Christopher Delporte Editorial Director, Michael Barbella Managing Editor05.13.13
There are many reasons medical device companies choose to outsource. Speed to market, reduced costs, streamlined product design and manufacturing, of course, are the most common and oft-cited by those in the industry. We know the reasons well. But in a healthcare market that is plagued by uncertainty, medical device manufacturers are searching for ways to respond to increased market pressures (think taxes, reimbursement challenges and universal healthcare), which means their outsourcing providers need to find creative ways to up the appeal of the usual offerings, while at the same time find new ways to demonstrate value. No small task. But for those with the right tools and talent, the future isn’t as gloomy. At least some industry analysts are upbeat about the prospects for the outsourcing market.
According to a recent report published by Transparency Market Research, the global medical device outsourcing market is expected to increase from $21.1 billion in 2012 to $40.8 billion by 2018—a compound annual growth rate of 11.6 percent. According to the report’s authors, the product design segment holds the largest share—29 percent—of the service market. And overall, manufacturing of Class II “medium-risk” devices—and the less onerous regulatory hurdles that come with them—comprise the largest sector of the outsourcing market.
“The medical device market is one of the fastest-growing and the most dynamic sector in the life-sciences industry due to its high profit margins and the increasing demand for advanced medical devices,” the authors wrote. “The medical device industry consists of three major participants—medical device manufacturers, product outsourcing companies and service outsourcing companies. These three participants have, together, increased product efficiency and reduced costs by improving the product life cycle management in medical device manufacturing.”
Outsourcing helps the medical device manufacturing industry to “overcome challenges” by providing OEM customers with “expertise in product design, regulatory consulting, testing and validation, product implementation and strategic consulting services,” the report noted.
Despite the robust bottom line projected by this one report, medical device contract manufacturers have their feet to the fire to implement new and differentiated methods and services that keep costs low and the value of their services high. Not the easiest of balancing acts. To find out how the market is responding to these challenges, Medical Product Outsourcing spoke with leading providers of manufacturing services to get a feel for the current state of the sector and how the definition of “full service” may (or may not) have changed over the course of the past year and in the last decade (a nod to MPO’s upcoming 10th anniversary in June).
Participants in the discussion included:
1. How have you seen the outsourcing market evolve over the last decade? What factors contributed to the changes you’ve seen?
Alan Connor: The outsourcing market can be viewed in a number of different ways. The traditional “contract manufacturer,” that essentially provides little more than contract labor for final assembly, was big several years ago but seems to no longer be a main focus. Rather, in more recent years, we have observed that medical device companies prefer to work directly with critical component and sub-system manufacturers, which are also considered contract manufacturers in a more general sense. These manufacturers bring differentiated technologies that enhance product performance and can deliver design-for-manufacturability savings in the highest-value elements of a product design. A recent trend is for the device companies to ask these critical component suppliers to provide a broader-range of lower-value services, including clean-room assembly of complete devices.
The other significant trend we have witnessed is in the quality system and regulatory expectations being placed on contract manufactures, both by customers and the U.S. Food and Drug Administration (FDA)—the FDA recently increased direct oversight on CMs [contract manufacturers], requiring registration as device manufacturers. CMs need to have made, and continue to make as requirements evolve, a significant investment in building and maintaining world-class quality systems—comparable to those of the device companies themselves in many areas—and must truly understand medical device requirements. Many of the smaller CMs have been unable or unwilling to make this transition and, as a result, are not being awarded any new business.
Matt Jennings: The market has become much more sophisticated with the willingness and desire of large OEMs to outsource the manufacture not only of components but fully finished products, ready for onward distribution. In my opinion, the drivers to this change are: 1.) the ongoing consolidation of component suppliers, which has created scale-driven, fully integrated outsource manufacturing companies; 2.) the economic pressures on OEMs and their realization that cost and quality requirements can be successfully achieved with larger integrated outsource manufacturing and design service providers; and 3.) the development and increased sophistication of design and development capabilities within large outsource service providers.
Julie Cameron: The medical device outsourcing market has responded to the need for cost containment and the opportunity in emerging markets with consolidation, geographic expansion and increased efficiency.
Jim Reed: Ten years ago it was assumed by many that the outsourcing of medical devices would become the norm. It was anticipated the medical device industry would expand via contract manufacturing partners vs. a brick-and-mortar approach to growth. While the outsourcing of medical device manufacturing continues to grow, many of the large OEMs remain committed to manufacturing within their own facilities, expanding in low-cost countries to serve both the United States and emerging markets. Many of these same OEMs continue to embrace outsourcing initiatives, often to source products they don’t view as being core to their technology or therapy competencies. We do see a significant increase in outsourcing by emerging medical device companies. Many of these emerging companies never intend to establish manufacturing operations. Their focus is on developing and marketing new product therapies, with a business model that relies on outsourcing for 100 percent of their manufacturing requirements, including quality and regulatory management, packaging and sterilization services, and warehousing.
Treasa Springett: The outsourcing market has evolved in a number of ways over the last decade. By and large, OEMs are outsourcing more in an effort to better focus their resources. They are consolidating their supplier list, while looking for an outsourcing partner who will help manage the entire supply chain. Most recently, globalization and emerging market penetration are on the forefront of the outsourcing evolution. Thrown into the mix is the recent emergence of suppliers who are expanding from the automotive and defense markets into the highly regulated medical market. OEMs are seeking to make their organizations leaner. They are focusing their efforts on product commercialization and regulatory pressures consuming engineering resources. They are broadening their global reach. OEMs are seeking to make their organizations leaner.
Mike Nowaczyk: Today, OEMs are looking for a manufacturing partner instead of numerous suppliers. Medical OEMs come to us looking for a reliable manufacturing partner that is financially stable, well invested in sound technology, and offers a broad range of services. The ability to deliver lower cost manufacturing without compromising product risk is key.
2. What services are popular with customers? Why are these services so important?
Jennings: Although all of our various services are in demand, clearly we have seen a large increase in the use of our design and development capabilities. Design and development capabilities are popular because we can quickly add significant resources for our customers whether they are trying to get a new product launched or refresh an existing product. With over 100 dedicated design and development professionals on staff, in three design centers around the world, we have been able to add value to OEMs by driving design and development efficiencies, which tend to result in faster market entry for these opportunities.
Connor: Most CMs specialize in one particular type of manufacturing—such as stamping, machining, or plastic injection molding—and each has a particular set of capabilities. The dialog between many CMs and customers is centered around how the customer should modify the design to fit the capabilities of the CM. There are elements of value-enhancing design for manufacturability but, in many cases, the goal of the supplier is to make sure the design is something that they can manufacture. We have had great success by approaching customers with a question they are not used to hearing from their CMs: “What patient outcome are you trying to achieve?” If necessary, we will then invent a process or technology that delivers the necessary manufacturing capabilities to enable that outcome. In other words, we try to change the process to facilitate the design, not the other way around. This approach is highly valued by our customers who are challenged with designing products that improve patient outcomes at ever-lower costs.
Cameron: Suppliers are looking for additional services from the current supply base. The first place medical device companies look for a supplier is on their current approved supplier list. There is a benefit to the medical device company to leverage purchases with the current base and limit their supply chain complexity. We have seen increased interest in secondary operations, assembly and even finished packaging from a fabricator.
