Capturing the value of good
quality in medical devices
Improving
quality can bring costs down significantly. New analysis and industry examples
suggest a way forward for device makers.
The medical device
industry has continued to innovate
aggressively and grow strongly. Worldwide sales of medical devices rose to $380
billion last year from $260 billion in 2006. This growth has been enabled by
underlying demographics and by the innovation and expansion of medical devices’
clinical applications and effectiveness. Companies continue to innovate:
wirelessly interconnected devices, software as a medical device, cloud-based
artificial intelligence, and cost-effective customization enabled by 3-D
printing are just a few recent examples.
Against this backdrop,
the need for quality in the design, manufacture, and distribution of devices is
as strong as ever. But it appears that device quality has not kept pace with
other aspects of the industry’s growth and evolution. One marker of this gap is
inspections by the US Food and Drug Administration (FDA). From 2010 to 2015,
about 50 percent of FDA device-surveillance inspections led the agency to
require official action (typically via a warning letter) or voluntary action to
correct quality system failures. This steady state of noncompliance suggests
that manufacturers have struggled to meet regulatory requirements, while the
FDA has struggled to communicate and enforce them. To be clear, compliance with
regulations is not the same as quality, and the benefits of quality extend
beyond avoiding the risks of noncompliance. Among the most important benefits
is lower quality costs, permitting greater investment in areas such as product
development and market expansion.
In 2011, McKinsey
published a study that showed the difference in quality-related costs—including
day-to-day quality costs, as well as costs and revenue losses from nonroutine,
poor quality events—between the leading and lagging performers in the medical
device industry. We recently conducted a second study to refresh and expand the
analysis to quantify the total cost of quality for medical devices. The study
also identified and measured the impact of the emerging best practices that
medical device companies are using to raise quality (see sidebar “Our
methodology”). We focused on manufacturing quality operations and did not
assess research-and-development (R&D) or commercial quality costs.
Studies of quality
costs are too often focused exclusively or predominantly on costs to prevent or
detect quality flaws. Such costs represent the tip of the iceberg and, without
accounting for equally important direct and indirect quality costs, these
studies are incomplete.
Our study probed
beneath the surface, using three lenses to characterize the cost of quality:
·
Direct cost of ensuring
good quality. This includes the organizational costs
involved in preventing or appraising quality issues. Both quality personnel and
operations staff may be involved in performing this type of work, so both have
been captured in the estimate.
·
Direct cost of poor quality. This includes the labor costs to remediate failures, as
well as the material and financial costs of internal and external quality
failures.
·
Indirect quality costs. For individual companies, this includes the revenue
loss and risk exposure from nonroutine compliance issues, as well as market-cap
losses.
We estimate the total
direct cost of quality at 6.8 to 9.4 percent of industry sales. Good quality
practices would recover a large part of these costs. Moving the industry to
median or top-quartile performance in quality operation practices and reducing
nonroutine external quality failures would capture savings equal to 1.6 to 3.0
percent of industry sales.2Our research found that
several practices correlate with good quality outcomes. These include robust
product and process controls, stronger operational maturity relating to people
and assets, mature quality systems (especially supplier controls and
nonconformances management), and robust quality culture and practices across
the organization.
What is the total cost of quality today?
The medical device
industry’s direct cost of quality of approximately 6.8 to 9.4 percent of
industry sales equals $26 billion to $36 billion annually, based on the
industry’s current annual sales of about $380 billion. The direct cost of
ensuring good quality represents about one-third of this total cost, with the
remainder resulting from the direct cost of poor quality. Spikes in nonroutine
compliance costs may increase the range by up to 1.5 percentage points, or an additional
$5 billion per year.
Our research identified
and evaluated the following set of cost-of-quality drivers:
Direct cost of ensuring good quality
Organizational costs of
prevention and appraisal, estimated
at 2.0 to 2.5 percent of annual sales, represent the largest share of total
costs. Prevention and appraisal costs include quality system support,
validation, quality control, testing and inspection, auditing, and other
quality activities. While these activities can be performed within the quality organization,
the operations staff can also contribute (as we discuss below), thereby
spreading the cost outside the quality organization’s budget. These costs do
not include R&D and commercial resources that contribute indirectly to good
quality, such as through product design and customer feedback. The cost of
prevention and appraisal varies by technology—from 1.5 to 2.0 percent of sales
for disposables and implants to approximately 3.5 percent of sales for small
electromechanical devices and capital equipment (based on weighted average
industry sales by share of each technology).
