Full-Service Outsourcing: Questions Answered
Industry experts weigh in on a host of full-service outsourcing questions facing manufacturers today. Learn how professionals from different medical device sectors view current trends and topics.
Christopher Delporte, Group Editor
Ask about the topic of outsourcing, and opinions vary widely. Is component manufacturing stronger than full product? What about the non-stop talk about the one-stop shop? How are suppliers helping their customers control cost? How do supplier partners meet OEMs’ quality and ever-increasing regulatory demands? Questions, questions, questions. Trying to stay out in front of all these topics will make anyone’s head spin.
In years past, the May issue of MPO has examined most of these broad industry concerns in a cover story, tapping expertise from numerous manufacturers, industry insiders and experts. This year, we’ve decided to mix up the status quo and provide a more direct link to the feedback we get from sources by providing a question-and-answer format—with the hope of delivering informative market insight from a variety of points of view.
The following industry professionals contributed their time and expertise to this discussion:
• Tom Black, vice president of OEM sales and marketing for B. Braun Medical Inc., a medical device contract manufacturer based in Bethlehem, PA.
• Ed Boarini, general manager of Teleflex Medical OEM in Kenosha, WI. Teleflex develops and manufactures custom medical devices and orthopedic surgical instruments. Teleflex recently purchased Specialized Medical Devices in Lancaster, PA.
• Philip Borden, principal of Riverside Partners LLC in Boston, MA. Riverside owns an extensive portfolio of healthcare and medical technology companies.
• Dave Busch, principal, PRTM, a worldwide management consulting firm. Busch, former vice president of medical for Milpitas, CA-based Solectron, is based in Mountain View, CA.
• Dan Croteau, president of Flextronics Medical, a division of Singapore-based Flextronics, an electronics manufacturing services (EMS) company. Flextronics recently purchased Solectron and Fort Worth, TX-based medical device contract manufacturer Avail Medical.
• Jari Palander, San Francisco, CA-based executive vice president of business development for Invetech of Melbourne, Australia. Invetech supplies contract development and manufacturing services for instrumentation, disposables and custom automation.
Falguni Sen, PhD, professor of Management, Graduate School of Business at Fordham University in New York, NY. Dr. Sen is an internationally recognized expert on medtech and pharmaceutical outsourcing issues.
Treasa Springett, president of New Brighton, MN-based Donatelle, a full-service supplier of molded and assembled products.
Following are excerpts from conversations with these industry executives and leaders.
Are requests for full-service outsourcing—either for components or finished product—still on the rise as they have been for the past few years?
Dave Busch: All the clients we’re working with are asking us to look into that. A client I currently work with is looking to outsource all of their manufacturing.
Jari Palander: They are still increasing, in principle, as a macro-trend, but current slowing of US/world economy may certainly cause some short-term slowdown.
Treasa Springett: We especially see this with larger OEM medical device companies looking for manufacturing partners that can provide the total supply chain solution, design and manufacturing through sterilization. This allows them to then focus on new product innovation—getting more new products to the market successfully.
Tom Black: For the most part, customers still demand or need as much as what you can provide. Requests for full-service outsourcing are still increasing, and the more that you can give them—not just for the product but also the services and support of the product itself—the more it is going to benefit both partners.
Ed Boarini: Because we serve such a broad market, we tend to see a large range of products, and we see that customers are beginning to ask for more of a full-service capability. It’s not a major part of our business at this time, but we are seeing a shift that it is increasing as a percentage of our portfolio.
Philip Borden: When we’ve had conversations with medical device OEMs—the folks that are making the decision [to outsource]—they really want to reduce the number of suppliers that they deal with. They are frustrated with the notion that they have to deal with so many suppliers to manufacture their products. One, it’s easier to deal with one person than multiple. Two, it is easier in terms of not having to ping pong among suppliers. OEMs get the component, bring it in, make sure it is good, send it to the second supplier, get the product returned, check it again and repeat—it’s a lot of validating and revalidating. This is incredibly inefficient. The trend is indicative that they want to reduce the number of suppliers and deal more with one-stop shops.
