Alrighty, good afternoon. Thanks everyone for joining us today for the Healthcare Summit at DB. For anyone who doesn't know me, my name is Peter Chickering, one of the MedTech analysts here at DB. We are very excited to have Greg Smith, Executive Vice President of Enterprise Operations for Medtronic today, which I believe may be your first public sell-side call.
Correct.
Excited to have you here. I guess just to start off with, a little background. You started at Medtronic in 2021. Can you just walk us through what the supply channel was before you started, when you got to Medtronic in 2021, kind of what you did to stabilize it?
Sure. No, thank you. Good afternoon, everyone. Pleasure to be here. I joined Medtronic, as you said, about four and a half years ago, right in the middle of the pandemic. You can recall those days where it was a challenge to get materials. It was a challenge to be able to supply, to stock our supply base. I would say where we found ourselves in the supply chain and operations organization is really, it came from a decentralized base. Having four different manufacturing teams in nine different supply chain organizations, we had a very disparate supply base, so the ability to be able to, our procurement organization. We were doing things in a lot of different directions and a lot of different ways. First and foremost, we had to do was really come up with kind of our approach as we went forward. It was setting the strategy.
It was setting the structure. It was going from four organizations to one. It was going from nine organizations down to one in supply chain and really setting ourselves up for basically taking on the task ahead.
How long did it take you to sort of just stabilize, just to stabilize out your supply channel? It was a period of disruption. You were sort of making a lot of changes. How long did it take you to sort of start stabilizing it out before you started focusing on sort of improving like the, you know, the COGS?
I would say we started instantaneously on trying to improve the COGS, but we had a lot of transitional base work to do on foundation. I would tell you, it took us a better part of two and a half years to really get to a position where we felt like we had stability around the base. We started with a very, very large supply base. Some of that were very, very good preferred suppliers, but a very smaller base than what we had liked. It was putting the foundations in place and making sure we understood. At one point in time, during the worst of times, we had over 250 people deployed to our suppliers to try to help them actually resolve some of the problems that we had.
There is a lot of foundational work to do, but knowing we needed to do the work to get service better, to continue to focus on quality, drive cost out, working capital, we started immediately on trying to develop the programs and put them in place to address the long-term needs.
Okay. Looking at your universe of all the areas that you touch, as you think about COGS, what are the big buckets to make sure I don't miss anything here? Materials, manufacturing, labor, logistics, contract manufacturing, what are the big buckets that we should be focusing on?
Yeah, I'd say there's kind of three verticals that I think about. One is your LBM, the labor, the burden, and the materials, which is what makes up the majority of the cost of goods sold. The highest of that is materials, about 60% of the cost structure. About a third of the balance is in labor and the other two thirds is in burden. There's a second vertical, which is really around logistics. It's really around how we move the products. It's the transportation aspect of it. It's the warehousing aspect. It's customer care. There's the third piece, which is more of the SG&A, the structural overhead that supports the businesses, which covers all the different functions. Between the two, some go to gross margin, some go to operating margin. Those are kind of the pools, I would say, the way that I think about it.
Okay, so materials is about 60% of the COGS. What was Medtronic doing for material purchasing in 2021? What have you instituted over time? Where are we today? Thinking about the savings we can get, how should we be thinking about, just on the material piece?
If you go to prior to 2021, basically the majority of the cost savings were coming out of negotiations with suppliers. I would say that base was being leveraged to the degree that we were benefiting savings coming out of the company. It wasn't a lot that was coming out of logistics and it wasn't a lot coming out of the factory. It was more around continuing to support top line, make sure we have service, make sure that we're providing to the customer and to the patient. I'd say since then, you look at all of those buckets of cost, the labor, the burden, materials, as well as logistics, supply chain components, a lot of focus now on specific programs to be able to drive more productivity and more benefit out. I'll give you an example. Materials, for instance, right?
At the time, we had a direct material supply base of about 4,500 suppliers. About 40% of that would be what I'd consider preferred suppliers, meaning that the other 60% weren't preferred, which meant there was something about the way they do business that we needed to improve. We went in and not only focused on negotiations, but also how do you go after other areas of materials? How do we take waste and yield loss out of our factories? How do we look at the engineering ability? We repointed our supply chain, I mean, our supply organization and through R&D to basically be on the technical front end of supply. When we had new product development coming through, we pointed them toward the suppliers that we wanted to have better service, better cost, better quality, better continuous improvement that they can drive.
