By Stephen Bradley, Specialist Leader, and Bill Murray, Specialist Executive, Deloitte Consulting LLP

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Most patient interactions with the healthcare system involve contact with medical devices such as syringes, diagnostic test kits, blood pressure and glucose monitors, pacemakers, surgical instruments, artificial joints and MRI and CT scanners. Semiconductor chips are critical to the function of many of these devices, and demand for chips is expected to double between 2021 and 2028 as healthcare systems tackle patient backlogs.1 Currently, a severe global shortage of chips threatens to disrupt the manufacturing of life-saving medical devices and systems. This week’s blog appeared first as a US Center for Health Solutions, Health Forward Blog and reflects on two surveys of medical device manufacturers conducted by our US colleagues in 2021 and 2022. It highlights the significant impact that the global semiconductor chip shortage is having on the medtech industry and explores the strategies that companies are adopting to navigate these challenges.2

Semiconductors, and their integrated circuits, act as the brain for millions of products—from smartphones, to automobiles, to laptops, to medical devices. However, these once inexpensive and plentiful silicon chips have been in short supply for more than 18 months, and medical device companies are suddenly competing with virtually every other manufacturing sector for limited inventory. Many medtech manufacturers are making difficult decisions to help ensure they can continue to meet the needs of the market. Some of them are likely to implement new (and often more expensive) strategies to keep their production lines moving.

About 50 per cent of all medical devices have a semiconductor, but this represents only about one per cent of the total semiconductor market.3 These components are essential for a wide range of devices, from blood-pressure cuffs to MRI machines. As medical devices become more tech-enabled, semiconductors will become even more important (see Smart Knee Brings Future of Health One Step Closer).

How did we get here?

Kinks in the supply chain created by the COVID-19 pandemic continue to hinder many industries, including semiconductors. In China, an uptick in COVID-19 infections caused some chip manufacturers to reduce production or temporarily shut down. This has further balled-up supply chains. Russia’s invasion of Ukraine adds another layer of uncertainty. Ukraine is a major supplier of neon gas, which is essential for the lasers that are used to build the microscopic circuits in the chips.4 Moreover, Russia is one of the world’s top suppliers of palladium, a precious metal used in semiconductors.5

In addition, rising fuel prices, combined with decreases in shipping volume, have increased the cost of transporting chips. The fact that some of the world’s most advanced chips are produced in Taiwan could potentially add another layer of risk to the supply chain if that region of the world becomes less stable.6 The shortage of chips has prompted many companies to boost inventory by ordering more than they need. But hoarding is making a difficult situation even worse.

Survey finds little near-term optimism

In July 2021, we surveyed medical device manufacturers to learn more about the supply chain issues they were facing. Most respondents admitted that it had become more challenging to acquire the semiconductors needed to manufacture their devices. Many respondents said they had figured out temporary workarounds and saw the shortage as a manageable pain. Most said they had enough inventory on hand to avoid production delays.

We followed up with a second survey in April 2022 to find out what had changed, what had stayed the same, and how semiconductor shortages continue to impact businesses and the patients they serve. We found that medtech manufacturers had grown more pessimistic. Many of them say their inventory has since been depleted, which has caused them to reduce or pause the manufacture of devices. Almost 80 per cent of respondents said they are experiencing extended lead times, often more than 12 months. Some respondents indicated they do not expect supply chain issues to improve before the first quarter of 2023.

More than 75 per cent of our most-recent survey respondents said that their customers have turned to alternative types of treatment for their patients. As a result, some hospitals and health systems are looking into alternate products, new usage strategies or treatment options.

