Medical Device Manufacturing: Bag Valve Masks
Social Sustainability in Ethiopia
Andy Bose, Christian Flygenring, Courtney Severson, Samson Payne
Executive Summary
The medical device manufacturing company described in this business plan will produce a new design of bag valve masks created by University of Wisconsin – Madison engineering students. Importing medical devices to the country of Ethiopia is expensive and the aim of the company is to create a socially sustainable solution to the problem, while saving the lives of individuals who require resuscitation.
We estimated the demand for BVM based on the capacity of the Ethiopian health care system. Given the 4% birth rate and 10% resuscitation rate and assuming each BVM will be sanitized every day, the total national demand of BVMs is 14500. In the country of Ethiopia, the government is the main provider of healthcare. Therefore, it is essential for the company to participate in the competitive bidding process through the government’s national procurement of medical devices.
The product is still in the development stages, but the prototype will be completed by December 2012. The goal of the new design is to reduce the number of parts from eleven to seven. This will also reduce the number of materials that need to be procured. Our calculations reflect the fact that all of the materials (capital equipment and raw materials) will need to be imported to Ethiopia.
The company is expected to reach a 50% market penetration, which translates to a demand of 587 units each month. The total number of man-hours required for the production of 587 units is 72, which results in costs of approximately $86 USD (per month). Labor needs could certainly grow over time to be orders of magnitude greater (which would scale with revenue). As a whole, labor cost is a much smaller factor than COGS and rent when determining profitability, breakeven, and ROI.
In terms of marketing the product, the product features that should be highlighted include: simple design, reusability, and low cost. The simple design makes it easy to train health professionals in device use. In addition, the product can be cleaned using disinfectants already available at hospitals and clinics. The bag valve mask easily beats its competitors on price.
At this time, the product will be sold business to business. The company should work to obtain a government contract to sell to the public hospitals. The remaining demand will be for private hospitals and NGOs. If a public information campaign was created to raise awareness about the necessity of resuscitation devices, there is a potential to sell the product to consumers. These consumers might not be able to reach a hospital and would require the device in their own home.
The product will sell for $10 USD. The cost to produce the product is approximately $2.31. The calculations assume that the company will sell the product to a distributor/wholesaler for $8 USD. The distributor will receive a $2 margin. The revenues from this model will be $54,600 in the first two years. A distributor/wholesaler was considered necessary because the transportation system in Ethiopia is relatively inefficient.
The capital equipment would allow for the production of other medical devices, which leads to additional revenue streams and the potential to export. These opportunities should be explored after the business is launched and successful within the country of Ethiopia.
Company Description
The First Breath Project is a collaboration between Sagean Inc., the University of Wisconsin, Madison and Addis Ababa University Faculty of Medicine. The purpose of this business plan is to provide direction for an Ethiopian entrepreneur to create a medical device manufacturing company, something that is currently missing in the country of Ethiopia. The overall goal of the project is to develop, manufacture, and sell a Bag Valve Mask (BVM) at a low price within the country of Ethiopia. The company could expand into other types of medical device manufacturing or export devices to surrounding countries.
Market Analysis
Medical care in Ethiopia, a nation of 80 million people, is provided by clinics in the countryside and hospitals in larger towns and cities. The government is the main health care provider in Ethiopia. According to Corporate Health Foundation Partnerships for Prevention and Care and Columbia University’s Center for National Health Development Ethiopia, there are about 135 public hospitals, 635 health centers, 5,955 health posts owned by the government, while there are about 50 private hospitals and 10 NGO hospitals. The limited number of health care facilities, insufficient supply of medical devices. Lack of skilled manpower and finance and difference between urban and rural areas make it difficult to provide Ethiopians with adequate access to health care.
We estimated the demand for the BVM based on the capacity of Ethiopian health care system. Based on a study conducted by Corporate Health Foundation Partnerships for Prevention and Care, a hospital (200 hospitals total) serves approximately population of 200,000 people each, a health center (650 health centers) serves 30,000, and a health post (5000 health posts) serves 5,000. Given the 4% birth rate and 10% resuscitation rate and assuming each BVM will be sanitized every day, the total national demand of BVMs is 14500. See the appendix (Calculation of Market Size)for calculations.
Product Specifications
The product is still in the development stage. The engineering students will have a functional prototype by the end of the year 2012. The primary motivators behind this new design are minimizing number individual parts for assembly and the number of material needed to manufacture the product; both of which are for the purpose of minimizing production cost. Existing models of BVM’s typically contain 11 components; the engineering teams goal is to reduce to seven components.
Materials
The following materials were considered (see Appendix for breakdown of materials by part):
●Flexible Materials
○Silicone rubber
○SEBS
●Hard Materials
○Clear PVC
●Other
○Small stainless steel springs
This product should be manufacturable entirely by either a plastic extrusion blow molder or plastic injection blow molder. We were not able to find information on current availability for either these pieces to equipment or local sources of the materials needed. Therefore, we are assuming that all equipment and materials must be imported.