Direct cost of poor quality
Remediation costs represent 0.4 to 0.7 percent
of annual sales. Remediation activities include investigations, corrective and
preventive actions (CAPAs), complaints, medical device reports (MDRs), and
field actions. These activities are often performed by the quality
organization—partially on-site, but often centralized above-site.
Routine internal
quality failures represent 2.1
percent of annual sales. Two sources drive routine internal quality failure
costs:
·
Rejects and rework, which typically represent
20 percent or less of this cost for small electromechanical devices and capital
equipment, but more than 50 percent for implants and disposables.
·
Deviations management, which includes costs
related to production quality failures, such as destroyed materials, inventory
changes, and fees for support, such as compliance and engineering consultation.
Routine external
quality failures represent 0.4 to
1.6 percent of annual sales. These failure costs primarily relate to warranty
costs, especially for small electromechanical devices and capital equipment.
The cost of returned and destroyed products comprises a much smaller share of
the cost of routine external failures. The cost of handling (which is part of
remediation labor costs) and costs incurred by the commercial organization (for
example, complaints intake and support for returns) are typically not measured
and thus difficult to quantify. Accordingly, these costs have been excluded
from routine external failure costs.
Nonroutine external
quality failures represent 1.9 to
2.5 percent of annual sales. These costs result from significant quality and
compliance events, such as recalls, FDA 483s, warning letters, consent decrees,
import bans, and consumer litigation. Given the average annual occurrence rates
and the typical cost for each such event, the cost of these events was
estimated at $7.0 billion to $8.5 billion. Taking into account an additional
$0.5 to $1.0 billion for nonroutine events at non-FDA-registered facilities,
the total is $7.5 billion to $9.5 billion annually. However, estimates based on
industry surveys and annual-report scans indicate a broader range that may
reach up to 3.8 percent of sales, or $14.4 billion (the highest reported
nonroutine external failure cost for the past three years is almost 8 percent
of sales).
Indirect quality costs
Additionally, indirect
costs, such as revenue loss and market-cap impact related to nonroutine
quality failures, can reach $1 billion to $3 billion for a medium to large
medical device company. These quality failures may lead to a major compliance
action, such as a consent decree requiring a plant shutdown, which can have a
disproportionate cost impact. Based on high-impact medical device case
examples, we estimate that, for individual companies, top-line impact can reach
as much as $1 billion and market-cap impact as much as $2 billion.
What are the recoverable costs?
Understanding the cost
of quality is one side of the coin in making a compelling case for the value of
well-executed quality. The other side of that coin is the savings that
companies achieve, in the form of recoverable costs, by applying
segment-leading quality practices.
We estimate the range
of recoverable costs at $6 billion to $11 billion per year, representing about
1.5 to 3.0 percent of sales. The lower estimate of recoverable costs reflects
movement of poor-performing manufacturers to average-level performance (the
“conservative” scenario), while the higher estimate assumes that poor- and
average-performing manufacturers elevate to top-quartile performance (the
“aspirational” scenario).3In either scenario,
significant savings would be achieved for each component of quality cost.
Climbing the maturity curve to better quality
In reviewing the
practices of high-performing quality organizations, we identified five sources
of maturity that correlate with good quality:
1. operational maturity: product and process design
2. operational maturity: people
3. operational maturity: production assets
4. quality system maturity
5. quality culture maturity
Device manufacturers
can apply practices related to these maturity sources to improve quality across
their operations. We provide an overview of what these practices involve, as
well as describe the gains made by companies that deploy them.
Operational maturity:
product and process design.
Quality performance is
directly affected by specific practices in product and process design.
Companies that show good practice in design for manufacturability and quality
often identify a set of critical quality attributes (CQAs)4and link them with
critical control points (CCPs)5in production, with
relevant in-process testing steps established at the outset of manufacturing.
Good practice also calls for companies to manage product complexity by
streamlining design, optimizing the CQAs tracked per product, and limiting the
total number of components in the product.
Our analysis found that
companies that have a high share of products with defined CQAs—and CCPs tied to
those CQAs—have a significantly lower share of low-quality products in the
market.6The strongest sites in
our analysis tended to have a higher number of products with CQAs: 71 percent
for high performers versus 40 percent for poor performers. However, unless
sites linked these CQAs directly to their shop-floor processes, the impact was
limited. At sites with the best quality performance, 70 percent of products had
CQAs defined and linked to CCPs, while sites with the highest share of
low-quality products had only 33 percent of their products formally
characterized this way.