Reed: Popular services include design assistance, design for manufacturablity (DFM), product life cycle management and inventory management programs. Customers embrace these services, as they are designed to control quality and costs from the start, while also ensuring a path to ensure long-term objectives are met.
Springett: We find many customers are not focused on just one service, but on our ability to provide multiple services from one facility. Design, engineering services and support with DFM on the front end of the project are critical. The ability to work collaboratively from concept through production and market launch enables the OEM to realize benefits involving quality, delivery and cost. Resource constraints and the need for a supplier with a clear and concise quality management system are probably the top reasons why these services are so important. They afford the OEM more time to focus on other critical areas of their business while mitigating risk when it comes to getting the right product to market, on time, with expected quality.
Nowaczyk: OEMs expect the services that are required to support their product portfolio inclusive of managing third- and fourth-tier suppliers through managing their finished goods inventory and distribution.
3. What is driving the need for certain technologies or services? Clinical drivers? Financial considerations? Regulatory concerns?
Jennings: There is a certain minimum requirement to be a finished-goods outsource provider. Beyond those requirements we believe that our technology offerings become a competitive differentiator. We believe that our customers need a greater capability for innovation from their outsource providers and, as such, we tend to invest in technologies that will aid us in increasing our ability to help our OEM customers innovate.
Connor: This is changing rapidly. Clinical outcomes and product performance is still critical. Recently, however, product cost has become much more important. We have a math problem in healthcare in the U.S. and medical device companies are in the process of sorting out how to respond to rapid changes in their markets. The CMs that thrive in this environment will be those that can help deliver product performance and economic advantage.
Cameron: We have experienced increased interest in our PEEK [polyetheretherketone] processing capabilities as PEEK is recognized as an MRI [magnetic resonance imaging]-safe alternative to metal. Braided and coiled reinforced tubing has also become more popular to deliver pushability and flexibility with kink or crush resistance.
Springett: In general, we are working on more projects that reflect a drive toward less-invasive devices resulting in less patient trauma, reduced procedure time and shortened hospital stays. In addition, implantable devices are getting smaller and they need a longer effective life; MRI compatibility is also becoming more prevalent. On the financial side, lower reimbursement and overall cost-containment are major drivers. A growing middle class within emerging markets are also seeking long-term “value” devices that have just the necessary features at an affordable lower cost. Large, growing populations are also enabling companies to develop market-specific device solutions that cater to specific patient population needs.
Nowaczyk: OEMs are looking to simplifying their value stream, increase speed to market, and increase shareholder value without compromising product risk for the end-user.
4. How do you manage the consistent cost pressures?
Jennings: Cost pressures are a market reality. To be a player in this market, the outsource provider must have active ongoing programs to continuously drive cost out of the products that they manufacture for their customers. Using Lean and Six Sigma tools, we regularly meet with each customer to discuss cost reduction opportunities and define an agreed cost improvement plan for each year. By doing so, we’ve been able to meet our customer’s needs without dramatically impacting our margin structure.
Springett: Having a clear understanding of cost objectives up front, prior to embarking on any project, is the best way to manage consistent cost pressures. The greatest cost savings can often be the result of effectively designing products for manufacturing. Early engagement in the design process enables optimal impact. Proper validations and value engineering further provide efficient costing throughout the product’s life cycle. Being a metric-driven company, with real-time data on quality and delivery, also helps prevent unexpected costs for our customers.
Connor: Most of the devices in which we participate are in the 5,000– to 50,000-units-per-year range, too high for extensive manual operations and too low for specialized automation. Our expertise is in combining precision manufacturing techniques with highly controlled but flexible automated systems. This flexibility allows us to provide exceptional product performance at a lower cost for mid-volume products.
Reed: The best means to manage cost pressures is together with our customers, establishing goals and working in partnership to achieve a desired outcome. Given today’s hyper-sensitive regulatory environment, changes to lower manufacturing costs often mean a change to the process and requires the full engagement of our customers. Any such changes now require the full support of our customers’ quality and regulatory operations, as without this support we are essentially locked into the current process, limiting options for driving costs out of the process. Of course, we embrace Lean [manufacturing principles] and we are implementing Lean programs across all facets of our business, but “Lean”ing out factories is only part of the equation.
Cameron: Collaboration and innovation. We work with our customers to collaborate using Kaizen and other tools. Together, we can define cost savings initiatives that justify the necessary qualifications, validations and approvals, and provide sustainable savings. In addition, we continually invest in manufacturing efficiencies, including appropriate automation and in-process inspection to deliver cost-effective solutions to the device market.
Nowaczyk: With economic conditions, increased regulatory requirements, and evolving technologies, it’s important to remain competitive over the life of a product. By working with an expansive supply chain we can leverage and secure competitive prices and optimize cost to our customers. In some instances, automation can be used to compete with low-cost wages in the Pacific Rim by minimizing manual intervention. For projects that do not accommodate automation, manufacturing in low-cost countries is an option.
5. How has the competitive landscape changed recently?
Reed: Consolidation in our industry continues, often with the larger players acquiring smaller and often niche companies, bringing a specific competency to their portfolio of products and services. Yes, there are still hundreds of smaller companies serving the medical device industry but we are seeing a growing trend of OEM customers focusing on supplier consolidation, often looking to the larger contract manufacturers as a means to consolidate their spending and ultimately lower their overall costs.
Jennings: Really, the competitive landscape has just continued to develop in a manner that began about 10 years ago with the consolidation of component manufactures into significant integrated outsource providers. We believe this consolidation effort is consistent with our customers’ desire to outsource not only componentry but finished products ready for onward distribution as well.
Springett: Recent changes in the competitive landscape include growing global competitiveness, the entry of automotive and defense companies into the medical market, continued consolidation, and we’re beginning to see the separation of players into a tiered supply base.
Connor: Quality systems and the ability to manage Tier 2 suppliers have become much more important. At the same time, customers expect responsiveness and creativity. The really small players are unable to support the overhead being required by the OEMs. The really large players are, generally, not able to be nimble in response to customer needs.
Cameron: The market is becoming more competitive, both for medical device manufacturers and the suppliers to them. Medical device manufacturers have worked to contain the rising cost of healthcare while providing products with improved clinical benefits and reduced risk. Suppliers from other industries have recognized the growth and relatively better margins versus industrial segments and have entered this market. Local suppliers have crossed borders and are supplying internationally. Increased competition has certainly benefited the industry as we each execute our strategy to outperform the rest.
Nowaczyk: In recent years, we have seen a lot of consolidation in the supply base, and quite a few competitors that are highly leveraged by their investment firms.
6. Are there device sectors in particular that are better, more open, or more accepting of outsourcing than others?
Jennings: It’s an adoption process with each individual customer. This process can definitely be driven by OEMs watching competitors and examining their outsourcing strategies, however, clearly the need for lower capital investment in plant construction and more efficient manufacturing processes are needed by all device OEMs.
