The Impacts of Lead Time on Supply Chain

Resilience in Medical Device Industry

I
 ABSTRACT

The increasing popularity of globalization integration across the supply chain has led to

various kinds of disturbances. Among studies on factors that affects firm’s resilience

performance, a focus on suppliers’ replenishment lead time remains sparse. This study is

motivated by a supply chain resilience performance of a leading medical device

manufacturer, regarding the risk of lead time variability. The purpose of this study is to gain

insights into the impacts of supplier’s lead time on resilience performance of the firm. By

investigating into the relationship between practices and processes of the company, the

impacts of variability in lead time can be reveal. A survey is used to gather information from

the population of managers and operational staffs from medical device manufacturers, and

based on that, an illustration is built to illustrate the relationship between suppliers’ lead time

performance and supply chain risk management. Overall, this study is expected to put an

emphasis on the perception of disruptive events during lead time, which can help alert supply

chain managers to quickly aware of a possible risk and develop recovery mechanism, thus

enhance resilience performance.

Keywords: Supply chain risk management, Resilience performance, Lead time variability.

II
 TABLE OF CONTENTS

ABSTRACT....................................................................................................................I

TABLE OF CONTENTS..............................................................................................II

LIST OF FIGURES......................................................................................................III

CHAPTER ONE INTRODUCTION.............................................................................1

CHAPTER TWO LITERATURE REVIEW.................................................................3

2.1: Supply Chain Resilience in Medical Device Industry.............................3

2.1.1 Supply Chain Resilience........................................................................3

2.1.2 Resilience in Medical Device Supply Chain.........................................6

2.2 Lead Time in Supply Chain Resilience Literature...........................................8

CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY......................13

3.1 Research objectives........................................................................................13

3.2 Research methodology...................................................................................13

REFERENCES.............................................................................................................15

APPENDICES..............................................................................................................19

Appendix A: Survey questions sample.................................................................19

Appendix B: Interview questions sample.............................................................20

III
 LIST OF FIGURES

Figure 1.1 The sand cone model of SCRES with set of propositions............................5

IV
 CHAPTER ONE

INTRODUCTION

To stay competitive in the modern economy, firms has to adapt various strategies, such

as offshore outsourcing (Chang & Lin, 2019). The competitive advantage of a global supply

chain network is, however, significantly depends on its resilience performance under

unexpected disruptive events (Hasani, Zegordi, & Nikbakhsh, 2015). Both natural and man-

made economics disruption can bring unexpected harmful consequences to the profitability as

well as resilience performance of a supply chain network (Hindle, 2008). Research on supply

chain management now is increasingly laying emphasis on enhancing resilience in the supply

chain practices. However, focus on the impacts of a supply chain’s intrinsic characteristics,

such as lead time, remains sparse.

Concerning the health service market, a supply chain is typically highly complex,

therefore having great exposal to disruptive events. However, due to the scope of this study,

the setup of the problem examines only the processes of tier one upstream suppliers that have

effects on the production of medical device manufacturers. Demand for medical device is

generally considered stable and experience less fluctuations. In this regard, a factor such as

unreliable transit time might have substantial effect on the production plan of the

manufacturers. The solution then will focus on the reliable lead time, which allows better

control of stock level.

In this study, a supply chain resilience level is assessed with the stability of production

process. This study adapts a critical operational factor examined by Bandaly, Satir, and

Shanker (2016), namely lead time variability to investigate its impacts on the supply chain

1
resilience performance. While his base model is built on simulation-based optimization to

achieve an optimal solution, this study will only focus on the practical problems that are

faced in operational levels resulted from a variability in lead time, thus indicating the impacts

that lead time variability exerts on the whole supply chain performance. The study is

expected to explain the effects of lead time variability on medical device manufacturers, thus

helping managers in decision making processes to manage the risks and develop

measurements of the supply chain performance. Overall, this paper serves to provide insights

of how variability in lead time could affect decisions in risk management.

This study is structured as follow: First, it presents a rigorous review of previous

literatures on supply chain resilience in general, and medical device supply chain in

particular. Then, it will propose a research design to gather information about practical

situations faced by medical device manufacturers related to lead time variability. In further

steps, this study is expected to provide meaningful for managers, as well as paths for further

studies.

