When college students take their introductory economics classes, the first lesson drilled into their impressionable minds is that people face trade-offs. It’s one of the ten basic assumptions on which the entire study of economics is based. Usually, this principle is illustrated with the classic example of “weapons and wheat.”
Picture a hypothetical country with limited resources. To make the example simple, we say that they can choose between spending their budget on some combination of defense or food production (weapons or wheat). If they start out spending all of their budget on weapons and decide they want to produce wheat, they have to produce fewer weapons. Conversely, if they start out with spending all of their resources on wheat and would like to also have weapons, they must accept that they will have to have less wheat. People face trade-offs.
The Medical Device Inventory Trade-Off
No one is more familiar with trade-offs than those who work in MedTech manufacturing. Device manufacturers usually carry very high levels of finished inventory to avoid stock-outs. In other industries, such as consumer products, not having a product in stock can result in the loss of a sale. In the medical device industry, running out of an item can put patient health at risk or harm a healthcare provider’s reputation with his clients. Accordingly, medical device manufacturers make great efforts to avoid these situations.
Medtech companies, who often rely on sales reps to deliver product to the customer, most commonly try to avoid stock-outs by having their reps carry “trunk stock,” which is excess stock in their cars, garages and other similar storage places. This results in the problem of built-up inventory that the manufacturers can have a difficult time keeping track of. In addition to trunk stock, MedTech manufacturers also have extra inventory in warehouses, distribution centers, at hospitals on consignment and sometimes in storage facilities.
Carrying all of this inventory to avoid stock-outs comes at a cost. Other industries see inventory turns of 50 per year, while even just three would be very high for a medical device manufacturer. In addition, sales representatives find themselves spending a disproportionate amount of time delivering product and managing their excess inventory rather than selling, which reduces sales volume.
Can Medtech Have Weapons AND Wheat?
Fortunately for medical device manufacturers, there are steps they can take to make this less of a binary choice. One of the easiest things they can do is leverage technology to better forecast demand and gain visibility into on-hand inventory, allowing them to carry the minimum quantities needed to meet demand on time without carrying excess. With the right software, medical device manufacturers can attempt to circumvent the economic principle of trade-offs. They can have both their weapons and their wheat. To learn more, check out this infographic.