Cameron: Outsourcing versus insourcing is a decision made typically based either on economics or strategy, and sometimes both. For instance, there may be manufacturing processes that are considered proprietary or part of a device’s competitive advantage and for strategic reasons, do not want to be considered for outsourcing. More often, it is a matter of economics. The investment considerations in personnel with the proper manufacturing know-how as well as the appropriate manufacturing environment and size, the proper equipment, including inspection and controls, must be considered. The financials typically point to insourcing for high-volume, long-life products with little iterations on innovation.
Connor: Traditional outsourcing has been around individual components of final assembly. Much of our growth in the past several years has been complex sub-assemblies where we are managing a significant sub-system of an overall design, not unlike what you see in other industries. Going forward, we will see this trend continuing. Many large OEMs perform clean-room final assembly in their own facilities. We are starting to see this change as well as large OEMs begin to more aggressively rationalize their cost structure.
Springett: Market sectors that are more mature seem to be more open to outsourcing a greater amount of their project needs. Good examples would be markets with greater competition and cost pressures are forcing OEMs to find more efficient ways of getting their devices to market. However, also open to and more accepting of outsourcing are early-stage companies where resources are typically limited.
Nowaczyk: Anyone who is looking todrive down cost in a highly regulated industry will look for partners that have strong process strength and a good value proposition.
7. Customers are expecting a full service of capabilities from their manufacturing partners. With supplier lists shrinking, how do you stay innovative to remain on those preferred vendor lists and differentiate yourself from the competition?
Connor: We see it as a combination of factors. First, we believe that the majority of product performance, innovation and cost derives from a relatively small number of critical components. We have differentiated expertise in several areas such as blade sharpening, needle grinding, Swiss-, laser- and EDM [electrical discharge machining] precision machining, and laser welding that our customers call upon to help enhance product performance. Second, we need to provide a broader set of capabilities. Cadence was traditionally the blade and needle expert. Over the years, we have added a very broad set of metals processing capabilities and, more recently, plastic insert- and over-molding and clean room assembly. Finally, manufacturing partners must be in a position to take on quality system requirements, including process validation and supplier controls, component and systems engineering, and sourcing and supplier management responsibilities traditionally fulfilled by the OEM.
Jennings: Once an integrated device outsource provider has the base manufacturing requirement to support OEMs’ finished-good needs, they need to define their investment strategies to support new technology additions which, in my opinion, need to drive product innovation for their OEM customers.
Cameron: Vesta continues to expand its services, offering increased capabilities, with the same level of precision and quality that customers have come to expect from us. We have recently added tipping and printing capability for our precision thermoplastic extrusions. The precision in our tipping has facilitated innovation while printing is providing supply chain efficiency.
Reed: Our business model is designed to align with those customers who expect full-service capabilities. Our design and development centers are staffed with engineers who are versed in all aspects of the design and manufacturing of complex medical devices—from concept development to product release. Accellent’s business model is intended to serve as an extension of our customers’ operations. It’s also recognized that customer requirements and expectations are greatly varied, so it’s essential that our business model be flexible, aligning products and services to serve each customer’s specific needs.
Our vertical integration allows us to control the entire supply chain, largely eliminating the need to engage with third-party suppliers. This vertical integration brings significant value to our customers; from simplifying and streamlining the supply chain, to driving out the non-value added costs that are often associated with managing multiple vendors.
Springett: Donatelle stays close to what is happening in our focus markets to understand trends and needs, and stay prepared to help customers make their next move. We also work with a number of early-stage and midsize customers who are thinking about devices and the market in new ways. This stretches us to master new technologies and offer new services to those companies we partner with.
Nowaczyk: SMC continues to invest in new technologies from equipment through personnel to stay ahead of the curve. We also evaluate the market looking for new technologies that can benefit our customers, and in some instances, by partnering with our customers we have created solutions specific to their needs. You can’t do it all from within, you need to bring on talent that can take you to the next level.
8. What are some of the risks outsourcing partners face when creating such a close business relationship? What can be done to minimize those risks?
Springett: Both parties of the partnership must know exactly what is expected of them for the partnership to be called successful. When expectations are not met, the partnership is at risk. From the OEM’s standpoint this can include anything from on-time deliverables to quality product to respectful customer service. The OEM is entrusting a high level of control when the outsourcing partner performs final assembly, inspection, and packaging of the device. From the supplier’s standpoint, this can include failure of product to launch to moving manufacturing overseas once developed. The supplier invests significant time and resources in scaling up for production and launch of the OEM’s device.
There is potential risk that product volumes never meet initial expectations. Throughout the entire process, risks can be minimized by clear communication and defined expectations. Visiting the supplier’s facility and performing a thorough audit of their quality management system can ensure the OEM’s risk will be minimized. There is always a level of risk in any partnership. It is a matter of working together and managing expectations.
Jennings: To minimize risk? Communication, communication, communication. There is no magic here. There needs to be a formalized process that allows the parties—including management—to meet regularly and exchange mutual challenges and opportunities that can impact their relationship.
Connor: From the OEM perspective, it is important to understand the mission, ownership structure, financial situation and culture of their outsourcing partner. Does their ownership perspective and financial situation allow the partner to take a long-term view on the relationship or will the OEM be “nickel and dimed” at every turn? Does the partner’s mission include patient outcomes? Does its culture embody a thorough understanding of the quality requirements of manufacturing medical devices? OEMs must assess all of these factors—not just unit price—when evaluating its partners.
Cameron: The risks for a close outsourcing partnership relationship are similar to the risks when a business chooses to insource. Is there adequate capacity in place to meet the potential success we could experience in the market? Is there appropriate quality control for product to perform as designed?
Nowaczyk: The contract manufacturer needs to assess the risk of each product forecast provided. You can go in very deep investing in capital and personnel only to find the data was inflated. You need to establish a contract and share ownership in the risk or cover yourself with other guarantees.
9. What qualities make for a solid outsourcing relationship?
Cameron: Like any relationship, open communication of both good and bad news fosters trust, collaboration and the best chance of success.
Reed: Quality, service and value are game stakes in any outsourcing arrangement, but that doesn’t always equate to a “solid” relationship. The best relationships are built on trust, integrity and transparency, with shared goals and a commitment for both companies to succeed.
Nowaczyk: A great relationship is built on mutual trust, partnership and open understanding of each other’s needs. A strong tie to the senior leadership at each company certainly can be a benefit. Start with early involvement and good communication on both sides.
Jennings: Deep, multiple-level relationships within both the outsource provider and OEM. A formalized review process where the management of both companies are actively engaged and, finally, superior execution by the outsource provider.
Connor: As with any relationship, communication is 98 percent of the battle. Both sides of the relationship must be able to honestly and openly assess the “fit” and must treat each other with mutual respect, both technically and financially. We pride ourselves in telling customers—even good customers—when we do not think we are the right fit for a particular opportunity.
Springett: Steady communication, clearly defined expectations, and a willingness by both parties to share the risk in the relationship. Ultimately, it becomes a commitment from both parties to create a win-win scenario that is in the best long-term interest of both organizations. An outsourcing partner should be financially stable, focused on medical, have a solid track record of success, and adhere to a rigorous quality management system.
10. How do emerging markets become part of offering a full-service outsourcing menu of capabilities—either from the sales side or from a manufacturing perspective?
