Supply Chain Metrics That Matter: A Focus on Medical Device Companies – 2016

A Focus on Medical Device Companies
A Ten Year View of Progress on Supply Chain Excellence
05/19/2016
Lora Cecere
Founder and CEO
Supply Chain Insights LLC
Heather Hart
Research Director
Regina Denman
Client Services Director
Helen King
Research Associate
Supply Chain Metrics That Matter

Contents
Research
Disclosure
Research Methodology
Understanding the Data
A Complex System with Nonlinear Relationships
Driving Profitability
Improving Cycles
Managing Complexity
A Closer Look at Value
Driving Improvement
Supply Chain Index: A Measurement of Supply Chain Improvement
Balance
Strength
Resiliency
Driving Supply Chain Improvement
Evaluating Supply Chain Excellence: Putting It All Together
Executive Overview
The Race for Growth
What Is Value?
Judging Supply Chain Performance
Managing Cycles
Industry Focus
Recommendations
Conclusion
Prior Reports in This Series
Methodology: Understanding the Math and Ratios
Supply Chain Index Methodology: Formulas and Calculations
Balance
Strength
Resiliency
A Closer Look at Inventory Turns: An Important Measurement
Corporate Overview Data
About Supply Chain Insights LLC
About Lora Cecere
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Research
Supply Chain Metrics That Matter is a series of industry-specific reports published throughout the
year by Supply Chain Insights LLC. The series starts in May when full-year corporate reporting is
complete for the prior year. In this report series we provide a deep focus on progress over the past
decade on supply chain excellence for a specific industry. This report is a deep analysis of the
medical device industry.
This analysis is based on data collected from financial balance sheets and income statements over
the period of 2006-2015. In these reports we examine how companies made trade-offs over the
course of the last decade. Here we analyze which medical device company’s supply chain did the
best on the delivery of a portfolio of metrics during that period.
Within the world of Supply Chain Management (SCM), each industry is unique. The pattern for
medical device companies is distinctly different than consumer products or a pharmaceutical
company. It is for this reason we believe it is dangerous to list all companies across industries in a
spreadsheet and declare a supply chain leader. Instead, we think it is more prudent to evaluate
change over time, with a focus on business results within an industry peer group.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research processes. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. All we ask for in return is
attribution when you use the materials. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.
Research Methodology
Supply chain leaders are in a race to deliver supply chain excellence. The questions are “What
defines excellence?” and “What defines value?” Here we answer these questions. To complete this
analysis, and understand the patterns, we analyze both performance and improvement of medical
device supply chains. We believe that the best supply chains outperform their peer groups while
driving improvement.

Performance is easier to measure than improvement. To build a method to measure improvement we
partnered with a research team from the School of Computing, Informatics and Decision Systems
Engineering at Arizona State University (ASU) during the spring of 2014 to develop the Supply Chain
Index methodology to analyze supply chain improvement. Details on the math used in this
methodology are outlined in the Appendix of this report. We have refined this over time.
Understanding the Data
In this analysis we use supply chain financial ratios as opposed to absolute numbers. The use of
ratios allows us to compare large companies to small entities, and also to compare the progress of
companies operating in different countries using differing currencies. Additionally, it allows us to
easily track progress over time.
Our first step was to determine which metrics to use. In Table 1 we share the supply chain ratios we
considered.
Table 1. Financial Ratios Considered in the Development of the Supply Chain Index
We find that most supply chain leaders measure too many Key Performance Indicators (KPIs). To
select the metrics in the analysis we mined trends and discussed them with supply chain leaders.

After a year of research, we determined that the patterns and trade-offs between year-over-year
Revenue Growth, Operating Margin, Inventory Turns and Return on Invested Capital (ROIC) were the
most helpful in the determination of performance and improvement. We term these as the Supply
Chain Metrics That Matter™.
While there are other measurements which we believe are important in the determination of supply
chain excellence—like forecast accuracy, case fill rate, carbon footprint, and inventory write-offs—we
cannot find a reliable and consistent source of data for these metrics that covers all industries and
years studied. In our research we find that the industry data sources are spotty and largely inaccurate
due to the self-reporting of data. Without a consistent data source across the industries we cannot
include these factors even though we believe they are important.
A Complex System with Nonlinear Relationships
The supply chain is a complex system with increasing complexity. We believe it is the supply chain
leader’s role to build and manage supply chain performance to drive year-over-year improvements
which are balanced, strong and resilient. In our research we see that it takes at least three years. On
the journey we often find companies throwing the system out balance. As a result, leaders are able to
only drive progress on a single metric, not the entire metrics portfolio. A balanced metrics portfolio
has a higher correlation to value-based metrics of either market capitalization or Price to Tangible
Book Value (PTBV).
Our goal was to select a portfolio that would be meaningful across all industries. It is important to note
that the maximization of market capitalization requires the management of a balanced portfolio on the
effective frontier of growth, cost, cycles and complexity. We believe that supply chain leaders improve
a balanced portfolio of metrics.
Figure 1. The Effective Frontier

In our writing it is deliberately not termed the ‘Efficient Frontier’—a term used in economic theory.
Why? Quite simply it is because the term ‘efficiency’ in supply chain processes is usually linked to the
lowest cost or the best revenue per employee. The concepts of the Effective Frontier are based on
the balance of growth agendas with cost, cycle metrics (a focus on inventory), and complexity. We
use Return on Invested Capital (ROIC) as a proxy for complexity.
Here we analyze the progress of the medical device industry on the Effective Frontier. Across all
industries we find that nine out of ten companies are stalled at the intersection of two important
metrics, i.e. inventory turns and operating margin. While some companies made no improvement
over time, most companies were able to either improve inventory turns, or cost, but not both together.
The reasons? One of the reasons is unchecked complexity. The second is the focus on functional
metrics to the detriment of corporate performance. As will be seen in this report, unchecked
complexity throws the supply chain out of balance.
Driving Profitability
There is often an inverse relationship between margin and supply chain excellence. Industries with
the thinnest margins are more serious about delivering on the promise of supply chain leadership.
With the historically high margins in the medical device industry, driving supply chain leadership has
not been an industry imperative. Today, with globalization, affordable healthcare, and an increase in
regulatory compliance there is more focus on building a strong supply chain. In our analysis for this
report we use operating margin as the measure of profitability. The methodology is equally applicable
to EBITDA.
Improving Cycles
When it comes to managing cash-to-cash cycles, a small number is better than a large one. The
question in the boardroom is “How small can supply chain working capital cycles be managed to
pump cash into the organization?” There is seldom the question of “How low can we go in working
capital cycles before we put the supply chain at risk?” Cash-to-cash is a composite metric of days of
receivables, days of inventory, and days of payables. As can be seen through the charts, the greatest
improvement in supply chains in the last decade has been made in payables—lengthening payment
terms to suppliers. Inventory levels and receivables have been more constant.
In our analysis we use inventory turns as our measure of supply chain cycles. While companies want
a smaller number for days of inventory, they want to turn inventory faster. The higher the inventory
turn value, the stronger the results.