Dan Croteau: I think there is definitely a growing subset of customers that is interested in having a supplier that can do lots of different things for them—from helping to drive innovation to lowering costs through a global supply chain to helping them think through better logistics solutions. The only reason I hesitate is that there are probably a lot out there that aren’t interested. In general, I believe it’s an increasing trend. Nothing, as you well know, changes overnight in our world.
Falguni Sen: It is increasing but still remains a small percentage of total outsourcing. This is not due to a lack of interest in full-service outsourcing but rather due to a lack of competitive options available to innovators. There are not that many companies with a reputation that can take an innovative idea through to prototype and regulatory approval. Thus, the financial options available to the innovator are not always that attractive. As more contract manufacturers develop this capability and more competitive bidding for innovators occurs, you are likely to see this increase. This is also being partly driven by the growth of drug-delivery devices and combination devices, where pharma companies are also in the picture. Note also that many large contract manufacturers are moving into more value-added parts of the device value chain, and a shift to one-stop [shopping] might become a supplier-driven phenomenon. There is a general trend toward looking for strategic partners as opposed to outsourcing companies. The advantage of strategic partners is that even risk is shared. A number of uncertainties in technology, economy and regulatory systems is increasing the element of risk in new product introduction and firms are looking for ways to spread that risk.
How should companies prepare to provide a full-service stable of capabilities?
Busch: I think that this is outside the comfort zones of many CMs [contract manufacturers]. You need a lot of manufacturing capabilities—you need scientists in new areas like metallurgy and electromechanical, and optics and fluidics that most CMs don’t have. So, if you’re going to take over doing more than the electronics and enclosures, for example, and you want to do complex subassemblies and top-level assemblies, you have to find and attract a cadre of those kinds of folks who can do those varied, technical parts of a complex medical device.
It’s difficult to find contract manufacturers that can do it. Not many have that capability. Everyone says they want to do this stuff, but I don’t see many stepping up to the plate to make those investments. What’s interesting is that a lot of the science and technology is concentrated in so few places that it sometimes actually has to be acquired from the OEM—what I call customer asset acquisitions, where you buy a facility and sometimes hire the people. How many optical engineers are there out there? Not that many. You can’t just go on Monster.com and find those folks. You have to acquire them, I believe.
Croteau: We need to be in a position to help companies with innovation strategies, and we have to be an active participant. You have to work very closely with your customers to understand their strategy. One of the benefits of Flex[tronics] Medical is you can reach into the broader Flextronics toolkit where we have global operations and global logistics and design centers to draw on them and expand or contract to meet the particular needs of a customer. We draw on that to be able to provide unique solutions. We have more than 4,500 design engineers around the world and more than 200 in our medical design centers. If you think about all the markets we operate in, we’re able to draw on the many trends that come from other industries like personal electronics that can be incorporated into consumer-driven medical technology or maybe from the complex architecture power supplies that come from telecommunications products. We try to leverage the technology that has come from other industries and bring that to our medical customers. It leads to really rich discussions with our customers about how we can enable more innovation for them. If we were just a $100 million finished-goods company or a $50 million component manufacturer, it would be very difficult to bring that range of solutions to customers.
Borden: It is a very difficult problem to solve. We have two separate investment platforms in this space. Within each, we’ve tried to have them specialize in certain types and applications of devices, so that they’re able to be one-stop shops, but not have such a broad range of capabilities that they cannot manage it well. For instance, one of our investments is in a company called J-Pac, which is involved in thermoform meshes, textiles, transdermal patches, and oral strips. And we specifically let the company focus on those types of markets and have not gotten into things such as metals or other types of capabilities. J-Pac is a one-stop shop for those particular types of applications. In short, the answer to this conundrum, from our perspective, is to specialize and be deep into one specific type of product or category.