Connor: For many years, there was a belief that manufacturing in low-cost countries was a cost savings panacea. Because of extended supply chains, logistics costs and quality control issues, this has proven to be untrue for the majority of relatively low-volume, high-complexity medical devices. Going forward, it is clear that OEMs will be increasing their R&D [research and development] efforts on emerging markets, some of which are not traditional low-cost countries. We believe that serving these customers will require early engagement to creatively deliver product performance at an optimal cost. This may require partners to have a sales and engineering presence in some markets such as China and Brazil. It remains to be seen if local manufacturing in these countries will be required over time.
Cameron: Medical device companies in emerging markets are looking for proven partners. We can draw on the depth and breadth of experience from serving the market for over 40 years. At the same time, multinationals are seeking ways to create lower cost in use solutions and need suppliers like us that can consider creative solutions.
Reed: I think we can all agree that serving emerging markets is critical to the future of our business. Growing a business in established markets has become a challenge, with most large OEMs reporting minimal growth across a wide array of device therapies. Most of Accellent’s larger customers have now established a presence in the Pacific Rim, with some establishing localized product development initiatives. Many of these customers are designing products specifically intended to serve emerging markets and are actively seeking regional suppliers in which to partner. When we made the decision to establish manufacturing operations in Penang, Malaysia, we did so based on input from our customers, as they indicated a desire to continue working with an established and stable partner vs. the challenges associated with engaging with unknown and in most cases, unproven entities.
Jennings: The reality is, outsource service providers follow the OEM’s requirements. Because of the cost structure and resulting margin realities of the outsourcing business model, it’s too risky to invest in an emerging market without knowing that the OEM community has targeted that geography. Once you have certainty on OEM expansion plans, expanding your business to emerging markets becomes part of your investment strategy.
Springett: The emerging markets are poised to provide substantial demand and opportunity for both OEMs and CMs. CMs wanting to participate in this growth and support their customers must make investments in needed capabilities to support the unique needs in these regions. Capabilities needed may differ from what is offered elsewhere. CMs must be willing to expand beyond their comfort zones.
11. How do you maintain quality in a full-service outsourcing setting? What regulatory pressures are passed from the OEM on to the outsourcing partner?
Connor: OEMs have significantly increased their expectations in the past several years, requiring substantial investment on the part of their Tier 1 outsourcing partners. Many are not in a position to make this investment. What we see happening now is increased expectations on the part of Tier 1 partners to take over the management of a larger number of Tier 2 suppliers. In addition, the regulatory requirements on these Tier 2 suppliers are also increasing. As of late 2012, the FDA now requires the contract manufacturer of any listed medical device to register as the manufacturer of the device even if they do not hold design control or marketing responsibility for the product. Many CMs and OEMs are not yet even aware of this new requirement. This will require coordination between the CM and the OEM to properly register devices and will probably increase the likelihood of the CM being subject to FDA audits.
Jennings: Quality is always job number one. You must have a global quality system that you are willing to continue to invest in to assure that this capability is state-of-the-art and integrates easily with typical OEMs’ QMS [quality management system processes. You must also have an ongoing process that ensures that each employee supports your quality policy. The FDA has recently focused OEMs on their suppliers for risk mitigation. To that end, the integrated outsource provider must also have an active supplier management process that supports OEMs’ needs in this area.
Reed: The answer is simple. Our quality and regulatory operations are designed to mirror that of our customers. As a full-service outsourcing provider, we are required to operate in the same manner as our customers, from design and development activities, manufacturing operations, packaging, sterilization and warehousing.
Springett: When you start with a solid quality system as your basis and build your infrastructure around that system, it leads to strength. We have quality management systems in place that provide real-time comprehensive data for quick response in the event of any quality issue. A proper understanding of our customers’ quality needs and interpretation of quality up front are also essential. We challenge ourselves daily to ensure we are providing consistent quality and continuous improvement that is second to none. Because regulatory responsibility to the FDA ultimately falls on the OEM, they need a partner they have confidence in. Device failure is not an option, and a thorough interrogation of potential failure modes needs to be part of the development process.
Nowaczyk: In some cases all regulatory pressures are transferred from the OEM to the outsourcing partner with the exception of complaint handling and adverse event filing. A harmonized quality system and compliance to that needs to be in the minds of all employees.Outsourcing: The Value Remains
By Marc Tanowitz, Principal, Pace Harmon
The benefits of outsourcing have been proven so many times over the last two decades the practice virtually has become gospel in the business world. Companies can seek outside help for any number of reasons, but they mostly do so to shorten product development and scale-up time, expand market share, reduce costs and focus on core competencies. And while shorter product life cycles, improved efficiencies and novel designs usually make outsourcing an attractive option, it may not always be the best option for medtech manufacturers. In the following commentary, compiled exclusively for MPO, outsourcing expert Marc Tanowitz details the benefits of subcontracting and explains the instances in which companies may want to consider keeping things in-house.
According to a recent report published by Transparency Market Research, the global medical device outsourcing market is expected to increase from $21.1 billion in 2012 to $40.8 billion by 2018—a compound annual growth rate of 11.6 percent. According to the report’s authors, the product design segment holds the largest share—29 percent—of the service market. And overall, manufacturing of Class II “medium-risk” devices—and the less onerous regulatory hurdles that come with them—comprise the largest sector of the outsourcing market.
“The medical device market is one of the fastest-growing and the most dynamic sector in the life-sciences industry due to its high profit margins and the increasing demand for advanced medical devices,” the authors wrote. “The medical device industry consists of three major participants—medical device manufacturers, product outsourcing companies and service outsourcing companies. These three participants have, together, increased product efficiency and reduced costs by improving the product life cycle management in medical device manufacturing.”
Outsourcing helps the medical device manufacturing industry to “overcome challenges” by providing OEM customers with “expertise in product design, regulatory consulting, testing and validation, product implementation and strategic consulting services,” the report noted.
Despite the robust bottom line projected by this one report, medical device contract manufacturers have their feet to the fire to implement new and differentiated methods and services that keep costs low and the value of their services high. Not the easiest of balancing acts. To find out how the market is responding to these challenges, Medical Product Outsourcing spoke with leading providers of manufacturing services to get a feel for the current state of the sector and how the definition of “full service” may (or may not) have changed over the course of the past year and in the last decade (a nod to MPO’s upcoming 10th anniversary in June).
Participants in the discussion included:
- Julie Cameron, vice president of marketing for Vesta Inc., a medical device contract manufacturer providing silicone molding and dip molding, silicone sheeting, silicone tubing, thermoplastic extrusion and assembly services. The company is headquartered in Franklin, Wis.
- Alan Connor, CEO of Cadence Inc., a Staunton, Va.-based contract manufacturer that provides outsourced design and manufacturing solutions for surgical devices and scientific applications.
- Matt Jennings, president and CEO of Phillips-Medisize, a Hudson, Wis.-based outsource provider of design and manufacturing services to the medical device and diagnostics, drug delivery and commercial markets.The company has annual sales of just under $500 million with 75 percent of the total revenue coming from drug delivery, medical device and diagnostic products.
- Mike Nowaczyk, vice president of operations at SMC Ltd., a contract manufacturer of devices supporting the healthcare industry. With a core competency of complex molding, SMC—headquartered in Somerset, Wis.—specializes in single-use finished devices.