Operational maturity:
people.
Device manufacturers
can reduce deviation levels and recurrence by addressing operational structural
factors, such as better employee-retention activities and shared quality
targets.
Our analysis found that
sites with higher product quality have lower employee turnover. At the high
performers, average employee turnover is 3.5 percent per year, compared with
10.2 percent for poor performers .
We also found that a
high share of employees with quality targets correlates with better quality
outcomes. The strongest sites include contribution to quality as part of their
evaluation criteria for all or most employees. These sites report that they do
this with specific, quantitative individual targets. In contrast,
poorer-performing sites may agree that quality is generally important but
usually do not enforce specific measures to improve it.
Operational maturity:
production assets.
The proper maintenance
and renewal of manufacturing assets is necessary for sustainable production and
quality performance. Sites that have a sufficient focus on preventive
maintenance have fewer issues with equipment and facilities. In the long term,
companies also need to invest sufficiently in the renewal of their production
assets to avoid serious issues with both quality and compliance.
We found that the sites
that spent less than 1 percent of their annual cost of goods sold (COGS) on
preventive maintenance generally suffered from a higher occurrence of
deviations related to equipment. On average, sites spending more than 1.5
percent had a significantly lower probability of equipment-related failures. We
consider 1.5 to 2.0 percent of COGS to be the minimum range for a healthy level
of spending on preventive maintenance for companies with an average-to-high
level of automation. By setting a formal preventive-maintenance plan and
ensuring its appropriate funding, companies can shift focus from remediating
deviations to preventing equipment-related issues.
Sufficient reinvestment
in maintaining capital assets is also crucial to prevent facilities and
equipment from aging and eventually failing. To reach appropriate levels of
asset renewal, average annual capital investment in replacements should be 1.3
to 1.4 times higher than annual depreciation.
Quality system maturity.
Aspects of quality
system maturity, such as supplier quality and fast but thorough investigations,
drive better quality performance and reduce quality cost.
Strong-performing sites
share their internal quality processes with their suppliers. In our research,
56 percent of the highest-performing sites shared their own CQAs with suppliers
and had them translated into supplier process CCPs. By contrast, only 10
percent of the poorest-performing sites did the same.
Proper investigations
are a fundamental part of any high-performing quality system. The challenge for
device makers, however, lies in ensuring that they are sufficiently thorough in
their investigations without getting bogged down in activities that take too
long or cost too much.
We found that investigations
that are too fast or too long each promote a high recurrence of
nonconformances. High-performing sites generally conduct thorough
investigations that span, on average, 40 to 55 days. Working at this speed
seems to provide sufficiently rapid information to correct deviations while
also allowing enough time to get to the true root cause of a problem. The best
companies monitor deviation investigations to ensure the timely handling of
emerging issues, but they also use performance metrics, such as CAPA
effectiveness and deviation-recurrence rate, to drive investigation robustness.
Conversely, setting investigation-closure time as a performance metric often
leads to short, cursory reviews, ineffective CAPAs, and recurring problems.
Quality culture maturity.
Aspects of culture
maturity, such as involving operations personnel in quality activities, also
help to achieve better quality outcomes. High-performing sites do not leave
quality to the quality function alone; instead, they embed quality-related
activities into the roles of staff across the organization. Manufacturing and
engineering personnel are involved in a range of activities, from prevention
(validation and equipment maintenance) to remediation (investigations and
root-cause problem solving).
By involving nonquality
employees in such activities, these organizations help to ensure that they have
technical expertise to continually improve operation robustness and fix issues
at their root cause. At the strongest sites we analyzed, the equivalent of 10
percent of site full-time equivalents (FTEs) or more are nonquality personnel
involved in quality work.
Quality maturity in action
Numerous examples
illustrate how device manufacturers have applied these best practices to
recover the cost of quality.
Automating data
collection.
A manufacturer used a
paper-based system for maintaining device history records (DHRs), with
individual DHRs containing hundreds of pieces of paper and thousands of quality
data points. Based on the amount of quality data manually collected throughout
the process, there were nearly 100 opportunities for documentation errors every
day. The manufacturer replaced this paper-based system with a closed-loop
manufacturing-execution system. This system enabled faster detection and
prevention of problems and improved investigations through greater speed and
visibility in finding and correcting root causes. The system likewise improved
data consistency across plants and the supply chain and deployed dashboards for
key metrics, enabling continuous improvement. The manufacturer achieved a
productivity improvement of 6 to 10 percent and captured significant reductions
in key performance indicators (KPIs): production noncompliance reports (41
percent decrease), overall complaints (58 percent decrease), workmanship
complaints (65 percent decrease), and documentation errors (100 percent
decrease).