Springett: We are constantly improving our quality systems, product development and manufacturing processes to be more nimble and responsive to the needs and demands of our customers and the medical device market. Having robust systems and procedures are critical in this business, while never losing sight of the end purpose in the products we are producing—safety and quality of the product has to be the number one priority. We continue to evolve and expand our capability offerings by developing expanded or new capabilities in house as well as developing our supplier-partner relationships.
Boarini: We try to stay in the confines of what we see as our strengths, so we try not to be everything to everybody. But when we do see an area that’s a good fit, we adjust our focus internally so we can ensure that we’re providing the right type of service to our customers.
One area where we focus is process efficiency. That's basically how we take the initial request for a quote all the way through the various stages of product development through to full-scale launch on the manufacturing side so that we’re able to be efficient and accurate in how we respond to clients’ needs. The second area is our internal systems—how we process that information so nothing gets lost in translation between the customer and us. So, for example, if there is a change, we are able to quickly respond to them. Our internal systems are a key element.
We continue to look at our product offerings and how we can add capabilities or products that boost our customers’ portfolio. Some of those, for example, may be secondary processes for complete catheter assemblies, packaging or sterilization. Another important area is having a key backup in the regulatory side and testing and qualification. Many of our customers are looking for more depth in regard to our process validation and that we’re backed by ISO and FDA, so that we have a formalized way of providing them information as we go through development and scale-up. And then there are pieces underneath there that are all the buzzwords you’ve heard—Six Sigma, Lean, Kanban and other types of vendor-managed inventory opportunities—that create value-added [services] for our customers. We’ve spent a lot of time internally using Lean and tools and techniques to manage plant efficiencies. We try to stay ahead of our customers’ needs.
Black: On the documentation side of things, there’s more validation and information required. Customers want all the necessary documentation to help support the product and help with continuous improvement. They’re also—right off the bat—recognizing that there may be one price now, but that they will need the price to go down over the next couple of years. Customers also want to know where [you are] with Lean initiatives in manufacturing, which is expected to bring shorter lead times and continuous improvement down the road. We benefit from being part of a company that already provides these services, documentation and practices for our direct-sales force line. We share that expertise with our OEM customers. We’re already practicing those FDA and ISO requirements, so we’re prepared. We haven’t had to do much differently. The only things that have been relatively new are the Lean manufacturing and continuous improvement that customers continuously look for. Time to market is one of the reasons people outsource. From a manufacturing perspective, you have to communicate up front to know what the volumes are going to be down the road to determine up front what you’ll need down the road. Lean helps with that.
Speed to market and cost-reduction demands are ubiquitous, but what other kinds of capabilities and services are of interest to device manufacturers? And how, if at all, has this changed in recent years?
Palander: Demand for truly innovative, groundbreaking products or processes. Customers also are looking for resourcefulness by the service provider to autonomously find a way forward in a challenging program.
Borden: I would say that quality and speed to market are the demands we’re hearing more of—even more so than cost. Perhaps it is because we’re focused on the high-end, difficult-to-produce products. The companies we’re most attracted to [manufacture] are high-margin, complex medical device products. These types of products are not immediately going offshore. And in this world, it is more about quality and time to market. The margins OEMs are making on these products are very attractive, so the OEM wants to get these products out quickly and correctly. And having a recall or product failure is catastrophic for the OEMs; therefore, quality and speed to market are the most important requirements. That’s the type of outsourced manufacturer we’re most attracted to. Cost is important too; there’s no denying that at all. But unique capabilities, quality and speed to market are the most important criteria when we evaluate a new investment.
Boarini: We’re seeing some increase in their desire for us to have certification from FDA and ISO 13485. The need is there. There are some cases where [customers] don’t recognize the need yet, but we anticipate there may be cases where the FDA will be drilling down deeper. It’s a plus that we’re able to offer that capability when we start talking to new customers. In broader terms, we consider how we can be a better supplier. Ultimately, the customer is really looking for the quality and the confidence that we’ll deliver what they want on time and accurately, so that it goes into their inventory without a hiccup. We start talking about the quality and responsiveness and the ability to be crisp in our on-time delivery. That tends to override a question of pricing or cost. But the real element is all about the quality, which is why the regulatory piece falls right in there, because we have a very clearly recognized format for how we report quality—whether you’re talking about quality in the product, in the delivery system or validation of the manufacturing process. It’s all under that umbrella.
