A New Twist On the “One-Stop Shop”
A Simple Shift in the Outsourcing Process Could Save OEMs Time From Overseeing Supply Vendors—Creating Additional Resources for Innovation
By Shannon Tillman
Millstone Medical Outsourcing
As outsourcing proliferates in the medical device industry, so has the adoption of a one-stop-shop model, in which a variety of services and capabilities is offered by a single supplier. While this strategy has paid off handsomely for many businesses, a newer, more innovative tactic has been gaining ground and is turning the current one-stop-shop model on its head.
In the past, inspection and packaging have been viewed as critical processes in the supply chain that could not be outsourced without excessive risk. Now, however, some top companies are finding that there are inspection and packaging partners with the proven ability to deliver on these vital functions.
Open but unused product can be inspected, repackaged and redistributed, saving one company as much as $8 million at standard cost in one year. Photo courtesy of Millstone Medical Outsourcing.
They have also found that making this partner the lead offers a more effective supply chain management solution. By trusting the inspection and packaging partner to take up where manufacturing leaves off and complete the final stages of production, the traditional supply chain model is changed for good.
Here’s how it works: A medical device OEM employs an inspection and packaging vendor not only to assemble and package devices, but also to purchase and inspect the components. In this model, the OEM still retains control by determining which additional suppliers will be used, but the inspection and packaging supplier assumes responsibility for purchasing and billing. Instead of cutting multiple purchase orders to both a contract manufacturer and packager, the medical device OEM cuts only one—to the preferred inspection and packaging house.
In this scenario, the preferred partner becomes the inspection and packaging house, not the contract manufacturer or another supplier. If incoming parts fail inspection, the inspection house sends them back to the contract manufacturer and oversees the rework process on behalf of the OEM, which frees up the OEM’s internal resources. Since packaging occurs immediately following inspection, the OEM doesn’t receive the final, acceptable product until it is ready to hit the shelf.
This outsourcing model is quite different than what has been the norm for companies on either side of the relationship. It’s important to note that simply shifting management of inspection and packaging does not eliminate the OEM’s responsibility for ensuring FDA and other compliance. That said, the OEM still must have great trust in the inspection and packaging partner when handing off these significant tasks. Therefore, the selection of an experienced and reliable outsourcing partner takes on paramount importance.
The packager’s business also changes as a result of the new paradigm. Inspection and packaging capabilities must be extremely robust to ensure that these critical functions are performed properly. This is vital because the inspection and packaging provider becomes the last entity to touch the product before it goes to finished goods stock. In addition, the packager must have ready access to capital so it can front the money needed to purchase components on behalf of the OEM customer. Finally, the packager must be invested—more than ever before—in the outcome for its client.
Looking Back: Evolution of One-Stop Shopping
From the beginning, medical device outsourcing has traveled an interesting road. Taking baby steps forward in the outsourcing realm, many OEMs began outsourcing by using outside suppliers to manufacture product that could then be handed back to the OEM for quality inspection in-house prior to packaging and distribution. This initial phase of outsourcing aided the OEM because it provided additional manufacturing resources when internal resources became overrun. After outside manufacturing was accomplished, the OEM could inspect its product prior to packaging. This process produced less concern because the two final portions of the process were kept in-house and could act as the safety net for externally sourced parts.
As the industry became more comfortable with outsourcing, OEMs began to farm out more devices and processes. These companies found themselves managing many different vendor relationships, which soon became a major chore. Along with the extra demand on resources, working with multiple suppliers also made purchasing and planning processes more difficult. As supplier management became a serious pressure point, many OEMs began to look for a one-stop shop—a single supplier that could perform a variety of critical manufacturing functions and diminish the supply chain headache.
The “Roll-Up” Revolution
The search for the one-stop shop spurred a “roll-up” revolution within the medical device industry. After realizing that no one company could offer all the necessary manufacturing capabilities, the larger vendors bought outfits with unique capabilities needed to provide OEM customers a complete supply chain. The rationale was that assembling a variety of capabilities under one “name” would provide a one-stop shop that would ease the customer’s supply management.
The problem with this practice was that having all the capabilities under one “name” did not necessarily mean these offerings were all under one “roof.” The idea was that, instead of one company in charge, the rolled up suppliers would work together to manage the supply chain for the OEM. Management would shift from the medical device OEM to the “roll-up” company, which was still just a collection of companies trying to collaborate and monitor themselves and each other.
The roll-up strategy worked to a certain extent, but it relied on multiple suppliers and careful orchestration. Ultimately, the strategy just shifted the supply chain management burden from the client to the roll-up vendor. While roll-up suppliers have been able to iron out the communication process and improve poor levels of coordination, many of their OEM customers have not been fully satisfied with the results. The bottom line is that numerous suppliers are still performing multiple operations in numerous plant locations. It is just as hard as ever to manage them all—regardless of who does the managing—and communication issues and delayed launch dates continue.
Gluing It Back Together
As the outsourcing model gained strength in the medical device community, leading OEMs began to look even farther beyond the manufacturing process; sterile packaging and inspection resources were the next target. As mentioned earlier, these operations historically were performed by the OEM, which had the opportunity to do the critical “final check” in the chain and ensure the outside manufacturing was correct before putting a device to stock. While the OEMs were growing more comfortable with the idea of outsourcing certain processes, they still were hesitant to use outside vendors for inspection and packaging—especially knowing that any flaws in these critical processes could result in a major recall.
The potential liabilities were enormous. An improperly inspected product could fail after implantation.
An improperly packaged device with compromised sterility could be fatal to a patient and result in enormous payouts in lawsuits.
Over time, however, many OEMs realized that overseeing final-stage operations such as inspection and packaging was a significant drain on resources that could otherwise be used for product design and development. As leading device companies became confident in the reliability of certain key vendors, the expansion of the outsource model—to include inspection and packaging—became a realistic and logical next step.
