How Inflationary Pressures Are Impacting the Medical Device Industry

Severe bottlenecks in the global supply chain are having a significant impact on the medical device industry, especially in terms of sky-high prices of shipping, commodities and other raw materials. Policymakers must understand that the next few months will be challenging for many medical device manufacturers, forcing businesses to walk a fine line between remaining competitive in terms of cost, while continuing to make the necessary investments to supply the country’s health care system.

The White House report on its 100-day review of the nation’s supply chain underscores the “new pressures” fueled by emerging shifts in demand and supply. The COVID-19 pandemic-fueled surge in consumer demand for goods imported from Asia means the global trade flow between the East and West is adding to the unprecedented imbalance.

MedSource Labs operates in a highly competitive market, and in order for any company to succeed, it needs to maintain tight control of its costs, provide competitive pricing, and still fund research and development to provide innovative products to customers.

In today’s environment, however, it is much more difficult, with inflationary pressures coming from many directions. Every day consumers are feeling it — and so are businesses.

In addition to the severe container shortage in Asia, the gridlock and “bunching” of shipping vessels and containers throughout the supply chain are forcing carriers into blank sailings – when a vessel skips one or multiple ports – in an effort to eliminate the backlogs.

The ocean carriers we work with warn that the container shortage may worsen in the coming months, as fully loaded containers are not being emptied and turned around at a fast enough pace. To compound matters, carriers continue to reduce allocations, making conditions challenging for ocean freight customers. Specifically, there is not enough capacity to meet overall container demand.

These acute shortages have caused major price spikes.

It has now become the norm to pay a premium on top of standard “Freight All Kinds” rates, with most carriers are now charging “FAK+Premium” to fill their vessels. This further limits capacity for any shipments that cost less.

The standard charge for a container in July 2020 ranged between $4,800 and $5,700. It has since ballooned to between $6,000 and as high as $11,000. Meanwhile the $3,500 premium now ranges between $13,600 and $14,700.

Paying these high spot rates plus premium does not guarantee a spot on the ship, and all this is before you factor in additional transportation costs, as carriers are only selecting the larger inland U.S. hubs – like Chicago or Memphis – to deliver cargo via rail from the East Coast and West Coast ports. Most freight carriers want to remain in close proximity to the ports in the hopes of securing return cargo to Asia, but the side effect has been an extra cost burden for companies located further inland.

Unfortunately, price increases are an inevitable outcome during supply chain disruptions. The minutes from the Federal Reserve’s April 27-28 meeting shows central bank officials noted that “supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year.”

Disruptions in the medical device industry have been more persistent than initially expected, leading to higher input costs. The U.S. Bureau of Labor Statistics reported that wholesale prices for “medical, surgical, and personal aid” devices in April were up 0.9 percent from March, and rose by 0.8 percent compared to a year ago.

This new normal will be with us for a while, and we’re already seeing other industries pass these costs on to consumers. Therefore, it is vital to begin planning ahead now in terms of pricing expectations and securing products so as not to be caught off-guard.

Eventually, price pressures should ease as shipping delays and container shortages recede. In the meantime, businesses must adapt.

As noted in the administration’s supply chain report, industries that experienced critical shortages in the past should bolster their stockpiles of critical products “to ensure greater resilience in times of disruption.”

Transportation problems and the massive backlog that has created means companies should prioritize placing advanced orders for products, and not wait for their inventory to run low before doing so. Much longer lead times and rising costs are two important reasons to be proactive and maintain a higher level of inventory.

For example, the demand for personal protective equipment and other essential medical supplies is likely to remain elevated, so distributors and hospital systems need to plan accordingly to avoid the concerning shortages witnessed in 2020.

Closely monitor inventory levels and factor in longer delivery times to determine when an order should be placed. The capacity of distribution networks should be expanded to absorb any disruptions and still get products to customers.

Companies should review their supply chain to identify vulnerable areas, while working closely with their partners – sharing data about inventory and supply chain issues.

Finally, as COVID-19 vaccination rates rise and the number of new cases declines in the United States and across the globe, expect a revival in demand for medical products not related to the coronavirus. For example, a lot of elective medical procedures were postponed during the pandemic, but as more people feel comfortable going to the hospital, there is likely to be a spike in demand for surgical products. Work with key suppliers and start stocking up on those and other critical medical products.

Inflationary pressures are shaping key business decisions and will impact their customers. Businesses are adapting and increasingly recognize the need to be well-positioned and anticipate future curveballs to stay ahead of the competition and respond rapidly when conditions change.

C. Todd Fagley is founder and CEO of MedSource Labs, a medical manufacturing firm based in Minnesota.

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