In the second article from our two-part series, contract manufacturers and OEMs discuss the complicated thought process behind the decision to form outsourcing partnerships.
The roads we take are more important than the goals we announce. Decisions determine destiny.
Every decision has consequences that help determine our destinies. Joseph Fleischhacker Sr. musthave been aware of this correlation more than 60 years ago when he made a series of career decisions that eventually determined his destiny.
Some industry experts argue that choosing the right contract manufacturer or supplier is the most important factor in deciding whether outsourcing is a good idea for medical device OEMs. Photo courtesy of Donatelle.
While working as an engineer at Honeywell in 1947, Fleischhacker and two colleagues decided to start a side business making fishing lures and tackle. The engineering trio called their new company Lake Region Manufacturing and operated it out of Fleischhacker’s backyard chicken coop in Minnetonka, Minn.
In the early 1950s, Fleischhacker and his cohorts decided to shift the focus of their business to water softening and treating equipment. Soon after taking this new road though, Sears and Culligan entered the market, forcing Fleischhacker to turn Lake Region into a part-time contract machine shop.
None of Fleischhacker’s early career decisions, however, was as important as the one he made in 1960. His decision to partner with a fellow engineer by the name of Earl Bakken arguably helped determine his destiny more than any other choice he made before that and any he would make in the future.
Bakken had co-founded a small company called Medtronic that he ran out of his garage in northeast Minneapolis, Minn. The startup firm was developing a new battery-powered medical device known as a “heart pacemaker,” but needed help manufacturing small diameter coils and wires that would connect the pacemaker to a patient’s heart. Bakken asked Fleischhacker to make the parts for him.
In his spare time, Fleischhacker worked to develop a mechanism that could hold and feed a spool of wire into a machine that produced coils consistently and accurately. The first coil-winding concept he came up with used a washing machine motor and an old lathe to drive the winding mechanism. A second-generation concept evolved into the first completed coil winder machine, which at one point was named Grandma and produced Medtronic’s entire lead coil requirements during the 1960s.
As Medtronic grew into the world’s largest manufacturer of pacemakers, Fleischhacker decided to narrow Lake Region’s focus to medical devices. That decision helped the company fulfill its destiny of becoming both an OEM of wire-formed medical devices and components, and a supplier to some of the world’s largest medical technology companies.
In many respects, the growth of Lake Region Medical (the latter word was eventually added to the company’s name to reflect its focus on medical devices) is directly related to the decisions Fleischhacker made over the years. Perhaps the most significant of those decisions was the one to become an outsourcing partner with Bakken and his fledgling company.
At the time Bakken and Fleischhacker collaborated on the pacemaker, outsourcing was a relatively uncomplicated business option. Companies that needed help producing a specific part for a product or supplying a service for customers simply looked for an outside partner to help them make that part or provide that service. Few factors were considered other than cost and convenience.
Outsourcing, however, is not such a simple option anymore. Many issues have emerged over the last 49 years that have complicated the decision-making process. These complications, in turn, have prompted medical device companies to re-evaluate both their desire and need to participate in an outsourcing relationship.
“In the early days [of outsourcing], the decision to outsource was less sophisticated and much more component-centric,” said Dan Croteau, president of Flextronics, a Singapore-based electronics manufacturing services provider that helps medical device OEMs design, build, ship and service electronics products. “It was a more tactical decision compared with today. There was a lot more component-only activity and it was driven more by local relationships that were important in proximity to customer factories. You also needed to have quality and some ability to demonstrate service and cost, but there wasn’t as big an emphasis on having both a short-term and a long-term plan to take down costs.
It Starts With the Right Partner…
In many respects, the decision to outsource is a fateful one. Companies that choose to outsource a facet of their production or manufacturing processes are, for all intents and purposes, determining their destinies with the partners they choose and the journey they take together through the product development cycle.
It should come as no surprise then, that the ability to choose a suitable outsourcing partner is a major consideration to device firms looking for help in getting a product to market. Some industry experts would argue that partner selection is the most critical factor in determining whether outsourcing is the right fit for a company.
Lake Region Medical, for example, owes much of its success to the outsourcing relationships it has forged (courtesy of Fleischhacker) with major medical device firms such as Medtronic.
“We have good [outsourcing] relationships, and a lot of that has to do with the fact that we go back to the founding of the companies,” said Ron Von Wald, global marketing director for the Chaska, Minn.-headquartered firm. “There’s not only business relationships but personal relationships as well, and they go back many years, whether it be with Medtronic, Boston Scientific or St. Jude [Medical]. There’s a lot of trust there. This year, we will have produced over 40 million manufactured devices for companies that compete with each other. We couldn’t do that without those relationships.”
