An even larger medtech supply chain shock looms beyond the pandemic

Tuesday, November 9, 2021

Source: Medical Design & Outsourcing

Drifting wildfire smoke made for blazing sunrises and sunsets this summer in Minnesota, where electronics manufacturer Nortech Systems has been replacing air handling equipment to ensure particle filtration and the ability to operate in more extreme temperatures.

“I had days where I jumped in the car, and I drove up to Bemidji and [the smoke] got steadily worse,” CEO Jay Miller said. “I’m thinking about not only small particles of particulate matter in very sensitive boards that we’re manufacturing, I’m also thinking about my employees that have asthma. … I can put them in a good environment for eight hours a day, but how are they going to be the rest of the time? That’s worrisome.”

Medical device companies are increasingly focusing on the risk climate change poses to their businesses, supply chains and the health and safety of their employees and patients.

“All the major companies are building climate contingency plans and thinking about business interruption,” said Brian Johnson, president of the Massachusetts Medical Device Industry Council (MassMEDIC). “The last five years have been an extraordinary wake-up call. … I have yet to see a region that is immune to impacts from climate.”

For years before COVID-19, we’ve known that a global pandemic was a matter of when, not if. We face the same certainty on climate change. In fact, climate change-related events on two separate continents are already partly to blame for the global semiconductor shortage.

When frigid arctic air escaped the polar vortex in February and knocked the Texas state electric grid offline, chip fabrication plants in Austin operated by Samsung and NXP Semiconductors stopped production for weeks after the record cold snap.

It’s not just extremely cold weather pressuring reliable electricity, but also heat waves, droughts, wildfires and increasingly powerful superstorms. As ocean temperatures rise, typhoons, hurricanes and cyclones are gaining strength and shifting their global patterns, meaning more precipitation for some regions and less for others.

Droughts in Asia threaten to throttle the water-intensive process of semiconductor manufacturing. In Taiwan — the global leader, with the foundries at Taiwan Semiconductor Manufacturing Co. churning out more chips than anyone else in the world — the average number of typhoons making landfall has decreased in recent years, including a typhoon-free 2020. The drought not only depleted freshwater reservoirs, but also reduced hydropower generation as electricity demand spiked during a heat wave.

On the other side of the Pacific, record-breaking heat killed hundreds of people across Western North America. It was the hottest summer on record for the mainland U.S., according to the National Oceanic and Atmospheric Administration, eclipsing the 1936 Dust Bowl summer by 0.01ºF.

‘Grave implications’

Tetsuo Kobayashi Olympus CSO and ESG

Olympus Chief Strategy Officer Tetsuo Kobayashi also serves as the environmental, social, and governance head. [Photo courtesy of Olympus]

Based in the Netherlands, a country with about one-third of its surface area below the rising global sea level, Philips recently offered incentives such as preferential payment terms for suppliers that set goals to reduce greenhouse gas emissions. In addition, the health technology company said it wants half of its supply purchasing by 2025 to come from firms that set science-based targets to help limit the catastrophic effects of global warming.

“We are at a critical point of urgency where we need to accelerate the global transition to climate neutral, circular and resource-efficient economies and societies,” Philips CEO Frans van Houten said in an October announcement of its latest climate initiative.

Medtronic didn’t use the word “climate” once in its 2020 annual report, though in previous years it warned investors that new climate regulations could increase energy costs and prices of raw materials. But in 2021, Medtronic’s annual report specifically flagged climate change as a real danger to its business.

​​”Climate change resulting from increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere could present risks to our future operations from natural disasters and extreme weather conditions, such as hurricanes, tornadoes, earthquakes, wildfires or flooding,” Medtronic said in the filing. “Such extreme weather conditions could pose physical risks to our facilities and disrupt operation of our supply chain and may impact operational costs.”

Medtronic soon followed up with plans to reward suppliers that help reduce greenhouse gas emissions throughout its supply chain, citing “the risks that climate change poses to human health and long-term global financial stability.”

It’s not just a hypothetical. In September 2017, Hurricane Maria killed thousands of people in Puerto Rice and took Medtronic’s four manufacturing plants there offline for nearly two weeks at a cost of approximately $60 million. The following month, California wildfires forced Medtronic to evacuate buildings in Santa Rosa, where several of its cardiovascular operating units are headquartered.

Johnson & Johnson’s climate change risk disclosures in its annual reports have shifted over the years. For example, it warned in 2010 of the “potential impact of climate change concerns on the design, manufacturing, marketing and sale of health care products” and more recently highlighted extreme weather, natural disasters and water availability.

Olympus identifies climate change not only as a serious issue that threatens the global environment, but one that carries “grave implications for the group’s business activities.”

The Japan-based company has analyzed physical risk to its factories from natural disasters such as typhoons and floods, created business continuation plans for each site, and forecasts supply chain risks and operational disruptions based on different scenarios of global temperature increases.

Preparing medtech for climate change disruptions

Nicolette Louissaint Healthcare Ready

Nicolette Louissaint, executive director of Healthcare Ready [Photo courtesy of Healthcare Ready]

“We just went through Hurricane Ida and saw this storm make landfall in two regions, and we’re seeing significant devastation from natural disasters,” said Nicolette Louissaint, executive director of Healthcare Ready. “On the West Coast, we’ve got wildfires … whether it’s a snowstorm in Texas or a Category 4 hurricane, there may be these disruptions [to not only supply] but also demand. We’re seeing more patients in greater need of healthcare with more acute needs with these extreme events.”

She made the remarks while moderating a supply chain panel hosted by AdvaMed, discussing the kind of work Healthcare Ready does to promote resiliency and preparedness in the industry.

“One of the biggest concerns we have is how do we keep our foot on the gas on preparedness even after the pandemic is over,” Louissaint said.

One of her panelists, Mark Thorburn, BD’s North America supply chain VP, said the medtech company lost a North Carolina distribution center to a hurricane a few years ago and diverted orders to the Midwest and West Coast to keep product moving.

“Be careful where you’re sole-sourced,” he said. “… Puerto Rico taught us a lot. If you get all your eggs in one basket, you can be in a bad situation, and when your product is the product they need to save lives and advance healthcare, you’ve got to think about things differently.”

These conversations start with supply chain managers, but the best results come from involving all parts of an organization as a normal part of business, said Jim Bourne, VP of global planning, sourcing and logistics at Edwards Lifesciences.

“We in supply chain are usually best positioned to bring these scenarios forward to our leadership,” he said. “Sometimes, if we put it in the position of can we afford not to, it does allow us to paint the scenarios in a different light.”

“And other times I’ve found if we challenge our regions — for example, we’ve done a look at all of our distribution sites around the world and if one were to go down, where would we service the other one from, so that we literally have a dashboard and go after it — sometimes by doing that and challenging our teams around the world to find different options … you find you can be more creative with those continuity plans than you might have otherwise thought,” Bourne said.

Nortech Systems CEO Jay Miller

Nortech Systems CEO Jay Miller [Photo courtesy of Nortech]

Engineers at Nortech are on board, said Miller, whose company has five manufacturing facilities in Minnesota, one in Mexico and one in China, plus thousands of suppliers, each with their own suppliers.

“I’m a biomedical engineer. I get it,” he said. “Designing the product is the fun part. Creating a redundant supply chain or fixing bugs or problems like that, that’s not fun. … [But] we’ve got everybody’s attention now. We are getting a lot more engineers that are focused on supply chain, supply chain redundancies, design for manufacturability, design for supply chain. Everybody’s got quite a bit of religion around that.”

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