We had structured programs that were playing out now that were driving to enhance our ability to get more out in materials, but also go after burden, to go after labor, and then to make demonstrative improvements as well on transportation, warehousing, logistics, the way we move our products across the globe.
Okay, from a materials, I guess, statement perspective, where are we today? What are the next steps that you guys can take to keep driving that? What entity do you see as getting to your optimal purchasing of materials?
Let me open it up and go to total. I would tell you where we were in 2021 is about 2.5% of our overall savings is what we would basically be accomplishing. Now, that's a gross savings. If you put inflation against that, and remember what happened in 2021 with labor costs going up, material costs going up, we basically found ourselves in a negative margin contribution because the actual benefit or the actual benefits weren't offsetting the impact of the inflation. That hit us hard. As we have built those programs, what we've seen now, our ability at 2.5% of gross savings is now more than double and sustained and growing across materials, across labor, across burden, and supply chain. We've also had the benefit of inflation abating, right? We look at inflation, we've seen it come down demonstrably from where we are.
Now we're in a position where we're contributing contribution to margins as it relates to our programmatic savings benefits outsetting and overcoming the cost of inflation and then contributing to expansion.
Just to sort of be super clear, you talk about, you know, right now on an overall basis, you know, the things you're driving, about 5% for gross savings, inflation is running 3%, that means your net savings should be 2%. Sort of total basis point.
Yes.
Looking at the 5%, which buckets is that? Is that kind of where you guys, as you go up from 2.5% to 5%, where are you seeing the biggest savings come from?
Net and biggest savings, obviously, it comes from supply because of the magnitude of the size. As far as % come from the labor out of the factory, we've been able to drive the last couple of years almost double-digit productivity improvement out of our factories and being able to run our lines more efficiently, take labor out. That's the smallest % of spend, but it's a big impact. We have those programs, and talk a little bit more about them, that are impacting labor and impacting yield. Those are the fastest yield. The one that we are doubling down on is in materials because it's such a large component of the whole cost structure.
You're looking into your fiscal sort of, let's say, let's ignore 2026. Looking at sort of fiscal 2027, 2028, what areas of materials sort of do you see the biggest, you know, the biggest savings? Is it from using, you know, preferred, better negotiation? I mean, kind of where are the biggest savings, right? Like you do it, you know, initially, you got, you know, if you're a number of suppliers, it makes sense. As you think sort of three years down the road, kind of where do you see these keep coming from on the material side?
Yeah, so we've been able to move over the last couple of years, we've been able to move from about 40% preferred to about 68% preferred. We've made a dramatic improvement there by getting the products on the front end of the innovation cycle with a preferred supplier base. It's now given us the ability to get leverage in scale. We're getting better scale leverage, we're getting better contracting, we're getting better continuation and programs with improvements with them as we gave them more volume. We have stood up a group called Supplier Transfer Office, whereas one of our challenges before was we would go out and bid, we really didn't have the leverage because we would never move from one supplier to another. Now we've added about 100 people to a team that all they do is move product and give us the leverage there.
We've also gone back and said, look, there are a lot of projects, programs, products that haven't necessarily been engineered on platforms that were real efficient. How do we go retrospectively and how do we address some of those products, specifically ones that may have low yields, ones that have idiosyncrasies associated with them that are not necessarily, they're expensive, but don't necessarily add value to the customer or to the patient. We have a team, we call it VAV, Value Added Value Engineering, that allows us to go back in and we're addressing some of those programs and products. We put a big focus on ensuring that through our development process that we are designing and putting in place a design for value.
When we make choices around how we build products, we don't ever deviate from what the outcome is to be, but we make sure the inputs are efficient and we're leveraging. Think about an automotive platform, right? We use more on multiple cars than you do just strictly one, right? It gives us the ability to leverage and leverage at scale.
Is your new CFO an ex-car manufacturer?
You know, as a matter of fact, he is.
That's excellent. I like how you have that. Just one more sort of quick question on materials. As you move from 40% to 60% preferred, how much savings do you guys get when you move into a preferred supplier versus non-preferred?