Busch: Everyone says the same things, but they’re missing the table stakes. And the table stakes are you have to have RA/QA [regulatory affairs and quality assurance] that’s at least as good or better than the OEM. So, again, the client I am working for is going to miss almost a year because the CM they were using said they were certified, and they were not. OEMs expect most CMs to make things less expensively than they can, so that’s not a differentiator. I just can’t stress enough that these basic table stakes have to be in place. Just because you may have a plant that’s [ISO] 13485 certified—though a good start—it takes more, particularly when you’re building Class II [or] Class III devices.
Sen: Quality, of course, is [a] given. However, many new products require complex technology skills. Outsourcing partners who have good technology networks from different disciplines can bring such complex designs into the prototype stage. Thus, multi-functional capability networks as well as regulatory experience and market knowledge are helpful. Many product categories are getting highly competitive, and market-positioning strategies have to be incorporated at very early stages of the design process. Partners who can bring flexibility into redesign based on market characteristics are in demand. In the final analysis, however, all these relate to speed to market and cost reduction.
Springett: Our customers expect us to be the manufacturing process expert—understanding and being proactive in developing the master validation plans and execution on these plans are critical. Having our engineers involved in their design process as early as possible will ensure more capable manufacturing processes and, in many cases, more robust product design. Our customers expect us to understand the quality requirements and be in a position to execute plans specific to our processes that meet all ISO and FDA regulatory requirements. Being responsible for the entire manufacturing supply chain, including packaging and sterilization, is not uncommon today. It is critical as the manufacturer of this supply chain to very effectively understand our customer’s quality requirements and ensure capable delivery on these requirements. This requires robust quality systems and controls at every step in the supply chain. We are seeing more and more value being placed on quality systems and capabilities in this regard.
Have OEMs begun to look for more finished-product manufacturing vs. components?
Sen: There is a shift similar to the one-stop-shopping issue discussed before. I do not have the numbers, but I would guess that even today, around two-thirds of all contract manufacturing in medical devices remain component production.
Black: We find customers still looking for components. We’re doing more non-sterile products, providing components for someone else to process further. I don’t know that you’ll ever get away from that. It depends upon the customer. I think the component side will stay strong. Most often, I think you’re going to have companies that take a look at what they’re good at—their primary manufacturing objectives and expertise—and outsource the few processes they don’t feel they need to get involved with.
Boarini: When an OEM looks at shifting more to the outside, they still end up buying a lot of components. They’re still doing the majority of the work, and they begin to consider offloading or not adding resources on their end by leveraging the resources that we, as a supplier, would have. I think we’re starting to see a higher mix of finished-product discussion rather than just the component portion.
Busch: First, I think there is a desire for more contract manufacturers to be able to do entire products, but what most OEMs are finding is that it is harder to do than anybody thinks. If I were laying out a five-year transition plan for an OEM to go to an outsource model, I would start with the easy components—such as boards and enclosures, because most of those don’t have to be done at a medically certified site. Next, I’d move to relatively simple subassemblies, then major subassemblies and then to full product. That could take three to five years. You have to get the right people on board. You also need to get certification and get the processes down pat. And finally, the real killer for medical products is that if you move them, you have to revalidate them. Part of what a firm like PRTM does is we go through an OEM’s portfolio and help decide what should be obsolete, what should be insourced and what has to be outsourced. Then you can rationalize a global plant footprint. When you do all that, anything that is outsourced has to be revalidated. You don’t want to do that for products that are going end-of-life or obsolete or margins are going down. So, even if the contact manufacturer had the capability to do the entire product, it may not be financially viable. Making subassemblies, for the most part, wouldn’t have those issues.