There are two primary ways to calculate inventory turns. In this report we measure inventory turns as:
Inventory Turns = Cost of Goods Sold/Inventory
Managing Complexity
By definition the medical device industry is an asset intensive industry. Manufacturing reliability is at
the core of supply chain excellence. Within the medical device company supply chain there are many
forms of complexity: increase in items, customer policies, geographic reach, changes in
manufacturing, serialization of items, and new product launch. In the last decade complexity abounds.
As complexity rises it is hard to drive asset effectiveness.
There are many measurements of asset effectiveness: Return on Assets (ROA), Return on Net
Assets (RONA) and Return on Invested Capital (ROIC). Return on Invested Capital is a less well-
known metric compared to Return on Assets. In this report we use ROIC as a measure of asset
effectiveness.
The reasoning? Return on Assets has a narrower focus. Our research indicates that ROIC has a
better correlation with stock market capitalization, and provides a broad perspective on cash flow
generation and profitability based on shareholder equity. Companies with a singular focus on ROA
will throw the supply chain out of balance. The formula used for ROIC is:
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑇𝑜𝑡𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠𝐸𝑞𝑢𝑖𝑡𝑦
ROIC is a measurement of the company’s use of capital. The goal of the measurement is for the firm
to drive higher returns than the market rate of the cost of capital. However, used alone as a singular
metric it will retard growth. As will be seen in this report, for many companies maintaining high levels
of ROIC is a struggle.
A Closer Look at Value
Traditionally the supply chain team’s focus was a cost agenda. Increasingly the organization is asking
the supply chain team to focus on value. However, to guide this journey there has to be a clear
definition of value. There is no industry-standard definition.
To help, we started this undertaking with an analysis between supply chain performance and market
capitalization. In 2012 we calculated the correlation of seven years of financial ratios (based on
quarterly reporting) to market capitalization (the number of outstanding shares multiplied by the share
price) on a quarterly basis.

The results of this initial study on the correlation to market capitalization are presented in Table 2.
Table 2. Correlation of Supply Chain Financial Ratios to Market Capitalization
Within the firm, 60-80% of total costs are controlled by the supply chain team. In parallel, most of the
physical assets are driven and/or defined by supply chain strategy. While market capitalization is
often driven by economic cycles we find Price to Tangible Book Value (PTBV) is a more disciplined
look at value.
Price to Tangible Book Value is calculated by dividing the share price of a public company by its
tangible book value per share. It is a ratio depicting what investors are paying for each dollar of
physical assets. For example, let's assume that Company XYZ has 10,000,000 shares outstanding
which are trading at $3 per share. Let’s assume that the same company’s tangible book value was
$15,000,000 last year. The calculation would be:
Price to Tangible Book Value = $3 / ($15,000,000/10,000,000) = 2.0
The PTBV ratio excludes intangibles: intellectual property, patents, goodwill and other intangible
assets. It is a representation of what debt holders or investors would receive if the company liquidated
all physical assets. We feel this is a measure which supply chain leaders can impact. In this report we
use the metrics that have the highest correlation to market capitalization and also evaluate which
companies have driven the greatest improvement on Price to Tangible Book Value.

Driving Improvement
In the analysis of supply chain excellence, it is a mistake to look at singular metrics at a point in time
and declare a supply chain winner. Instead, it needs to be measured as a pattern over many years.
The best supply chain improvements take at least five to six years.
Sustaining competitive advantage is difficult. A bad project, a quality issue, or a merger, drives
gyrations. As a result, most companies go through ups and downs with distinct patterns. We believe
that the patterns matter. It is for this reason in this report we analyze companies’ progress during the
time periods of 2006-2015, 2006-2009, and 2010-2015. Why these time periods? Here we are
analyzing pre-recession and post-recession progress within specific industries as defined by NAICS
code designations.
To understand the differences, by industry, let’s take a closer look at the healthcare value chain.
When we compare the 2006 to 2015 industry averages we can see the Medical Device industry did
not fare as well as Pharmaceuticals. However, there was some improvement. Operating margin
improved 2% when 2006 averages are compared to 2015. Similarly, ROIC decreased by 3%.
Table 3. Changes in Industry Average Values of the Supply Chain Metrics That Matter When the 2006 Averages
Are Compared to 2015

Supply Chain Index: A Measurement of Supply Chain
Improvement
The Supply Chain Index is the measurement of improvement used in this report. The foundation of
the Supply Chain Index starts with understanding the resulting pattern when two supply chain metrics
(generally ratios) are plotted over time on an orbit chart. As shown in Figure 2a, the orbit chart
enables the visualization of performance patterns. In this case the company is Becton, Dickinson and
Company (BD). The average values for the two financial ratios of operating margin and inventory
turns are shown in the box, and the annual progress is shown as points on the chart. The best
scenario is notated in the upper right-hand corner.
Simply put, the overall industry struggled in the post-recession periods; and due to supply chain
programs, Becton, Dickinson and Company experienced the least impact on overall supply chain
performance, but was set-back on operating margin performance by the 2014 merger.
Figure 2a. Becton, Dickinson and Company - Orbit Chart Performance
To understand the patterns, let’s compare the performance of Stryker and Medtronic in Figure 2b.
Note that Stryker is higher performing, but that the overall performance impact for the post-
recessionary period is more severe than that in the pattern of Becton, Dickinson and Company in 2a.

Figure 2b. Example Orbit Chart - Stryker and Medtronic
Due to the complexity of the orbit charts, our first challenge in the creation of a methodology was to
define ‘Supply Chain Improvement’. This was our goal in building the Supply Chain Index. We wanted
to develop a means to analyze improvement across a variety of industries, with applicability to
companies with different levels of revenue, and at different levels of supply chain maturity. With each
chart we measure balance, strength and resilience in performance metrics within a peer group for the
Supply Chain Metrics That Matter.