It depends. We have examples of where we have single digit, most single digit. We have others where we have a high double digit. A lot of it is making sure that we are just picking the suppliers that actually have the capabilities that we need. For us, it's critical, especially as you guys know in this industry, you got to have the right product, the right place, the right time. If you don't have a customer that can service you or a supplier that can service you consistently, problem. If you have issues of quality that we have to catch internally because they haven't produced a product right, problem. We also want people that understand the best-in-class approaches. How do you automate? How do you drive continuous improvement on your end? You're not coming to us asking for pricing.
In addition to that, a lot of the ideas that we have for taking materials out, they don't come from us. They come from our suppliers because they're doing something for a competitor, they're doing something else in the space, and they may have a better knowledge base than we do. Therefore, it's suppliers that are willing to work with us and to be able to have a win-win scenario where they get more volume and they actually give us better price structure along the way.
Okay, is 60% materials, a third labor, and a third burden? Let's just go to labor for a second. How much of the labor improvements have been just more of a one-time, your ability to run more efficiently, to maybe shut down facilities, kind of looking through your labor productivity? How much of that is just sort of adjusting, sort of catching up with where it should be? How do you think about that from a durability perspective, continuing to keep finding those strong labor improvements?
I would say part of it is that, but what we have driven is a lean manufacturing process. We call it a Medtronic Performance System that we are replicating across all of our factories. When I first started, we had 67 manufacturing facilities, and if you go visit them, every one of them was manufacturing and doing things differently. They had different operating approaches, they had different ways of doing things. We have taken a standard approach that we have deployed across all. It starts with what our key objectives are, and we sequence them all the way through the manufacturing facility. As part of that lean, we brought DMAIC processes, zero loss, a lot of tools that are not new to the world. They are implementations that you'll see best-in-class companies have used, and we've been pushing those across our facility.
The advantage of that is it helps enable our 54,000 people to be able to be part of problem solving, identify the issues, start problem solving. We are seeing more and more productivity coming off our production floor where we're actually seeing the creativity and the thought processes generated from the bottom up that we have processes in place to be able to exploit. It is very durable. If you look at a lot of companies out there, best-in-class companies that use lean manufacturing, you'll see that sustained approach over time.
You're looking at your labor depletion as zeroing in, sort of typical, you know, like 3% to 4%, somewhere in there. As you look at your sort of, you know, three-year plan here, you know, looking at the sort of that gross 5% savings, you still get a big chunk of savings by simply, you know, continual improvement within that, just offsetting that 3% to 4% labor.
Labor is probably one of the ones that we would say from an inflation standpoint, we feel it's probably more of a risk. I feel better about materials. I feel a little worse about labor. A lot of that is other countries that we do business in, where they'll have statutory increases, things like Mexico, where we're seeing higher wage rates, if you will, than the U.S. Generally, yes, we will be in a position to have net productivity coming from our labor pools because our productivity will exceed the inflation.
Okay. The other third is burden. I guess what is burden? You know.
Burden is the overhead. It's the individuals, the engineers, the infrastructure, the depreciation, the elements of running the manufacturing machine.
How do you get leverage? I mean, besides simply manufacturing 5% more, 5% more, 5% more, how do you get leverage from burden?
big element of it we're finding is automatic. It's actually using AI and machine learning. A lot of the folks that we have in those facilities are actually there, in some cases for inspection and improvement and dealing with problem solving. We have put in place a lot of systems, manufacturing execution systems, overall equipment, digital factory, a number of things that are taking and basically automating the work that has to be done. Probably one of the biggest opportunities that we've found is a lot of inspections that take place in the facilities. We've basically gone to automated digital inspection systems. We're starting to deploy those rapidly across the enterprise to be able to address where we got manual intervention and manual labor and tie those into the overall digital initiatives that we have.
What's the FDA's view, I guess, because you go through the FDA approval process, there's a certain set of areas. We typically just see the approvals, but from a manufacturing perspective, there's something we can go through that. I guess, what are the regulations around AI for visual inspection versus using a marker and eyeball?
Yeah, I mean, our regulatory teams are working that actively now. It definitely has to go through FDA and that's the approval. We have to validate it. So far, we're seeing some really good promise.
Is that actually up and running live, or is it something which, and then do you have to validate it for each product that you go through, or how does that work?
We do. A lot of places that we've been able to find the most helpful so far is in packaging. Those things that aren't quite as product sensitive, when we use the briefcases, we can replicate and horizontally deploy across the enterprise, but also take those learnings against other things upstream.