Not every company, however, has such a rich history with the major (and midsize) device manufacturers. Those that lack such longstanding relationships often have a more difficult time selecting the right partner because they may not truly understand the capabilities of their counterparts until months or years after making the decision to outsource. This could increase the chance that a company would partner with a supplier or contract manufacturer that lacks experience in specific areas of need. For example, companies that need help developing a product should choose a partner that knows how to develop original products rather than a cohort that has experience developing previous generations of a medical device.
Avoiding such a mistake is simple. Potential outsourcing partners must communicate their needs and capabilities at the start of any relationship, industry experts told Medical Product Outsourcing. Open communication not only helps dispel misconceptions companies may have about the capabilities of their outsourcing partners, it also helps both parties better understand what is expected of them over the course of the relationship.
In order for companies to clearly communicate their needs, however, they must decide on the kinds of services or product development processes they want to outsource. And to do that, they have to clearly understand their core competencies.
“Understand what your core competencies really are—the underlying capabilities that drive your business,” said Timothy Bowe, CEO and co-founder of Foliage, a Burlington, Mass.-based company that provides custom software development services and product strategy consulting. “Often, what appears to be core is really only an integral component of your product, but not an area in which you need to be deeply competent.”
Device firms that have had the most success outsourcing usually partner with a contract manufacturer or supplier that has a similar corporate structure, industry experts said. Lake Region Medical, for example, has been able to sell products to most major medical device OEMs partly because of its vigilance in protecting its customers’ sensitive data. This vigilance in customer data protection is part of the company’s mindset, and that mindset is taken into account each time Lake Region decides to partner with a supplier on a particular product.
“We don’t compromise on what we share across lines. We protect from one customer to the next,” Von Wald noted. “We’re very careful. For example, if a customer is interested in buying a product from us that is similar to one that we are selling to a different customer, we will not leverage test data that’s been produced for that product. It’s just part of the way we do business and how management thinks. It’s not in our nature to compromise the relationships we have with those companies. If I was on the other side of the table—and we do business with our suppliers as well—I would be very skeptical of a supplier that was selling to my competitors. But because of the relationships we have, we’re very careful in how we manage that.”
Executives at Smiths Medical use a list of attributes to evaluate potential suppliers and decide whether they would be a good fit with the firm’s corporate culture. The St. Paul, Minn.-based supplier of medical devices and equipment such as syringe pumps, catheters and Wallace oocyte needle sets assesses potential outsourcing partners for such basic traits as competitive pricing, service, flexibility, on-time delivery, continuous improvements, and capital investment.
Company officials share the list with potential new outsourcing partners to convey their expectations and give the candidates an opportunity to decide for themselves whether they want to forge a relationship with Smiths Medical. Besides reviewing the checklist, executives also provide potential partners with an overview of the company and an explanation of the role it plays in the medical device market.
In reviewing the attributes, however, company executives ask a number of pertinent questions of the supplier (or outsourcing partner) to determine whether a relationship is warranted. The questions are designed to give potential partners insight into the way Smiths Medical operates and the kind of value it places in outsourcing relationships.
“Suppliers appreciate the fact that you’re being open with them, telling them what you’re looking for and what you value,” said Barry K. Lynn, Smiths Medical’s director of global sourcing. “Basically, it’s a warning. You’re saying, ‘this is the way we want to operate, and I don’t want you to tell me yes when you can’t to it. This is how we value the relationship.’ And we ask them to show us evidence of these things. Obviously, we’re going to be measuring on-time delivery performance, we’re going to be measuring incoming quality. It’s important that you explain what you’re valuing and how you’re looking for it. This goes back to understanding your partner—it’s very important that they have an appreciation of what you value and what you expect so you can work together and have a strong partnership going forward.”
…Takes Quality and Cost Into Account…
Finding the right outsourcing partner is not an easy task. Myriad factors must be taken into account, and they don’t always guarantee success.
In many instances, outsourcing partners are chosen based on their quality systems and ability to help
Industry experts warn that placing too much emphasis on cost containment increases the chances that a medical device firm will choose the wrong outsourcing partner. Photo courtesy of Donatelle.
the OEM (or contract manufacturer) increase productivity and profit. Some industry experts who spoke with MPO said quality and cost are the factors that most influence outsourcing decisions.
While hardly a revelation—these issues are the very reason device firms began to outsource—quality and cost are increasingly being linked with two other factors that are equally as important to companies today: innovation and globalization.
