Production a Key Focus of Medtronic’s Cost Strategy

As part of Medtronic’s efforts to rein in costs, a large portion of its anticipated savings will come from reducing the cost of manufacturing, a company executive said.

Simplifying product designs, manufacturing more devices in tax-advantaged jurisdictions and implementing lean and Six Sigma production control processes are expected to save the firm $700 million to $800 million in recurring savings by fiscal 2012, according to James Dallas, Medtronic’s vice president of quality and operations.

Dallas, formerly the chief information officer tasked with implementing the firm’s cost-reduction strategy, detailed the plans to investors during the company’s analyst day last month. He said the firm has achieved $175 million in cost savings by using Six Sigma and lean manufacturing principles and moving production to tax-advantaged sites during Medtronic’s 2008 fiscal year, which ended in late April.

Going forward, $275 million to $300 million in efficiencies are expected to result from implementing lean and Six Sigma manufacturing process controls, which focus on reducing waste in processes, lead times and variances in product components and processes.

Medtronic said it was moving to a just-in-time inventory control system for raw materials and finished goods although more work in that area needs to be done. It also plans to reduce production costs by designing products with fewer parts, a step that is expected to save $225 million to $250 million by reducing assembly demands.

“When you look at our manufacturing costs, on average, labor only represents 15 percent. And on the surface, product design only represents 5 percent of the costs. But if you look behind the scene, you see that product design influences 70 percent of the costs because it determines the number of components, how they’re manufactured and the amount of time it takes to assemble them,” Dallas said.