Okay, fair enough. Logistics, you guys have an enormous number of manufacturing facilities and we'll talk about tariffs in a bit. Let's separate just pure logistics. How are products being delivered, whether manufacturing to warehouses to customers? I guess in 2021, where are we today and kind of what's your sort of vision of where this moves to?
Today, in this last year, we took over our distribution network. Historically, it's been a third-party run network. We acquired and we closed, I think, five distribution centers over the last couple of years, instead of a brand new large facility in New Jersey and then also another one in Memphis. For us, as we think about the strategy associated with logistics, we want to minimize touches. The more that we can do things directly, touches include inefficiencies and cost. We don't want to take miles out. We want to maximize the cube. An example would be I visited a facility in the Minnesota area, Minneapolis area, where we had 19 boxes of products that arrived from the same location, the same day.
Basically, how do we realize that all of it would fit in two boxes and be in a position that we start working to be able to cube out that shipment as much as we possibly can? From a logistics standpoint, a lot of it has been the blocking and tackling, starting to now move into... I was visiting a customer the other day that's probably one of our advanced on supply chain, and we've cut their orders down by 90% working together, where we're sending products now to their central distribution center, and we are having a lot less processing, a lot less FedEx shipments, a lot less work. There are a number of opportunities that exist in the supply chain space in those kinds of areas that we are starting to exploit.
For me, total costs, because logistics to your point is both in COGS as well as SG&A. The key sort of size, so what's the total dollars around a ballpark logistics for the whole company? What's the split between COGS and SG&A?
I would say it's, you know, it's in the 2% to 3% range of sales is in that space, total cost. The majority of that is in cost of goods. Probably 60% of it, I would say, and 40% of it is SG&A or it's operating margin versus gross margin.
Okay. From, I guess, taking over the distributors and sort of taking them on yourselves, there's obviously investments you guys have had to make.
Not distributors, but distribution centers.
Distribution centers.
Yes.
Were those investments that were made? Were those cost savings, because walk us through when you decide to do that to sort of day one, year one, year two, year three. I guess, how does that cost savings flow through on that, like 2% to 3% of sales?
There was an investment that was required for us to buy out those facilities, buy out, you know, and take them over ourselves. It was based on the trajectory of the benefits. First and foremost, you get the fees back that you're paying and the party to run it, so immediately. Second of all, as we look at our lean processes that we're using at manufacturing facilities and we look at the success that we've had there and our ability to be able to deploy those, we didn't have a situation where we had as much productivity that could be generated from our third parties as we could internally. It's part of our, you know, a benefit that we received on day one, and then it's a continuation of our multi-year plan to be able to drive productivity down across those networks.
Miles, touches, and cubes, those are the big three.
Miles, touches, cube, rate now. We negotiate the rate. Those are the big ones.
Can you just quantify each of these miles, touches, and cubes, and then rate two years ago for where we are today and kind of where it can get to, your way to quantifying just the improvements that you can make by being more efficient with your logistics.
Logistics has been one of the areas that, when you look at the breakdown between cost structure, it's been one of the ones we've gotten the most success out of the last couple of years. The way that it's been creative to us and what we've been able to do for margin, it's been a higher % I would say than the average of what we've done over the period of time. A lot of that is because of the factors. Also, we've had the benefit of freight rates, and now a little bit because of the demand. That's been a tailwind to us as well.
Yeah, if you cut miles by 3%, 5%, 2%, 1%, what's a target from areas of miles?
Yeah, I would say that when we look at a macro basis around logistics supply chain, we're in that mid single-digit target for benefits on a year-over-year basis. I won't get into the specifics around miles because I couldn't tell you off the top of my head yet. Right. Examples of simple things that you can identify that are just opportunistic, and this is a one-off, is products that are produced in Mexico, for instance, that we would ship to the U.S. to go to a distribution center that would ultimately be distributed to Europe. As you get smarter, we get better with intelligence, digitalization, then we can just, you know, it's how do you take that intermediate step out and go direct.
Okay.
Those kind of opportunities are the ones that we're working to exploit now.