Balance
Balance in the supply chain is a constant struggle. Growth requires an increase
in inventory. Forecasting and managing a new product launch is difficult.
Excessively long Days of Payables leads to weakened supplier health. The
examples are endless. The two metrics which comprise our balance measure
are Revenue Growth and Return on Invested Capital.
The balance measure in the Supply Chain Index is a mathematical calculation
of the vector trajectory of the pattern between growth and ROIC for the periods of 2006-2015 and
2009-2015.To understand this measurement, imagine a four quadrant grid with growth and ROIC on
the two axes. In our calculation, the overall trajectory of this vector from Year 0 (2006) to Year 9
(2015) is simplified into a single value which represents the company’s ability to balance growth while
improving ROIC.
Companies that were able to drive improvement in both metrics scored the best, while companies
that deteriorated in both metrics scored the worst. The companies are then stack ranked based on
factor ratings. In Figure 3 we profile Becton, Dickinson at this intersection. Note the impact of growth
on ROIC.
Figure 3. Orbit Chart of Growth vs. Return on Invested Capital (ROIC) for 2006-2015 for Becton, Dickinson

The balance factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement
on both year-over-year growth and ROIC indicates a balanced supply chain and is reflected in a high
balance score.
Strength
A successful supply chain is strong and reliable. Supply chain leaders strive to
deliver year-over-year improvements in both cost and inventory management.
Our research on pattern recognition has uncovered a rich relationship between
operating margin and inventory turns. For most supply chain leaders, these are
some of the most important measures of their performance. Not only are they
important, they are more directly influenced by day-to-day supply chain
decisions than other, and more broadly used, corporate metrics. It is for this reason they are the two
components of our strength factor in the Supply Chain Index.
The strength measure in the Supply Chain Index is a mathematical calculation of the vector trajectory
of the pattern between inventory turns and operating margin for the periods of 2006-2015 and 2010-
2015. Like the balance factor calculation, the work starts with understanding the orbit chart pattern.
To understand the calculation, imagine a plot—an orbit chart—of inventory turns and operating
margin. In this report, performance is graphed on an annual basis from an origination point
representing performance on the two metrics at Year 0 (2006). The overall trajectory of this vector
from Year 0 (2006) to Year 9 (2015) is simplified into a single value which represents strength.
Improvement on both metrics simultaneously is graphically shown as movement to the upper-right
quadrant with increasing values for both inventory turns and operating margin over the period. The
strength ranking is 1/3 of the Supply Chain Index.
Resiliency
Resiliency is an adjective easily tossed around as one of the important qualities
of a successful supply chain in today’s volatile world. However, the concept of
resiliency is difficult to define, and there is rarely clarity among stakeholders as
to what resiliency is or should be.
As we plotted orbit chart after orbit chart, we could see that some supply chains
had very tight patterns at the intersection of operating margin and inventory
turns, and that other companies had wild swings.

We wanted to find a way to measure the variation. So, we turned to the experts at ASU. After
evaluating several methods to determine the pattern in the orbit chart, we settled upon the Euclidean
Mean Distance between the points.
These results were published in our March 2014 report, Supply Chain Metrics That Matter: Improving
Supply Chain Resiliency, where we define resiliency as the tightness of the pattern at the intersection
of inventory turns and operating margin. (The calculation is outlined in the Appendix of this report.)
These metrics, both critical for any supply chain, are components of both the strength and resiliency
metrics in our Supply Chain Index model.
The tightness of the pattern (mathematically speaking, the Euclidean Mean Distance) indicates the
ability of a supply chain to maintain a tight, consistent pattern across these two metrics as the
business environment shifts and changes over a nine-year period (2006-2015). As shown in Table 4,
supply chain resiliency varies considerably by industry. The medical device industry is more resilient
than contract manufacturing and consumer electronics, but more volatile than consumer packaged
goods.
Table 4. Supply Chain Resiliency by Industry
The resiliency metric is similar to the cash-to-cash cycle in that a smaller number is better. A lower
number for resiliency is an indicator of a tighter pattern and greater reliability in results over the time
period.

Driving Supply Chain Improvement
In the overall analysis each company is judged by their own potential to make progress. While the
average values of a company’s performance may be higher, in the Supply Chain Index we are
evaluating companies on their ability to drive year-over-year improvement and reliable progress on
the metrics that we believe matter.
The Supply Chain Index is a measurement of supply chain improvement. Each of the factors—
balance, strength and resiliency—as defined above, comprises 1/3 of the total score.
𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐼𝑛𝑑𝑒𝑥™ =
1
3
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 +
1
3
𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝐹𝑎𝑐𝑡𝑜𝑟 +
1
3
𝑅𝑒𝑠𝑖𝑙𝑖𝑒𝑛𝑐𝑦 𝐹𝑎𝑐𝑡𝑜𝑟
The Supply Chain Index results for Medical Device companies are shown in Table 5.
Table 5. Supply Chain Index for Medical Device Companies for the Years of 2006-2009, 2010-2015 and 2006-2015
Companies that are underperforming their peer group can drive supply chain improvement faster than
higher-performing companies. As a result, when evaluating supply chain excellence, it is important to

look at improvement and performance together. We use this analysis to determine the best
performing supply chains through our Supply Chains to Admire methodology.
Evaluating Supply Chain Excellence:
Putting It All Together
In the overall analysis for the Supply Chains to Admire, each company is judged by their own
potential to make progress. While the average values of a
company’s performance may be higher, in the Supply Chain
Index we are evaluating companies on their ability to drive
year-over-year improvement and reliable progress on the
metrics that we believe matter.
The companies that are above the industry peer group on this balanced portfolio, and have driven
supply chain improvement, are given a “Supply Chains to Admire” award. This recognition award is
now in its third year. The 2016 winners and finalists are shown in Figure 6.
Figure 6. 2016 Supply Chains to Admire Award Winners