2
 CHAPTER TWO

LITERATURE REVIEW

Two main literature streams that are related to this research are the literature of supply

chain resilience in medical device industry, which motivates and gives foundation to this

paper, and the research on lead time variability regarding resilience performance. The

following literature review will address the previous related research.

2.1: Supply Chain Resilience in Medical Device Industry

2.1.1 Supply Chain Resilience

There has been a variety of research on the understanding of supply chain resilience

capabilities. Hohenstein, Feisel, Hartmann, and Giunipero (2015) construct a holistic

systematic literature review on this matter. This paper adapts the definition by Töyli, Lorentz,

Ojala, Wieland, and Wallenburg (2013), where a supply chain is considered resilient with the

ability to sustain the original stable situation, or if it can achieve a new stable situation after

disruption. Since disruption might be the result of both natural and man-made actions, studies

have been focusing on both types of the causes. Papadopoulos et al. (2017) highlight that

natural disaster can cause disturbance to both supply chain network activities and firm’s

commercial activities. This study draws the need for a more professional way of

investigating, storing, and analyzing the data, mostly with the use of Big data and AI. On the

other hand, raw materials have a long travel before reaching the production site and be

processed into products to reach customers. During the transits, disruption may occur due to

the change in ownership, changes in geographic regions with various political situations, and

changes in mode of transportation. These activities involve human acts, which are another

3
source of volatility. Globalization allows firms to cut the cost by applying various strategies

such as offshore outsourcing, or building production plants in various locations, however, it

also increases the risk of facing changes in regions that a product will travel through. Stecke

and Kumar (2009) point out that these factors, which involve constant changes, can cause

vulnerability to the supply chain performance. Therefore, supply chain resilience should be

seen in term of the ability to cope with changes.

Resilience has a larger scope than supply chain risk management (Brusset & Teller,

2017). Supply chain resilience has an emerging important since supply chain nowadays face a

higher risk of disruption, as well as the fact that global sustainability is of increasingly

concern (Ribeiro & Barbosa-Povoa, 2018). Risk, in its general term, is considered to exist

throughout the firms itself as well as along the whole supply chain, creating disappointing

outcomes and is potentially significantly detrimental. One subset of supply chain risk

management literature studies the firm’s resilient performance in the case of threats and

unexpected supply chain disruptions. The more complex that a supply chain become, the

more it is prone to disruption resulted from natural disasters and man-made event. Thus, both

practitioners and researchers are concerning more about the quick recovery after disruption

(Brusset & Teller, 2017).

According to Hohenstein et al. (2015), there are four stages of supply chain resilience

(SCRES) performance. The first step is referred to as Readiness. In this stage, firms and

suppliers prepare the ex-ante mechanism against disruptive events, in order to effectively

alleviate the negative impacts of disruption and maintain stable operation during the crisis. In

the next stage, which is Response, SCRES takes control over the disruption and initiate the

responses to mitigate the consequences of the disruption. In the third stage (Recovery), the

supply chain resilience system takes part in the post-disruption recovery. This step is defined

as the help for the supply chain network to bounce back to the normal condition quickly. The

4
more resilient a supply chain is, the less time it takes to recover from a disruption. The

ultimate goal is presented as Growth, where a new stable situation is achieved. As a firm

recover faster than its competitors do, it can achieve a more favorable condition and have

considerable competitive advantages when disruption happens again (Bakshi & Kleindorfer,

2009).

Figure 1.1 The sand cone model of SCRES with set of propositions

Disturbances can make a supply chain more vulnerable to risk of disruption, and it will

have negative impacts on the firms’ performance in both financial aspect and corporate

image, The undesirable outcome are likely to be a demand fall (Lücker & Seifert, 2017).

Studies by Hendricks and Singhal (2005) have proven the effect of a supply chain disruption

in the long-term corporate stock price, which resulted in an average abnormal stock return

(the differences between observed return and the normal expected return) of nearly -40%,

which means the actual price had been affected seriously by the news of disruption happened

to the supply chain. In order to deal with this challenge of vulnerability, the definition of

resilience arises as “the ability to return to its original state or move to a new, more desirable

state after being disturbed” (Christopher & Peck, 2004). This is consistent with other studies,

where supply chain’s ultimate goal is to achieve a new stability after the disruptive event

5
occurred. On the supplier’s side, Tomlin (2006) argues that if firm can source from two or

more suppliers, it can increase the resilience performance through factors such as supplier

reliability and volume flexibility. When there are more suppliers, firms also suffer from less

bargaining power from suppliers, which is one of the five force that directly expose effect on

firms’ operation. Even when there is no supply uncertainty, having multiple suppliers can still

be greatly beneficial since different suppliers have different lead times, thus allowing firm

more choices when designing a risk management mechanism.

