Medical device manufacturers face a range of pressures in today’s market, including fluctuations in demand, staffing shortages, supply chain challenges, and limited customer budgets. These factors make it difficult to forecast sales and revenue and exacerbate existing challenges with quote, price, and channel data accuracy.
Given experts’ gloomy economic outlook and belt-tightening among hospitals and healthcare organizations, device manufacturers must ensure they take advantage of every revenue optimization opportunity from quote to delivery. To do this, manufacturers need better data, greater visibility, and real-time analytics to inform decision-making.
Let’s look closer at the most pressing industry challenges and what device manufacturers can do to ensure greater profitability in the near and long term.
To optimize profitability, medtech manufacturers must anticipate demand to meet contractual obligations without leaving products on the shelves. The current economic environment presents an even more complicated forecasting scenario.
Anticipating demand requires analysis of myriad variables, like macroeconomic factors, supply chain disruptions, complex pricing structures, hospital budgets, government regulations, and hundreds of individual contracts. Evaluating this information with manual methods and limited resources is difficult and expensive.
Manufacturers can streamline the process and improve forecasting by leveraging AI. This technology can gather and analyze data to provide a comprehensive understanding of impactful elements and trends. Resulting dashboards create visibility into day-to-day operations, sales, pricing, supply chain, and available resources, empowering informed business decisions.
Ensuring Pricing Compliance
Compliance with contractual terms and conditions, rebates, pricing, and financing agreements is vital to revenue optimization. With increasing competition in the medical device market, companies are offering more complex contracts to meet customer demands. The complexity creates openings for lost revenue — gaps that AI-powered automation can close.
Let’s dig into why automation is invaluable, starting with pricing challenges. Pricing guidelines account for target revenue goals, manufacturing costs, customer profiles, and order volume. The contractual pricing and terms vary wildly between customers, and each contract contains many nuances based on product type, amount, and negotiated terms. All these details can be hard to track and result in incorrect pricing — something that 77% of surveyed medtech executives report experiencing.
Improperly invoicing customers at the time of sale creates a cascade of complications. On top of straining the relationship, a credit and rebill is required. The process ties up money in collections and unpaid bills, while more money is wasted in time spent rectifying the error. The ripple effect impacts rebates and sales rep compensation.
Rebates add another level of complexity for manufacturers trying to fulfill contractual obligations. Are rebates based on year-over-year growth over baseline? Is that measurement based on growth in a facility or within the entire healthcare organization? How much latitude do sales reps have to make rebate adjustments?
Customers want their rebates, and manufacturers want to provide them. But the calculation is complex and often handled with nothing more sophisticated than a series of spreadsheets. It’s a fraught solution, but it’s virtually ubiquitous, even among manufacturers fairly far along in their digital transformation.
Layer customer compliance atop pricing and rebate management. Many prices and rebates are based on healthcare entities achieving certain conditions, such as order quantity or growth milestones. If the customer fails to reach thresholds, they will pay more. But when relying on a spreadsheet, the manufacturer may be unable to identify compliance issues and adjust the price accordingly. This leads to lost revenue.
With so many variables, compliance with pricing terms is nearly impossible to manage by spreadsheet. As with forecasting, undertaking such an endeavor requires extensive manual effort and cost.
Pricing is the most important lever for revenue and margin growth, and AI is a game-changer in pricing management. Technology can sort through each agreement’s nuances and calculate the right price to maximize the deal’s value. In addition to ensuring correct invoicing, revenue management solutions also consider customer memberships and affiliations, pricing tiers, and past performance to help set the right price and drive deals that align with pricing and portfolio strategies.
Customer Demand, Supply Chain, and Staffing Challenges
Medical device manufacturers’ key customers — hospitals and healthcare organizations — are grappling with macroeconomic factors. As hospitals struggle with budget cuts, increasing operating costs, and declining revenue, they are becoming more cost-conscious and are more likely to negotiate prices, which can erode profit margins.
Another influence on medtech demand has been hospitals’ shift to performing more essential procedures and fewer elective ones, necessitated by surges in respiratory cases during the pandemic. Hospitals’ limitations on elective procedures hurt revenue and caused a decrease in demand for certain medical devices.
In addition, medtech manufacturers are experiencing disruptions to the supply chain and soaring manufacturing and shipping costs. The recent explosion in semiconductor demand has depleted a stock already in a precarious position due to underinvestment in production. The CHIPS and Science Act aims to strengthen domestic chip manufacturing, but it will take time for the law to have an impact. The Semiconductor Industry Association reports that while the legislation has spurred many new projects, material production isn’t expected to begin until 2024.
Manufacturers also face a shortage of skilled workers. Medtech companies must find ways to attract and retain skilled employees to maintain production levels and stay competitive. For example, medtech organizations like AAMI have championed training, certifications, and apprenticeship programs to attract new talent.
Technology can help in these areas by maximizing productivity and efficiency. Contract management solutions can quickly gather customer and market data to develop pricing guidelines, contract templates, and profitability requirements for the sales team. Instead of spending time hunting through spreadsheets to calculate the right invoice price, finance teams can focus on more strategic tasks to drive business value.
Accurate demand forecasting also helps manage the workforce. If companies can correctly anticipate the necessary product production, they can more efficiently staff factories and manage supplies and resources, controlling overall costs.
Revenue Optimization Amid These Challenges
These challenges present significant hurdles to achieving revenue optimization. Cross-functional visibility and accurate information-sharing among departments can strengthen a company’s performance during tough times. Siloed departments result in lost time, productivity, and, ultimately, revenue. Real-time insights and communication help identify urgent issues, prevent important items from being overlooked, and guide process improvement. Technology strengthens team collaboration by centralizing information and making it easily accessible.
Manufacturers should establish performance metrics and monitor them to ensure continued improvements. Revenue management and process improvement are moving targets. Priorities, procedures, staffing, budgets, and technological capabilities may change, so observing key performance indicators helps companies measure success and identify when changes are necessary.
Data drives revenue management from beginning to end. More information empowers companies to make better business decisions and prepare for market fluctuations.
Technology unlocks that data to improve forecasting accuracy, manage pricing, streamline operations, and control costs more effectively. While budgets are tight, technology investment provides a significant return on investment by providing insights to improve revenue performance.
The next 12-24 months will likely continue to be uncertain for medical device manufacturers as supply and demand challenges and broader economic headwinds persist. However, manufacturers have opportunities to maximize revenue streams by improving quote, price, and channel management systems, building new talent pathways, and improving their data analytics output. An investment in these efforts today will pay off tenfold down the road as economic conditions improve.
Editor’s Note: Kyle Forcier is a Senior Director of Life Sciences Product Marketing for Model N. For more than 15 years, Forcier has focused his time in the life sciences space helping manufacturers increase their revenue, maintain compliance, and bring innovative ideas to the marketplace. He currently helps shape Model N’s strategic direction focusing on bringing complex, valuable solutions to the market to solve long-standing operational challenges within the medtech industry.