Which then I think is a nice sort of segue into as we think about the tariffs and how tariffs change, you know, almost logistics as much as manufacturing, I guess. How do you, you know, do you guys have enough information at this point to sort of plan out the next three years of what tariffs are? Are you still sort of waiting to see? How much have you guys, again, changing logistics first, manufacturing second, around the evolves of the tariffs?
Yeah, for us, looking at country of origin has been a big deal. It's not just because of where you move products, but it's also how you label products. Puerto Rico, for instance, is in the U.S. trade zone, so it's designated as a U.S. product, right? When in reality, it's Puerto Rican, and it's different than how other countries would view that, right? We've taken a real strong approach to the Nairobi Protocol, USMCA, country of origin, bypassing borders. If we could make something in Tijuana, Mexico, and have it sterilized in the U.S., the Southern California, shipped over to Europe, we can bypass that now, skip the border if you can, and try to run through that. We've been very successful with those, you heard recently, but we set our target implications are for this year and for next year.
We're not completely out of the woods, but it factors into our decision-making, specifically really quickly around supply chain, manufacturing, not as much. This is a very complicated industry, as you know, and to stand up a new manufacturing and duplicate manufacturing process is a commitment. We got to think about that in the context of all the other things that we think about, geopolitical and everything else that could arise.
Yeah.
Our risk profile.
It's also, to your point, if you're just bypassing the U.S. or bypassing different countries, from manufacturing to sterilization to even warehousing, as long as it's basically, your shipping has changed structurally to avoid bypass, essentially, certain countries.
Yes.
Okay, fair enough. You know, looking forward to those areas, materials, labor, and burden, where do you see the overall inflation going through within those few segments? As you think about that 5% gross offset, how should you think about it, a three-year view?
We kind of think about it, you know, our planning parameters around 3%. I would say probably, you know, the labor is the one that has been a little bit more, it's been a little bit higher, and a lot of that's because of the statutory impact of some of these countries that we're in when you look at wages. I'd say that's kind of what our planning parameters are, is roughly in the 3%.
You know, from a blended labor perspective, is that running more like 4% or 5% because of the statutory increases? Do you see that those increases changing at all as the global economy sort of moves around, or are those just fixed costs within those countries?
I think that probably the biggest, the biggest thing of fluctuation we've seen in the last few years is Mexico. Mexico has taken about 20% increases over the last four years as they've changed their assumption. That's kind of something that's weighted a little bit. You see the U.S. is probably being lower. You don't see quite as much impact in Europe, and we don't see as much even in Puerto Rico anymore. Those are the four areas that are biggest for us.
Okay.
I would say that, you know, we probably wouldn't anticipate labor to be 4% to 5% in that risk.
Okay. One quick question, actually, going back to sort of your tariffs, I guess, you know, as you have to adjust your logistics to deal with sort of country of origin, like how much cost does that add? Is that a real cost to optimize tariffs, or is it beneficial because it offsets tariffs? You know, how much of an additional cost burden is that going to be on the overall system?
It hasn't tended to be one. In some cases, it probably causes us to revisit our whole structure, how we move products, but we haven't seen it being a burden at all. To your point, when you look at the benefit from the tariffs, the offset, the impact is positive.
Okay. From a manufacturing optimization, how many facilities have you guys consolidated, and how do you view that? Going forward, is this still an area of opportunity to help increase your labor? Is it an opportunity to help get from a tax perspective? How do you view what have you done so far from a manufacturing facility?
Yeah.
Basis? How should we think about that going forward?
If you look at the last few years, we've had a few facilities that we've added as a result of acquisition. We had five facilities that we invested as part of a divestiture spin-off. We shut down seven manufacturing facilities, one in the UK, one in Germany, four in California, and one in Massachusetts. Obviously, our footprint changes with diabetes. We'll have a couple of additional facilities that we'll exit. Network optimization is one of the transformational programs we're very focused on. We see it as an opportunity. However, it's also not a quick payback. As you highlighted earlier, the implications associated with FDA and, you know, ISO and everything else of moving products is a choice that we have to make. As we think about the deployment of our resources and we think about the deployment of capital, it enters into it.
In many cases, it's better off to plan network changes as part of our PLM. Those are product lifecycle management. We have a new launch that's going to cause a base to change dramatically, will cause us to think about the implications of that.