- Jim Reed, vice president of sales at Accellent Inc., a Wilmington, Mass.-based provider of outsourced manufacturing and engineering services to the medical device industry.
- Treasa Springett, president of Donatelle, a medical device contract manufacturer with expertise in such areas as cardiac rhythm management, neuromodulation, cardiovascular surgery, diabetes and spine. The company is headquartered in New Brighton, Minn.
1. How have you seen the outsourcing market evolve over the last decade? What factors contributed to the changes you’ve seen?
Alan Connor: The outsourcing market can be viewed in a number of different ways. The traditional “contract manufacturer,” that essentially provides little more than contract labor for final assembly, was big several years ago but seems to no longer be a main focus. Rather, in more recent years, we have observed that medical device companies prefer to work directly with critical component and sub-system manufacturers, which are also considered contract manufacturers in a more general sense. These manufacturers bring differentiated technologies that enhance product performance and can deliver design-for-manufacturability savings in the highest-value elements of a product design. A recent trend is for the device companies to ask these critical component suppliers to provide a broader-range of lower-value services, including clean-room assembly of complete devices.
The other significant trend we have witnessed is in the quality system and regulatory expectations being placed on contract manufactures, both by customers and the U.S. Food and Drug Administration (FDA)—the FDA recently increased direct oversight on CMs [contract manufacturers], requiring registration as device manufacturers. CMs need to have made, and continue to make as requirements evolve, a significant investment in building and maintaining world-class quality systems—comparable to those of the device companies themselves in many areas—and must truly understand medical device requirements. Many of the smaller CMs have been unable or unwilling to make this transition and, as a result, are not being awarded any new business.
Matt Jennings: The market has become much more sophisticated with the willingness and desire of large OEMs to outsource the manufacture not only of components but fully finished products, ready for onward distribution. In my opinion, the drivers to this change are: 1.) the ongoing consolidation of component suppliers, which has created scale-driven, fully integrated outsource manufacturing companies; 2.) the economic pressures on OEMs and their realization that cost and quality requirements can be successfully achieved with larger integrated outsource manufacturing and design service providers; and 3.) the development and increased sophistication of design and development capabilities within large outsource service providers.
Julie Cameron: The medical device outsourcing market has responded to the need for cost containment and the opportunity in emerging markets with consolidation, geographic expansion and increased efficiency.
Jim Reed: Ten years ago it was assumed by many that the outsourcing of medical devices would become the norm. It was anticipated the medical device industry would expand via contract manufacturing partners vs. a brick-and-mortar approach to growth. While the outsourcing of medical device manufacturing continues to grow, many of the large OEMs remain committed to manufacturing within their own facilities, expanding in low-cost countries to serve both the United States and emerging markets. Many of these same OEMs continue to embrace outsourcing initiatives, often to source products they don’t view as being core to their technology or therapy competencies. We do see a significant increase in outsourcing by emerging medical device companies. Many of these emerging companies never intend to establish manufacturing operations. Their focus is on developing and marketing new product therapies, with a business model that relies on outsourcing for 100 percent of their manufacturing requirements, including quality and regulatory management, packaging and sterilization services, and warehousing.
Treasa Springett: The outsourcing market has evolved in a number of ways over the last decade. By and large, OEMs are outsourcing more in an effort to better focus their resources. They are consolidating their supplier list, while looking for an outsourcing partner who will help manage the entire supply chain. Most recently, globalization and emerging market penetration are on the forefront of the outsourcing evolution. Thrown into the mix is the recent emergence of suppliers who are expanding from the automotive and defense markets into the highly regulated medical market. OEMs are seeking to make their organizations leaner. They are focusing their efforts on product commercialization and regulatory pressures consuming engineering resources. They are broadening their global reach. OEMs are seeking to make their organizations leaner.
Mike Nowaczyk: Today, OEMs are looking for a manufacturing partner instead of numerous suppliers. Medical OEMs come to us looking for a reliable manufacturing partner that is financially stable, well invested in sound technology, and offers a broad range of services. The ability to deliver lower cost manufacturing without compromising product risk is key.
2. What services are popular with customers? Why are these services so important?
Jennings: Although all of our various services are in demand, clearly we have seen a large increase in the use of our design and development capabilities. Design and development capabilities are popular because we can quickly add significant resources for our customers whether they are trying to get a new product launched or refresh an existing product. With over 100 dedicated design and development professionals on staff, in three design centers around the world, we have been able to add value to OEMs by driving design and development efficiencies, which tend to result in faster market entry for these opportunities.
Connor: Most CMs specialize in one particular type of manufacturing—such as stamping, machining, or plastic injection molding—and each has a particular set of capabilities. The dialog between many CMs and customers is centered around how the customer should modify the design to fit the capabilities of the CM. There are elements of value-enhancing design for manufacturability but, in many cases, the goal of the supplier is to make sure the design is something that they can manufacture. We have had great success by approaching customers with a question they are not used to hearing from their CMs: “What patient outcome are you trying to achieve?” If necessary, we will then invent a process or technology that delivers the necessary manufacturing capabilities to enable that outcome. In other words, we try to change the process to facilitate the design, not the other way around. This approach is highly valued by our customers who are challenged with designing products that improve patient outcomes at ever-lower costs.
Cameron: Suppliers are looking for additional services from the current supply base. The first place medical device companies look for a supplier is on their current approved supplier list. There is a benefit to the medical device company to leverage purchases with the current base and limit their supply chain complexity. We have seen increased interest in secondary operations, assembly and even finished packaging from a fabricator.
Reed: Popular services include design assistance, design for manufacturablity (DFM), product life cycle management and inventory management programs. Customers embrace these services, as they are designed to control quality and costs from the start, while also ensuring a path to ensure long-term objectives are met.
Springett: We find many customers are not focused on just one service, but on our ability to provide multiple services from one facility. Design, engineering services and support with DFM on the front end of the project are critical. The ability to work collaboratively from concept through production and market launch enables the OEM to realize benefits involving quality, delivery and cost. Resource constraints and the need for a supplier with a clear and concise quality management system are probably the top reasons why these services are so important. They afford the OEM more time to focus on other critical areas of their business while mitigating risk when it comes to getting the right product to market, on time, with expected quality.
Nowaczyk: OEMs expect the services that are required to support their product portfolio inclusive of managing third- and fourth-tier suppliers through managing their finished goods inventory and distribution.
3. What is driving the need for certain technologies or services? Clinical drivers? Financial considerations? Regulatory concerns?
Jennings: There is a certain minimum requirement to be a finished-goods outsource provider. Beyond those requirements we believe that our technology offerings become a competitive differentiator. We believe that our customers need a greater capability for innovation from their outsource providers and, as such, we tend to invest in technologies that will aid us in increasing our ability to help our OEM customers innovate.
Connor: This is changing rapidly. Clinical outcomes and product performance is still critical. Recently, however, product cost has become much more important. We have a math problem in healthcare in the U.S. and medical device companies are in the process of sorting out how to respond to rapid changes in their markets. The CMs that thrive in this environment will be those that can help deliver product performance and economic advantage.
