Practice Makes Perfect
As Outsourcing Evolves, Partners Have Become More Sophisticated, and Day-to-Day Operations Have Changed
Stacey L. Bell, Editor at Large
Photo courtesy of Jabil.
Consider outsourcing in the medical device industry. Years ago (and, to a lesser extent, today), OEMs hesitated to send any portion of their heavily regulated business to outside sources.
“Twenty years ago, companies said they could accomplish certain tasks. Today, they actually can. The number and proficiency of outsourcing providers has increased dramatically, and they’ve embraced meeting all of the environmental and legal regulations our industry is subject to,” said Frank Maloit, vice president of corporate procurement for C.R. Bard, Inc. in Murray Hill, NJ. “Perhaps the biggest change is that the industry has moved toward full-service providers that can provide an entire finished device, not just one element, such as packaging.”
Daniel R. Matlis, president of Axendia, Inc. in Yardley, PA, agreed with this assertion, noting, “The contract manufacturing market has matured to a point where standard operating procedures and the outsourced way of doing business between the OEM and the external manufacturing partner are commonplace. As outsourcing companies have grown more sophisticated, and their relationships with OEMs have matured, that has benefited the industry.”
In fact, outsourcing as a whole has evolved, with gains made in aerospace, semiconductors, automotive manufacturing, consumer electronics and other industries now making their way into the medical device space. “We’re seeing a tremendous shift to outsourcing, not just in manufacturing, but in R&D and product engineering,” Matlis said. “Contract manufacturers continue to broaden the scope of services they can offer to an OEM, and next they need to allow for more integration for the continuous flow of information from product development through manufacturing.”
The business model for OEMs is changing as a result of the popularity of outsourcing, Matlis added. Rather than staying traditional manufacturing havens, they are transforming into service companies, concentrating on sales, service, marketing products and performing early stage R&D. The manufacturing and assembly pieces are outsourced.
Even outsourcing partners are finding their own business models evolving. The most advanced outsourcing partners offer “business solutions rather than simply product solutions,” explained Bill Ellerkamp, CEO of ExtruMed, LLC in Placentia, CA. “These include product development, engineering analysis, transfer management, turnkey operations, supply chain consolidation / integration / management and plant-in-a-plant operations [wherein an outside vendor manages the manufacturing function within the OEM’s facility].”
Held to Higher Standards
Outsourcing companies’ business models and service offerings have grown more sophisticated in response to a more complex work environment and increasingly complicated medical innovations. “In general, our customers today have much more stringent manufacturing, engineering and incoming quality requirements,” noted Bill Sherman, president and chief operating officer of the Hi-Tech Group in Anaheim, CA. “The protocols, tool validations, quality and project completion timeline requirements are increasingly more complex and, thus, more demanding on us as a contract manufacturer.”
In a recent Medical Product Outsourcing survey of more than 100 medical device manufacturers, 93% rated quality systems and 77% rated ISO certification as very important qualifications when choosing an outsourcing partner. Specialized skills and capabilities, flexibility, continuous cost improvements and turnkey capabilities also scored high.
“Ten years ago, I’d say clients were relieved to see that you had the technical wherewithal to help get their product to market on time. That’s no longer good enough,” said John Carey, vice president and medical division general manager of Foliage, a technology consulting and product development company in Burlington, MA. “Today, clients qualify you much more on the process side. A decade ago, we had one or two audits a year reviewing our processes. Today, we can have up to one or two a month.”
There’s been a paradigm shift, Carey explained. OEMs now expect their suppliers to have ISO certification and be able to prove they have control processes in place and standard operating procedures to support them.
The People Side of the Equation
Another paradigm shift has occurred in hiring. “We hire and train differently today,” Carey said. “Ten years ago, we had technical leads, developers, quality assurance and project managers. Today, we have people trained to also provide a consulting role to customers focused on developing product road maps and product line architecture strategies that result in an alignment of business and product strategies. Customers now want consulting services grounded in their business drivers, not just technical expertise.”
In fact, even the bar for technical expertise has risen. “Our employees’ skill level has increased significantly over the years,” said Tony Allan, vice president of instrumentation and medical for Jabil, which is headquartered in St. Petersburg, FL. “No longer can a contract manufacturer afford to bring in employees with a junior-level skill set. Due to advances in technology, equipment and the type of support and services our customers demand, more advanced technical expertise is required.”
Contract manufacturers and OEMs agree that more machining and assembly jobs as well as engineering functions have been transitioning to the contract manufacturing business.
“We definitely employ more engineering, quality engineering and development personnel today,” Ellerkamp reported. “Our customers expect us to mirror their strengths. The anomaly is that they expect us to be more cost effective at doing what they previously did. This means lower manufacturing overhead, lower SG&A [selling, general and administrative expenses] and greater asset utilization/operating leverage.”
