How Is the Current Component Shortage Affecting Healthcare OEMs?

Back in 2007, the National Association of Home Builders and Bank of America combined their resources to produce an intriguing list of the longest-lasting electronic products in the average household. Among the top candidates were refrigerators and dryers at 13 years, garbage disposals at 12 years, and water heaters at 11 years. If you were lucky enough to have a new gas oven, you could expect roughly 15 years of cooking bliss.

In many ways, the life cycle of medical devices such as MRI scanners, 3-D mammography machines, and particle accelerators are strikingly similar — only longer. In 2014, the IMV Medical Division conducted a report that concluded the average age of the MRI scanners still in use was 11.4 years, with only 24 percent of users stating they might consider purchasing a new one in the next 2-4 years. In the medical field, it’s not uncommon to find regularly-used medical equipment purchased 15-20 years ago.

This trend isn’t going to slow any time soon. According to the U.S. Bureau of Economic Analysis, 2015 saw the average lifespan of medical equipment and tools reach its oldest age since 1945. Once a hospital or economic institution makes the decision to enter the market, they intend to keep it for the long haul.

The Evolution of the Healthcare Industry

There are a few reasons why the medical field has evolved in this way. Taking full advantage of new medical technology, for example, often requires additional training – an added expense many medical practitioners are unable to accommodate. The healthcare industry is home to some of the most stunning examples of technological innovation the world has seen as of late, but in a field where lives are at stake, doctors and healthcare providers often opt to stick to what they know works rather than increase the margin of risk beyond the point of comfort.

On the OEM side, manufacturers also have several additional regulatory hurdles to clear not present in other industries. The U.S. FDA, for example, is required to clear all new equipment through a strict 501(k) process before entering the market. Although this is understandable, it’s a process that takes time. According to a 2017 study by Emergo Group, the average waiting time for a device submitted to the FDA was 177 days, although this time frame varies significantly depending on the nature of the product. For a device related to immunology, for example, manufacturers can expect a 250-day average wait time.

Over the years, OEM supply chains specializing in medical equipment have adapted to these challenges by introducing devices designed more as an upgradable platform than as standalone products. While there will always be a strong contingent of buyers who will purchase a new iPhone Day 1 regardless of the age of their current model, medical devices are meant to be continually supported through long-term service commitments between the buyer and manufacturer.

What the medical industry has not adapted to, however, is the unprecedented component shortage seen in today’s market.

Not long ago, the medical industry was seen by many analysts as the next great frontier for electronic components and semiconductors, and following the 2008 recession, many suppliers dropped component prices that allowed manufacturers across many industries to adopt their designs at an incredible rate. Suddenly devices ranging from blood pressure machines to CAT scan machines to pacemakers were using the same commoditized components seen in mobile phones, automobiles, and other OEM products.

At the time, this was seen as a key development in the medical field because it allowed OEMs to bring the latest life-saving technologies to the market at lower costs, which granted buyers a golden opportunity to update their hospital infrastructures without the typical financial burdens. Such a market state, however, can only last as long as the commoditized components required to support these products remain readily available.

Obviously, in 2018, this is far from the case.

Surviving the Current Component Shortage

Component shortages are not new to the medical industry, but what makes the current shortage different is the competition medical OEMs have to deal with to acquire critical inventory. Where once OEMs would only have to compete with a small pool of other manufacturers to purchase highly-specialized legacy components designed specifically for the healthcare industry, now they have to worry about the component needs of industries outside their own. IoT, smartphone, and automotive industries are currently pushing demand, as well as lead times, to unprecedented heights.

Even worse, suppliers are now commonly opting to focus on the production of high-growth, high-margin components that are obsoleted almost as fast as they’re introduced. While this is exactly what OEMs who design products with minimal life cycles desire (smaller buying cycles mean more opportunities to highlight faster, more efficient technologies in their marketing), this leaves industries that are built around supporting products for 15 years or more out in the cold.

Many experts, seeing this dilemma, are calling for medical OEMs to adopt a new business model more in line with industries associated with shorter buying cycles. In an article for EPS News, The Morey Corp. COO George Whittier is quoted as saying that “many suppliers are trying to move customers to the newer technologies so they can obsolete less profitable lines. They’re increasing prices on the legacy products, but not on the newer technology.”

The medical industry, which has traditionally relied on legacy products to support long-term service commitments, is no different, and developments in IoT and Big Data have the potential to be catalysts for a movement toward shorter life cycles and more advanced technologies. It’s just a matter of timing; until a favorable market exists that can cultivate such a fundamental change in philosophy, medical OEMs are stuck maintaining the status quo for now — at least until the start of the next buying cycle.

The only solution for medical OEMs who wish to survive the current shortage is to buckle down on purchasing the inventory required to support long-term service commitments at the beginning of a product’s lifecycle, not during.

Medical manufacturers have historically been buyers prone to low-quantity, high-volume orders, but when the market is unable to supply even the most commonplace components within a 12-month window, time to accumulate inventory is of the essence like never before. This requires maintaining tight-knit, transparent relationships with trusted suppliers, as well as adopting strategies designed to ensure extended product life cycles are supported.

Current projections regarding the end of the component shortage are bleak. Most analysts do not foresee lead times decreasing until 2019 or 2020 at least. Healthcare OEMs have a bright future ahead – but to get there, they need to prepare their supply chains for the worst.

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