Here are a few steps some companies have taken to mitigate risks and navigate shortages:

  • Consider alternative suppliers: More than half of our most recent survey respondents said they previously relied on a single source for 75 per cent of their chip supply. All of them are now pursuing alternative sources.
  • Evolve broker relationships: In the past, medtech manufacturers had little need for brokers. Now, nearly one-third of respondents said they have reached out to brokers as an alternate source of supply. Some companies have turned to brokers because they don’t have any other way to acquire the semiconductors they need for their products. Additionally, brokers can provide safeguards against counterfeits, which has become more of a challenge since our first survey.
  • Increase inventory: In the past, medical device manufacturers usually didn’t stock a large chip inventory. For example, 13 per cent of respondents said they did not have a chip inventory prior to the pandemic. That has since changed. More than 70 per cent of respondents said they have recently increased their semiconductor inventory levels.
  • Focus on agility: Building speed and flexibility into component substitutions—through planning, manufacturing, and regulatory processes—could make it easier for manufacturers to switch to alternate suppliers when needed. Many companies are revalidating components to increase sourcing options even though the process can be cumbersome.
  • Use digitisation to enhance supply chain visibility: There are typically multiple tiers between a medtech company and the chip manufacturers. Since our 2021 survey, most companies have increased their multi-tier visibility. Increased visibility can help medtech companies identify issues more quickly, which can mitigate risk. Digitisation of the supply chain can provide visibility from the suppliers all the way to the customer and help enable a quicker response. Advanced analytics could enhance the ability to be more proactive in every step of the supply chain.
Today’s challenges could make medtech more resilient

Medtech manufacturers historically have not paid close attention to the semiconductor supply chain because chips had been plentiful and inexpensive. Prior to the pandemic, some semiconductors could be purchased for pennies. In some areas, we have seen costs increase by a factor of 100 or more.

Semiconductor shortages, supply-chain delays, and rising fuel costs have made it difficult and costly for some medtech manufactures to purchase the inventory needed to keep their production lines moving. Industry trade group AdvaMed is working with the White House’s Joint Supply Chain Resilience Working Group to develop a national strategy in the US to create a more resilient public health supply chain.7 While supply-chain constraints are unlikely to be resolved in the near future, ongoing efforts to increase resilience and fortify supply chains could help medtech companies respond to future challenges.

Acknowledgement: Kathleen Foote

Author1

Stephen Bradley, Specialist Leader, Deloitte

Stephen Bradley is a Specialist Leader for Deloitte in the Jacksonville, FL office. For five years prior to working at Deloitte, Stephen was the President and CEO of a successful start-up SaaS software company in the Life Science commercial supply chain space. The company focused on implant field inventory management and sales. Stephen also spent nearly 18 years as a business leader and senior operations executive for Stryker Corporation. Both in his entrepreneurial experience and with Stryker, Stephen developed expertise in supply chain management, business leadership and mergers, acquisition and divestiture. Stephen has broad experience in multi-plant integrations, restructuring that included divestiture and relocation of a 300 person organization and global due diligence activities.

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Author2

Bill Murray, Specialist Executive, Deloitte Consulting

Bill Murray is a Medical Technology Specialist Executive with Deloitte Consulting, LLP. Bill joined Deloitte in May 2018. He has over 25 years of senior leadership and strategy experience within the medical technology industry. His areas of senior level expertise within Medtech include strategy, M&A, technology and innovation, operations, quality and regulatory. At Deloitte, Bill has served as a subject matter advisor on multiple programs in the areas of business strategy, technology & innovation, commercial operations, and technology enabled regulatory & clinical transformations. Bill is a regular speaker and panelist on issues important to the medical technology innovation ecosystem. Bill an American Institute of Medical & Biological Engineering (AIMBE) Fellow and holds a BS in engineering from the University of Florida.

Email | LinkedIn

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1 https://www.weforum.org/agenda/2022/05/global-chip-shortages-put-life-saving-medical-devices-at-risk

2 https://www2.deloitte.com/us/en/blog/health-care-blog/2022/how-is-the-semiconductor-shortage-affecting-medtech.html

3 Why patients deserve priority in global semiconductor chips shortage, AdvaMed, June 6, 2022

4 Russia’s attack on Ukraine halts half of world’s neon output for chips, Reuters, March 11, 2022

5 Russia is one of the biggest producers of palladium, Barron’s, March 4, 2022

6 Commerce secretary warns US needs to secure a future for its chip industry, CNBC, May 25, 2022

7 AdvaMed joins Biden administration working group to address medtech supply-chain concerns that could soon affect patient care, AdvaMed press release, May 19, 2022

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