Croteau: We make a lot of subassemblies. Avail [which is owned by Flextronics] is primarily a finished-product company, but we level a tremendous amount of component technology, whether it’s plastic molding or preprinted circuit boards. There’s an entire range of component technologies that are absolutely integral to our short supply chain, lower cost and help drive more innovation for our customers. I don’t see that trend letting off. With Flextronics, we have more than 1,000 plastic molding machines, though obviously not all on the medical side. We could be one of the largest molders in the world, if you just looked at molding—leading device companies purchase plastic molding from us. That said, the pipeline increasingly is for finished devices, and that’s part of our strategy. Part of it is customers are demanding it more. Certainly, the conversations we have with medical device companies are different than they were four or five years ago.
How have market forces and the current business climate affected outsourcing?
Springett: With increased opportunities for contract manufacturers, we are seeing many component manufacturers jumping into the mix and selling themselves as full-service outsourcing solution providers. Medical device manufacturers need to be very careful to assess and audit suppliers to ensure they understand the quality, design and manufacturing requirements in producing medical device components and finished assemblies. We respect and appreciate competitors that meet the stringent quality system demands in this industry; they help support and drive the continual improvement efforts and technology advancements required to support our OEM customers.
Borden: We’re certainly seeing more and more private equity firms interested in the industry. We’re seeing more consolidation occurring, companies combining capabilities. One of the major forces over the last couple of years has been—to put it bluntly—the decline and troubles of large companies. This has often benefitted the medium-sized players in the industry who are picking up customers because of larger companies not being able to properly service the OEMs. The 800-pound gorillas are struggling a little bit, and we benefit from a competitor having difficultly.
Sen: Cost and speed to market remain major drivers for outsourcing, and the current market forces have not changed that. There is likely to be a slowdown in the “offshoring” part of the business due to recent issues with “quality and integrity,” but this will, in my view, pass with time as China in particular takes major steps to make sure that such cases do not occur. Offshoring may also be affected somewhat by a democratic presidential victory, but that, too, is likely to be temporary and, in any case, will not affect the general outsourcing business. There is, however, much reason to expect more consolidation in the medical devices industry due to increasing advantages of scale and market power. That is likely to have a major impact on the industry itself. Further, convergence with pharma due to the growth of combinations and delivery systems is also likely to affect the outsourcing part of the industry.
Busch: Global supply chain and logistics is a big issue, too. So many companies, because it doesn’t cost them anything to hold inventory, have way too many distribution centers and very complex logistics and supply chains that add enormous amounts of cost to the product. Most medical devices are like science products, and they’re not designed for manufacturability. You look at the design and you think, my gracious, we could take out a ton of cost if we could do some DFM [design for manufacturability].
We have to figure out how to make healthcare more cost effective. The United States isn’t prepared for the bill that’s coming up. We need to provide access for more people to the solutions that medical devices can provide. They have to be more cost effective. I don’t think demand is going to go down. In fact, demand is going to go up. As demand goes up and volumes increase, I think there are chances for economies of scale. And, as we know, China is around the 12th- or 13th-largest consumer of medical products in the world and it will become the third largest—after the United States and Japan— in the next several years.
The description of the healthcare and medical technology industries as being relatively “recession proof” is common. Have you been affected or noticed changes in your clients as a result of the current economic downturn?
Black: I have not seen anything yet. The bottom line has been cost pressures. Right off the bat, [customers] are looking to get the cost down everywhere, no matter what the volumes are. They’re being pressured on their margins, so they pressure their suppliers and it just keeps trickling down, particularly with manufacturing going overseas to the Dominican Republic, Mexico or Costa Rica. Customers appreciate your quality and the support and services you provide, but when you get down to it, if you can’t provide a cost that is acceptable now or over the next couple of years, then they will look elsewhere. They won’t give up quality for that, but cost is a very strong driver—for finished goods and components.
Boarini: Right now, we’re not seeing much effect at all. The economy and fuel costs certainly are on our mind. Generally speaking, when we talk about our relationships with customers, we’re talking about customers who are working on bringing a new product to market, so the economy and other elements haven’t had any material effect on our business at this point.
