Lessons From @TeslaMotors – Rethinking the Role of the Dealer

Medical device companies and auto manufacturers depend on a network of dealers or distributors, to market, sell and service manufacturers’ products around the world. It’s the accepted way of doing business, and it’s expensive. I’ve had great relationships with distributors, in the US and around the world. They perform an important set of services, but they are also expensive. Distributors can cost 25% of revenues (or more depending on local pricing). Compare that percentage to the percentage of revenues you spend on R&D.

So I’ve been pretty impressed that Tesla has gone dealer-free. They’ve up-ended the traditional model, and I think it’s time for medical device companies to rethink the role of the medical device distributor. If you’re a medical device distributor, it’s time you rethink your business model too.

To understand why Tesla went dealer-free, let’s look at the reasons auto manufacturers needed dealers in the first place, and what has changed.

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Lessons From Tesla – Service Is Not a Profit Center

In almost every business, customers weigh the downside of poor product reliability more than the upside of new product features. Consumer demand for reliability has driven automotive industry design improvements for the last few decades.

Achieving reliability for innovative products is pretty hard. Tesla has delayed new models to hit performance, cost and reliability objectives. My guess is that they have some pretty sophisticated product testing. Nevertheless, real world experience is never the same as bench testing, and even for Tesla the need for after-sales service is a fact-of-life.

Most vehicle manufacturers and medical equipment manufacturers manage after-sales service as a profit center. Tesla has taken a different approach to its real world reliability issues. Innovative medical equipment companies can learn a few things from Tesla’s approach.

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The State of Manufacturing 2012

Manufacturing Jobs (Photo credit: Leader Nancy Pelosi)

Medical device companies manufacture their products, so you’ll find plenty of talk about manufacturing on my blog. A year ago I posted “Manufacturing Matters” about the unfortunate disconnect between product development and manufacturing. Six months before that I posted “The Dwindling Allure of Building Factories Offshore” where I tried to give some guidance about factory location decisions.

Other than news of factory closures and layoffs, or management misbehavior in Chinese factories, relatively little is written about manufacturing in the US media. A handful of publications, though, have not forgotten the importance of manufacturing to the US economy. Medical device executives would do well to pay attention to the overall manufacturing environment. So today I offer up a great collection of manufacturing articles for your year-end reading pleasure.

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Bits and Atoms

More than two million drug-eluting stents were sold worldwide in 2011, of which 87% were manufactured from just five product designs [source]. The success or failure of product development is ultimately measured by financial outcomes. Each of us hopes our large investments in product development will be returned many times over by the sale of millions of profitable manufactured units.

A great product design is thus the set of instructions that enables scalable, salable, profitable production.

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Manufacturing Matters

Personalefabriksmall — Image via Wikipedia

Look around the parking lots of medical device companies, and you’ll find that most engineers drive Japanese cars. Even those who drive something else acknowledge the manufacturing prowess of Toyota, Honda, Nissan, Subaru and Mazda. When it comes to cars, we all know that manufacturing matters. Look inside the buildings of medical device companies though, and it’s often a different story. Most product development engineers have little understanding of the discipline of medical device manufacturing, other than a required familiarity with good manufacturing practices. It’s the rare medical device product developer who understands single-piece flow, 7 wastes, line-balancing, cell-based manufacturing, theory of constraints, poka-yoke, kanban design, kaizen events, six sigma, zero defects and the many other buzzwords/elements of lean manufacturing. It’s a real problem.

The best development engineers know that manufacturing matters, and engineers who “get” manufacturing create significantly better product designs and significantly more value. No great medical device designs make it to the end customer without being manufactured. I could even argue that medical device product development is all about manufacturing. Here’s what I mean.

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“The Dwindling Allure of Building Factories Offshore”

Interior of the 3m Co.(Minnesota Mining and Ma... — Image by The U.S. National Archives via Flickr

A recent article in The Economist describes “The dwindling allure of building factories offshore.” The article concludes that “Increasingly, it makes sense to make things in a variety of places, including America.”

I agree. Medical device companies face the same global opportunities and challenges as other manufacturers. While moving medical device manufacturing to a low-wage location sounds like a no-brainer, it takes real skill and experience to make it work well. Sometimes it makes sense, and sometimes it doesn’t.

How do you decide?

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