Dan O’Mahony, Lifesciences Manager, Exertis Supply Chain Services Limited07.26.17
Large medical device companies are mostly publicly traded firms that are obliged to meet consistently high levels of market returns. Analysts not only expect robust revenue growth and healthy profits, but also strong margins. Satisfying these demands requires a strong pipeline of innovation as well as the ability to maintain margins on existing product portfolios.
Naturally, manufacturers want to maintain maximum margins but face perpetual pricing pressures and relentless global competition. Such challenges benefit customers, but frustrate commercial managers attempting to maintain minimum sales margins. Manufacturers do their best to combat price declines—implementing Lean programs, reducing waste, increasing efficiency, and maximizing output—but market forces inevitably prevail.
Patents can temporarily insulate companies against competition and margin erosion, but the opposition eventually evens the score. The lengthy, time-consuming regulatory approval process in the medtech sector generally curtails the patent protection period in the drug and device arenas compared with other industries.
Medical device companies are investing heavily in research and development (R&D), with the average top 20 firm devoting 6.8 percent of total revenue to the practice, according to Evaluate Ltd. data. The firm estimates global medtech R&D investment (from the top 20 companies) reached a record $15 billion in 2015 and predicts it to rise to $22 billion by 2022. Certainly, the pace of new product introduction (NPI) is not about to slow anytime soon.
With so much new technology expected, why don’t medtech companies discontinue legacy products? There’s no easy answer to this question. Simply stated, the medical device market can be complex and it is often difficult to discontinue legacy products even when it seems most practical. Surgeons, physicians, and medical staff are trained to use these products, and training can be quite expensive. Plus, it takes time to roll out new devices.
In a market where the payer now controls procurement practices, lower priced, contracted products may remain on the order books longer than a company might wish. A manufacturer that tries forcing an insurer or hospital group to purchase a newer item will most likely be met with resistance, as there are plenty of lower-priced alternatives available.
How can a business unit manager satisfy customer demand then, while maintaining a minimum margin? One way is by outsourcing the production of a legacy device to a contract manufacturing organization (CMO). The CMO may have a lower cost base than the original manufacturer or it may offer a greater economy of scale for a particular product line. Outsourced manufacturing can help a brand maintain its margin and breathe new life into legacy products.
The original manufacturer of a legacy device knows a lot about the nuances of making that product. Thus, the product owner and CMO must work very closely together to ensure a smooth hand-over of technology and know-how so the legacy product is manufactured efficiently and safely.
The transfer of technology to a CMO can have a major impact on all stakeholders in the legacy product supply chain. Some of the challenges involved include integrating a client’s existing supply chain into new manufacturing operations, supplier reactions to the new manufacturer, and ditching legacy suppliers for a CMO’s preferred vendors.
“Medical device supply chains can be notoriously complex,” explained John Harhen of Orbsen Consulting, who has helped devise strategies for portfolio management and complexity reduction for many major device firms. “It is not unusual to find medtech companies with 10,000 or even 20,000 SKUs. Body size variation is a big factor. Finished products may vary in length and size depending on patient requirements. In addition, medical practitioners want to have various product size options available to them during surgeries and procedures. This can create a very long-tail supply chain effect that may be transferred to the CMO.”
The introduction of an outsourced partner can allow a company to review and consolidate its legacy product range. “Having a structured methodology for portfolio management is key if one is to avoid the risks of throwing the baby out with the bath water,” Harhen added.
Hospital Pass
In rugby parlance, a hospital pass is the point at which the transfer of the ball from one player to another provides more challenges than opportunities. Similarly, medical device companies should avoid outsourcing poor supplier relationships or design imperfections to an outsourced partner. VistaMed Ltd. is an Irish contract manufacturer of complex extrusions, finished catheters, and devices to the minimally invasive device market. The company develops new products for its client base and also takes responsibility for the manufacture of legacy products. Ray McQuillan, supply chain coordinator for the firm, knows more about supplier integration in the outsourced medtech world than most, and champions proper communication between all parties involved in a supply chain transfer. “Our experience is that most suppliers are willing to work with the CMO. It is important that the client introduces the CMO to the supplier and does a proper hand-over. This helps prevent any communication issues,” he noted.
Medical device companies have different approaches to outsourcing and transferring or replacing an existing supply chain. VistaMed has experienced a myriad of options, from cases where CMOs are allowed to source material, to those in which certain suppliers are specified in the engineering files. “In some cases customers will give us full autonomy and we can therefore use suppliers already on our AVL. Other customers require us to use their exact vendor base, and the customer will have these conditions written into the design files, and the vendor details are included in the final specifications to be signed off [on] by the client,” McQuillan said. “Sometimes we will face challenges where a customer may transfer a product with an unresolved reliability or safety issue. In other cases, a client may have limited documentation or a manufacturing process has not been adequately developed or validated. In these cases, we will work to correct the situation and offer a better documented process ourselves.”