Borden: It’s too early for us to have noticed anything at this point. Every industry is affected by recessions, and healthcare is no different. It’s a matter of degree, though, and healthcare is usually less affected than many other industries. If we’re moving into a period of stagnation or economic decline, it will certainly impact the outsourcing space just as it does every sector of the economy. But we haven’t seen the first sign of it. The underlying fundamentals are still quite strong—the propensity of OEMs to outsource, the underlying growth of medical devices in general. I still think there are a lot of excellent macro drivers for the industry.
Palander: There is some caution in the air currently but not much concrete slowdown yet. I would expect small, VC [venture-capital] backed companies to be particularly affected and reduce their outsourcing.
Sen: There are many uncertainties associated with the healthcare industry in the US, and cost of innovative products is likely to become more important to large purchasers such as hospitals/institutions. Adoption rates may slow. Emerging markets such as China and India, where domestic growth is accelerating, need “good-enough” products and not the latest innovations and a different type of innovation. Thus, slowdown in the industrialized markets and a lack of demand for the latest innovations in the emerging markets, along with a general questioning of the value of innovations in healthcare, given the costs, are likely to have an impact in the next five to 10 years. However, there is no real evidence I have seen as yet to show that a major shift is occurring.
Springett: Yes, there is much more attention to cost reduction. Some clients are driving at overall cost reduction through a more analytical approach to the entire supply chain by utilizing Lean Sigma methodologies. This approach, implemented properly, can provide improved product quality and, in many cases, reduce overall total cost in the supply chain. Our customers taking this approach also seem more willing to allow our product development engineers to be engaged early in the design processes for their new products. This generally is the greatest area for cost and quality improvement—getting new programs to market with the best overall product quality and cost. There are some customers that take a more component-level look at cost and, in cases such as this, there tends to be less opportunity to reduce cost and waste in the end product.
How do you distinguish between outsourcing and offshoring? What are the benefits or drawbacks to offshoring?
Black: It depends on the product. With offshoring, you’ve got to be careful because you can’t be as lean from an inventory standpoint as you may want to be. So you’re trading some costs for possibly holding some more inventory or having to expedite supply. And your communications and forecasting have to be better. Outsourcing can be anything—US or overseas—and we hope that it would continue to be strong in the US down the road, although the cost pressures are really going to drive more offshore manufacturing, depending on the product. The biggest benefit from offshoring is cost. [However,] difficulties arise when you have a quality issue from a product coming from offshore. Making changes on the run and being able to keep the flow of product going without any interruption is tricky. If your customer goes above their forecast in quantity, you have to react quickly and with offshore production that can be more difficult. There are different challenges. But I don’t think anyone is going offshore if you’re not going to save from a cost perspective. From the beginning, you have to determine if you can develop a product here in the US knowing that you’ll have to get it to a certain cost in a year or two—and then determine if your facilities outside the US are capable without sacrificing quality. If the costs are okay to start it in the US, offshore may be an option later.
Boarini: I don’t think they’re interchangeable terms. Offshoring is not really part of our market. We’re really more of a front-end developer, so when an OEM is deciding whether to go offshore, it’s more of their internal discussion and doesn’t impact our business that often.
Borden: The way I distinguish between the two is that outsourcing is having another firm make the device or components and using another firm’s capabilities. Offshoring, on the other hand, is taking an existing product and moving it, predominantly to reduce costs. If your primary motive is saving cost, that lends itself toward offshoring and you go to the Caribbean, Mexico or over to Asia. Outsourcing to me is more about not necessarily having the internal capabilities to produce a product, which could be in the US and lots of different places.
Busch: I just had to correct a client the other day. They’re not interchangeable. They’re very different. Outsourcing is giving work to somebody else. It could be next door to you; it could be anywhere in the world. We all do that. Most of us take our woolens to a dry cleaner. Someone else can do that faster, better, cheaper than we can.