Cameron: We have experienced increased interest in our PEEK [polyetheretherketone] processing capabilities as PEEK is recognized as an MRI [magnetic resonance imaging]-safe alternative to metal. Braided and coiled reinforced tubing has also become more popular to deliver pushability and flexibility with kink or crush resistance.
Springett: In general, we are working on more projects that reflect a drive toward less-invasive devices resulting in less patient trauma, reduced procedure time and shortened hospital stays. In addition, implantable devices are getting smaller and they need a longer effective life; MRI compatibility is also becoming more prevalent. On the financial side, lower reimbursement and overall cost-containment are major drivers. A growing middle class within emerging markets are also seeking long-term “value” devices that have just the necessary features at an affordable lower cost. Large, growing populations are also enabling companies to develop market-specific device solutions that cater to specific patient population needs.
Nowaczyk: OEMs are looking to simplifying their value stream, increase speed to market, and increase shareholder value without compromising product risk for the end-user.
4. How do you manage the consistent cost pressures?
Jennings: Cost pressures are a market reality. To be a player in this market, the outsource provider must have active ongoing programs to continuously drive cost out of the products that they manufacture for their customers. Using Lean and Six Sigma tools, we regularly meet with each customer to discuss cost reduction opportunities and define an agreed cost improvement plan for each year. By doing so, we’ve been able to meet our customer’s needs without dramatically impacting our margin structure.
Springett: Having a clear understanding of cost objectives up front, prior to embarking on any project, is the best way to manage consistent cost pressures. The greatest cost savings can often be the result of effectively designing products for manufacturing. Early engagement in the design process enables optimal impact. Proper validations and value engineering further provide efficient costing throughout the product’s life cycle. Being a metric-driven company, with real-time data on quality and delivery, also helps prevent unexpected costs for our customers.
Connor: Most of the devices in which we participate are in the 5,000– to 50,000-units-per-year range, too high for extensive manual operations and too low for specialized automation. Our expertise is in combining precision manufacturing techniques with highly controlled but flexible automated systems. This flexibility allows us to provide exceptional product performance at a lower cost for mid-volume products.
Reed: The best means to manage cost pressures is together with our customers, establishing goals and working in partnership to achieve a desired outcome. Given today’s hyper-sensitive regulatory environment, changes to lower manufacturing costs often mean a change to the process and requires the full engagement of our customers. Any such changes now require the full support of our customers’ quality and regulatory operations, as without this support we are essentially locked into the current process, limiting options for driving costs out of the process. Of course, we embrace Lean [manufacturing principles] and we are implementing Lean programs across all facets of our business, but “Lean”ing out factories is only part of the equation.
Cameron: Collaboration and innovation. We work with our customers to collaborate using Kaizen and other tools. Together, we can define cost savings initiatives that justify the necessary qualifications, validations and approvals, and provide sustainable savings. In addition, we continually invest in manufacturing efficiencies, including appropriate automation and in-process inspection to deliver cost-effective solutions to the device market.
Nowaczyk: With economic conditions, increased regulatory requirements, and evolving technologies, it’s important to remain competitive over the life of a product. By working with an expansive supply chain we can leverage and secure competitive prices and optimize cost to our customers. In some instances, automation can be used to compete with low-cost wages in the Pacific Rim by minimizing manual intervention. For projects that do not accommodate automation, manufacturing in low-cost countries is an option.
5. How has the competitive landscape changed recently?
Reed: Consolidation in our industry continues, often with the larger players acquiring smaller and often niche companies, bringing a specific competency to their portfolio of products and services. Yes, there are still hundreds of smaller companies serving the medical device industry but we are seeing a growing trend of OEM customers focusing on supplier consolidation, often looking to the larger contract manufacturers as a means to consolidate their spending and ultimately lower their overall costs.
Jennings: Really, the competitive landscape has just continued to develop in a manner that began about 10 years ago with the consolidation of component manufactures into significant integrated outsource providers. We believe this consolidation effort is consistent with our customers’ desire to outsource not only componentry but finished products ready for onward distribution as well.
Springett: Recent changes in the competitive landscape include growing global competitiveness, the entry of automotive and defense companies into the medical market, continued consolidation, and we’re beginning to see the separation of players into a tiered supply base.
Connor: Quality systems and the ability to manage Tier 2 suppliers have become much more important. At the same time, customers expect responsiveness and creativity. The really small players are unable to support the overhead being required by the OEMs. The really large players are, generally, not able to be nimble in response to customer needs.
Cameron: The market is becoming more competitive, both for medical device manufacturers and the suppliers to them. Medical device manufacturers have worked to contain the rising cost of healthcare while providing products with improved clinical benefits and reduced risk. Suppliers from other industries have recognized the growth and relatively better margins versus industrial segments and have entered this market. Local suppliers have crossed borders and are supplying internationally. Increased competition has certainly benefited the industry as we each execute our strategy to outperform the rest.
Nowaczyk: In recent years, we have seen a lot of consolidation in the supply base, and quite a few competitors that are highly leveraged by their investment firms.
6. Are there device sectors in particular that are better, more open, or more accepting of outsourcing than others?
Jennings: It’s an adoption process with each individual customer. This process can definitely be driven by OEMs watching competitors and examining their outsourcing strategies, however, clearly the need for lower capital investment in plant construction and more efficient manufacturing processes are needed by all device OEMs.
Cameron: Outsourcing versus insourcing is a decision made typically based either on economics or strategy, and sometimes both. For instance, there may be manufacturing processes that are considered proprietary or part of a device’s competitive advantage and for strategic reasons, do not want to be considered for outsourcing. More often, it is a matter of economics. The investment considerations in personnel with the proper manufacturing know-how as well as the appropriate manufacturing environment and size, the proper equipment, including inspection and controls, must be considered. The financials typically point to insourcing for high-volume, long-life products with little iterations on innovation.
Connor: Traditional outsourcing has been around individual components of final assembly. Much of our growth in the past several years has been complex sub-assemblies where we are managing a significant sub-system of an overall design, not unlike what you see in other industries. Going forward, we will see this trend continuing. Many large OEMs perform clean-room final assembly in their own facilities. We are starting to see this change as well as large OEMs begin to more aggressively rationalize their cost structure.
Springett: Market sectors that are more mature seem to be more open to outsourcing a greater amount of their project needs. Good examples would be markets with greater competition and cost pressures are forcing OEMs to find more efficient ways of getting their devices to market. However, also open to and more accepting of outsourcing are early-stage companies where resources are typically limited.
Nowaczyk: Anyone who is looking todrive down cost in a highly regulated industry will look for partners that have strong process strength and a good value proposition.
7. Customers are expecting a full service of capabilities from their manufacturing partners. With supplier lists shrinking, how do you stay innovative to remain on those preferred vendor lists and differentiate yourself from the competition?
Connor: We see it as a combination of factors. First, we believe that the majority of product performance, innovation and cost derives from a relatively small number of critical components. We have differentiated expertise in several areas such as blade sharpening, needle grinding, Swiss-, laser- and EDM [electrical discharge machining] precision machining, and laser welding that our customers call upon to help enhance product performance. Second, we need to provide a broader set of capabilities. Cadence was traditionally the blade and needle expert. Over the years, we have added a very broad set of metals processing capabilities and, more recently, plastic insert- and over-molding and clean room assembly. Finally, manufacturing partners must be in a position to take on quality system requirements, including process validation and supplier controls, component and systems engineering, and sourcing and supplier management responsibilities traditionally fulfilled by the OEM.