Okay. How much leeway does senior management, you are the senior management, so basically your CEO and CFO give you to do the things that you see fit? I mean, you came in from the outside and with a fresh perspective, you've been in the business a while. There's a lot to be done to be stabilized and then work on improvements. How much of a free hand do you have to get all the things done that you want to do?
I would say nothing but support would be what I would describe. Now, can we do everything and does everything make sense? No. Industries are different. There are certain things like network optimization, a great example coming from the CPG or from automotive. It's a different model, if you will, around how you move things around. Some of the things that, opportunities like that, it hasn't made the most sense to prioritize at the highest level. I have been very supported, I would say, through this. What we try to do is make sure that there's a leadership team. We collectively review the strategies and make sure that we align with where we're taking the organization and making sure that not only the people understand, they understand and have input into decisions as well. It's more of a, I wouldn't call this an operations plan.
A lot of this work is an overall business plan that we review with the board when they have board meetings on facilities or where we review the definition.
You know, going back to this 5% gross savings number, as we look back at fiscal 2025 and fiscal 2026, with inflation coming down, how should we think about when do you guys get, when do you ramp up to that 5% number? As we look at the numbers from outside, obviously fiscal 2025, you had FX, fiscal 2026, you have diabetes investments plus PFA investments. How should we be looking at that 5% gross savings number versus the VCPI of inflation? As we're looking at the gross margin line, how should we be thinking about it for the last two years and the next two years?
Yeah, I think we had a little discussion about this earlier, but I would say the way to think about it is our inflation exceeded four years ago, inflation exceeded the benefit. Right. I'd say we were neutral the next year. In the last few years, we have, the model has played out that we've seen the 5% top line, and we're seeing an accretion to the gross margin basis point contribution. Look at last year, you know, we saw an accretion coming from the work that we're doing around programmatic savings exceeding inflation, and we will see the same as we go forward. We are seeing our ability to move from the lower percentage of savings up to that level of achievement. We've got a robust pipeline and a lot of different programs and projects to get us there.
I'd say we saw the results in fiscal 2025, the contribution basis points. We anticipate, you know, that will continue.
Yeah, I mean, obviously you have to pull out FX when, you know, as we sit there and look at the analysis, you have to pull out FX to figure out.
Pricing and a number of other aspects, which is difficult. Terry, I think Wiz has addressed that recently around the contribution factors as it relates to what was attributed to us on pricing actions we took last year, what kind of contribution we're seeing from the net benefit. I'll leave it to him to explain when we go.
Yeah, I mean, it's, you know, pricing, that's not your world, so we're not going to, you know, you're just cost, cost, cost. I mean, I guess looking at those buckets again, whether it's materials, labor, or burden and logistics, logistics seems like you guys are able to ramp up on that pretty quickly, pretty early. Labor, you guys ramped up pretty quickly, pretty early. Can you sort of walk through how long it takes on the material side? Reformulating products, getting the FDA, that's sort of the next three-year horizon that we're looking at, that we should be looking at some of the biggest leverage there?
The material side, you know, we started ramping up with the stop program coming on, the VAV program coming on, with the negotiations work, the work that we're doing around the development side. I would say we're building muscle in all those areas. What used to be our laggard as a %, we're seeing it pick up as we move along. I anticipate we'll be at a run rate on material savings in the next few years. It will be at average of what we seek to achieve across the board.
Okay. Going into some specific examples, Aferra, obviously, you guys acquired, ramping up aggressively. Can you sort of walk us through just the process of how it is that you optimize this process when the leverage begins to get there, when it goes from a margin headwind into a margin tailwind, and just the details actually around just literally how you guys ramped up in Aferra because it went from zero to a lot, a lot in a very short time period.
Let me give you a contrast. PulseSelect™ is a product that also operates in that field. It's something that we developed internally, and part of our process is design for manufacturability. The conception of the idea of the product, the engineers, the operations teams, the R&D teams work together to make sure that we produce a product that meets the need, that has the right margin structure, that's repeatable, that we can manufacture, it's reliable, and it's got a good cost structure. That was not how Aferra was designed. We acquired Aferra. We purchased it. It had not gone through a similar process. At the time that we purchased it, we were making five products a week of the catheters. The clean room in that facility in Bedford, Massachusetts, was half the size of this room.
