CAREMED: IMPORTING MEDICAL SUPPLIES AHEAD OF A PANDEMIC

THE DATE IS JANUARY 2022

CareMed Inc. sells a wide range of personal protective gear, medical devices, and other medical supplies used in hospitals and private practices [see Appendix 1]. CareMed was founded ten years ago by Morgan Melendez and Victoria Contreras, two nurses who met while completing their MBAs at Grand Valley State University. The company is headquartered in Grand Rapids, Michigan, and has 623 employees and revenues of nearly $1 billion per year.

All of CareMeds sales occur in the United States. However, the company imports 80% of its products from suppliers outside the US. To manage international suppliers, the company has offices in Shanghai, China, and Eindhoven, Netherlands.

The medical device market in the US is governed by strict regulations and standards, designed to ensure patient safety. Imported medical equipment must undergo rigorous government certification before it can be sold in US markets. Certifying that imported supplies meet US regulatory standards represents one of the biggest cost drivers for CareMed.

Morgan and Victoria have been watching the news closely and are concerned about a novel coronavirus that has emerged in Central Asia. The new virus, called the Eurasian Steppe Virus 2022 (or ESV-2022), is highly contagious and has been spreading quickly westward from Kazakhstan to Russia and Ukraine. China and other Asian countries to the east have not yet been affected. The World Health Organization (WHO) has been closely monitoring the viruss spread. The WHO is working closely with the Ukrainian government to stop the spread of the virus, but these efforts have been hampered by political instability in the country and a lack of funding from the international community. If the WHOs efforts are unsuccessful, the virus could reach Europe and the US in 6 weeks to 8 weeks.

Morgan and Victoria think that it is only a matter of time before the virus spreads to Europe and the United States. When that happens, Morgan and Victoria are expecting a major surge in demand for exactly the types of medical supplies that CareMed sells. With this surge, CareMed expects annual unit sales of at least 150,000 units with average revenue per unit sale of $10,000.

To prepare for a possible surge in demand, Morgan and Victoria are considering onboarding a new supplier. They have found two potential suppliers: Zhuoyue Supplies located in Shanghai, China, and Schlechte Medizin, located in the Baden Wuerttemberg region of Germany.

Zhuoyue Supplies (Shanghai)

Zhuoyue specializes in high quality healthcare products. The company has annual revenues of roughly $2.2 billion. It has long-term contracts with well-known US medical suppliers including Cardinal Health, McKesson, and Henry Schein. The company is ISO 9001 certified and has been awarded the prestigious AME Award for Manufacturing Excellence. However, in-depth reporting by the Wall Street Journal suggests that Zhuoyue is currently undergoing a leadership change that has caused its service levels (lead time, on-time delivery, etc.) to drop off.

The companys operations are entirely inhouse. Its production facilities are located in the Shanghai Free-Trade Zone (SFTZ). Operating in the SFTZ provides a number of benefits to Zhuoyue. These benefits include the elimination of export duties levied by the Chinese government although imports from the SFTZ are still subject to the 25% tariffs recently imposed by the US. Operating in the SFTZ also makes it easier for Zhuoyue to maintain quality and comply with US medical certification guidelines. On the other hand, Chinese authorities maintain tight control over the SFTZ and therefore would be able to quickly shut down exports from the SFTZ if an outbreak were to occur in China or if political tensions with the US were to flare.

If CareMed were to purchase products from Zhuoyue, the likely route would be as follows: Products would be palletized and placed in a container for shipment at the Zhuoyue facility. Products would then be moved by train a short distance to the Port of Shanghai. At the Port of Shanghai, product would be loaded onto a container ship. The container ship would depart Shanghai and arrive at the Port of Seattle, Washington, in approximately 13 days. At the Port of Seattle, containerized products would be load directly onto trains and shipped to Chicago via rail. In Chicago, cargo would be unloaded and palletized product would be loaded onto trucks and shipped to CareMed warehouses in Grand Rapids. The entire process is estimated to take from 24 to 28 days [See Appendix 2]. Zhuoyue has a minimum order quantity of 1 container per month.

Schlechte Medizin GmbH (Germany)

Schlechte Medizin was established two years ago and had revenues of roughly $750 million last year. The company sells a wide range of medical products.