To meet the criteria for The Supply Chains to Admire for 2016, companies needed to score better
than their peer group average for performance metrics, while driving a higher level of improvement
than 2/3 of their industry peer group.
The calculation process is:
 Supply Chain Index. The Supply Chain Index is calculated for the peer group. A ranking in the top
2/3 of the peer group qualifies a company for further analysis. A company in the lower 1/3 for the
period is eliminated from consideration.
 Price to Tangible Book Value. This analysis determines which companies are driving the greatest
value. We first throw out the outliers in the (PTBV)i calculation. After the elimination of outliers, we
include companies that are at or above the PTBV value (allowing for no more than 5% below the
mean for the peer group to account for rounding errors).
Companies passing these two tests are then analyzed against the performance factors for 2009-
2015:
 Growth. Higher percentage growth than the industry average.
 Operating Margin. Greater margin performance than the industry average for the peer group for
the period studied.
 Inventory Turns. Better performance in inventory turns than the peer group average for the period
studied.
 Return on Invested Capital (ROIC). Higher performance on ROIC than the average for their peer
group for the period.
In the analysis of the performance factors, companies are divided into two classifications:
 Supply Chains to Admire Winners: In the analysis of the performance factors of growth, operating
margin, inventory turns, and Return on Invested Capital, companies scoring at or above the industry
peer group average for all four of the factors are listed as Supply Chains to Admire winners. (Must
be within 5% of the mean of the peer group to account for rounding.)
 Supply Chains to Admire Finalists. Companies meeting the Supply Chain Index and the PTBV
criteria, but falling below the peer group averages on the performance factors, are ranked as
finalists if they are no more than 10% below the industry average for three out of four of the
performance factors, and no more than 25% below on any single performance factor.
After doing this comparative analysis of the performance factors, we form a short list of companies.
The methodology is not limited to the best company in the peer group. Within a peer group, there can
be multiple winners.

Executive Overview
Globalization. Compliance. Risk Management. Corporate Social Responsibility (CSR). Patient
outcomes. Affordable Healthcare. Over the last decade the number and variety of supply chain
initiatives exploded for the medical device leader. As a result, the supply chain group, and the related
business imperatives, grew in importance.
Overall the medical device supply chain fared better through the decade than other industries, despite
the fact that they are smaller, and more focused companies trying to become global. (see Table C in
the appendix for company size). On average the industry performance on operating margin and
inventory turns was better in 2006 than 2015. The reason? The medical device supply chain entered
the decade as a supply chain laggard. Through focused supply chain programs, they were able to
catch up to the level of other industries. While far from a leader today, they are catching up.
Table 6. Industry Snapshot of Performance

We hope this report can be a guide to help companies understand what is possible, and how supply
chain metrics drive value. In the Medical Device industry we find many companies’ performance stuck
and regressing. For many supply chain leaders that attend conferences, this may seem
unfathomable. There is an industry belief that companies have implemented new technologies, and
evolved processes, and driven improved balance sheet results. The goal of this report is to enable
benchmarking and to spark a new conversation on the definition of supply chain excellence.
For the medical device industry, Edwards Lifesciences Corporation is a Supply Chain to Admire
Winner for 2016, with Becton, Dickinson and Company, Coloplast A/S, and Medtronic Plc qualifying
as finalists.

The Race for Growth
Growth rates for the medical device companies were faster early in the decade than the last part of
the decade. The overall growth for the period of 2006-2015 is 6%. As shown in Table 7, note that
companies posting higher growth rates are also in the top half of the Supply Chain Index
(measurement of supply chain improvement) for the periods of 2006-2015 and 2010-2015. These
companies are Becton, Dickinson and Company and Edwards Lifesciences Company. Conversely,
Boston Scientific growth slowed and their supply chain performance stalled. We find across industries
that companies with the highest growth rates also drive the fastest rates on supply chain
improvement. This is often counterintuitive. Many supply chain leaders don’t believe it is possible to
grow and manage the Supply Chain Metrics That Matter simultaneously.
Table 7. Industry Growth Rates in the Medical Device Industry over the Last Decade with a Comparison to the
Supply Chain Index

What Is Value?
As noted in Table 8, companies outperforming in market capitalization may not outperform in Price to
Book, or Price to Tangible Book Value. Also note the trend between PTBV and the Supply Chain
Index. While a company like C.R. Bard is outperforming on many metrics, the supply chain
performance levels are declining (as measured by the Supply Chain Index) with a falling Price to
Tangible Book Value.
Table 8. Comparison of Market Capitalization, Price to Book, and Price to Tangible Book Value
Judging Supply Chain Performance
When it comes to overall supply chain performance, Edwards Lifesciences is the clear winner while
Becton, Dickinson and Company; Coloplast A/S; and Medtronic Plc are finalists. Smith & Nephew,
and Zimmer have struggled to deliver on inventory performance, and Medtronic and Zimmer fail to
perform higher than the industry averages for ROIC. Boston Scientific is performing the worst in the
analysis.

Table 9. Comparison of Performance and Improvement for the Periods of 2006-2009, 2010-2005 and 2006-2015
Managing Cycles
When comes to managing cash-to-cash cycles, a small number is better. The question in the
boardroom is “How small can supply chain cycles be managed before we put the supply chain at
risk?” To understand the management of cycles in the medical device industry we evaluated them in
three time periods: pre-recession, during the recession and post-recession. We wanted to understand
how the components of cash-to-cash cycles had changed across competitors over time.
Cash-to-cash is a composite metric of receivables, inventory and payables. As can be seen through
the charts, the greatest improvement in supply chains in the last decade has been made in
payables—i.e. lengthening payment terms to supplies—while inventory levels and receivables have
been more constant. This is true for most industries that we study.

Table 10. Comparison of Cash-to-Cash Components: Medical Device Industry During 2006-2009 and 2010-2015
Companies like Smith & Nephew PLC and Coloplast A/S are pushing cash-to-cash through the
extreme manipulation of Days of Payables. This is dangerous. With issues of supplier viability, each
of these companies should view this as a risk management issue, especially true in the medical
device industry where there is a critical dependence on suppliers and contract manufacturers.
Figure 6. Cash-To-Cash Cycles for Major Medical Device Companies for the Period 2006-2009

Figure 7. Cash-To-Cash Cycles for Major Medical Device Companies for the Period of 2010-20015
We find that the supply chain leaders who are making the most progress on the Effective Frontier,
and have the tightest resiliency on orbit charts (at the intersection of inventory turns and operating
margins), usually have lower payables in the 30- to 120-day range.