Now a handful of highly trusted suppliers offer inspection and packaging capabilities that are on par with or superior to those of an OEM’s internal resources. These partners focus solely on these critical processes instead of manufacturing. A single-minded pursuit of excellence has earned these suppliers the trust of leading OEMs.
This trust and level of reliability has enabled the more savvy suppliers to expand on the existing one-stop-shop model to include the inspection and packaging steps of the manufacturing and production process. Moreover, the medical device OEM can promote the inspection and packager to the tier one position in the chain.
Why This New Model Is Better
Paradigm shifts don’t happen overnight, but usually there is a tipping point that makes change worthwhile. The demand for medical devices creates both pressure and opportunity. OEMs need original yet effective strategies for conserving capital so they can deploy as many resources as possible in the areas of research and development. This new twist on one-stop shop is shaping up to be an air-tight strategy. Following are some of the advantages:
1. Further decrease in the number of vendors needing management. Cutting one purchase order is easier than cutting two. This new model makes the inspection and packaging house the tier one supplier. One PO is cut to cover everything—not just the machining process, but the entire chain, all the way through inspection and packaging. As a result, the “roof” on the one-stop-shop is extended while simultaneously decreasing the in-house resources needed for supplier management activities.
2. Removal of bottlenecks in receiving inspection. As more products are outsourced for manufacturing, the internal resources needed to inspect all these incoming devices have become strained. Advanced mechanical inspection personnel are in high demand and cannot be trained overnight. Ultimately, bottlenecks form in the receiving inspection area, something that has occurred at most major medical device companies. Bottlenecks mean delays, and the longer it takes to get product to the shelf, the more inventory must be carried to meet demand. Precious dollars tied up in inventory could instead be directed towards research and development. Moving some or all of the inspection work to an outside supplier with greater flexibility of inspection resources unclogs the inspection bottleneck, keeps product moving through the line and gets product into stock faster.
3. Objective inspection resources. Many medical device OEMs rely on their machining or contract manufacturing suppliers to additionally perform the inspection process. Data from inspections are then supplied to the OEM customer, who often relies on that data for market acceptance support.
Shifting the responsibility for inspection to an outside inspection house, however, can lead to less dependence on the contract manufacturer for inspection activity. The “objective” third-party review of incoming devices helps alleviate concern regarding the inherent and unavoidable conflict of interest that may exist when machining or other vendors inspect their own work on behalf of the OEM customer. The end result is a more objective inspection and reduced risk of “out of tolerance” product finding its way to the shelf.
4. Delivers greater buying power. The move to outside inspection and packaging allows device makers to see discounted costs on materials common to other packaging processes. When a contract packager buys a material used by more than one client, the company often can buy in far greater quantities than each client can as a single purchaser. The cost dilution stemming from higher-volume purchases is passed on to each client, lowering overall costs in a way not possible through in-house processing. This same concept is true for generic product components.
5. Enhances supply chain quality. In addition to the technical knowledge needed for control of the packaging and inspection process, any vendor promoted to a tier one position must have top-notch quality systems and a full understanding of FDA requirements to effectively audit and manage the remainder of the chain from a quality compliance standpoint.
Many machining vendors are versed in purchasing raw materials but not necessarily expert FDA compliance knowledge. Vendors on the finishing end, however, tend to have vast regulatory experience in line with FDA requirements regarding inspection and packaging operations. For this reason, inspection and packaging suppliers may be better suited for auditing and managing their upstream partners.
6. Keeps suppliers focused on core competencies. Outsourcing the machining process is a tricky task, but even more risky can be the use of outside partners to inspect medical devices and provide sterile packaging. Many OEMs, therefore, have decided to keep their machining suppliers focused on their core competencies—as opposed to encouraging them to expand operations to include clean room packaging capabilities.
The reasons are fairly straightforward. One-stop-shop machining enterprises, just like the device OEMs for whom they manufacture product, are expected to see enormous growth over the next five to seven years. Keeping up with this growth, while maintaining the requisite level of quality in their core competencies, will be a significant challenge. In addition, the idea of encouraging a machining supplier to expand into an entirely new area such as sterile packaging perks up the ears of most experienced quality and regulatory decision makers. Unlike machining, inspection and packaging are extremely critical processes—areas the FDA knows how to oversee.
The idea of handing off these critical services to machine shop with little or no prior experience is enough to keep many quality and regulatory professionals up at night. A single misstep in either process could spell disaster and result in a major product recall. This is why trusting an established vendor with a proven track record in these processes is the most conservative and cautious path to follow.
The Race Is on
The bottom line for the medical device industry is ever-increasing demand for innovating medical products. In fact, some leading device OEMs are preparing for up to 200% growth over the next seven to eight years. To meet these demands and still have time to maintain a competitive edge through new product design and R&D, industry leaders are realizing the potential benefits of building innovative relationships with their inspection and packaging suppliers. As a result, these outsourcing partners are being viewed as viable supply chain managers that enable OEMs to spend less time overseeing suppliers and more time deploying internal resources on design and development. This new twist on the one-stop-shop model is pushing the envelope on the existing outsourcing model and is proving to be a winner.
Shannon Tillman is president and CEO of Millstone Medical Outsourcing, a global provider of aftermarket services, startup solutions, and premier contract packaging services. Before he founded his company in 2000, Shannon served in a variety of capacities in the DePuy Orthopaedics, DePuy Spine and Codman divisions of Johnson & Johnson. Prior to his career in the medical device industry, he spent five years in the Navy SEAL Teams after graduating from the Naval Academy in Annapolis, MD. For more information about Millstone Medical Outsourcing, visit www.millstonemedical.com or call (508)-679-8384.