Schlechte Medizin has an outsourced production model for personal protective gear, such as medical masks, gowns, and gloves. A network of suppliers in Ukraine and Russia makes the products then ships products to Schlechte Medizin for distribution. The company also operates several inhouse factories in the Baden Wuerttemberg region of Germany. These inhouse factories produce medical devices such as eye and ear scopes, stethoscopes, blood pressure monitors, and other small-scale equipment. Schlechte Medizin then ships all products from Germany to customers around the world.

Schlechte Medizin representatives suggested that both the personal protective gear and medical equipment are compliant with US standards, although it is not clear whether this is the same as being certified. CareMed has asked for additional information on this point but has not heard back from their contact yet. Still, the company has executed some short-term contracts for a few well-known medical equipment companies.

If CareMed were to purchase products from Schlechte Medizin, the likely route would be as follows: Products warehoused in Baden Wuerttemberg, in southern Germany, would be palletized, placed on trucks, and shipped to the Port of Hamburg, in northern Germany. There products would then be loaded into a shipping container and placed onto a container ship. The container ship would depart Hamburg and arrive at the Port of Charleston, South Carolina, in approximately 21 days. At the Port of Charleston, palletized product would be loaded back onto trucks and shipped to CareMed warehouses in Grand Rapids. The entire process is estimated to take from 28 to 31 days [See Appendix 3]. Schlechte Medizin has a minimum order quantity of 2 containers per month.

CareMeds Internal Production Capabilities

CareMed is primarily a medical supplies distributor. In other words, CareMed typically purchases finished goods from external suppliers and then sells them to customers in the US. As noted above, all of CareMeds sales occur in the US and the company imports 80% of its products from international suppliers.

Still, CareMed does have some options for internal production. It has a small inhouse facility that produces personal protective gear. This facility produced about 10% of CareMeds medical supplies last year. But with an expansion, Morgan and Victoria think that the facility could ramp up production to a volume equal to approximately 50% of the expected increase in sales. Such an expansion would require substantial fixed investment and the redesign of existing processes. An expanded facility would likely be able to begin production in 12 weeks.

1. TOTAL COST ANALYSIS

Calculate the following information using the information and template provided:

1. Total cost per unit based on the current price for Zhuoyue Supplies

2. Total cost per unit based on the current price for Schlechte Medizin

2. MAKE/BUY CONSIDERATIONS

1. Analyze the CareMeds make option in terms of

   1. Strategic considerations

   2. Supply risk considerations

   3. Economic considerations

2. Give a robust discussion of each consideration, providing evidence from the case.

3. With regard to the economic considerations, what additional info would you like to have to carry out a full economic analysis for a make/buy decision?

5. GIVE A RECOMMENDATION.

   1. Make a recommendation as to whether CareMed should MAKE, BUY, OR SOME COMBINATION. Explain your reasoning (including the Make vs Buy three pillars) based on your analysis. Provide a robust discussion with supporting evidence from the case and your own analysis.

2. Take an alternative position. If you recommended that CareMed should outsource, provide some points in favor of keeping production in-house. If you recommended CareMed should go in-house, then provide some points in favor of outsourcing production. You do not have to have a fully developed argument in favor of the alternative position. The idea is to get you to consider evidence in favor of an alternative.

6. DEVELOP A SCORECARD

   1. Develop a scorecard for the supplier(s) that you selected in 4a above.

   2. Make sure your scorecard has 4 categories with 3 criteria under each category.

   3. Make sure criteria are measurable.

   4. Make sure to appropriately weight each category and criteria.

   5. Provide a brief discussion of each category and criterion that explains why you decided to use that category/criterion in your scorecard. In other words, explain what you think CareMeds strategic goals are and how your scorecard helps to ensure that your supplier is aligned to those goals?

   6. Use the excel scorecard template to create your scorecard. Use the word document to provide your descriptions. Do not try to score the different suppliers at this point just create the scorecard that you would use.

7. CUSTOMER OF CHOICE

   1. For the supplier(s) that you selected in 4a above, discuss how CareMed could structure their relationship to be a customer of choice for their supplier(s). Include in the discussion any risks that exist and can be minimized or offset by being a customer of choice.