Industry Focus
Over the past decade the medical device supply chain moved into the operating theatre of the
hospital. Companies mobilized to develop teams and instruments to improve doctor loyalty and
patient outcomes. As can be seen from these quotes from annual reports in the period, consignment
inventory, mergers and acquisitions, compliance, globalization and affordable healthcare were major
drivers. As you read these annual report quotes, refer back to the performance and improvement
metrics. Note the different orientations of Edwards Lifesciences Company, a supply chain winner, and
Zimmer Biomet, a supply chain laggard.
2010. Becton, Dickinson and Company: We also continued to invest in international expansion in
2010, including beginning operations in new manufacturing facilities in Hungary, for Pharmaceutical
Systems products, and Mexico, for Medical Surgical Systems products. We anticipate that over the
next decade, an important part of the Company’s revenue growth will come from emerging markets
such as China, India and Latin America. We are investing in more capabilities and resources to
expand market coverage, and also plan to expand local manufacturing and R&D in some of these
regions.1
This year, we finished the design phase and began the implementation phase of EVEREST, our
multi-year enterprise resource planning program which will provide
the foundation for global, common work processes and refresh technology to drive operating
effectiveness and improve service excellence to customers. Our ReLoCo (Reliable low-cost
manufacturing) initiative also made excellent progress. We will introduce a series of lower-cost
hypodermic products for lower-priced developing world markets based on new designs and a new
manufacturing process beginning in 2011.2
2010. Zimmer Biomet: We manufacture substantially all of our products at nine sites, including
Warsaw, Indiana; Winterthur, Switzerland; Ponce, Puerto Rico; Dover, Ohio; Statesville, North
Carolina; Carlsbad, California; Parsippany, New Jersey; Shannon, Ireland; and Etupes, France.
Additionally, in December 2010 we acquired two businesses, Beijing Montagne Medical Device Co.,
Ltd. (Montagne) and Sodem Diffusion S.A. (Sodem).Montagne has manufacturing facilities in Beijing
and Xianning, China and Sodem has manufacturing facilities in Geneva, Switzerland. We expect
these facilities will become an important part of our manufacturing network.
We believe that our manufacturing facilities are among the best in our industry in terms of automation
and productivity and have the flexibility to accommodate future growth. The manufacturing operations
at these facilities are designed to incorporate the cellular concept for production and to implement
tenets of a manufacturing philosophy focused on continuous operational improvement and
optimization. Our continuous improvement efforts are driven by Lean and Six Sigma methodologies.
In addition, at certain of our manufacturing facilities, many of the employees are cross-trained to
1 Becton, Dickinson, 2010 Annual Report, March 2011, p.2, http://media.corporate-
ir.net/media_files/irol/64/64106/reports/BD_2010ar.pdf, accused April 1, 2016.
2 Becton, Dickinson, 2010 Annual Report, March 2011, p.3, http://media.corporate-
ir.net/media_files/irol/64/64106/reports/BD_2010ar.pdf, accessed April 1, 2016.

perform a broad array of operations. We generally target operating our manufacturing facilities at
levels up to 90 percent of total capacity. We continually evaluate the potential to in-source products
currently purchased from outside vendors to on-site production. We have improved our manufacturing
processes to protect our profitability and offset the impact of inflationary
costs. We have, for example, employed computer-assisted robots and multi-axis grinders to precision
polish medical devices; automated certain manufacturing and inspection processes, including on-
machine inspection and process controls; purchased state-of-the-art equipment; in-sourced core
products, such as castings and forgings; and negotiated reductions in third party supplier costs. We
use a diverse and broad range of raw materials in the manufacturing of our products. We purchase all
of our raw materials and select components used in manufacturing our products from external
suppliers. In addition, we purchase some supplies from single sources for reasons of quality
assurance, sole source availability, cost effectiveness or constraints resulting from regulatory
requirements. We work closely with our suppliers to assure continuity of supply while maintaining high
quality and reliability. To date, we have not experienced any significant difficulty in locating and
obtaining the materials necessary to fulfill our production schedules.3
We believe adverse conditions in the broader economy have negatively affected elective hospital
procedures. In the fourth quarter of 2010, we saw some stabilization in
procedure volumes and we believe the number of procedures will increase as the global economy
strengthens. Despite the current conditions of the global economy, it is well known that demographic
trends will expand the patient base that needs our products. We believe these factors will ultimately
foster long-term sustained growth even if in the short-term the timing of these elective procedures
continues to be adversely affected.4
2011. Becton, Dickinson and Company: This year, we made excellent progress on EVEREST, our
enterprise resource planning program, which will provide the foundation for global, common work
processes and refresh technology to drive operating effectiveness and improve service excellence to
customers. The initial sites are well prepared for implementation of the new system in the spring of
2012, and we are on track to complete the program early in fiscal year 2014. We have also
successfully implemented our ReLoCo (Reliable Low Cost) program in our Medical Surgical Systems
unit, and we expect to realize savings of approximately $50 million by fiscal year 2013. We are
currently ramping up a ReLoCo II program, applying the same principles, knowledge and skills
more broadly to enable us to generate incremental savings in fiscal year 2014 and beyond.5
2011. Edwards Lifesciences: We developed a rigorous clinical training program that promotes
teamwork among cardiac surgeons and interventional cardiologists, and emphasizes excellent clinical
results. To support expected growth, we expanded our heart valve manufacturing capacity, and made
additional enhancements to our infrastructure, including our information and quality systems. These
investments, plus a 20 percent increase in research and development, moderated our earnings
growth, yet we still grew net income nearly nine percent, which was above our original expectations.6
3
Zimmer Biomet, 2010 Annual Report, March 2011, p.11,
http://files.shareholder.com/downloads/ZMH/1870043614x0x452623/52E0AB39-6649-48D0-9FBD-
DEDCD2951B11/Zimmer_2010AR.pdf, accessed April 1, 2016.
4
http://files.shareholder.com/downloads/ZMH/1870043614x0x452623/52E0AB39-6649-48D0-9FBD-
DEDCD2951B11/Zimmer_2010AR.pdf, accessed April 1, 2016.
5
Becton, Dickinson & Company, 2011 Annual Report, March 2012, p.2, http://media.corporate-
ir.net/media_files/irol/64/64106/reports/AR11/pdf/BD_2011ar.pdf, accessed April 4, 2016.
6
Edwards Lifesciences, 2011 Annual Report, March 2012, p.2, http://files.shareholder.com/downloads/AMDA-
RAMKH/1881812604x0x593923/8a3b5b04-64de-4b5b-8f1f-10cfe001b7d1/2011_Annual_Report.pdf, accessed April 4, 2016.