2.1.2 Resilience in Medical Device Supply Chain

A typical supply chain in medical device industry is a highly complicated network,

comprising of various parties at different stages across the value chain. A medical device

supply chain has a number of similarities with other supply chains (such as sourcing,

warehousing, logistics and distribution), and also differentiates itself by customer sectors and

management structure, largely due to the specific requirements of medical sector. Due to this

fact, the medical device supply chain is characterized by three distinguishable aspects: less

network hierarchy, high network resilience, but has higher failure cost (Xiao & Wang, 2014).

Its lower network hierarchy is determined by a specific distribution network, in which

products are directly sold through hospitals, rather than going through a number of

distributors or retailers for other goods. This characteristic makes the medical device supply

chain becoming flatter, which can be seen as an advantage for managerial levels. Secondly,

this type of supply chain also demands for a higher network resilience since medical device

production has to follow strict requirements on its specifications and usage of products.

Those specific requirements lead to the fact that medical devices need to have strong product

specificity and low substitutability. Thus, if any part of the supply chain is disrupted, it is

challenging to find a substituted material quickly. Thirdly, regarding failure cost, the impact

of a disruption in a medical device supply chain is more severe than other goods because it

6
directly involves people’s health (Xiao & Wang, 2014). If the supply chain is disrupted, there

is high chance that patients will suffer from serious consequence due to lack of device, thus

having a late treatment. In other words, any failure happens across the network can lead to

detrimentally severe consequence for the patients.

In general, medical device supply chains are highly complex, fragmented, incomplete,

and dynamic (Lenin, 2014). Massuda, Hone, Leles, de Castro, and Atun (2018) point out that

the increasing investment in the healthcare system can be a leverage for the resilience

performance of the whole supply chain. However, the medical device supply chain is lagging

behind other industries about a decade in term of management processes. While other

industries such as automotive, fast moving consumer goods… have been putting emphasis on

supply chain excellence for about two decades, the medical device industry has been putting

effort to improve its supply chain practices for only 8 to 10 years (Tjhin & Pandey, 2012).

One of the key driving forces for such move was Medical Device Supply Chain Council

being founded in 2004, which was established by supply chain and operations executives

from leading medical device manufacturers. According to a research that was attributed to

Medical Device Supply Chain Council in 2011, about 40-45% of the operating expenses

derives from the supply chain expense, and better supply chain management strategies could

help reduce the supply chain costs by a potential of 5-15% (Global Healthcare Exchange,

2011). To enhance resilience performance of the industry, three themes can be examined

according to Opata (2015): (a) designing, planning, and forecasting of supply chain practices;

(b) developing a flexible and diverse supplier base; and (c) allocating resources and

managing demand. The implications are straightforward: mitigating supply chain risk, thus

enhance its performance, which in turn lower price of the products, increase satisfaction of

stakeholders and achieving a higher living standard.

7
 The resilience of medical device industry has been tested during the spread of the global

pandemic COVID-19. The pandemic has changed the market structure of healthcare supply

chain, with an upsurge in medical equipment that are used in the treatment and cure of the

patients. This is a great opportunity to increase profitability of the medical device

manufacturer, but also put great pressure on the supply chain as a whole, since it has to suffer

from more burden than in normal condition. The European Commission recently made an

announcement, in which it declared to postpone the application of a certain number of

medical device provisions. Following this delay, it is likely to lead to the delay in production

of the mentioned devices, which in turn results in the shutting down of certain number of

manufacturing plants. This fact would put great the stress on the whole supply chain system

because all the parties in the supply chain are involved. This postpone from customer’s side

could potentially lead to the Bullwhip effect, which is magnitude throughout the supply

chain, therefore creating a disruption to a larger extent than the disruption by COVID-19

itself.

