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August 2004 16:00 - Source: The Manufacturer.com

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New products have Philips Medical Systems' CT division growing rapidly. Jennifer Monroe examines their strategy for success

Investing in the right place at the right time seems to be what is behind the recent and rapid success of Philips Medical Systems. In October of 2001, Philips completed the acquisition of Marconi Medical Systems, based in Highland Heights, OH, just outside Cleveland. Through this move, Philips gained the operations that developed and manufactured leading multi-slice CT, MRI, and Nuclear Gamma Camera systems.

While the company knew it had plenty of opportunities to investigate, Philips Medical Systems got an additional boost from a shift in the CT market; a shift that would have a tremendous impact on the CT operations in Highland Heights.

"The market wants niche scanners, so we have to produce them," explains John Percival, director of engineering for Philips Medical Systems' CT division. "There is still a large generic market, but they are turning over more quickly. A CT scanner pays for itself within eight months, allowing a hospital to turn around and in two years get a new one with the leading edge technology. The average life [of a CT scanner] is around five years, but that's down from eight years."

This switch to niche scanners is rapidly expanding Philips Medical Systems' portfolio, says Al Perusek, director of operations for the company's CT division. "A couple years back our portfolio included only a couple products," he says. "We've added eight to nine new products in a period of three years."

One of those new products is the Precedence SPECT/CT system, the first hybrid SPECT with multi-slice diagnostic CT system, which was introduced at the 51st Society of Nuclear Medicine annual meeting in Philadelphia, PA. This scanner, which has applications in both oncology and cardiology, combines SPECT and CT images into a single data set. The images produced by the Precedence SPECT/CT system help with the identification of tumors, analysis of appropriate treatment, delivery of targeted therapy to precisely destroy target cells, and assessment of treatment effectiveness. Theoretically, this technology could ultimately provide a widely available and cost-effective alternative to chemotherapy and radiation. Percival said the Precedence is just the beginning. "Every hospital will have a generic [CT scanner] and specialty departments will have their own," he says.

Perusek agrees. "Our marketing people say they sell images, not equipment," he says. "They are selling clinical applications based on the specialty and the application requirement."

To stay ahead of the changing CT market, Philips Medical Systems began to get aggressive about new product development and introduction. Known as "rapid product introduction" inside Philips, the effort will result in eight new systems this year alone. Being successful at this pace would not be possible without solid communication, both internally and externally. "There is intense communication," Percival says. "This organization is a multi-dimensional matrix."

He continues by explaining that cross-functional teams comprised of employees from marketing, service, manufacturing, and engineering define each of Philips' new systems. Each of the specific departments then support those teams. But the development teams do not work in isolation; rather they discuss their projects through multi-team meetings.

Internal communication is just part of the matrix. Perusek says the "key to the formula" is working with suppliers.

Although the CT scanners Philips Medical Systems designs and manufactures contain 45,000 to 50,000 components, the company does not buy at that level. Instead it buys nearly 1,000 components, sub-assembled by suppliers from around the world, and then integrates these into the final CT systems. Inventory management has always been vital for the company because it operates in a low volume, high mix mode. Rapid product development has further increased the importance of effective inventory control.

To control inventory in the "rapid fire" environment, Philips Medical Systems turned to a Web-based program called Nocturne, which Al likens to an electronic Kanban. "We found [Nocturne] at another Philips location a year and a half ago," recalls Dan Vargo, material manager for the CT division. "We set a goal to get half of the suppliers on it, and by second quarter [of this year] everyone but one was running it. Ninety-seven percent of our inventory is being managed by the supplier. It is the only way we can manage this beast."

Nocturne looks at daily consumption and projects out when it is going to run out. It uses what Perusek describes as a "gas gauge," which allows suppliers to see how much inventory Philips has base on established minimum and maximum levels. For example, suppose for a component the maximum level is 20 pieces and the minimum level is five. If the level is between 10 and 20, Nocturn will show a green line. As the inventory level begins to drop, that line will turn yellow. It will turn red if the inventory falls below the minimum level. These levels are being watched not only by suppliers, but by Philips Medical Systems' buyers as well. "They are always looking for the red item," Perusek says, "but by the time they call, the supplier is already correcting.

"The feedback has been very positive," Perusek adds. "With so many using lean manufacturing, [the software] is getting embedded even down to small corporations. It helps them with their operations."

And in communicating with their suppliers, Vargo adds. "Some of our larger suppliers are using the Web-based software with their sub assemblies."

Even though Nocturne is still relatively new, the results have been impressive. "Two years ago we were running a very narrow product line and probably carrying $45 million worth of inventory a month," Perusek continues. "Today we are producing four times the volume and carrying $17 million worth of inventory a month. That's what it's done for us; more than half of the inventory has been cut out."