2011. Zimmer Biomet: We stock inventory in our warehouse facilities and retain title to consigned
inventory in sufficient quantities so that products are available when needed for surgical procedures.
Safety stock levels are determined based on a number of factors, including demand, manufacturing
lead times and quantities required to maintain service levels. We also carry trade accounts receivable
balances based on credit terms that are generally consistent with local market practices.7
We continue to assess the impact that federal healthcare reform will have on our business. Federal
healthcare reform includes a 2.3 percent excise tax on a majority of our U.S. sales that is scheduled
to be implemented in 2013.8
2013. Zimmer Biomet: We believe that our manufacturing facilities are among the best in our
industry in terms of automation and productivity and have the flexibility to accommodate future
growth. The manufacturing operations at these facilities are designed to incorporate the cellular
concept for production and to implement tenets of a manufacturing philosophy focused on continuous
improvement efforts in product quality, lead time reduction and capacity optimization. Our continuous
improvement efforts are driven by Lean and Six Sigma methodologies. In addition, at certain of our
manufacturing facilities, many of the employees are cross-trained to perform a broad array of
operations. We generally target operating our manufacturing facilities at optimal levels of total
capacity. We continually evaluate the potential to in-source and out-source production as part of our
manufacturing strategy to provide value to our stakeholders. We have improved our manufacturing
processes to protect our profitability and offset the impact of inflationary costs. We have, for example,
employed computer-assisted robots and multi-axis grinders to precision polish medical devices;
automated certain manufacturing and inspection processes, including on-machine inspection and
process controls; purchased state-of-the-art equipment; in-sourced core products and processes; and
negotiated cost reductions from third-party suppliers.9
During 2012, growth in the healthcare industry and our revenue growth were adversely affected by
continuing challenges in the global economy. Although the U.S. economy is recovering from the worst
recession in decades, unemployment remains high and consumer confidence remains low, resulting
in reduced numbers of insured patients and the deferral of elective reconstructive procedures. Global
economic conditions, particularly in Europe, our second largest operating segment, remain uncertain.
We believe that European austerity measures implemented to address the ongoing financial crisis
contributed to decreased healthcare utilization and increased pricing pressure for some of our
products.10
2014. Becton, Dickinson and Company: On October 5, 2014, just days after we closed the books
on fiscal 2014, BD announced a definitive agreement to acquire CareFusion, a leading provider of
infusion pumps and drug dispensing systems, to create a global leader in medication management
7
Zimmer Biomet, Annual Report, March 2012, p.3,
http://files.shareholder.com/downloads/ZMH/1881827854x0x557425/F98DB45F-0C31-40AD-9ACC-
7909C00AAF12/Zimmer_2011_Annual_Report__Final_.pdf, accessed April 4, 2016.
8
Zimmer Biomet, Annual Report, March 2012, p.3,
http://files.shareholder.com/downloads/ZMH/1881827854x0x557425/F98DB45F-0C31-40AD-9ACC-
7909C00AAF12/Zimmer_2011_Annual_Report__Final_.pdf, accessed April 4, 2016.
9
http://files.shareholder.com/downloads/ZMH/1881827854x0x649725/4521EBFE-22CD-41FD-8557-
0EDCA4C69302/458588_005_BMK1.PDF, accessed April 5, 2016.
10
http://files.shareholder.com/downloads/ZMH/1881827854x0x649725/4521EBFE-22CD-41FD-8557-
0EDCA4C69302/458588_005_BMK1.PDF, accessed April 5, 2016.

and patient safety solutions. The blending of the two companies’ complementary product portfolios
gives us the potential to offer integrated medication management solutions and smart devices — from
drug preparation in the pharmacy to dispensing on the hospital floor, administration to the patient and
subsequent monitoring.11
Organizational alignment is key to BD adapting to rapid changes in the healthcare industry. Recently,
we announced a new organizational structure to better position us to pursue our purpose and
solutions strategy. Effective October 1, we restructured our business units from three segments —
BD Medical, BD Diagnostics and BD Biosciences — to two — BD Medical and BD Life Sciences.12
2014. Edwards Lifesciences: We operate manufacturing facilities in various geographies around the
world. Our Transcatheter Heart Valve Therapy and Surgical Heart Valve Therapy products are
manufactured primarily in the United States (California and Utah), Switzerland, and Singapore.
Critical Care products are manufactured primarily in our facilities located in Puerto Rico and the
Dominican Republic. We use a diverse and broad range of raw and organic materials in the design,
development, and manufacture of our products. Our non-implantable products are manufactured from
man-made raw materials including resins, chemicals, electronics, and metals. Most of our
Transcatheter Heart Valve Therapy and Surgical Heart Valve Therapy products are manufactured
from natural tissues harvested from animal tissue, as well as man-made materials. We purchase
certain materials and components used in manufacturing our products from external suppliers. In
addition, we purchase certain supplies from single sources for reasons of quality assurance, sole
source availability, cost effectiveness, or constraints resulting from regulatory requirements. We work
closely with our suppliers to mitigate risk and assure continuity of supply while maintaining
uncompromised quality and reliability. Alternative supplier options are generally considered and
identified, 4 although we do not typically pursue regulatory qualification of alternative sources due to
the strength of our existing supplier relationships and the time and expense associated with the
regulatory validation process.13
2014. Zimmer Biomet: At the end of 2014, we had 337 days of inventory on hand, an increase of 52
days compared to December 31, 2013. In order to maintain high service levels to our hospital
customers in numerous geographic regions, we consign inventory to them, including all the various
sizes of a particular product, so that our products are available when needed for a surgical procedure.
As a result, we have a significant amount of inventory on hand. There are some seasonal trends in
our days of inventory on hand, as it usually trends higher in our third quarter due to lower sales
volumes and is lower in our fourth quarter when sales volumes are at their highest. Other factors that
can affect our days of inventory on hand include when we build inventory for new product launches,
or the level of excess and obsolete inventory charges and gains/losses related to foreign currency
that is reported in cost of products sold in any particular period. Our days of inventory on hand in the
past three years have ranged between 285 and 356 days. As of December 31, 2014, our days of
inventory on hand were near the high end of this range. The higher inventory balance and days of
11
Becton, Dickinson & Company, 2014 Annual Report, p.1,
http://www.bd.com/ar2014/pdf/BD_AnnualReport_2014.pdf, accessed April 13, 2016.
12
Becton, Dickinson & Company, 2014 Annual Report, p.7,
http://www.bd.com/ar2014/pdf/BD_AnnualReport_2014.pdf, accessed April 13, 2016.
13
Edwards Lifesciences, 2014 Annual Report, p.4, http://files.shareholder.com/downloads/AMDA-
RAMKH/1886225045x0x817173/1be6601d-0e64-415e-8702-3dcec1559555/Edwards_Lifesciences_2014_10K_Wrap_AR_FINAL.pdf,
accessed April 13, 2016.