2.2 Lead Time in Supply Chain Resilience Literature

Song, Zhang, Hou, and Wang (2010) argues that lead time is a crucial parameter in

operation planning, while Agrawal, Sengupta, and Shanker (2009) states that lead time is

strategically important when firms want to improve supply chain performance. These studies

argue that when competition between firms increases, customers now have a wider range of

choice, which leads to a more fluctuated demand. This deviation can cause substantial impact

on every parties across the supply chain, but since the bullwhip effect exists, the impacts are

worsened when lead time are wider and less certain. Most of the research has put emphasis

on the methodology to assess the resilience performance toward unforeseeable disruptive

events, therefore creating a gap in the intrinsic network characteristics, such as lead time.

Studies on the implication of lead time on supply chain resilience performance regard lead

8
time as a deterministic parameter. A system of dynamic simulation has been developed to

explore the impacts of lead time on performance of a supply chain (Kim, Chatfield, Harrison,

& Hayya, 2006). Follow that, different lead time exhibits the fragility on a supply chain when

disruptive events occur. They also highlight that in case of sharing customer demand, there is

a linear relationship between the bullwhip effect and supply chain echelons, while the

relationship could be exponential if the information is not shared. By understanding that, a

firm can better allocate its resources and deploy investment, thus increase its resiliency

performance when facing disruption, making itself more competitive than other rivals.

However, there have been conflicts on what impact that lead time really exerts on supply

chain resilience performance. Firstly, lead time is proven to have a positive relationship with

the firm’s preparation in reducing the impact of disruptive events (Rumyantsev & Netessine,

2007). In this paper, scholars conducted an empirical study to show that procurement lead

time moves along with inventory level, therefore, reducing the replenishment lead time can

shorten the variance of lead time in the case of high demand variation from customers. Song

et al. (2010) also points out that firm with shorter lead time can react more quickly and

efficiently to a shift in customer demand. However, failure in delivery or shortage in supply

can exert severe impacts on manufacturers, such as production halt, as buffering inventory is

low (Simchi-Levi, Snyder, & Watson, 2002). Therefore, a supply chain planner should well

address the problem of how much buffer stock that firms should hold to mitigate the

consequences of production disruption. They also point out that strategies applied across the

supply chain must be robust in order to respond quickly to the uncertainty. This work draws

academic attention and creates a flow of studies on the supply chain’s bullwhip effect.

On the other hand, a longer lead time is believed to have no benefits in responding to

disruptive events (Chang & Lin, 2019). In other words, shorter lead time allows downstream

customers to be more flexible in mitigating the disruption impacts. As delivery lead time get

9
longer, firms face a more substantial risk of disruption since inventory management is less

accurate. Kim et al. (2006) argues that the bullwhip effect is far larger in the case of wide

lead time in comparison with the mean lead time, as it folds the magnitude of the bullwhip

effect. In other cases, when lead time remains constant, the study report a low variance

amplification. Sadeghi (2015) also confirms the positive relationship of the bullwhip effect

and lead time, indicating that bullwhip effect become larger with a longer lead time. Since it

can cause asymmetric situation in supply and demand, longer lead time can worsen the firm’s

ability to handle the disruption. A comparison between moving average and exponential

smoothing forecast implies that when firm use exponential smoothing to forecast demand, the

bullwhip effect is less severe as it causes a lower degree of fluctuation. This is resulted from

the fact that supply chain consists of various segments and demands for a high level of

coordination to increase the profitability of the chain in a whole, rather than maximizing each

party’s own profit.

The effects of lead time variability have been well studied in previous studies. The risks

that have root cause in variability of lead time should be managed carefully in order to

improve supply chain practice. While other factors such as demand, transportation, or

environment factors, are external factor of a supply chain, lead time is among internal factors,

thus can be monitored with various risk management approaches. Impacts of lead time

variability are put down to different measurements, such as (i) order variability

(Chaharsooghi & Heydari, 2010), which is reported as when upstream level of order variance

is less than that of downstream, the bullwhip effect can be lessened with an increase in lead

time variance; (ii) cost of inventory as well as its level (Chopra, Reinhardt, & Dada, 2004),

where a “fill rate” is reported to reduce the level of required stock, then in turn reduce the

total holding costs percentage in the cost structure; and (iii) financial indicators (Croom,

Christensen, Germain, & Birou, 2007), which suggest that the variance in the supply chain

10
practices has a greater impact on the firm’s financial performance than the averages. As other

uncertainties do, lead time variability can deteriorate the supply chain performance, which

leads to a lower resilience.