Jennings: Once an integrated device outsource provider has the base manufacturing requirement to support OEMs’ finished-good needs, they need to define their investment strategies to support new technology additions which, in my opinion, need to drive product innovation for their OEM customers.
Cameron: Vesta continues to expand its services, offering increased capabilities, with the same level of precision and quality that customers have come to expect from us. We have recently added tipping and printing capability for our precision thermoplastic extrusions. The precision in our tipping has facilitated innovation while printing is providing supply chain efficiency.
Reed: Our business model is designed to align with those customers who expect full-service capabilities. Our design and development centers are staffed with engineers who are versed in all aspects of the design and manufacturing of complex medical devices—from concept development to product release. Accellent’s business model is intended to serve as an extension of our customers’ operations. It’s also recognized that customer requirements and expectations are greatly varied, so it’s essential that our business model be flexible, aligning products and services to serve each customer’s specific needs.
Our vertical integration allows us to control the entire supply chain, largely eliminating the need to engage with third-party suppliers. This vertical integration brings significant value to our customers; from simplifying and streamlining the supply chain, to driving out the non-value added costs that are often associated with managing multiple vendors.
Springett: Donatelle stays close to what is happening in our focus markets to understand trends and needs, and stay prepared to help customers make their next move. We also work with a number of early-stage and midsize customers who are thinking about devices and the market in new ways. This stretches us to master new technologies and offer new services to those companies we partner with.
Nowaczyk: SMC continues to invest in new technologies from equipment through personnel to stay ahead of the curve. We also evaluate the market looking for new technologies that can benefit our customers, and in some instances, by partnering with our customers we have created solutions specific to their needs. You can’t do it all from within, you need to bring on talent that can take you to the next level.
8. What are some of the risks outsourcing partners face when creating such a close business relationship? What can be done to minimize those risks?
Springett: Both parties of the partnership must know exactly what is expected of them for the partnership to be called successful. When expectations are not met, the partnership is at risk. From the OEM’s standpoint this can include anything from on-time deliverables to quality product to respectful customer service. The OEM is entrusting a high level of control when the outsourcing partner performs final assembly, inspection, and packaging of the device. From the supplier’s standpoint, this can include failure of product to launch to moving manufacturing overseas once developed. The supplier invests significant time and resources in scaling up for production and launch of the OEM’s device.
There is potential risk that product volumes never meet initial expectations. Throughout the entire process, risks can be minimized by clear communication and defined expectations. Visiting the supplier’s facility and performing a thorough audit of their quality management system can ensure the OEM’s risk will be minimized. There is always a level of risk in any partnership. It is a matter of working together and managing expectations.
Jennings: To minimize risk? Communication, communication, communication. There is no magic here. There needs to be a formalized process that allows the parties—including management—to meet regularly and exchange mutual challenges and opportunities that can impact their relationship.
Connor: From the OEM perspective, it is important to understand the mission, ownership structure, financial situation and culture of their outsourcing partner. Does their ownership perspective and financial situation allow the partner to take a long-term view on the relationship or will the OEM be “nickel and dimed” at every turn? Does the partner’s mission include patient outcomes? Does its culture embody a thorough understanding of the quality requirements of manufacturing medical devices? OEMs must assess all of these factors—not just unit price—when evaluating its partners.
Cameron: The risks for a close outsourcing partnership relationship are similar to the risks when a business chooses to insource. Is there adequate capacity in place to meet the potential success we could experience in the market? Is there appropriate quality control for product to perform as designed?
Nowaczyk: The contract manufacturer needs to assess the risk of each product forecast provided. You can go in very deep investing in capital and personnel only to find the data was inflated. You need to establish a contract and share ownership in the risk or cover yourself with other guarantees.
9. What qualities make for a solid outsourcing relationship?
Cameron: Like any relationship, open communication of both good and bad news fosters trust, collaboration and the best chance of success.
Reed: Quality, service and value are game stakes in any outsourcing arrangement, but that doesn’t always equate to a “solid” relationship. The best relationships are built on trust, integrity and transparency, with shared goals and a commitment for both companies to succeed.
Nowaczyk: A great relationship is built on mutual trust, partnership and open understanding of each other’s needs. A strong tie to the senior leadership at each company certainly can be a benefit. Start with early involvement and good communication on both sides.
Jennings: Deep, multiple-level relationships within both the outsource provider and OEM. A formalized review process where the management of both companies are actively engaged and, finally, superior execution by the outsource provider.
Connor: As with any relationship, communication is 98 percent of the battle. Both sides of the relationship must be able to honestly and openly assess the “fit” and must treat each other with mutual respect, both technically and financially. We pride ourselves in telling customers—even good customers—when we do not think we are the right fit for a particular opportunity.
Springett: Steady communication, clearly defined expectations, and a willingness by both parties to share the risk in the relationship. Ultimately, it becomes a commitment from both parties to create a win-win scenario that is in the best long-term interest of both organizations. An outsourcing partner should be financially stable, focused on medical, have a solid track record of success, and adhere to a rigorous quality management system.
10. How do emerging markets become part of offering a full-service outsourcing menu of capabilities—either from the sales side or from a manufacturing perspective?
Connor: For many years, there was a belief that manufacturing in low-cost countries was a cost savings panacea. Because of extended supply chains, logistics costs and quality control issues, this has proven to be untrue for the majority of relatively low-volume, high-complexity medical devices. Going forward, it is clear that OEMs will be increasing their R&D [research and development] efforts on emerging markets, some of which are not traditional low-cost countries. We believe that serving these customers will require early engagement to creatively deliver product performance at an optimal cost. This may require partners to have a sales and engineering presence in some markets such as China and Brazil. It remains to be seen if local manufacturing in these countries will be required over time.
Cameron: Medical device companies in emerging markets are looking for proven partners. We can draw on the depth and breadth of experience from serving the market for over 40 years. At the same time, multinationals are seeking ways to create lower cost in use solutions and need suppliers like us that can consider creative solutions.
Reed: I think we can all agree that serving emerging markets is critical to the future of our business. Growing a business in established markets has become a challenge, with most large OEMs reporting minimal growth across a wide array of device therapies. Most of Accellent’s larger customers have now established a presence in the Pacific Rim, with some establishing localized product development initiatives. Many of these customers are designing products specifically intended to serve emerging markets and are actively seeking regional suppliers in which to partner. When we made the decision to establish manufacturing operations in Penang, Malaysia, we did so based on input from our customers, as they indicated a desire to continue working with an established and stable partner vs. the challenges associated with engaging with unknown and in most cases, unproven entities.
Jennings: The reality is, outsource service providers follow the OEM’s requirements. Because of the cost structure and resulting margin realities of the outsourcing business model, it’s too risky to invest in an emerging market without knowing that the OEM community has targeted that geography. Once you have certainty on OEM expansion plans, expanding your business to emerging markets becomes part of your investment strategy.