“We have definitely grown in the areas of engineering, particularly in reliability engineering as well as information technology associated with operations management and business systems. Another area of significant growth has been in our sterilization technology centers, including adding experts in microbiology, validation scientists and regulatory affairs professionals,” said Thad Wroblewski, director of sales for STERIS Isomedix Services, which is headquartered in Mentor, OH. He added that significant change also has occurred in the area of safety. “Our responsibility to organizations such as the US Nuclear Regulatory Commission with respect to security and, in particular, aspects of Homeland Security also has grown.”
On the OEM side, more companies are instituting chief resource officer positions or assigning another person to oversee the firm’s outsourcing efforts. “The outsourcing overseer job is a much more important aspect of the procurement community than it was 20 years ago,” Maloit explained. “You’re managing relationships with companies and technology as well as projects. It takes a group effort to identify suppliers and work with them to make them constantly better, just as we are working internally to improve constantly.
“In the past, you negotiated a price and that was it,” Maloit continued. “Today, you’re managing the supply chain, monitoring their process control and exploring ways to benefit both companies in the long term, whether through improvements to the product or to processes.”
Paul Secosky, senior purchasing/supplier quality engineer for Respironics, Inc. in Monroeville, PA, noted that his company has recognized the importance of overseeing outsourcing arrangements and currently is consolidating the oversight function. “Three different divisions have been outsourcing projects directly, and we’re now defining that function and sharing best practices so that the outsourcing process and results will be consistent throughout the company,” he explained.
Project managers also are being added on the contract manufacturing side. “We’ve added a dedicated project manager in OEM to help the salespeople and engineers run projects more efficiently,” said Tom Black, vice president of OEM sales and marketing for B. Braun in Bethlehem, PA.
Change is a constant within the medical device industry—from changing products to an increasing trend of mergers and acquisitions and personnel leaving one company to join another. As in other industries, employees with a long tenure at one firm are quickly becoming a rarity. Such movement affects outsourcing efforts, experts said.
“We see more of an evolving partnership mentality these days,” Sherman said. “As people change jobs from one OEM to another, you may lose a key person with whom you’ve built a relationship for a number of years. You must, therefore, work that much harder to retain and grow your business with that customer. Of course, it’s important to stay competitive by consistently offering optimum quality products at the right price.”
Sherman added that long-term business relationships usually are rewarded. “We have customers who actually pay lower unit costs for their finished products today than they did 20 years ago. That’s because of increased efficiencies in our internal engineering and manufacturing processes and the trusting working relationships we’ve built together over the years. That’s the ongoing result of a true partnership,” he said.
“There is a lot of movement in the industry, especially due to mergers and acquisitions,” Wroblewski agreed. “Therefore, there’s a continued focus on long-term contracts. Minimally, we look for a three-year agreement, and depending on the circumstances, five- or seven-year terms are more appropriate and better for both parties.”
Due to the high capital investment requirements for contract sterilization providers, long-term contracts have become a necessity. “It’s with long-term contracts with sizeable volume where efficiencies can be gained,” Wroblewski continued. “Long-term contract customers know that we are committed in supporting their growth requirements by continuing to add capacity to our network. They can enjoy favored pricing and business terms and demonstrate a commitment to working through challenges and finding solutions. Ultimately, both companies derive great value from a long-term relationship.”
Part of that value is working together to determine what types of capabilities, tool sets and intellectual property must be developed now and in the coming years to keep both partners operating optimally, noted Allan. “While in the past, outsourcing relationships were very transactional in nature, today we certainly see more of a partnership level,” he said. “Both partners are more involved and have placed more trust in each other. We talk about how to expand our capabilities to meet their requirements, how we can help them enter new geographical areas, how we can help them market new products and technologies.”
Automating for Greater Flexibility and Throughput
Another shift in the daily practice of medical device manufacturing has occurred in how large a role automation plays. “You’d think that contract manufacturers would have embraced robotics long ago, since they would benefit greatly from flexible robot automation that lets them meet numerous customers’ needs by making minor modifications to hardware and software,” noted Craig Tomita, director of the medical product business, North America for Adept Technology, Inc. in Livermore, CA. “But when it came to a decision point, companies usually opted to throw more labor at the problem than to invest in automation.”
That mentality has changed, making life sciences/pharmaceuticals/biomedical/medical devices one of the strongest markets for robotics. In 2007, robot sales to this sector have soared by 13%, second only to the automotive industry, reported the Robotic Industries Association.
Robotics’ popularity likely is due to several factors, Tomita said. First, the medical device industry is becoming more aware of the many benefits that robots can offer—from lowering production costs in the long run, to relieving humans from handling potentially dangerous objects such as syringes or performing tasks such as grinding, to providing a level of product consistency, reliability and quality that is unparalleled by using other methodologies. Second, contract manufacturers previously built plants in countries with lower-cost labor, those employee costs have been rising in recent years, negating some of the gains that were achieved. Third, maintaining the integrity of one’s intellectual property (IP) always is a top priority, and in a few too many cases, since the laws governing IP differ in different countries, companies have gotten burned when their innovations have been pirated.