Companies go offshore for a reason. The benefits of offshoring are often tax benefits. And because everything comes down to labor, you’re really working on a labor arbitrage. Anything that takes lots of labor is probably better done outside of our country or in Western Europe. For something that takes a small amount of labor and a highly educated workforce, you’re better off doing it here. For certain kinds of precision machining, only a few places in the world do that kind of precision work, which dictates where you can do it. Another factor is logistics. If your market is all in North America and you’re making 10-ton MRIs, it doesn’t make sense to make them all in China and ship them back to the United States. They might do some of the subassemblies—certainly the electronics—in Asia, but you would do the big, heavy things like the gantry and the big RF coils here in the US.
Sen: They are very different in some ways and exactly the same in others. The main issue is the obvious one of distance. Innovators in medical devices like to work with real teams that they can relate to in proximity. This helps them convert ideas into prototypes. Virtual teams can provide most of the inputs today, but most innovators lack the confidence for that. Thus, offshoring is likely to remain mostly a routine manufacture of standard products, where low labor costs can give great advantage and access into markets of other regions. But the example of GE [General Electric] shows that product development and innovation outsourced into India and China ended up with new products for markets in those regions, some of which were relevant to the US market as well. Large manufacturers such as GE and even Medtronic could realistically offshore much more. The traditional advantages are again speed to market and cost. The usual drawbacks are lack of control over quality and product integrity and some fears about intellectual property, which have rarely been shown to be a real problem in most industries.
Springett: We see outsourcing as a process or method for improving or enhancing the overall supply chain of a product—from concept to full-market distribution. Bringing the right partners—core competencies—together to effectively and efficiently deliver new product innovation to the market; meeting a need to deliver and improve healthcare.
Offshoring, in our experience, has been more about driving for lower piece-part cost and/or proximity to local markets. The benefits could be freeing up resources to manufacture new products and introductions to the marketplace by offshoring the mature products. Certainly a benefit can be gained by penetration of offshore markets with medical device products and improving quality of life in those areas. Drawbacks might be not always finding the best overall technology or quality approach to producing the device. Other drawbacks include the logistical and intellectual property challenges for OEMs and their manufacturing partners.
While medical device OEMs seem to be growing more comfortable with outsourcing, many appear to remain reticent about discussing their use of contract manufacturing. Do you find this to be the case? If so, to what do you attribute this reluctance to discuss it?
Black: I think they want to keep their business objectives to themselves. They don’t want to give anything away. I don’t want to let my competitors know who I’m doing business with and they don’t want to let me know either, so it’s like any other business or industry. Everybody outsources. Even the outsourcing people outsource. You focus on what you’re good at and outsource the rest. It’s a basic business practice. You don’t show your cards to anyone. The bottom line is that it is still a small industry. People know who is good at doing what and who the competitors are. I don’t know anyone who doesn’t outsource or makes everything themselves. You’re always outsourcing something—from packaging materials to rubber components, to metal components. It all comes down to cost, quality and continuous improvement.
Borden: I think it actually isn’t too hard to understand. If I am Medtronic, for example, and I have an existing plant in Minnesota, I don’t necessarily want to talk about my efforts to outsource because I have existing personnel in Minnesota who will start to wonder what will happen to them. Outsourcing is a much easier conversation with a start-up without existing manufacturing. There’s no entrenched interest there. I think that’s where it stems from. When you get hold of the real decision makers at large OEMs that have an understanding of true manufacturing capabilities, they are very focused on outsourcing and not having as much of those capabilities in house. I don’t think that there’s any doubt that trend is going to continue, but they’re probably more unwilling [to discuss it] for more internal political reasons.
Busch: Let’s use the software industry as a proxy. You’ve got Oracle and SAP; they’re the 800-pound gorillas. The gorillas think they’re the only ones who can do this stuff. They would never outsource the design of a new product. They started when there wasn’t the outsourcing capability in software, so you needed that expertise in house. At the last software company I worked with, everything was done in China, for example. You’re going to see more of that in the device area. You’ll see more companies that just hold the patent on a device and the actual design and build is outsourced completely.
