Medical Device Excise Tax Strategy 1 - Eliminate the Fog of War
Carl von Clausewitz’s book, On War, has long formed the basis of most Western military strategy. One of the theories he presents is the Friction in War – the reality that things on a battlefield are not as clear as they appear on paper, and even the simplest tasks can be highly difficult to complete. Part of this problem is the Fog of War, otherwise known as the presence of unclear information. To get a better idea of his point, picture yourself on a battlefield in the early 1800s discombobulated from the piercing noise of cannon fire, dirt raining upon you from all directions, and standing in dense smoke. Information is unclear regardless of your orientation.
Modern militaries spend billions of dollars in systems designed to clarify the information on the battlefield. Everything from satellites to thermal cameras to night vision goggles are specifically designed to bring more clarity to chaotic situations to make the best decisions. So the question currently facing the medical device industry is, “what are we doing to gain the best information to combat the effects of the Medical Device Excise Tax?”
The answer begins with first clarifying the tax’s point of impact (i.e. what are you going to focus on?). Numerous articles clarify the point of impact for the MDET as reduced Profit Margins and/or cuts in R&D spending to pay the tax. The options seem to be either take the loss and pay from the bottom line now, or cut spending and pay for it later with a diminished new product pipeline. But are these the only two options short of repealing the tax altogether?
There is a better option to defend against losses in Profit Margin that could pay the tax and eliminate R&D spending cuts. Consider this: the largest impact on Profit Margin is not a 2.3% top line tax but rather the Cost of Goods Sold (COGS). COGS are within the control of the manufacturer. COGS should be the focus of medical device companies to offset the tax. However, to systematically reduce COGS across your product families, production lines, and globally dispersed production facilities, you must first ‘eliminate the fog.’ Only then can you effectively focus resources on attacking waste and inefficiencies that reduce profitability.
To reduce COGS, we must create visibility into the global manufacturing enterprise. Without a clear, precise, real-time understanding of manufacturing operations around the globe (the fog), we deceive ourselves in believing that changes are standardized, problems are eliminated, and quality is improving. This deception of unclear information allows for no defense and is best described in the phrase: you don’t know what you don’t know. And what you don’t know is already costing you a lot of money.
So how do we create this visibility inside manufacturing operations to eliminate the fog? Can you leverage systems such as ERP and PLM? Not really – these systems were designed for other purposes and do not adequately interface with, control, or clarify manufacturing operations. The best answer to this question is a Manufacturing Execution System (MES). These systems are specifically designed to provide enterprise-wide control and visibility across global manufacturing operations. The proven direct impacts on COGS from MES are: reduced non-value-added activities and associated costs; consistent quality and reduced cost of quality at every plant. MES also defends against COGS increases through reduced risk of adverse events and recalls. Even if the tax is abolished in the future, the focus on reducing COGS and the payoff in higher profits presents a ‘win’ on the battleground of business for medical device manufacturers.
That sounds like a solid, foundational strategy to eliminate the fog, bring clarity to the battlefield, and reduce the tax’s impact. Next let’s look at strategies on applying our forces.
Other Articles in this Series:
Military Strategy and the Medical Device Excise Tax: Introduction
Medical Device Excise Tax Strategy 2 – Force Application
Medical Device Excise Tax Strategy 3 – Multi-dimensional Forces /Concentration of Force