Basically, what we needed to do to get Aferra there, we believed in the product, we knew its capability, we knew the market, and it was really basically we stood up a brand new factory. We have multiple lines in there. We sought to get FDA approval. We had to do all the work to basically retrospectively do design for manufacturability, through all the engineers and R&D and the quality teams and operations teams, and basically got to a position where we overcame those issues. Now we're producing a product at a significant rate, and we're doing it at yields that are almost comparable to what we're doing at PulseSelect™. I would say it was just really solid work from all the multiple teams, with a very clear intention of what we need to accomplish that the team worked together to achieve. The cost structure has improved dramatically.
We are seeing very good, very good margins off the product. The exception being right now is obviously as we launched the capital units. Capital units are a little bit of a drag, but the good news of capital units is they're what compelled the people to buy the catheters. It's a good thing. I know our team between Mappers and between the capital units is ramping up as aggressively as they can. The catheter supply is not only enabled by the new facility that we stood up in Massachusetts to produce this, but we've also taken one of our premier facilities in Galway, Ireland, which is one of our shining stars. We have put multiple lines in place there as well to produce the product. We are feeling very good about the foreseeable next three to five years on passing deals with the product.
Which is sort of, and it's a window, you know, as you prepare for these launches. RDM, you're coming up, obviously, it's a, you know, potentially it's a big launch, a lot of excitement building around it. You know, reimbursement, CBD, a lot of uncertainties at this point, it's sort of, you know, in terms of how it'll be rolled out. You know, across the board, you talk to hospital systems and physicians, there's a lot of excitement here. How do you balance the scale of these potentially large product launches without sort of crushing your margins in the near term? How do you balance that out?
I think it depends on what's involved, right? RDM is a great example of where we've had a capacity online now for two years. We've got ample ability to be able to meet the high side scenarios in that. We've basically negotiated with our suppliers that we have the flexibility on their side to be able to give us instantaneous capacity that we need. We built a safety stock, if you will, to be able to prepare for the launches. At the same time, we can react quickly. Versus in some situations that have we not planned for that, it may be a slow reaction and it takes a while to be able to react to that. On these product launches, we're trying to make sure that we have instantaneous capacity. Internally, we have the right supply contracts.
We're in a position that we have the flexibility of our suppliers, assuming that the business is on that side.
You have great contracts with suppliers. You still need the manufacturing lines. You still need the staff. How do you plan for that? At some point, you have the suppliers that can give you what you need, but you still have to have fixed cost investments. How do you balance the fixed cost investments with potential demand? Obviously, as you think about Aferra, the example about when demand goes off, it's almost you can throw everything you have at it as you're planning this launch. How do you balance, ignoring suppliers, just your own fixed cost investments, whether it's labor and/or manufacturing lines?
I'd say from a lot, when we have the visibility, for instance, like RDM, that we've had pipeline for years, and we know what's involved in that, it's a lot easier to do than to acquire a business like Aferra and not really understand what has to be through from, you know, with the growth that comes from that. With our base of RDM, for instance, in our Galway facilities, it's a relatively small footprint. There's a flexibility of labor there that we're able to move in and out. It gets back to that flexibility again. It's not just our supply base, it's also with what we have internally.
Okay, shifting kind of more macro, I have to ask the AI question. We talked about how you're using AI for visual inspection, which is for the packaging. Eventually, you need the visual inspection, assuming FDA approval on the products. What other areas do you see AI from a savings perspective? If you rank it from the biggest savings that you're focusing on right now, is using AI?
Yeah, for us in the last few years, we have put in place an advanced planning system. Before, we had multiple planning systems, and from the initiation of our IDP process all the way through to where we deploy products, that's a big area of opportunity for us. We now have a system, we have a foundation, and the team is working aggressively to find ways to be able to digitize that so that we have less manual intervention through the process. We have better signals deep into our supply base, and we have the ability to be able to get early warning signals, if you will, and be able to manage things across our co-parties, if you will. That's a big area. We've also put MES systems in, manufacturing execution systems, and now we're installing across our facilities. We put operate overall equipment effectiveness tools in place.
We're basically connecting all the equipment on the lines so that we have the ability to be able to see how effective is it operating, and not only how effective is it operating, but when does it deviate. We can go into the planning process and we can basically change the standard deviation, and it gives us a lot more productivity, and it gives us a lot less waste. We're starting to get into the factories and then look at the big work streams that we have around how do we deploy machine learning and AI. The two big ones for us that we're focused on right now is perfect order. When the time and order comes in, have zero touch.
