Jennifer Whitney06.12.06
Good Partnering 101: A Meeting of the Minds
When Outsourcing, Good Relationships and Detailed Contracts Are Everything, Said MPO Summit Attendees
Jennifer Whitney
Editor
Mitch Parrish of Medtronic Minimed explained why more OEMs are turning to outsourcing. |
The timing for such an event was appropriate, given that the medical device industry has been at an interesting juncture for the past few years. Double-digit growth has been aided by everything from consistent innovation to the industry’s good reputation.
However, as issues such as reimbursement, gainsharing and consolidation through mergers also continue to affect the climate in which medical device manufacturers operate, OEMs that strive to remain competitive are taking a hard look at their business structures and are increasingly outsourcing to save costs while continuing to reap maximum profits.
As a result, outsourcing is expected to eventually double the $3.5 billion medical device outsourcing market in 10 years. As more companies anticipate a need to focus strictly on core competencies—usually sales and marketing, with some R&D thrown in—OEMs realize that having a partner with a different field of expertise can help relieve some of the market pressures they face.
“We’re not there yet, but we’re getting better [about outsourcing],” reported John Gossman, vice president of supply chain solutions for Medtronic, at the MPO Summit during an invigorating panel discussion between OEMs and contract manufacturers. As an example of this evolution, he pointed out that while most major OEMs didn’t have any have any kind of “sourcing” or “strategic” job titles among personnel eight years ago, the mindset is changing rapidly. Today, more OEM companies are hiring people to help manage outsourcing relationships and supply chains.
As the industry consolidates with myriad acquisitions, many newly joined companies often find they have a huge number of suppliers to contend with—in some cases, as many as 40,000, said Chris Oleksy, a former Medtronic veteran who now serves as president of ATEK Companies, a contract manufacturer. Therefore, as the supply chain becomes more complex, many OEMs are streamlining these supplier threads by turning to contract manufacturers for support in every facet of a product life cycle.
A Closer Look at Outsourcing Trends
Since the medical device industry is predicted to continue posting impressive gains, OEMs are trying to capitalize on the industry’s overall success by introducing new products as quickly as possible. To achieve these objectives, many companies are realizing that outsourcing makes better business sense when they examine factors such as cost, capacity and flexibility.
Many of the larger OEMs realize that if they are going to keep launching new products at a competitive rate, they will have to either build new manufacturing plants or leverage operations some other way.
“If they [OEMs] are going to launch two to three products a year, they don’t have the manufacturing capability,” said Dan Kunst, executive vice president of worldwide sales and marketing for finished goods manufacturer Avail. He predicted that this trend means outsourcing—a strategy traditionally used by OEMs for component manufacturing—will continue to evolve into a practice of manufacturing finished goods.
Many companies are turning to outsourcing as they reevaluate expenditures for new capital equipment and other technology. Often, an OEM will crunch numbers and realize that even if it were to invest in the capital equipment, the company may not have the in-house expertise to run the machinery and work with the materials, reported Mitch Parrish, vice president of manufacturing operations and quality for Medtronic Minimed.
Risk mitigation is yet another concern. A savvy company realizes that putting all its eggs in the proverbial basket means a higher chance of disaster should a fire or other catastrophe occur. If manufacturing plants were affected by a potential disaster, the company could quickly find itself in deep trouble. Therefore, OEMs are realizing the benefits of spreading their resources.
“The key, right now, for us is to look at risk and do disaster planning,” Parrish noted.
Financial issues also come into play. Specifically, many companies are turning to offshore outsourcing for both the usual reasons (lower labor costs, less expensive raw materials/supply) and also because other countries—and even neighboring US states—often offer lower tax rates, which can save money.
Attendees of the MPO Summit were active participants in all sessions. |
However, attendees reported that they are seeing a slow evolution occurring from what used to be more “transactional” piecemeal relationships to those that are more “collaborative.”
Baxter is one company that has evaluated its outsourcing model over the past several years and looked to develop strong relationships with its manufacturing partners. After a period of “turmoil” while Baxter underwent some significant internal changes, Baxter accepted an offer from NAMSA (a testing service provider) to work on some of its products, according to Isaac Young, director of strategy and operations, North America purchasing and supplier management for Baxter Biosciences. This resulted after a courting period in which NAMSA approached the large OEM with a proposal to help reduce Baxter’s cycle time, costs and other factors. Isaac noted that NAMSA eventually won the business because the testing company proved to be “open and focused on the long term.”
A Match Made in Heaven?