In a fast-changing environment, clients cannot always provide completely accurate forecast information, which requires greater management of inventory. McQuillan also noted the importance of identifying obsolete or end-of-life (EOL) components in legacy products, advising, “these EOL type components need to be called out early by the clients so that we can work on alternative sources.”
Flexibility
Patrick Byrnes is business development manager at Croom, County Limerick, Ireland-based Croom Precision Medical (CPM). Following a career as an engineer in several global orthopedic device companies, Patrick returned home to work in the family business. CPM is a contract manufacturer specializing in precision components and part finishing of orthopedic devices. The firm provides services to help large manufacturers scale up production of new orthopedic products as well as outsource the manufacturing of legacy products.
Byrnes has experience in both the in-house and outsourced manufacturing processes. When asked about supply chain integration, he said flexibility is the secret to success. “We try to be as open and flexible as possible with customers. Our production platform may be shaped to best match the specific operations of the customer,” Byrnes said. “The same goes for supply chain preferences. We offer a dedicated team to work with the client to ensure a smooth transfer and quality is always a priority. We spend a great deal of time at the beginning of a project to educate ourselves on the client’s production process and supply chain. Building up relationships with both the client and the AVL is also important. It can be difficult for a client to invest time with a new OEM supplier. However it is time well spent. Once the first two or three projects are complete, the cycle tends to reiterate faster as the personal relationships bolster confidence in the proceeding projects.”
Just because a CMO is smaller in scale does not mean it cannot provide cutting-edge technologies.
“One of our biggest technical challenges working with legacy products is documentation. It is not untypical to see old GD&T (geometric dimensioning and tolerance) practices being projected on old drawings, which may be difficult to adhere to in modern material specifications. From a cost model point of view, modern technology and advanced metrology hosts superior processing time over past practices,” commented Byrne.
When asked about on-boarding vendors for legacy products, he added, “We do not have the same buying power with our suppliers as the multinational corporations. However our main suppliers have been part of our supply chain for over 20 years and they are as committed to this market as we are.”
Dan O’Mahony leads customer engagement within the lifesciences portfolio of Exertis Supply Chain Services. He helps medical device and pharmaceutical firms outsource non-core activities. He has more than 20 years of experience working with companies to create robust supply chains and sales channels across EMEA markets.
Naturally, manufacturers want to maintain maximum margins but face perpetual pricing pressures and relentless global competition. Such challenges benefit customers, but frustrate commercial managers attempting to maintain minimum sales margins. Manufacturers do their best to combat price declines—implementing Lean programs, reducing waste, increasing efficiency, and maximizing output—but market forces inevitably prevail.
Patents can temporarily insulate companies against competition and margin erosion, but the opposition eventually evens the score. The lengthy, time-consuming regulatory approval process in the medtech sector generally curtails the patent protection period in the drug and device arenas compared with other industries.
Medical device companies are investing heavily in research and development (R&D), with the average top 20 firm devoting 6.8 percent of total revenue to the practice, according to Evaluate Ltd. data. The firm estimates global medtech R&D investment (from the top 20 companies) reached a record $15 billion in 2015 and predicts it to rise to $22 billion by 2022. Certainly, the pace of new product introduction (NPI) is not about to slow anytime soon.
With so much new technology expected, why don’t medtech companies discontinue legacy products? There’s no easy answer to this question. Simply stated, the medical device market can be complex and it is often difficult to discontinue legacy products even when it seems most practical. Surgeons, physicians, and medical staff are trained to use these products, and training can be quite expensive. Plus, it takes time to roll out new devices.
In a market where the payer now controls procurement practices, lower priced, contracted products may remain on the order books longer than a company might wish. A manufacturer that tries forcing an insurer or hospital group to purchase a newer item will most likely be met with resistance, as there are plenty of lower-priced alternatives available.
How can a business unit manager satisfy customer demand then, while maintaining a minimum margin? One way is by outsourcing the production of a legacy device to a contract manufacturing organization (CMO). The CMO may have a lower cost base than the original manufacturer or it may offer a greater economy of scale for a particular product line. Outsourced manufacturing can help a brand maintain its margin and breathe new life into legacy products.
The original manufacturer of a legacy device knows a lot about the nuances of making that product. Thus, the product owner and CMO must work very closely together to ensure a smooth hand-over of technology and know-how so the legacy product is manufactured efficiently and safely.
