated with a ratio according to its segmentation.
For each Kit the ratios in the Kit would be averaged to establish a Kit ratio that was then applied to the current practice calculated overhead.
The expected results for this change would drive overhead for Kits with A and Bs down and Cs and Ds up.
A cero balance based on the projected production output was achieved by adjusting the factors within the simulation. In addition, the following metrics were established to track performance and ensure absorption will be in range when implemented