In forming a collaborative environment, OEMs and contract manufacturers are like-minded in realizing that the best relationships are grounded by certain principles. Dennis Nevins, vice president of sales and marketing for NAMSA, reported some of his own lessons learned over the years in what will lead to a successful outsourcing venture:
• Patience
• Ability to understand and articulate the value of an OEM’s core competency
• Transcending the fear of perceived loss of control
• Open communication
• Understanding of how each partner will benefit from a deal
• Agreement by both parties on performance metrics
Gaining an OEM’s initial trust relies on certain factors, according to Kunst of Avail. If an OEM is going to hand over a portion of its business, the company will closely examine a supplier’s quality programs, broad engineering system, continuous improvement initiatives, partnering mentality and ability to diversify its skills.
Of all those factors, Parrish said any supplier should have a top-notch quality system in place. “You can’t have any short cuts,” he warned. “Don’t cut corners. I’m really going to look at that. And not only should [an outsourcing partner] have that in place, it should demonstrate it in action. If you screw up, word will get out and you’re done [in this business].”
Grady Barnes, PhD, director of OEM product development for Abbott Laboratories, agrees. “Money and time are important, but they can’t be the sole driver of how to get things done. They have to be balanced by the quality of the work,” he noted.
When examining a potential outsourcing partner’s overall business, OEMs attending the summit said they don’t just evaluate upper management; the people doing the actual work on the manufacturing floor are usually the target of the most intense scrutiny, because OEMs want to ensure that leadership and quality are trickling down to all personnel within an organization.
“Make sure you’re balanced,” Parrish advised. “If you’re strong, you will develop a great reputation and get the business.”
That reputation will most likely be fueled by demonstrative honesty and good ethics, industry leaders said. “I’m not impressed by a contract manufacturer who tells me what I want to hear,” Parrish explained. “Be honest with me. I want to know what all costs involved will be. If you’re approaching me with services, you need to really know them. Be upfront—I don’t want any surprises [down the road].”
Echoing Parrish’s opinion was that of Barnes. To ensure that relationships with service suppliers continue to grow stronger, he has found success in maintaining regular contact with partners on a weekly basis—and even daily as a product launch nears. “Regular communication and analysis are key,” he said. Barnes also suggested that both parties may benefit from creating a “Joint Development Committee” containing members of each company to ensure that input on the outsourcing process is continually shared and reviewed.
Putting It All in Writing
A major part of building the foundation of a solid relationship is having proper contracts in place, according to attendees. In general, contracts should detail requirements; roles and responsibilities; definitions of market, product, etc.; defined phases and how both parties will perform during each phase; which company owns the IP; product pricing; development costs; and termination agreements, among many other factors. Summit attendees also recommended that secondary contracts be created to help further the OEM/supply partner relationship.
Gossmann urged contract manufacturers and other service suppliers to share as much information with the OEM up front. He warned that if the OEM finds it has to “drag information out of you,” it sets a precedent for business practices to come and will lead to a poor perception of a potential supplier.
Tom Black, vice president of OEM sales and marketing for contract manufacturer B. Braun, has faced many tough negotiations and found that “there’s no such thing as a small detail in this industry.” He added, “You have to be up front. Once you feel comfortable, open the books and share numbers regarding what you’re looking for from a deal.”
Barnes admitted that his company used to write very one-sided contracts (mostly to the OEM’s benefit) and later realized it was disastrous, because “our most successful relationships are built on trust and ethics. You need to be able to share needs and work from there. Once you start using a contract to beat up a partner, problems will start.”
Perhaps the major OEMs who have more experience in outsourcing are better prepared to deal with their supply partners these days. One attendee lamented that “smaller OEMs will tell the contract manufacturer it’s not really about price—but it really is. It’s difficult to get OEMs to share what they really want to achieve. I honestly don’t think OEMs know how important it is for us to really know what they’re looking for.”
Tom Taylor, president of Nypro Medical Products Group, has found that many companies underestimate startup costs when developing a new OEM/supplier relationship. In the haste of excitement, people often overlook the “soft” costs associated with a project. The danger to the outsourcing partner is that if it later tells the OEM that other hidden costs emerged, the relationship could be irreparably damaged.
If a stalemate on agreements occurs, Richard Malo, vice president of contract sales for Ethox International, suggested that both parties take a “time out” to gain new perspective. In addition, perhaps companies should try to deal less in a traditional “company format” and more of a “personal format” to create more intimacy. Furthermore, both parties also need to figure out when a situation is less than optimal and when it may be time to walk away.
The bottom line is that the outsourcing partner often faces a double standard, according to Tom Coneys, president of Medefab, a contract service provider. Many OEMs hold their partners to a much higher standard than the one they would hold for themselves. The reality is, expectations are bigger than if the OEM were doing the work itself.
“OEMs expect perfection,” he admitted. “We have less than a 1% failure rate. Our customers won’t accept anything less. When outsourcing, the standard simply goes up.”
With all the interesting topics covered at the West Coast MPO Summit, attendees are surely looking forward to see what will transpire at the next MPO Summit, to be held September 25-27 in East Rutherford, NJ. For more information on this upcoming event, please visit www.mposummit.com.