The transfer of technology to a CMO can have a major impact on all stakeholders in the legacy product supply chain. Some of the challenges involved include integrating a client’s existing supply chain into new manufacturing operations, supplier reactions to the new manufacturer, and ditching legacy suppliers for a CMO’s preferred vendors.
“Medical device supply chains can be notoriously complex,” explained John Harhen of Orbsen Consulting, who has helped devise strategies for portfolio management and complexity reduction for many major device firms. “It is not unusual to find medtech companies with 10,000 or even 20,000 SKUs. Body size variation is a big factor. Finished products may vary in length and size depending on patient requirements. In addition, medical practitioners want to have various product size options available to them during surgeries and procedures. This can create a very long-tail supply chain effect that may be transferred to the CMO.”
The introduction of an outsourced partner can allow a company to review and consolidate its legacy product range. “Having a structured methodology for portfolio management is key if one is to avoid the risks of throwing the baby out with the bath water,” Harhen added.
Hospital Pass
In rugby parlance, a hospital pass is the point at which the transfer of the ball from one player to another provides more challenges than opportunities. Similarly, medical device companies should avoid outsourcing poor supplier relationships or design imperfections to an outsourced partner. VistaMed Ltd. is an Irish contract manufacturer of complex extrusions, finished catheters, and devices to the minimally invasive device market. The company develops new products for its client base and also takes responsibility for the manufacture of legacy products. Ray McQuillan, supply chain coordinator for the firm, knows more about supplier integration in the outsourced medtech world than most, and champions proper communication between all parties involved in a supply chain transfer. “Our experience is that most suppliers are willing to work with the CMO. It is important that the client introduces the CMO to the supplier and does a proper hand-over. This helps prevent any communication issues,” he noted.
Medical device companies have different approaches to outsourcing and transferring or replacing an existing supply chain. VistaMed has experienced a myriad of options, from cases where CMOs are allowed to source material, to those in which certain suppliers are specified in the engineering files. “In some cases customers will give us full autonomy and we can therefore use suppliers already on our AVL. Other customers require us to use their exact vendor base, and the customer will have these conditions written into the design files, and the vendor details are included in the final specifications to be signed off [on] by the client,” McQuillan said. “Sometimes we will face challenges where a customer may transfer a product with an unresolved reliability or safety issue. In other cases, a client may have limited documentation or a manufacturing process has not been adequately developed or validated. In these cases, we will work to correct the situation and offer a better documented process ourselves.”
In a fast-changing environment, clients cannot always provide completely accurate forecast information, which requires greater management of inventory. McQuillan also noted the importance of identifying obsolete or end-of-life (EOL) components in legacy products, advising, “these EOL type components need to be called out early by the clients so that we can work on alternative sources.”
Flexibility
Patrick Byrnes is business development manager at Croom, County Limerick, Ireland-based Croom Precision Medical (CPM). Following a career as an engineer in several global orthopedic device companies, Patrick returned home to work in the family business. CPM is a contract manufacturer specializing in precision components and part finishing of orthopedic devices. The firm provides services to help large manufacturers scale up production of new orthopedic products as well as outsource the manufacturing of legacy products.
Byrnes has experience in both the in-house and outsourced manufacturing processes. When asked about supply chain integration, he said flexibility is the secret to success. “We try to be as open and flexible as possible with customers. Our production platform may be shaped to best match the specific operations of the customer,” Byrnes said. “The same goes for supply chain preferences. We offer a dedicated team to work with the client to ensure a smooth transfer and quality is always a priority. We spend a great deal of time at the beginning of a project to educate ourselves on the client’s production process and supply chain. Building up relationships with both the client and the AVL is also important. It can be difficult for a client to invest time with a new OEM supplier. However it is time well spent. Once the first two or three projects are complete, the cycle tends to reiterate faster as the personal relationships bolster confidence in the proceeding projects.”
Just because a CMO is smaller in scale does not mean it cannot provide cutting-edge technologies.
“One of our biggest technical challenges working with legacy products is documentation. It is not untypical to see old GD&T (geometric dimensioning and tolerance) practices being projected on old drawings, which may be difficult to adhere to in modern material specifications. From a cost model point of view, modern technology and advanced metrology hosts superior processing time over past practices,” commented Byrne.
When asked about on-boarding vendors for legacy products, he added, “We do not have the same buying power with our suppliers as the multinational corporations. However our main suppliers have been part of our supply chain for over 20 years and they are as committed to this market as we are.”
Dan O’Mahony leads customer engagement within the lifesciences portfolio of Exertis Supply Chain Services. He helps medical device and pharmaceutical firms outsource non-core activities. He has more than 20 years of experience working with companies to create robust supply chains and sales channels across EMEA markets.