inventory on hand were driven by the ongoing global commercialization of new product offerings, the
effects of placing more inventory into distributor and hospital consignment and additional inventory in
certain Eastern European markets where we now have a direct sales presence instead of selling to a
distributor.14
2015. Zimmer Biomet: Over the past five years, we have continuously expanded adjusted operating
margins through the achievement of process-driven improvements in all aspects of our global
business, as part of our culture of operational and quality excellence. Moreover, since announcing the
Zimmer Biomet transaction in the second quarter of 2014, we have modeled significant net
operational synergies into our combination. Our integration teams also made noteworthy progress
executing against our well-defined roadmaps to achieve cost savings and efficiencies. These
programs have included our ongoing sourcing initiative to more effectively leverage our global
purchasing power, the implementation of shared service centers and a more streamlined
management structure. In 2015, these programs contributed to our solid adjusted earnings and
adjusted operating margin performance for the year.15
14
Zimmer Biomet, 2014 Annual Report, March 2015, p. 26,
http://files.shareholder.com/downloads/ZMH/1881827854x0x819050/C1935C65-9C4E-4E29-95E6-9B95E5BE3755/zimmer-2014-
annual-report.pdf, accessed April 11, 2016.
15
http://files.shareholder.com/downloads/ZMH/1881827854x0x882366/03D970B5-3039-43D3-A2C5-
67266EAA19B6/2015_Annual_Report_FINAL.pdf, accessed April 11, 2016.

Recommendations
In supply chain benchmarking it is important to look at performance and improvement of peer
companies over time. Here we look critically at the period of 2006-2015. As companies study supply
chain excellence and corporate performance, we recommend that they:
1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data.
Organizations should benchmark companies within an industry. Each industry has unique rhythms and
cycles. As a result, supply chain excellence analysis needs to be within an industry. No company within
the medical device supply chain has exercised power to improve the value chain. The medical device
industry has largely been a follower of supply chain practices and a late adopter of technology. Only
Edwards Lifesciences Company outperforms.
2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier.
Supply chain leadership teams should analyze the total portfolio of metrics and study progress at the
intersections of the Effective Frontier. Companies with higher performance are using more advanced
analytics to plan outcomes and design the supply chain.
3) Apply Systems Theory.
Teams should evaluate performance over time to understand improvement while realizing they are
managing a complex system. The functions should be aligned to a balanced portfolio of metrics
representing the Effective Frontier, while functional metrics should be focused on improving reliability
(first-pass yield, OEE, hands-free orders, etc.).
4) Focus on Building Value Networks.
No medical device company is driving improvements in value chain effectiveness. While many of these
companies could be a powerbroker in the industry to redefine outside-in processes, all companies are
accepting the limitations of the inside-out supply chain. To drive the necessary change, the medical
device company needs to take charge of the supply chain in the channel and translate and orchestrate
demand.
5) Learn from Other Industries. Use a Steady Hand/Focused Leadership to Drive Improvement.
Companies within the medical device industry are late adopters of supply chain analytics and Supply
Chain Operating Network technologies. To make the necessary improvements, they must move past an
“ERP-centric view” and build outside-in processes with a focus on patient outcomes.

Conclusion
The supply chain within the medical device industry is increasing in importance to deliver on the
objectives of quality healthcare. To understand who performed best within the peer group, we
systemically analyzed medical device company performance on the Effective Frontier. Becton,
Dickinson and Company; Coloplast A/S; and Medtronic Plc are finalists in the Supply Chains to
Admire methodology, while Edwards Lifesciences Company is the industry leader.

Prior Reports in This Series
Over the course of the last four years our methodology has changed and matured. You can track our
progress and find industry-specific information here:
Supply Chain Metrics That Matter: A Focus on Retail
Published by Supply Chain Insights in August 2012.
Supply Chain Metrics That Matter: A Focus on Automotive
Published by Supply Chain Insights in September 2012.
Supply Chain Metrics That Matter: A Focus on Automotive
Published by Supply Chain Insights in August 2015
Supply Chain Metrics That Matter: The Cash-to-Cash Cycle
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: A Focus on the Food and Beverage Industry
Published by Supply Chain Insights in December 2012.
Supply Chain Metrics That Matter: Driving Reliability in Margins
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Hospitals
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Consumer Electronics
Published by Supply Chain Insights in April 2013.
Supply Chain Metrics That Matter: A Focus on Apparel
Published by Supply Chain Insights in May 2013
Supply Chain Metrics That Matter: A Focus on Contract Manufacturing
Supply Chain Metrics That Matter: A Focus on the Automotive Industry
Published by Supply Chain Insights in October 2013

Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012)
Published by Supply Chain Insights in November 2013
Supply Chain Metrics That Matter: Third Party Logistics Providers
Published by Supply Chain Insights in December 2013
Supply Chain Metrics That Matter: A Critical Look at Operating Margin
Published by Supply Chain Insights in December 2013
Supply Chain Metrics That Matter: A Closer Look at Medical Device Companies
Published by Supply Chain Insights in April 2014
Supply Chain Metrics That Matter: A Closer Look at Chemical Companies
Supply Chain Metrics That Matter: A Closer Look at Food and Beverage Companies
Published by Supply Chain Insights in June 2014
Supply Chain Metrics That Matter – A Focus on Medical Device Companies
Published by Supply Chain Insights in April 2015
Supply Chain Metrics That Matter – A Focus on Chemical Companies – 2015
Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies-2015
Published by Supply Chain Insights in June 2015
Supply Chain Metrics That Matter: A Focus on Consumer Products – 2015
Supply Chain Metrics That Matter: A Focus on the High-Tech Industry – 2015
Published by Supply Chain Insights in January 2016
Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies – 2016
These reports, and additional information on the Supply Chain Metrics That Matter methodology, are
available at our Supply Chain Insights website and in the Beet Fusion community.

