Turning Cost Pressure into Performance in Medtech

Medtech companies know they need to reduce costs, but many often take a limited approach, with isolated programs that target individual functions and business units. To generate better results, they should think end to end, launching comprehensive cost programs that target the entire enterprise.

In our experience, medtech cost programs that start with procurement produce quick wins, build a data-driven foundation for change, and spur innovation. This builds momentum and generates funds for a more cross-functional, comprehensive cost program that can shave 7% to 12% off a company’s total cost baseline and increase gross margins by up to 3%. In addition, AI and GenAI can create a multiplier effect, making functions such as IT services, media, and translations far more efficient. (See “The Multiplier Effect from AI.”)

As Headwinds Grow, Companies Need to Protect Margins

The medtech industry faces an increasingly complex macroeconomic environment, characterized by tariff uncertainty, softening demand in some product categories, foreign-exchange volatility in emerging markets, reduced academic funding, and pricing pressure from budget-constrained hospitals and payers.

These challenges are pushing companies to preserve margins and deliver value to shareholders. BCG’s value creator rankings illustrate this shift. Overall total shareholder returns for medtech companies are slowing, with less than one-third of the top 25 companies delivering positive TSR from 2022 to 2024. The common thread for firms delivering positive TSR during this period was both flat to growing EBITDA margins and above-market revenue growth of at least 8% CAGR. (See Exhibit 1.) In contrast, companies with declining EBITDA margins consistently underperformed in TSR, even when they delivered modest revenue growth. (See Exhibit 1.)

The Power of a Comprehensive Approach to Cost Reduction

Many medtech leadership teams have launched cost programs but have failed to generate results that meet expectations. To succeed in the current environment, they need an approach that spans the entire end-to-end value chain—beginning with procurement—in order to drive value across all functions. (See Exhibit 2.)

Start with procurement to fund the journey. Procurement is a powerful starting point for cost transformation in medtech, offering quick wins through commercial levers while providing a cross-functional, data-rich view of external spend to support a broader strategic agenda. Targeting select procurement categories based on market insights can deliver great returns. For example, contract research organizations—key suppliers for research and development—are under pressure, creating opportunities for better commercial terms. Similarly, IT managed services are undergoing a major shift, with AI-driven efficiencies reducing client costs by up to 30%. (For other case examples, see “High-Impact Initiatives in Marketing and Freight.”)

Procurement-led programs have delivered significant value for medtech companies, with reductions in the total external spend base ranging from 7% to 12%, and reaching more than 30% in certain high-priority categories. This has delivered gross margin improvement of up to 3 percentage points. Beyond those cost savings, best-in-class initiatives have enabled companies to strengthen supplier partnerships, mitigate supply risks, and establish procurement as a strategic partner, not just a support function.

Conduct a diagnostic to identify problem areas and opportunities. Leading companies start with a full diagnostic of the cost base, identifying high-spend areas and performance gaps. They benchmark both internally (to highlight variations among business units and production sites) and externally (to gauge their performance relative to peers). The diagnostic generates a fact base of accurate data across the full cost structure, including external spend, labor, working capital, and technology, along with the potential value from targeted improvements. Critically, the diagnostic also results in a set of prioritized initiatives across both size of impact and time to value. (See Exhibit 3.)

Apply the full set of procurement cost reduction levers. Once the right priorities are identified, procurement can apply various levers to capture external spend savings across several initiatives:

• Commercial Levers. Negotiate with suppliers to reduce unit costs, restructure contracts to capitalize on volume discounts or performance-based pricing, and create more competitive bidding processes.
• Technical Levers. Partner with internal stakeholders and suppliers to optimize design and processes for cost reduction—for example, by changing product specifications, consolidating SKUs, improving manufacturing processes, or streamlining the supply chain.
• Demand Levers. Challenge consumption patterns, normalize service levels, generate more accurate forecasts, and enforce compliance with maximum usage rates.
• Technology Enablers. Apply digital tools to identify, quantify, and act on savings faster. AI-based analytics can benchmark pricing, flag contract leakage, and identify sourcing opportunities. Forecasting tools improve demand planning, while sourcing workflow automation accelerates execution.

Expand to other cost priorities. After capturing savings from procurement, medtech companies can reinvest savings from those initiatives into an integrated set of transformation levers across the full value chain, ranging from manufacturing and footprint to process improvement, automation, and inventory. (See “Cost Opportunities Along the Full Value Chain.”)

Some medtech manufacturers have invested in reducing structural costs in their production networks, particularly from fixed overheads. For example, aligning core competencies with the desired manufacturing product mix can lower costs. For capacity allocated to production of nondifferentiated products, competitive bidding has driven savings through cost-effective contract manufacturing alternatives. Make-versus-buy processes that balance cost opportunities with supply resilience can de-risk these changes and ensure reliable supply. Once focused on the right product mix, companies can invest in new capabilities and right-size their footprint for more cost-effective manufacturing.

Other companies have applied a similar approach to kitting operations, which can be fragmented and labor intensive, with wide variations in labor cost, automation, and service models. Leading medtech companies are consolidating networks and standardizing kit designs. Some are applying lean principles and automation to improve labor efficiency and eliminate production bottlenecks. Others are simplifying the product portfolio and introducing modular bundles (such as a base kit plus a preset list of add-ons) to manage complexity.

Many medtech companies are challenged with excess inventory of both raw material and finished goods. Often, manufacturers carry surplus stock as a well-intended—but unnecessary—attempt at managing long lead times and supplier risk (which is often exacerbated by relying on sole suppliers for key components). To reduce inventory, companies can build SKU-level statistical models to define inventory targets based on demand variability and service-level assumptions. They can also reduce hold times for certain SKUs, partner with suppliers to adjust minimum order quantities and contractual buffer stock, and optimize their production scheduling.

Key Success Factors

Although the specific measures will vary among medtech companies, some principles can increase the odds of success in a margin improvement program:

• Give procurement a seat at the table for strategic decisions. Procurement’s ability to create value is amplified when it evolves from a support function to a strategic partner and enabler of broader business outcomes. Top-performing procurement organizations have an active voice in cross-functional decisions, with ownership of external spend strategy. A best practice is to establish a cross-functional sourcing council to align on priorities, approve strategic initiatives, and monitor results. Co-led by procurement and business stakeholders, these councils promote transparency, accelerate execution, and ensure that decisions balance cost and value.
• Track value to the bottom line. All too often, companies gauge performance in terms of dollars saved, rather than direct P&L impact. Without close alignment to finance, savings are often repurposed and fail to deliver the intended margin impact. It’s critical for companies to track every dollar of savings to the P&L.
• Redouble investments in AI. Across the entire value chain, digital-technology investments, particularly in analytics and AI, are generating a large and growing ROI as part of cost reduction programs.

---

Medtech companies face a tough operating environment, and they need to respond by reducing costs. To date, many cost programs in the industry have been narrowly focused on specific business units or functions, but they can generate better results with a comprehensive approach that spans the entire value chain. Procurement is a natural place to start these initiatives, giving companies an opportunity to generate quick wins, build momentum, and free up capital to fund other measures. It’s a difficult challenge, but the organizations that succeed will deliver a favorable return to shareholders and give themselves a lasting cost advantage over the competition.

The authors thank Ari Platt, Nick Gerwe, and Murilo Oliveira for their contributions to this article.