For companies with world-class supply chains, expanding gross margins while reducing inventory isn’t aspirational; it is the standard for operational leadership. These top supply chains prove that supporting high growth and improving efficiency can go hand in hand. Companies such as Apple, TransDigm Group, Howmet Aerospace, and Eli Lilly demonstrate that cost efficiency and capital efficiency are complementary outcomes, not competing priorities. We call these companies cost and capital high performers. They exist in most industries across technology, industrial manufacturing, life sciences, consumer products, and more.

This is what makes medtech’s record so striking.

Our analysis of the 19 largest pure-play public medtech companies shows that from 2019 to 2025, on average, gross margins contracted by 149 basis points while days inventory outstanding (DIO) increased by 21 days.

Plotted on a quadrant chart, the picture is stark: The top-right quadrant that should contain cost and capital high performers is completely empty (see Figure 1). More than half of medtech companies landed in the opposite corner, with gross margin erosion and deteriorating inventory efficiency.

Figure 1

This matters because when a company can expand margins while reducing inventory at the same time, it is a sign of genuine, durable operational efficiency. Yes, companies can temporarily support reported gross margins by building inventory, since producing more than you sell shifts fixed manufacturing costs from the P&L to the balance sheet. But margin expansion alongside inventory reduction is a combination that cannot be engineered on paper.

It’s important to note that medtech supply chains were already under strain prior to the pandemic. The industry was hit disproportionately hard compared with others, forcing companies to spend years prioritizing service recovery over efficiency. While inventory levels have started to normalize, DIO is still 17% above the 2019 baseline (see Figure 2).

Figure 2

Growth is king in medtech: It’s the primary driver of valuations. But it’s getting harder to rely on growth alone to carry the story. In an environment of acute pressure from investors and boards, ceaseless volatility, and elevated input costs, the threat of valuation decline is looming.

The opportunity, however, is anyone’s. For the median company in this analysis, closing this performance gap could unlock more enterprise value than most medtech acquisitions deliver, without the integration risk. And the timing has never been better: With service levels finally recovering from the pandemic, supply chain transformation can move to the top of the agenda. The first medtech companies to get this right won’t just improve operations; they’ll gain a significant competitive edge.

Why medtech operations reinvention is difficult

What explains the lack of cost and capital high performers in medtech? The pandemic recovery is part of the story, but it’s not the whole story. Some may point to portfolio mix, as M&A can affect reported margins. It’s a fair consideration. But across the industry, portfolios have generally shifted toward higher-margin, higher-growth categories. If anything, M&A and divestitures should have supported gross margin expansion.

Others cite pricing pressure. When price declines offset gains, it can certainly mask operational improvement. However, pricing pressure isn’t unique to medtech. It hasn’t prevented high performers in other industries from expanding margins.

Operations leaders may also highlight growth as a complicating factor. When the business is growing fast, the need to keep product flowing comes first. But greater volumes should absorb more fixed costs, creating leverage in the cost structure. A well-designed supply chain produces better margin economics as it scales.

The more important explanations are systemic. Medtech’s struggle to meaningfully reinvent operations is not for lack of effort. The industry operates under a set of interlocking constraints that are largely absent in other sectors.

• Change control and quality management system (QMS) constraints: Even straightforward improvements, such as plant consolidation, can take years and consume significant resources.
• Fragmented supply base: It’s challenging to consolidate supply bases that were assembled through M&A and remain anchored in high-cost locations with complex logistics flows.
• SKU complexity: Decades of M&A, physician preferences, and overlapping product generations have created fragmented portfolios. The result is inflated inventory requirements and more manufacturing complexity.
• Demand variability and ineffective planning: SKU complexity, tender and country requirements, and capital cycles all push forecast error well above most manufacturing sectors, pressuring service levels and inventory requirements.
• Product availability: Patients require reliable access to safe, high-quality care, regardless of supply chain challenges. Demand variability creates additional pressure to overstock at every inventory position.
• High margins: Gross margins greater than 60% can reduce the urgency to act and reinforce a cultural tendency toward safety stock.

These realities help explain why traditional lean programs, cost reduction campaigns, and working capital task forces often disappoint. Most address individual points in the value chain without redesigning the underlying architecture.

Medtech’s supply chain problem is largely self-inflicted, not by bad decisions but good ones. Every SKU added for surgeon preference, every buffer stock built against a quality hold, every 18-month supplier qualification was the right call at the time. The companies that break into the top quadrant will be the ones willing to revisit the cumulative effect of those decisions, not just optimize around them.

Six steps to improve cost and capital efficiency in medtech

Becoming a cost and capital high performer in medtech takes more than another incremental cost program. It requires a fundamentally different operating philosophy. In our experience, six moves matter most.

1. Link operations to commercial strategy. A single improvement agenda rarely works across a diversified medtech portfolio. In high-growth, innovation-driven categories, speed to launch and new product scalability matter more than year-over-year cost reduction. In service-critical categories, lead time and fill rate are the performance currency. In mature, commoditizing categories, cost efficiency is paramount. Leading companies segment their operations accordingly and set performance targets to align with these distinct competitive realities.
2. Take an unconstrained view. Everyone has a bias to think about the supply chain they already have. But the seemingly impractical exercise of considering an optimal supply chain built from scratch with infinite capital and options is an important one. The clean-sheet view forces leaders to separate real constraints from historically assumed ones: Which sites, supplier relationships, and regulatory interpretations are truly fixed vs. simply never questioned? With an ideal future state defined, medtech leaders can work backward to map out the steps needed to get there.
3. Combine radical simplification with zero-based redesign. Radical simplification and zero-based redesign ensure that a company’s bold ambition is executable. Simplification attacks the hidden costs of complexity, such as excess SKUs, subscale geographies, and legacy supplier relationships, through bold portfolio rationalization, focused geographic footprints, and streamlined supplier bases. Zero-based redesign rethinks the organization’s ways of working to eliminate inefficient steps and handoffs.
4. Optimize end to end across functions. In medtech, some of the largest pools of value in supply chains are lost in the interfaces between functions: commercial and planning, planning and manufacturing, manufacturing and quality. Leaders counter this by establishing shared performance targets and designing governance that makes cross-functional trade-offs explicit. They hold teams accountable rather than leaving handoffs to be resolved (or avoided) at the seams.
5. Apply risk-based quality management to boost speed and savings. Not every change carries equal risk. For instance, transferring manufacturing of a class III device portfolio is categorically different from switching a component supplier for a class I product. Yet QMS often imposes similar process weight on both. Instead, a risk-based approach can preserve rigorous oversight where patient safety demands it while accelerating lower-risk changes through streamlined pathways. Done well, this improves speed and reduces cost without compromising compliance.
6. Modernize with AI and Industry 4.0. AI-powered demand forecasting, predictive maintenance, control towers, and connected production systems are already delivering measurable results in medtech. And the economics are improving rapidly. Custom solutions that once required multiyear development and deployment are now achievable in months. But the sequence matters. Companies that simplify and standardize their operations first and then deploy AI on that cleaner foundation will see compounding results. Each improvement strengthens the data and process infrastructure.

The window is open. But it won’t stay open for long. The first medtech companies to break the trade-off between margin and inventory will do more than improve operations; they will strengthen supply chain resilience and gain an immediate, durable competitive advantage.

The authors would like to thank Anshika Uppal for her contributions.