Optimal Medical Parts (OMP) is a manufacturer of precision parts that are used to repair many types of medical equipment ranging from X-ray machines to oxygen pumps to laser guided surgical devices. The company is headquartered in Peoria, Illinois where they also have a large manufacturing facility. Manufacturing facilities are also located in Scranton, Pennsylvania and Long Beach, California. The company makes over 200,000 different products that range in value from pennies per unit to over $1500 for a replacement scope on a CAT scan device. As with most companies making assemblies and parts, the company finds that a very large percentage of the volume is concentrated in about 20 percent of the products. Similarly, close to 85% of their sales are made to about 20% of their best customers. Total sales for OMP last year were over $6 billion.

OMP’s market is primarily based in the US, but they are beginning to expand slowly to other parts of the world. With sales offices in eight major cities in the US, OMP recently opened offices in Frankfurt, Germany, Shanghai, China, and Sao Paulo, Brazil. Sales outside the US are relatively small at present, but the company expects to see their global sales grow by double digits over the next five years. The major customer segments for OMP are hospitals, both for-profit and not-for-profit, surgery centers, urgent care facilities, free-standing clinics, all branches of the U.S. military, large medical schools, and retirement facilities.

Currently the firm distributes its products through an extensive network of industrial distributors. Although OMP has its own sales force, distributors are used to call on many small and medium-sized customers, many of whom are also in remote locations. The very largest accounts are handled by OMP’s sales force, and the remaining customers (about 85 percent of all customers) are called on by the distributor’s sales force. Distributors are currently used exclusively to handle sales to non-U.S. customers. The major effort of the distributor network is to provide the logistics support to physically move product to customers. OMP does not manage any of the supply chain and logistics activities: these are all handled through the network of distributors in place throughout the US and selected locations outside the US. Hence, OMP manufactures the products in three factory locations, and from that point on the physical movement, inventory management, customer service activities, warehousing, order processing, and returns management are all handled by the distributors.

Top management is rather concerned about the firm’s supply chain and logistics performance, as some of their key customers have been grumbling about late and short shipments, product damage issues, and the ability to track products and orders through the relatively complex logistics network. Currently one distributor is responsible for managing three “super warehouses” that accept truckload shipments of a variety of products from the three OMP factories. At these warehouses, the company’s full line of products is maintained so that they are able to ship the full array of OMP items to satellite warehouses that are located closer to customers. Currently, OMP has agreements with four different distributor companies to manage the small satellite warehouses that actually ship to the final customer locations. At present, there are 12 satellite warehouses in the US. In Europe, final shipment to the customer is handled from one central warehouse in Frankfurt, Germany that is managed by the European distributor. Similar logistics/supply chain arrangements are in place in China and Brazil.

The issue with the current logistics and supply chain system is, as mentioned above, one of service level—delivering orders in a timely manner, in good condition to the right customer, along with a good data support system. In addition to service issues, the current distributor network appears to be a relatively high-cost network. The average cost of supply chain operations has hovered around 11% of sales for the past couple of years. Top management feels that something in the neighborhood of 8% would be a reasonable target. If this level were achieved, profits would be enhanced significantly, and if the service problem were eliminated, management feels that sales might grow significantly. So, at this juncture, the executive management team at OMP has asked the company’s top internal supply chain manager to develop a bold, new strategy. The distributor supply chain network would be replaced by a centrally-controlled supply chain, with the company assuming all the logistics and supply chain operations, facilities, and activities.

Discuss the pros and cons of OMP assuming the total responsibility for owning and managing their supply chain operations, giving special attention to the problems OMP would face as well as the advantages that might be captured by such a strategy.