“All of these issues, coupled with the increasing capabilities of robots, are driving the manufacturing of medical devices back within US borders,” Tomita said. “Everyone is trying to reduce costs, increase volumes and efficiencies, and avoid some of the challenges that can occur with hand assembly. Robotics and automation address all of these challenges.”
The Key to Success
In practice, outsourcing has changed dramatically over the past two decades—from how much of a project is outsourced, to which professionals work at which facility, to how companies work together, to how much automation is used. Experts expect outsourcing volume to continue increasing.
As one leading OEM employee said during a panel discussion at a recent industry meeting: Thirty years ago, his company outsourced nothing. Twenty years ago, it began outsourcing components. A decade ago, it began outsourcing finished devices. Now, it outsources a wide range of components, finished devices and semi-finished devices and considers outsourcing a key element in its success. He expected other OEMs would follow a similar maturity curve.
“Developing trust is the key to success in outsourcing,” concluded John Gorski, president and CEO of NAMSA in Northwood, OH. “Those companies that simply seek to reduce transactional costs or keep their vendors at arm’s length will not be as successful. Honesty and trust are essential to developing a partnership that will allow both companies to prosper.”
Sidebar: A Look at the International Influences on Outsourcing
Food. Toothpaste. Toys. It seems the list of recalls of potentially dangerous products manufactured in China grows daily. While consumer goods not created to proper standards are troublesome—and heartbreaking for people who lost their pets to tainted pet food—medical devices and implants that aren’t produced to specification could have a deadly impact on humans—an unacceptable risk.
As a result, OEMs are re-examining their approaches to outsourcing internationally. “Sixty percent of medical products are manufactured in the United States,” said Andrew Kinross, associate director for Navigant Consulting in Burlington, MA. “In recent years, manufacturing has been transitioning to Mexico and China, but in light of recent recalls, there is some concern. If you have problems making toys, you will definitely have problems making medical devices.
“On the flip side, EMS [electronics manufacturing services] companies in China are doing well,” Kinross continued. “They are part of a global footprint in which you can interchange products from one facility in the United States to one in China using the same standards, with relative ease.”
Any OEM considering outsourcing in other countries thus must screen potential partners that much more carefully, and ensuring that the partner has a manufacturing execution system that will provide real-time visibility into all portions of the manufacturing process is critical.
“I don’t care if someone is in-house or not,” said David Jacques, vice president of software development for Stereotaxis in St. Louis, MO. “I want the best engineering possible for our projects, and they can be located anywhere in the world as long as they’re accessible and can respond promptly to questions.
“The problem I have with outsourcing to India or China is that if I have a single question, it can take a full 24-hour period to get an answer due to the time differences,” Jacques continued. “During a rapid development process, such a delay can be disastrous.”
Also disastrous can be misunderstandings that arise due to language and cultural barriers. Because people’s backgrounds and experience color their impressions, you’ll often find that 10 people from the same company, but working in different disciplines, will meet about a particular project, but each leave the meeting with a slightly different understanding of what occurred. The opportunity for miscommunication and misunderstanding can be amplified enormously when American medical device companies work with firms located outside of US borders. Longer delivery timelines also can be a concern.
That said, US firms will continue to look offshore for cost savings. “Fifteen to 20 years ago, a large medical device manufacturer would go to Puerto Rico. There was a huge movement of manufacturing and assembly from the mainland USA to the islands for tax advantages and lower labor costs,” said Daniel R. Matlis, president of Axendia, Inc. in Yardley, PA. “Ten years ago, there was a shift to Mexico because of NAFTA. Then companies started to realize, ‘Perhaps I should not own that piece of the puzzle. Let’s subcontract it.’”
While in the past, Europe, Mexico and the Caribbean basin were hotspots for medical device manufacturing, in recent years southeast Asia, Malaysia and China have become popular, noted Frank Maloit, vice president of corporate procurement for C.R. Bard, Inc. in Murray Hill, NJ. Costa Rica, Russia and India also are expected to join these countries’ ranks in the future, according to industry experts.
“With these relatively young markets, you have to be very careful,” Maloit advised. “You need local supervision and monitoring to ensure they’re following your requirements. As automation and technology continue to develop, I believe more companies will be able to keep manufacturing within our own borders more cost effectively.”
In the end, no matter which country OEMs target for their outsourcing projects, they need to keep one question in mind: What will it cost in the end?
“You see more and more outsourcing outside of the United States, but then you hear horror stories,” said Tom Black, vice president of OEM sales and marketing for B. Braun in Bethlehem, PA. “Customers want a lower price, but it comes down to price versus cost. You may get a lower price, but what will you pay in the end? Reliability, quality, delivery and availability of resources and personnel when you need them—all of these factors can trump a lower initial price tag.”
Editor’s Note: See Part 1 of our series on the evolution of outsourcing, “Bettering Business,” in the October 2007 issue of MPO.