Introducing so many new CT scanners does not require Philips Medical Systems to start from scratch with suppliers or components. Instead, the company has moved to component-based engineering. "What that does is heavily leverages reuse," Percival says. "Many things from the past carry forward and we are designing new components to be backward compatible with existing systems. Many of these things are modifications, so we can stick with the same vendors.

"There is extended functionality for the new models," he continues, "and the mix mode lines Al employs in manufacturing demands this. To live within this, [component engineering] is the way we have to go. It works well in the current market; of course it grows and morphs, but this slows that. It makes it slower and more manageable."

Perusek adds that often the changes Philips Medical makes to scanners aren't evident on the outside. "It's subtle," he says. "The technology looks the same but inside it is quite different. This, all of this, helps us phase in new products."

Phasing in new products to manufacturing also is aided by the fact that the CT division uses a two mix model flow lines. Its operations are so flexible that all of its seven current models of scanners (and any future products) can be put together using just these two lines. "They are flexible enough to take what comes next," Perusek notes. They also are flexible enough for the customization that is part of every scanner. "At first glance they all look the same," he adds, "but they are customized. This gives us the flexibility to deliver specialized products."

Since it builds to order, the process begins with a work order. All the materials needed come through receiving and go straight to point of use. This will change, however, as the company completes its transition from an older MRP system to SAP. Once SAP is in use, materials will be delivered just-in-time and straight to the production floor.

Once in production, each of the eight stages takes about four hours to complete. Philips Medical uses an eight-stage build process with two operators, and all the materials they need, at each stage. "Each one has a kan ban limit or size," Perusek explains. Usually a scanner is completed in four days and then spends eight days in testing and customization. Then it is shipped directly to the customer. "The benchmark is 13 days from order," he continues. "Four to five days to build and the rest is test and a day to pack it up."

Of course the introduction of new products changes operations, but it is happening gradually. "They've evolved as the technology has evolved," Perusek says of the two lines. "It is a slow, migrating process, not a light switch turnover."

This evolution is guided by daily Kaizen events and ideas from employees on the production floor. Employees are encouraged to write down ideas on posters boards next to the build and test lines and a manager will review those suggestions at 1 p.m. every day. "We are looking for feedback from our employees," Perusek says. "It can be a quality issue, an idea for cost improvement or efficiency-anything."

At this point, running lean isn't an option for the CT division of Philips Medical Systems; it's a requirement. "With the volume growing with the excitement of all the new products it forces you to get lean," Perusek says. But Vargo says it is more than increasing volume. As the company has decreased its materials and finished goods inventory, the free space has been taken over by other Philips Medical divisions. "A few years ago, CT had an average of 100 products in finished goods," Vargo says. "We gave that space to other Philips entities that have come to Cleveland. It's good because overall Philips wins and it keeps CT lean."

In addition to changes in engineering, supply chain management, and production, another key factor in Philips Medical Systems' rapid product introduction success are partners from the health care industry that watch for emerging trends. One of these partners is The Cleveland Clinic. In November of 2003, Philips entered into a $50 million long-term strategic alliance with The Cleveland Clinic Foundation, which boasts the top ranked heart program in the US for the past nine years.

Through this partnership Philips Medical will be a preferred supplier for medical products and technologies for CCF and its affiliated hospitals and clinics nationwide; use CCF as a premier, global reference site as a forum to demonstrate advanced imaging technology; and utilize CCF's clinical expertise to carry out research and development in radiology and cardiology in connection with Philips product plans.

At the time the partnership was announced, Floyd D. Loop, M.D., president and CEO of CCF said the new effort is an extension of a half century of working together. "Our selection of Philips ensures that we will have a long-term, highly committed technology and research partner known for innovation throughout its history. Together, we will continue to forge a unique way of delivering healthcare that can reduce costs and optimize patient outcomes."

Perusek notes that the Cleveland Clinic is just part of the equation. "We are reaching out to our key clinical supports out in the field," he says. "It extends beyond Cleveland. We need a perspective globally to identify different market trends. We have strong partners world wide."

As the CT division of Philips Medical Systems moves forward, it does so well prepared for the challenges it will face as new products enter the mix. "The stage is set to go to multiple shifts," Perusek says. "We will turn inventory even more and the increasing volume will only help it now."

There also are plans to use a Philips Medical manufacturing site in Haifa, Israel for testing of products bound for European customers. "In the long term, the scanners will come off the build line here and some will go to our test bay here in Ohio and some will go to Israel," Perusek says. "This will shorten delivery time from test."

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