Appendix
Here we share more data to help the reader understand the math behind this report.
Methodology: Understanding the Math and Ratios
Throughout this report we reference a number of commonly used financial ratios. Each company has
a unique potential. The potential is based on the size of the company and the drivers within the
industry. As shown in Figure A, each has a major impact on the company’s potential on the Effective
Frontier.
Here is a summary of the definitions of the ratios used in this report.
Figure A. Measurement Definitions

Supply Chain Index Methodology: Formulas and
Calculations
Supply chain leaders are competitive. Each wants to drive performance improvement faster than the
peer group. To gauge improvement, companies need to compare and benchmark. To make this
easier, we developed the Supply Chain Index. In the building of the Index, we used financial ratios
versus absolute numbers. The use of ratios allowed us to compare companies regardless of size, and
also compare companies across currencies.
The Index has three factors: balance, strength and resiliency. In this report, the three factors were
calculated for the periods of 2006-2009, 2010-2015 and 2006-2015. Our goal was to understand pre-
recession and post-recession trends while also looking at progress over the longer-term view. The
companies within the industry are stack ranked based on performance within each factor and given a
ranking. The rankings are then built into an index based on overall performance of the three factors.
The math behind the Index is defined below. This methodology was built in cooperation with the
Operations Research faculty at Arizona State University (ASU) in the spring of 2014.
Balance
To develop the balance factor used in the Index, we evaluated a scatter plot of revenue growth and
Return on Invested Capital (ROIC) for a specific company. The balance factor (B) is the proportional
difference of points on an orbit chart for the period of 2006-2012 at the intersection of revenue growth
and Return on Invested Capital. To calculate the balance factor, let iREV denote the revenue growth
of the ith
time period, iROIC denote the return on invested capital of the ith
time period and n denote
the total number of periods under consideration. Thus the balance factor is defined as:





 




1
1
1
1
1
1
ROIC
ROICROIC
REV
REVREV
n
B nn
.
Strength
Strength factor is a similar calculation to balance factor, but with a focus on the intersection of
operating margin and inventory turns. For this analysis, we used a scatter plot of operating margin
and inventory turns on an orbit chart for a specific company. Let iOM denote the operating margin of

the ith
time period (e.g. ith
year), iIT denote the inventory turns of the ith
time period and n denote the
total number of periods under consideration. The strength measure (S) is defined as:





 




1
1
1
1
1
1
IT
ITIT
OM
OMOM
n
S nn
The denominator reflects that there are n-1 differences between n time periods. Figure B depicts the
intersection of operating margin and inventory turns for an example company. The difference in
operating margin and inventory turns between the first and last time period is shown.
Figure B. Inventory Turns and Operating Margin Intersection for an Example Company
Resiliency
The resiliency factor is a measurement of the tightness of the pattern at the intersection of operating
margin and inventory turns for a given company. For companies that did well, and had a tight pattern,
the value will be lower than companies that lacked reliablity for the period. To develop the value, we
considered a scatter plot of operating margin and inventory turns for a specific company. Let dij

denote the Euclidean distance between a pair of points i and j and let m denote the total number of
pairs. The resiliency measure (R) is defined as the mean distance of all possible pairs of points at the
intesection.
That is,


i ij
ijd
m
R
1
Figure B shows an example of the opertaing margin and inventory turns intersection for an example
company. Table A shows the distances between every possible pair of points at the intersection. The
resiliency is calculated from the mean of the distance values and is equal to 0.7335.
A Closer Look at Inventory Turns: An Important
Measurement
In an ideal world, companies want to turn inventory faster. The faster the turns, the faster the cash
turnover, and the greater contribution to market valuation.
There are two primary measurements for inventory turns. Both are used in the industry. Often they
are used with clarity of the underlying definition. The results are very different.
One ratio is based on inventory turnover as a ratio based on revenue, and the other measures the
inventory turnover ratio based on cost of goods sold. In the period of 2013-2014, at Supply Chain
Insights, when calculating the Supply Chain Index rankings, we used financial information from
YCharts. The methodology used by YCharts is to calculate inventory turns as Inventory Turnover =
Revenue / Average Inventory where Average Inventory is equal to the average of the last two
reported inventory levels of the specified frequency. However, in this report, and the subsequent
series of industry-specific reports, we will be using the cost of goods sold formula:
Inventory Turnover = Cost of Goods Sold/Inventory.
As can be seen in Tables A and B, the two calculations yield very different results. The larger the
margin in the industry, the greater the difference. With operating margins as high as 22%, the
difference in the measurement is especially relevant for medical device companies. Consider the
differences between Table A and Table B. When turns are viewed as a ratio based on revenue, the
inventory turns value for the industry for the period of 2006-2015 is 8.44 versus 2.43 for the same
period when measured based on cost of goods sold.

It is for this reason that in the calculation of the Supply Chain Index methodology in this, and
subsequent reports in this series, we are using the cost of goods sold method in the calculation of
inventory turns.
Table A. Inventory Turns Analysis for All Industries Using Revenue/Average Inventory
.

Table B. Inventory Turns Analysis for All Industries Using Cost of Goods/Inventory Analysis
In our countdown for the Supply Chain Insights Global Summit, we will be publishing a series of
reports on the Supply Chain Metrics That Matter by industry. In this series we will use the cost of
goods definition for inventory turns.

Corporate Overview Data
In looking at the data, it is useful to understand the size and scope of the company. To help the
reader, here we share some overarching corporate data.
Table C. Medical device Companies Overview

About Supply Chain Insights LLC
Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of
operation. The Company’s mission is to deliver independent, actionable, and objective advice for
supply chain leaders. If you need to know which practices and technologies make the biggest
difference to corporate performance, we want you to turn to us. We are a company dedicated to this
research. Our goal is to help leaders understand supply chain trends, evolving technologies and
which metrics matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written four books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; and the fourth book, The
Shaman’s Journal 2015, published in September 2015.
With over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a
year on the evolution of supply chain processes and technologies. Her research is designed for the
early adopter seeking first mover advantage.

Endnote
i
How to Find Outliers, July 4, 2016, http://www.varsitytutors.com/ap_statistics-help/how-to-find-outliers

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