Manufacturing
All manufacturing can be done through an injection blow molder, which can produce and individual (or batch) component in anywhere between 1.5-15 seconds. At this rate, one injection molder has the capacity of producing at least 300,000 BVM’s per year. Aside from material and operating labor cost, the only other costs incurred from manufacturing is electricity. A 17.3kW Injection molders will consume approximately 300kWh of electricity per month if producing one component at a time for 587.5 BVMs (50% market penetration) per month, and double that for 100% market penetration. The average cost/kWh in Ethiopia is $0.07, so it will cost approximately $21 in electricity for manufacturing at 50% market penetration.
A heat sealer will also be used for sealing the assembled BVM’s in shipping packages, but the electricity cases for this operation are negligible.
Labor
At the estimated demand of 1175 units/mo BVMs in Ethiopia and 50% average market penetration in the 1st year, we have determined the following schedule for labor (see Appendix for how figures were calculated:
Man - Hours / Man - HoursLabor/mo / 587.5 units/mo (50% Market Penetration) / 1175 units/mo (100% Market Penetration)
Parts Production / 18 / 36
Assembly / 18 / 36
Packaging&Shipping / 36 / 72
Subtotal / 72 / 144
Distribution* / 38 / 38
Total* / 110 / 182
*If a distributor is not found, average over year.
Cost in USD (@$1.19/hr) / 85.5 / 171
Cost in USD (@$1.19/hr)* / 130.63 / 216.13
Notes: The values with astericks (*) represent a model where the company distributes its own products as opposed to going through a distributor.
The values in the table above do not take into account labor costs for production to meet market demand greater than what we predicted (which could certainly be greater in actuality), other products that might be produced by the same facility in the future, and the possibility of exporting products outside of Ethiopia. With all these factors, labor needs could certainly grow over time to be orders of magnitude greater (which would scale with revenue). As a whole, labor cost is a much smaller factor than COGS and rent when determining profitability, breakeven, and ROI.
Marketing & Sales
The product will sell for $10 USD. The goal is to slowly decrease price (after the initial investment of machinery has been paid off) until the product is available for $5 USD.
The distinguishing product features are as follows:
○Simple design, with fewer parts
■Easy to train health professionals on device use
○Reusable
■No need for repeat purchases
■Can be cleaned using disinfectants already available at hospitals/clinics
○Low cost (cheaper than the cost of most disposable BVMs)
At this time, the product will be sold business to business. If the company or an NGO created an educational campaign, the product could also be sold direct to families. Customers who are not able to reach adequate healthcare facilities could purchase the product and use it as needed.
Competitors
The Ethiopian Food, Medicine, and Health Care Control Industry found 92 wholesalers and 114 importers of medical devices. These companies are able to provide BVMs. Wholesalers and importers buy devices from the manufacturer and increase the selling price in order to receive high margins. In this case, the company will manufacture and sell the he product. There is no need to increase the price above the $10 selling price.
The majority of products imported to Ethiopia come from China, India, the European Union, and the Middle East. Companies that manufacture medical devices and export to Ethiopia represent a potential threat if they can beat the BVM on price. No import laws exist, but medicines and medical devices must be registered with the Drug Administration and Control Authority of Ethiopia. This is the largest barrier to entering the market.
In Ethiopia, public hospitals use national contracts for procurement of goods and services. The bidding process would be used for procurement of Bag Valve Masks. This company would likely win the bid from the Ethiopian government for two main reasons: the product is created within the country and has the lowest cost.
Financial Projections
The financial projections section is broken up into three parts: initial investment, short-term revenue, and long-term revenue.
Initial Investment
Capital equipment: The capital equipment required includes an injection molder, customized molds, and a heat sealer. The cost of the injection molder is approximately $15,000. The customized molds are approximately $1,000 for each part, with design costs of approximately $1,000. The heat sealer is $300.
Materials required: See the appendix for the materials needed.
Labor: See Labor section above.
Short Term Revenue
Cost per device: Assuming the BVM is produced entirely of SEBS, clear PVC, and a spring, and an estimated 30% material use is lost in production, we have estimated the cost per unit to be $2.31 (42.04 ETB). See Appendix for details. SEBS was chosen in place of silicone rubber due to significantly lower material costs.
Sales: We predict an average market penetration of 50% (587.5 units/mo) over the course of the first 2 years of production. Because of the relatively low production volume, sale price will likely need to be on the higher end of our target ($10/unit), and distribution margins may be on the order of $2. At these operating points, we anticipate an average annual of $56,400/year for the first 2 years.
Long Term Revenue
BVM Sales In Ethiopia: We estimate that over time, market penetration will reach 80%, allowing for negation of a lower distributor margin ($1.50), and that sale price may need to decrease (to $9/unit) in order to remain competitive. At these adjustments, revenue would increase to $84,600/year.
Other device manufacturing: An injection molder has the capacity to produce almost and soft or hard plastic device, medical or otherwise. They also have a high output rate (as high as an impression every 1.5 seconds). Because of this, facilities set up to produce BVMs could produce a plethora of other devices.
Exporting
The Bag Valve Mask can be exported to other countries. The surrounding countries of Sudan, South Sudan, Kenya, Uganda, Somolia, Djibouti, and Eritrea should be considered first. The potential revenues from selling in these countries are difficult to determine. A variety of factors must be considered, including: import/export laws, distribution/transportation, and market size.