“Most of the outsourcing decisions that are made have to do with quality, cost and innovation,” Flextronics’ Croteau said. “Certainly, there are a lot of other factors, whether it’s a relationship, small companies trying to use their capital more efficiently or tax strategies for the bigger companies. But the core of what is being delivered and what is being decided upon is around quality, cost and innovation, and how you can help us be stronger in all those areas around the world. The pendulum is definitely swinging toward companies and solutions providers that have world-class systems, whether it’s quality management systems or compliance. There’s a much more sophisticated solution being delivered now to many of these outsourcing companies.”
That solution, however, is no longer being driven entirely by costs. It also is being shaped by such factors as speed to market, customer service, and the experience level of an outsourcing partner. Cost factors may still come into play if a company needs help reducing inventorylevels, for example, or minimizing transportation expenses.
Though minimizing expenses makes good business sense, it should not be the only reason companies outsource. Too much emphasis on cost containment increases the chances that companies will choose the wrong outsourcing partner, industry experts warned. And that could be disastrous for both partners’ bottom lines.
Quality has become just as complicated an issue as cost. While few device firms would hesitate to outsource in order to improve the quality of their products or comply with federal (and international) regulations, the partners they choose to help them attain better quality systems are critical.
As OEMs continue to grow their supplier networks and outsource components and services from different corners of the globe, they must choose partners that have solid quality management systems and can prove they understand federal regulations. Otherwise, the OEMs could be subjecting themselves to warning letters and costly recalls from the U.S. Food and Drug Administration (FDA).
“Someone may simply use an ISO 13485 certification as the sole indicator of quality,” noted Dana Schramm, vice president of engineering at Donatelle, a supplier of molded and assembled products based in New Brighton, Minn. “Although this is a fundamental building block, being able to consistently produce quality products goes well beyond this. With the large number of FDA warning letters being written because of supplier management, OEMs are starting to dig much deeper and are looking for companies that truly demonstrate the knowledge of FDA requirements and have demonstrated application of this knowledge. In our experience, OEMs that have received warning letters in the past now generally have a much more stringent interpretation of FDA requirements and look for suppliers that share this interpretation.”
A mutual understanding of FDA requirements and global quality standards, however, is often not enough to ensure improved product quality or more efficient operating systems. OEMs must be willing to relinquish some control over the product development process in order to obtain quality specification agreements from their vendors.
Companies also must be willing to accept responsibility for a product when it enters the market. They should not enter an outsourcing relationship to “shift the burden of blame” as one industry observer put it, or make unrealistic demands on a vendor once a relationship has been established.
“The hardest part about outsourcing is having our clients appreciate the mindset that they’re not outsourcing accountability for the business outcome, especially in the healthcare industry,” said Marc Tanowitz, a principal at outsourcing advisory and management consulting firm Pace Harmon. “If your name is on the product, you’re absolutely responsible for the implications of that product on the market and to the people that are using it. An outsourcer can do what you tell it to do, and it can control what it knows about, but we don’t think it’s a reasonable expectation to ask your outsourcer to, in isolation, achieve an outcome that you couldn’t achieve on your own. You can make a wish list of what you want from your vendor, but there needs to be a layer of practicality that you put on it.”
… And is Vulnerable to Various Market Forces
While issues such as quality, cost, innovation and vendor relationships factor into most outsourcing decisions, other dynamics must be considered as well.
Regulations from the FDA, Global Harmonization Task Force, and the International Organization for Standardization easily can affect decision-making, particularly when there is a change of focus or leadership at these governing agencies. New directives from these groups affect outsourcing decisions as well.
The change in leadership at the FDA, for example, is certainly affecting the kinds of outsourcing relationships that are being forged between OEMs and suppliers. The new commissioner, Margaret Hamburg, M.D., has been vocal about her intention to improve device safety, communication (both within the agency and with the general public) and regulatory compliance. Her focus on these areas already has resulted in a change in management at the Center for Devices and Radiological Health and the implementation of a review process to more closely examine medical device approvals. The FDA also has been zeroing in on supply chain compliance, having been given a black eye in recent years by problems with suppliers that resulted in contaminated peanut butter, dog food and the anticoagulant Heparin.
Such changes and increased scrutiny are bound to make some companies think twice about the outsourcing partners they choose in the future. As one industry expert told MPO, “It could make some companies not want to have any outsourced relationships and it could make other companies say ‘look, if I’m going to enter an outsourced relationship, it’s going to be a major deal. I want one master outsource provider.’”
Revisions to foreign directives and ISO certification standards can complicate outsourcing decisions as well. ISO 13485 and 9001 are standard certifications for vendors or contract manufacturers that work in the medical device industry in the United States and in dozens of countries overseas. Those standards, however, are about to change. Work has already begun on revisions to ISO 9001; and since that standard is the basis for the 13485 criterion, companies should expect to undergo recertification when the new standards are issued.