Springett: The emerging markets are poised to provide substantial demand and opportunity for both OEMs and CMs. CMs wanting to participate in this growth and support their customers must make investments in needed capabilities to support the unique needs in these regions. Capabilities needed may differ from what is offered elsewhere. CMs must be willing to expand beyond their comfort zones.
11. How do you maintain quality in a full-service outsourcing setting? What regulatory pressures are passed from the OEM on to the outsourcing partner?
Connor: OEMs have significantly increased their expectations in the past several years, requiring substantial investment on the part of their Tier 1 outsourcing partners. Many are not in a position to make this investment. What we see happening now is increased expectations on the part of Tier 1 partners to take over the management of a larger number of Tier 2 suppliers. In addition, the regulatory requirements on these Tier 2 suppliers are also increasing. As of late 2012, the FDA now requires the contract manufacturer of any listed medical device to register as the manufacturer of the device even if they do not hold design control or marketing responsibility for the product. Many CMs and OEMs are not yet even aware of this new requirement. This will require coordination between the CM and the OEM to properly register devices and will probably increase the likelihood of the CM being subject to FDA audits.
Jennings: Quality is always job number one. You must have a global quality system that you are willing to continue to invest in to assure that this capability is state-of-the-art and integrates easily with typical OEMs’ QMS [quality management system processes. You must also have an ongoing process that ensures that each employee supports your quality policy. The FDA has recently focused OEMs on their suppliers for risk mitigation. To that end, the integrated outsource provider must also have an active supplier management process that supports OEMs’ needs in this area.
Reed: The answer is simple. Our quality and regulatory operations are designed to mirror that of our customers. As a full-service outsourcing provider, we are required to operate in the same manner as our customers, from design and development activities, manufacturing operations, packaging, sterilization and warehousing.
Springett: When you start with a solid quality system as your basis and build your infrastructure around that system, it leads to strength. We have quality management systems in place that provide real-time comprehensive data for quick response in the event of any quality issue. A proper understanding of our customers’ quality needs and interpretation of quality up front are also essential. We challenge ourselves daily to ensure we are providing consistent quality and continuous improvement that is second to none. Because regulatory responsibility to the FDA ultimately falls on the OEM, they need a partner they have confidence in. Device failure is not an option, and a thorough interrogation of potential failure modes needs to be part of the development process.
Nowaczyk: In some cases all regulatory pressures are transferred from the OEM to the outsourcing partner with the exception of complaint handling and adverse event filing. A harmonized quality system and compliance to that needs to be in the minds of all employees.Outsourcing: The Value Remains
By Marc Tanowitz, Principal, Pace Harmon
The benefits of outsourcing have been proven so many times over the last two decades the practice virtually has become gospel in the business world. Companies can seek outside help for any number of reasons, but they mostly do so to shorten product development and scale-up time, expand market share, reduce costs and focus on core competencies. And while shorter product life cycles, improved efficiencies and novel designs usually make outsourcing an attractive option, it may not always be the best option for medtech manufacturers. In the following commentary, compiled exclusively for MPO, outsourcing expert Marc Tanowitz details the benefits of subcontracting and explains the instances in which companies may want to consider keeping things in-house.
The benefits of outsourcing have been proven so many times over the last two decades the practice virtually has become gospel in the business world. Companies can seek outside help for any number of reasons, but they mostly do so to shorten product development and scale-up time, expand market share, reduce costs and focus on core competencies. And while shorter product life cycles, improved efficiencies and novel designs usually make outsourcing an attractive option, it may not always be the best option for medtech manufacturers. In the following commentary, compiled exclusively for MPO, outsourcing expert Marc Tanowitz details the benefits of subcontracting and explains the instances in which companies may want to consider keeping things in-house. Beyond cost cutting, what are the other key benefits manufacturers should look to glean through outsourcing? While reducing costs has been a primary driver of outsourcing engagements, manufacturers are also using outsourcing as a way to focus their internal resources on mission-critical and core competencies. This strategy often results in more rapid introduction of products to market and accelerated innovation of existing offerings. Manufacturers can also leverage outsourcing partners as a way to tap into relevant technologies that are designed to eliminate manual processes and deliver real-time information for critical business capabilities like demand planning, manufacturing efficiencies, etc. Finally, manufacturers can use outsourcing as a mechanism to get closer (geographically) to their customer base, which can help to drive down supply chain costs. All of these elements ultimately give manufacturers a stronger competitive edge. How can manufacturers benefit from a proactive vendor management program? While it is important to create and negotiate an outsourcing contract that will yield business efficiency and innovation benefits, it is equally as vital to establish provider governance to help bring those benefits to bear. Manufacturers can apply key lessons learned from the sourcing and contracting stages to ensure that the deal stays on track. This involves going beyond monitoring service level agreements and invoices to dedicating specific resources to the necessary planning, structure and communication that is required for accomplishing strong provider governance. These resources have a solid understanding of the contract and its structure and have the skills needed to manage remote delivery, escalate issues, resolve exceptions and control costs. Companies without effective governance practices frequently experience suboptimal service and lower realized outsourcing value. When does insourcing make sense for manufacturers? While outsourcing works well for many companies—especially those with well-structured agreements designed to drive cost reduction and leverage outsourcing provider skills and benefits while maintaining proper service levels—many manufacturers are considering bringing some of their previously outsourced manufacturing back in house to allow them greater flexiblity (e.g., rapidly responding to changes in demand, creating unique customizations for clients, increasing collaboration between product development and manufacturing). This may be a better option for those experiencing consistently sub-par service and results or if there is business value in establishing an in-house competency to bring the organization deeper value in particular areas. If done properly, this can help drive faster go-to-market product cycles and bolster revenues and innovations while protecting the manufacturer’s intellectual property assets. Before pursuing an insourced model, however, manufacturers should perform a thorough evaluation of financial models and their outsourcing contract options for remediation and termination. They should also ensure that the manufacturer’s retained organization has the appropriate skills and knowledge of standards, tools and processes that are currently performed by the outsourced provider, as failure to deliver on service quality or cost requirements as an insourced function defeats the purpose of bringing capabilities back into the organization. Does it still make sense for manufacturers to offshore, or is domestic outsourcing a better fit for today’s business environment? It’s no secret that more and more manufacturers are bringing their outsourcing operations back to the United States. These companies are pursuing onshore outsourcing providers that are able to delivery quality services at a competitive cost rivaling that of offshore providers when the total cost is considered (inclusive of inventory carrying costs, transportations costs, etc.). U.S.-based providers are often located in rural areas with lower costs of living or in areas near universities and major companies. Manufacturers that outsource domestically often sidestep the complexities of offshore outsourcing and benefit from working in the same (or similar) time zone with resources that have a master of domestic language and cultural norms. Marc Tanowitz is a principal at Pace Harmon (www.paceharmon.com), an outsourcing advisory services firm providing guidance on complex outsourcing and strategic sourcing transactions, process optimization, and supplier program management. Bringing more than 16 years of experience and delivering more than $1 billion in client savings to date, Tanowitz works with global enterprises to develop and implement strategies for improving operations and increasing company performance. Founded in 2003, Pace Harmon is headquartered inTysons Corner, Va. |