That includes how we go through the contracts, it goes how the pricing, it goes to any kind of credit holds, it goes to any kind of credit blocks, anything that could deviate from everything coming out. That's one that we stood up. We think there's tremendous value in that that we can extract. The other one, the bigger one is just really from the demand all the way through the demand signal, all the way through the deployment. How do you leverage and connect systems? I have the advantage of having global IT in my team as well. We're really deploying and using a lot of that team, but doing it across the enterprise as well. We're trying to find those areas that we can really leverage it. Human resources have been a big one for us.
Not necessarily my space, but human resources transactions have been a big one. Finance and some of the things we're able to do on AP and AR, and be able to really get efficient in those areas. Early indications of where we can go bigger. We're making the investment in time and resources now to do that.
Okay. We're sort of four minutes left here, so I'm just going more of a macro question. I mean, you're looking at sort of the biggest opportunities in the next three to five years for cost savings, any sort of specific details that we should be looking for, talking to you about in the future, and perhaps in writing about as we look at gross margins for Medtronic?
Yeah, I think that it's going to be a balanced approach, right? It's not going to be a one-size-silver bullet. There's not, you don't walk in, close this or open this. It's going to be the continuous improvement and the transformational programs that we have to do around driving material costs out, continuing to get more productive and efficient in our facilities, driving out our distribution network. I think the other part that will emerge and is emerging to some degree is how we work together across the value streams and how we bring those handoffs together so that we're much more efficient through the process.
Okay. With sort of this durable target of 5% gross savings, if one year you miss that, again, we're not talking about pricing, we're not talking about volume, we're talking about your target of 5% gross savings. What are the biggest risks there? What are the things that keep you awake at night? Where is it that you have to deploy your time that could be the areas that pressures are at?
I think the biggest thing that worries me is what happens around the world. The day that Ukraine was bombed, we found, you realize the supply lines go up. You realize that the borders close. You realize that there's a geopolitical aspect of it, right? Those are the elements that I feel like we have a very good understanding of where our supply base resides, what those risk profiles look like. We also depend on tier two and tier three and tier four suppliers as well, very diverse across the globe. Those are probably the ones to me that are the most concerned, how we get the right contingency in place and continuity to make sure that we protect supply when it's such a volatile world right now.
Which is a nice segue to as you think about sort of the volatility that we're seeing, whether it's geopolitical tariffs, et cetera, how do you think about inventory levels, right? How do you balance working capital with inventory levels as you think about sort of managing like the shock of a system that we sort of somehow keep seeing year after year?
There is certainly a role for safety stock that exists. I think also an area that we're really focusing on is trying to give cycle time span. We'll get better reaction from our suppliers, so we don't have the latency, if you will, when you think something does occur. Part of what we're doing with these suppliers is getting a much better understanding of what their capacity models are, what kind of capacity is available to us, and then how we deal with that and risk profiles further upstream. That is to us going to be really important as well. Make sure we get better reaction times from the suppliers, understand their system, their supply chain better. That's where digital and AI is going to help us as well.
With that many suppliers, it's sometimes challenging, but the systems are designed to be able to help us infiltrate and understand a little bit better than we do.
Last question is that, you know, again, looking at us for three or five years, the inflation hovers around sort of this 3% level, you know, the target of a gross savings of five. These sort of, you know, turn-to-base points, potential, you know, gross margin savings kind of coming out of, you know, Medtronic for the next several years. You know, are there any other areas that need the investment that will offset sort of that net savings that you have that you see at this point, or should we start seeing this continual gross margin improvements over the next three to five years?
Yeah, it's probably best to have Terry walk you through the components we have in office, as you know. Mixed plays in there, FX plays in there. There's a number of components that are positives, you know, years, negatives, other years, right? I can tell you that from a standpoint of breaking out programmatic savings versus the inflation aspect of it, we're seeing the benefits come through. They'll come through this year, and we've got a robust pipeline for the future.
Awesome.
We're not creating the atom, we're not splitting the atom. It's not what others have never done before. A lot of it is tried and true capabilities that just didn't exist in this industry and didn't exist within Medtronic.
That's why you're brought in. Thank you so much for joining us. Greg, I appreciate it very much.
Thank you, guys. Appreciate it.
Thanks so much.