Launching a holistic
quality improvement program.
After receiving a
corporate warning letter, a manufacturer launched a holistic quality improvement
program that encompassed its management philosophy, business processes,
systems, and culture. Its vision was to make quality a source of competitive
advantage and continuously improve to drive higher performance. To comply with
global regulations and standards, the manufacturer developed a standardized
quality management system based on ISO 13485. It also implemented single global
electronic systems for key quality system processes like CAPA to ensure a
consistent approach and behavior and promote a culture of compliance. The
manufacturer appointed stewards for each of the key quality system processes
that are responsible to engage and empower talent from across the organization
to drive rates of improvement across the quality system. As a result of such
initiatives, field actions are now one-third of what they were in 2005, and
CAPA cycle time has fallen by 50 percent, during which time the business has
grown in size and complexity. Because there are fewer service issues, inventory
has been reduced by 25 days, resulting in millions of dollars in savings.
Quality spending decreased by 8 percent from 2010 to 2013, compared with an
average increase of 7 percent industry-wide during that period.
Improving yield.
A manufacturer faced
severe quality-yield issues for a biological product. Its facility lacked
clarity on the source of yield issues and lagged behind in employing
world-class lean manufacturing practices. The manufacturer was on the verge of
depleting safety stock, and current output levels could not meet demand. To
focus its efforts exclusively on the highest-priority issues, the manufacturer
created a “war room” to oversee daily governance and to quickly accelerate or
stop initiatives. It also applied lean manufacturing tools to increase
throughput, using a process map and issue tree to select levers and KPIs and
relying on visual management to track progress. Additionally, it used a number
of initiatives to increase quality yield, including analytics to understand
yield loss, issue trees to prioritize resources, experiments to prove or
disprove root causes, and acceleration of yield drivers. The manufacturer
achieved a 50 percent throughput increase in less than one month and doubled
production yield.7
Driving line
improvements.
A manufacturer sought
to drive quality-related line improvements across several devices. Challenges
came from a range of sources: bottlenecks caused by quality issues resulted in
long lead times and high costs for a line of disposable devices, while
customers complained about performance issues for other disposable devices. A
third line saw high variability among operator performance, with production
yields varying from less than 50 percent to 90 percent per operator. The
manufacturer employed several quality initiatives in response. It conducted a
thorough complaint investigation and identified critical quality attributes. It
also designed appropriate process controls and improved products through design
and process changes. And it used process automation to improve quality and
repeatability. Through these initiatives, the manufacturer reduced the
complaint rate for one product line by a factor of 18 and for another line by a
factor of 12. It reduced its head count by 38 percent at one facility and by 75
percent at another. The manufacturer also increased capacity by 210 percent and
reduced its manufacturing footprint by 50 percent, respectively, at these
facilities.
Using predictive
modeling of parts failure.
By implementing
predictive modeling of parts failure, a manufacturer was better able to undertake
preventive maintenance and enhance device quality and performance. The modeling
predicts probable part failures and replacement needs, which the manufacturer
addresses during regularly scheduled preventive maintenance or maintenance for
unpredicted breakdowns and replacements. Proactively scheduling maintenance and
replacements minimizes warranty costs and avoids the need for expensive urgent
and repeat service visits. In addition, the system examines the device to be
serviced and recommends additional maintenance. Service kits are then assembled
for the technicians, minimizing lost time that results from searching for parts
and tools or scheduling further service when parts and tools are unavailable
on-site. As a result of these efforts, the aggregate rate of field service
calls and visits fell by more than 20 percent. The rates of field failure and
negative customer feedback also fell significantly. The financial returns
exceeded the target of 3 percent of revenue and redirected more than $100 million
to the business, making funds available for design enhancements and
improvements to the quality management system.
Although the device industry’s cost
for quality operations has decreased since 2011, it remains significant.
Opportunities to recover these costs are likewise significant. In discussions
with senior quality executives, we repeatedly hear that they know that good
quality pays dividends, but they struggle to support that firmly held belief
with numbers. Our analysis provides these numbers. It also shows the real-world
benefit enjoyed by companies that deploy leading quality practices. Taken
together, these numbers and examples make a strong case for quality.
By Ted Fuhr, Evgeniya Makarova, Steve
Silverman, and Vanya Telpis
MCKINSEY.COM FEB17
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