In order to export the product, a trading license must be obtained from the Ethiopian Ministry of Trade and Industry. See their website for more information:
The projections for this area should be obtained after successful implementation within Ethiopia. If the projections for potential revenue and expense are made at this point, the numbers will be inaccurate. The goal is to translate this company to other countries after 5 years, so estimates for revenues and expenses should be made after the initial project is successful.
Conclusion
The manufacturing of bag valve masks in Ethiopia is financially viable. The company provides a social sustainability solution to the current problem of lack of availability to low cost bag valve masks. See the Appendix for further calculations and graphs showing multi-variable relationships. In addition, the excel sheet provided will allow the changing of assumptions and show the differences in revenue and expenses.
Appendix
Ethiopian Health Care System
Population per facility
Hospital by type
Calculation of Market Size
Birth rate: 0.04, resuscitation rate: 1/10,
Number of resuscitation needed per facility per month:
200 hospitals, 650 health centers, 6000 health posts.
population served per facility: 200,000, 30,000, 4000 respectively.
(200,000 * 0.04 *0.1)/365= 2.19 resuscitations/day per facility => At least 3 BVM’s needed/facility
(30,000* 0.04* 0.1)/365= 0.32 resuscitations/day per facility => At least 2 BVM’s needed/facility
(5,000*0.04*0.1)/365 = 0.05 resuscitations/day per facility => At least 2 BVM’s needed/facility
Each each health facility will likely want more than the bare minimum to account for days with abnormally high demand. Each facility will likely want at least 2 BVM’s in case one breaks. Therefore, we added 1 to each result above:
(3 + 1)*200+(1 + 1)*650+(1 + 1)*6000= 14500 BVM’s needed in the Ethiopian Market.
Unfortunately, we could not obtain any data on the lifespan of each BVM. We are currently assuming that each BVM will need to be replaced every year. Therefore, the the Ethiopian demand for BVM’s should be at least 14500 units/yr.
Materials By Part
Component / MaterialBag / Latex free thermal plastic rubber, capital SEBS
Mask / Alpha PVC 300695,
Silicone Rubber,
Spring / Stainless Steel
Neck, 02 port, threaded neck piece,
Stopper neck / PVC, K Resin,
One way valve/rubber stopper / Polysulfone,
Silicone rubber
Cost of Production per BVM
Materials Cost / ($/kg)Per spring ($) / 0.1
Rubber per kg ($) / 8.3
Rubber per unit (kg) / 0.1379
PVC per kg ($) / 2.2046
PVC per unit (kg) / 0.0815
SEBS per kg ($) / 3.4
SEBS per unit (kg) / 0
Packaging per unit ($) / 0.018
Material Lost in Production (fraction) / 0.3
Total cost/unit / 2.308
Potential Travel Costs
Estimated One-Way Travel Distance & Time of major HighwaysMajor Roads / Distance km / Time hr
1200 / 16
800 / 10
900 / 12
980 / 13
1000 / 13
700 / 9.5
1000 / 14.5
740 / 9.5
Total / 14640 / 195 / <Round Trip
Gas Cost ($/gal) / 8.33
Mileage (MPG) / 10
Mileage (kmPG) / 16.0934
Gas Cost ($) / 7577.715088 / per trip
% Time at site / 0.15
Distribution Time (hrs) / 224.25
number of trips/year / 2
Cost per month / 1262.952515
Timer per month / 37.375
Graphs
The following are a series of graphs that show how breakeven is affected by several variables. This can be very useful information, because all of our predictions can only serve as a best guess of what the actual operating points are for the business model.
Additionally, if multiple variables differ from our predicted operation points, then the proportional change caused by each one individually can be multiplied together to get a new estimate of breakeven. The error in this value tends to be proportional to the amount of deviation, and the number of variables that deviate, from our predicted operating points, but so long as the actual operating point is within the range that is plotted on the graph for the given variable, then the actual breakeven tends to be accurate to within +/- 50% of the calculated result, and is often accurate to within +/- 10%. This is still accurate enough to determine viability.
Ex. (using Model with a distributor):
Actual Material Waste: 20% => Breakeven changes from 21mo to 17mo
=> 17/21 = 0.81
Actual Rent: $1500/month => Breakeven changes from 21mo to 15mo
=> 15/21 = 0.7
Original Breakeven was 21 months => It is now 21*0.81*0.7 = 12.1 months
For each graph, breakeven was also plotted for 3 scenerios:
●Model using a distributor
●Model where the business does its own distribution
●Model where the business does its own distribution, and has to initially purchase a $10,000 truck to transport the products
For each graph, all other variables are held constant, and one is changed. The other variables are fixed at the following values.
Base Operating Points
●Two full trips per year (w/o Dist.), see Potential Travel Costs
●$2 Distribution Margin (w/ Dist.)
●587.5 units/mo (50% Market Penetration)
●$2000/mo Rent
●Sale Price $10
●$1.19/hr wage
●30% Material Waste
●$10000 Truck (w/o Dist. + Truck)