I think that means we’ll see more proliferation of devices because people won’t have to acquire all the manufacturing, supply chain and sourcing skills within their company. They’ll rely on a contract manufacturer to do that. A lot of it is history. J&J [Johnson & Johnson] is 120 years old, for example, and it takes a while for older, established companies to switch over to a new paradigm. And the other thing is that they don’t understand it, so they’re afraid to talk about it—whereas, for smaller companies, it’s the way they’ve grown up. It’s like having small kids that embrace technology and they do things that leave you scratching your head. They grew up with it, so it’s easy for them. Many companies also treat contract manufacturers just like suppliers—trying to play them off each other—so they don’t have a strategy and, as a result, aren’t able to talk about it.
Croteau: I don’t see it as that complicated. Everyone has a different risk profile and strategy—so having a broad geographic footprint as a supplier helps. Globalization is still a very big topic that a lot of companies are dealing with. They are really launching strategies and getting serious about emerging markets.
Palander: Outsourcing seems to, at times, carry the stigma of in-house resources not being good enough. If you outsourced successfully, your customers or employees may think that you were unable to pull it off on your own, which indeed may be the case with difficult programs—ie, the ones that are truly worth outsourcing. Companies should shift their pride from “we did it” to “we found the best way for getting to the desired outcome.”
Sen: There is a bandwagon effect. As one product category is outsourced successfully, others join in. However, the initial reluctance to do so is very high in all fragmented industries where each firm feels that they have something of real and difficult-to-transfer value. Mostly the issue is one of organization culture or the success of a really niche product with no market threats. Often times it takes a “crisis” of some sort to overcome the cultural inhibitions. There is also much ignorance about the risks and benefits of outsourcing. Different industries have different learning curves. I believe that outsourcing will grow very fast in the device industry, especially with consolidation.
What trends should we expect in the next few years?
Palander: [There will be a] shift in service providers to become enablers for truly groundbreaking products—[a] demand for innovation [and an] ability to understand the field of use by service provider will increase. It is no longer good enough to just have a bunch of good engineers—they have to be harnessed to pursue truly winning product designs. Those cannot always be defined or conceived by the client, so the service vendor needs to strongly contribute by thinking outside the box.
Croteau: Minimally invasive; smaller, more sophisticated communication capabilities and user interfaces; and a more consumer-driven look and feel and finish. Users want ergonomic designs that incorporate many things that are coming out of consumer markets. I see these trends creeping into our business—perhaps not so much with a catheter obviously, but with hand-held instrumentation in terms of look and feel, glucose meters and things like that.
Borden: I think we’re going to continue to see a convergence of devices and biopharamceutical products. So one of the capabilities we’re looking into with our portfolio companies is how do we get to be a leading provider of products at the intersection of medical devices and biotherapeutics. Things like coatings or medicaments of some sort. With the combination of devices and biopharma, you get the benefit of a medical device and delivering site-specific drugs, which is a trend we’re very focused on. And those are capabilities that small mom and pop firms will have a hard time executing. It will take a sophisticated set of capabilities to be able to take advantage of those opportunities.
Boarini: There’s a trend toward more finished devices, so we have to sort out what that means to us as far as capacity, capabilities, packaging and labeling and other things like that. We’re staring to see supplier consolidation. Customers are looking for fewer suppliers, so we start to broaden our portfolio and look at potential linkages with third-party suppliers to us to provide a single point of contact for our customer base. That seems to be an important trend and something that will continue to accelerate. We’re seeing growth in the demand for the capacities for some of the launch quantities, so we need to make sure we have the capacity to absorb that. And in the continuous improvement element, [customers] are expecting us to do more of that proactively to help in areas where customers can improve product quality and pricing.
Springett: Pressure for overall cost reduction will certainly continue. I expect the quality attention and focus will continue to be front and center. The medical device manufacturers need to clearly understand customer requirements and FDA regulations and be able to demonstrate consistency in meeting those standards. This will mean more focus and attention to supplier development throughout the entire supply chain.