The European Union’s new medical device directive (MDD) is set to take effect on March 21, 2010. That directive, according to industry experts, contains changes to central requirements about users and usability, instructions for use and reuse, and the robustness of purchasing controls. The MDD also places more emphasis on outsourcing and suppliers as well as the selection and activities of notified bodies.
The current economic climate isn’t making outsourcing decisions any easier, either. Some suppliers said the recession has triggered an influx of vendors to the market that offer “very attractive pricing” to customers. Others claimed the stagnant economy has forced vendors to ask their outsource partners more questions about their finances, including losses in supply and demand, operational cutbacks or plant closings, and the potential for bankruptcy.
“Creating and sustaining a long-term partnership through the current recession is one of the challenges in selecting an outsourcing partner,” said Khristine L. Carroll, vice president of sales and marketing for AdvanSource Biomaterials Corp., a polymer-based materials company headquartered in Wilmington, Mass. “Many smaller companies are being consolidated and merged with larger organizations which may not have the same strategic industry focus. This can lead to an uncomfortable situation for the OEMs and has heightened the focus on ensuring longevity and continuity of supply in strategic partnerships.”
Outsourcing can be a powerful competitive weapon for medical device companies, but it also can be a double-edged sword. Used strategically, it can help improve a firm’s efficiency and quality; conversely, it can lead to higher production costs and sullied reputations when it goes wrong.
While much of the rationale behind the decision to outsource is linked to quality, cost and innovation, a myriad of other factors must be considered as well. The type and class of device, for example, can affect the kinds of vendors that are chosen as outsourcing partners. So can issues such as time, communication, trust, and a clear understanding of core competency. Using these factors to make the right outsourcing decisions almost certainly will impact a company’s bottom line, but it also has the potential to foster innovation through fresh thinking, new expertise and a marked change in performance. As Foliage’s Bowe put it, “Working with any outside organization represents a challenge to the status quo, rarely seen as a good thing inside development organizations. Bringing in the right partner…can revitalize many organizations. New ideas and approaches can improve both organizations and open the opportunity for real ‘teaming’ to occur over time.”
Editor’s note: Click here to read part one of our series on outsourcing strategies, “Getting it Right: Contract Manufacturing Firms Discuss the Components to Successful Outsourcing Relationships” in the October 2009 issue of MPO.
Making the Case for Insourcing
Over the last 20 years, outsourcing has become such an accepted practice in the medical device industry that most companies cannot imagine operating without it.
But there are times when it doesn’t make sense to outsource.
“There are far more reasons not to outsource than reasons to outsource,” said Marc Tanowitz, a principal at outsourcing advisory and management consulting firm Pace Harmon. “Usually, more than half the time, the reason to outsource has to do with the business case supported by some subjective or qualitative factors. If the business case doesn’t work, it’s off the table from the get-go. But there are also decisions like, ‘can I shed these assets or am I going to be stuck with this building?’ Or ‘do we think an outsource vendor can continue to provide the level of quality that we’re accustomed to?’”
Such questions about quality and cost are certainly central to any decision about outsourcing. But they should not be the determining factors in a company’s ultimate choice to keep work in-house. Industry experts said questions and concerns about core competency, intellectual property, and the feasibility of manufacturing a product overseas should be taken into account as well. Political unrest and future market growth also must be considered when evaluating foreign outsourcing partners.
“Outsourcing core competency can be very dangerous,” said Timothy Bowe, CEO and co-founder of Foliage, a Burlington, Mass.-based company that provides custom software development services and product strategy consulting. “Outsourcing core IP to areas of the world that don’t protect (or worse steal) IP is clearly not a good strategy.”
Neither is partnering with the wrong supplier. And unsuitable partners come in many forms: those that have incompatible quality systems and business models; those that institute a change in the product development process without informing the OEM; and those that cannot perform a logistically challenging process, such as laser marking a final assembly lot number on an individual component.
Sometimes, though, the reason is more subtle. Companies that are heavily involved in the community in which they are located may want to carefully consider the impact outsourcing could have on their reputation and standing with residents.
“Companies should think about whether it changes their stature or standingin the communities in which they operate,” Tanowitz explained. “We worked with a company based in a small Midwestern town. Anyone who has a career in that community works for one of the handful of manufacturers there. If [the manufacturers] were to go and start outsourcing components of their supply chain, it would really change their standing in town. And for the owners and leaders of that business, they may have a really hard time facing the people in the community in which they work. That is something that large manufacturers in small towns have to think about.” —MB