However, studies also argue lead time variability might has negligible effect on the

supply chain. Chatfield, Kim, Harrison, and Hayya (2004) classify the effect of lead time

variability from “very little” to “exponential” with regard to different levels of quality of

information. They also examined the cushion of “extra safety lead time” instead of safety

stock. Huang, Hung, and Ho (2017) states that the information sharing practice can help

performance of the supply chain better, but in some case, it can also increase the competition

among parties across the value chain. They found out that information sharing can reduce a

great level of inventory, thus reducing total cost for both suppliers and manufacturers. It also

depends on the level of information sharing, where a perfect sharing can lead to the

consequence of double margination, while partial sharing of information can cause deviation

between actual demand and inventory level. For the same level of lead time variability, when

information about demand is shared, the order variance at factory and the variance of

customer order will drop significantly. Chopra et al. (2004) also introduce a minimum service

level, below which a reduce in lead time uncertainty will increase the level of safety stock

instead of decreasing. Firms who manage to perform at a lower service level cannot take

advantage of reducing lead time in reducing variance, instead, it can only reduce the

inventory level. Moreover, lead time variability exhibits different level of impact when

operating in different business environment. While a number of previous study consider the

quality of information shared, Bandaly et al. (2016) examines the level of risk aversion. Their

study report that variability is not always significant to some extent regarding a low risk

aversion level. Instead, those variability will exert greater effect on the expected opportunity

11
cost. With low risk aversion level, lead time variability has negligent impact on the supply

chain performance.

12
 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Research objectives

In this study, the resiliency of the supply chain is assessed regarding the stability of

production process. The overall objective is to assess the impacts of lead time variability on

supply chains resilience performance. To judge the consequences of lead time variability, the

survey will focus on:

i. Determining the causes of lead time variability faced by the firms.

ii. Determining the problems caused by an unexpected change in lead time.

iii. Evaluating the consequence of the aforementioned problems.

iv. Evaluating of the demand for a stable lead time.

3.2 Research methodology

This study will take the descriptive research design. Based on the objectives that are

stated above, survey and interview are considered to be the main instruments for data

collection.

Information will be collected mainly on the causes and consequences of an unexpected

lead time change and the flow of information within the supply chain. Affected procedures

such as ordering raw materials, inventory handling, production planning, outbound logistics

will be explored. The target population of these survey are managers of Procurement,

Production, Logistics, and Warehouse departments of various medical device manufacturers,

as the lead time volatility will have effect on their managerial decision making. Surveys will

also be distributed to employees of operational levels. They are the ones who perform daily

tasks related to the procedures, therefore, they are also the people who, at the soonest and

13
most seriously, perceive the consequences of an unexpected disruption happened because of

lead time variability. For survey questions sample, please see Appendix A.

Interview will be arranged to obtain more insights and reference check of the accuracy

of given data. The purpose is to have a closer look at the problems that employees may be

unaware of or unable to describe thoroughly via surveys. Each interview may last for about

30-40 minutes with short break. It is expected to generate a snowballing effect, thus allow

better understanding of the situation. For interview questions sample, please refer to

Appendix B.

14
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 APPENDICES

Appendix A: Survey questions sample

1. Which department are you working for?

2. How often do you face an unexpected change in lead time from suppliers?

3. When lead time changes, do suppliers explain to you why it happens?

4. When lead time changes, do you aware of the cause for it?

5. When lead time changes, do suppliers commit to take responsibility for the

consequence (i.e., Production halt)?

6. How does a change in lead time affect your work?

7. How does a change in lead time affect the firm’s plan as a whole?

8. Do you need a flexibility in lead time (i.e., Pulling in or pushing out delivery)?

9. How does a fixed lead time affect your work?

19
Appendix B: Interview questions sample

1. Please describe your daily operational task.

2. What is a normal lead time for your suppliers?

3. Do you experience lead time variability for different raw materials? If yes, how

does that affect your production scheduling?

4. Please report a time when you experience unexpected change in lead time. How

does that affect your workflow?

5. How do you address the aforementioned problem? How long does it take you to

address the problem?

6. How frequently do you face unexpected lead time changes? Is that result from

suppliers or third-party logistics providers?

7. Do you think it is important that your company share demand forecast information

with suppliers?

8. What do you think can improve your supplier’s lead time reliability?

20