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 are required 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 multi-decade history of endoscopic technology, the procedures have only become popular in the last ten 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

1 Copyright � 1995 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 rather than to illustrate either effective or ineffective handling of an administrative situation. The case is based on the author's thesis, "Management of the Supply Chain in a Rapid Product Development Environment," supervised by Professor Rebecca M. Henderson and Professor Alvin W. Drake, fr om an LFM internship during July-Dec., 1994.

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 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.

While 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) which 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, etc. In all cases of use, surgeons use the instrument for one operation and then immediately dispose of it. Instruments are never re-sterilized and re-used 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

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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 only uses four or five major distribution companies, it still receives orders from, and ship