How One EMS Thrives in a Covid-Disrupted Market

by

KMC Systems Inc. isn’t  just surviving the Covid-19 pandemic — it’s thriving. The medical equipment it manufactures is, of course, in critical demand.  But the proximity of KMC’s suppliers – 90 percent are within 200 miles of the Merrimack, NH, electronics manufacturing services (EMS) provider —  enables it to fulfill surging orders.

The supply chain’s onshore, offshore, nearshore, re-shore debate is rarely as simple as it seems. Certain devices, such as smartphones and computers, benefit from the cost-savings associated with offshore manufacturing.  Highly-regulated, technology-sensitive and bulky products – such as the medical instrumentation, diagnostic and therapeutic systems and lab equipment produced by KMC — haven’t moved offshore to the same extent.  Many manufacturers have established long-term partnerships with nearby vendors.

Covid-19 is an unprecedented – or “black swan”– event and its impact on the supply chain was initially underestimated. China – the epicenter of the coronavirus outbreak — is also the main source of the materials, chemicals and compounds relied upon by the global healthcare market.  At the beginning of the pandemic, when overseas transportation was suspended, the EU, U.S. and other western nations found themselves competing for those, and other, supplies.

“Our demand increased 3 or 4 times higher than normal,” said Derek Kane, executive vice president and general manager for KMC Systems. “We have roughly 200 suppliers which represent the bulk of our spend. We saw lead times expand 4 to 6 times beyond the usual rate.”

That was working against the mass mobilization of critical healthcare equipment and the capacity KMC needed  to meet demand.

“We employed some strategic decision-making,” said Kane.

Lead-time reduction

KMC’s typical supplier lead times range from 12 to 28 weeks. As 28 weeks became the norm, KMC deployed engineers and supply chain professionals to its supplier facilities. The teams reviewed everything from materials costs to logistics to product redesign. KMC reduced its average supplier lead times to 8 weeks.

“If you pinpoint our factory on a map, you could draw a radius to our suppliers to within a couple hundred miles,” said Kane. “Our supply based in concentrated in our time zone.” This enabled the EMS to execute design modifications, prototypes and testing quickly.

KMC sources about 10 percent of its components offshore.

“We only offshore when we have to for commodity items that have set capacity in other regions,” said Kane. “We have a specific strategy around onshoring to drive flexibility and control of suppliers through our development cycle. We have seen that this offers the best total cost of ownership model through a product’s life cycle.”

The Covid-19 crisis has seen the medtech industry quickly recalibrate across the value chain to serve healthcare’s critical needs, according to business consultancy McKinsey But beyond the immediate crisis response, medtech companies should consider additional imperatives—particularly over the next three to nine months—to strengthen crisis resilience and plan for recovery.

KMC’s business has tripled during the Covid outbreak. As a subsidiary of Elbit Systems, KMC does not break out its revenue.

“When you see what was going on – the factory shut-downs in China – limiting our offshore options served us well,” said Kane.

Manufacturers will often concentrate their spend with a limited number of select suppliers to increase their importance as customers. Beyond managing pandemic-related demand, KMC continually works with its vendors to design costs out of the supply chain.

“Having regional suppliers allow us to be nimble and make changes to designs before they reach production,” Kane explained. “Our little universe is highly regulated and various bodies come in every year to audit us. Our typical development cycle is 3 to 4 years and the products are designed to last a decade or more.”

For example, KMC is compliant with:

• ISO 13485:2016
• IEC 62304
• FDA Current and Good Manufacturing Practices (cGMP)
• Calibration and Metrology
• FDA QSR Parts 820, 803 and 806
• Part 11 compliant software development

Long-lifecycle equipment – such as medical, military and aerospace – tends to be less cost-sensitive than consumer goods.

“We look at things through the scope of total cost of ownership from the development phase on,” said Kane. “We work with our customers from the beginning to optimize costs and innovate to take costs out at the front end of the process. We have a healthy funnel of development projects in addition to the market penetration achieved from pandemic-related orders.”

KMC’s output has increased dramatically this year, Kane added, and will continue in the years to come as new products exit the development cycle and enter the product stage. The company also offers spare parts programs, field service engineer training, obsolescence management, and repair services.

“The planning and actions taken in the short term can have significant implications, not only for medtech’s continued resilience in the crisis, but in shaping its longer-term recovery for what is likely a significantly different future for healthcare and the medtech industry,” McKinsey concluded.