The Big Shift: Nearshoring Trends in Medtech Manufacturing

For many decades, medical device manufacturers (MDMs) established operations in low-cost countries (primarily China) to take advantage of inexpensive labor overseas. However, escalating labor costs in China continue to erode this cost advantage; in response, over the last 10 to 15 years, nearshoring to Latin America, Mexico, and the Caribbean by U.S. companies has grown steadily. Now, with COVID-19 causing serious, long-duration supply chain disruptions, MDMs are even more motivated to shorten their supply chains and reduce operational costs through nearshoring.

“Medical device companies are on the move,” said Lisa Anderson, president of LMA Consulting Group, a Claremont, Calif.-based consulting firm that specializes in manufacturing strategy and end-to-end supply chain transformation. “For example, Costa Rica continues to gain significant nearshoring opportunities. There is also strong growth in Mexico, which is still the number-one nearshoring option for MDMs because of its proximity to the U.S. and shorter lead times. Most MDMs realize that if they want to meet customer requirements today, they need better control over their production costs, and nearshoring is an attractive option for achieving this.”

Now, more than two years into the COVID-19 pandemic, supply chain shortages are still rampant and delays continue to disrupt manufacturing processes—in fact, for some components and materials, lead times are longer now than they were during the peak of the pandemic. Further, when supply chains finally do settle down, how long will the calm last, and what will happen when the next international crisis erupts? Medical device companies are definitely rattled.

Recent surveys show about two-thirds of North American manufacturers are interested in either nearshoring to a nearby country or bringing production back to the U.S. (reshoring).¹ Mexico is still the number-one destination for nearshoring, due to its modern manufacturing clusters, reliable communications infrastructure, skilled workers, established knowledge base, shared U.S. border, and long history of friendly relations between the two countries.

Other top nearshoring destinations are the free trade zones in Latin America. In June 2022, the Inter-American Development Bank reported the potential gain for Latin American and Caribbean countries from nearshoring opportunities in the near future could be as much as from the export of goods and services, including medical devices, pharmaceuticals, and life sciences.

In Costa Rica, the medical device and pharmaceutical industries continue to expand their presence. Nearshore production in Costa Rica has been so successful medical devices are now the country’s primary export. “In fact, after Mexico, Costa Rica is the most prolific exporter of medical devices in Latin America,” said Steve Colantuoni, director of marketing for San Salvador, El Salvador-based The Central American Group, which owns and operates the Green Park Free Zone in Costa Rica.

Even with its nearshoring successes, the Dominican Republic continues to strengthen its position as a destination for MDMs. In September 2021, the Dominican Republic, Costa Rica, and Panama signed the Alliance for Development in Democracy, which allows for greater utilization of the proximity of markets, promotes greater flow of trade and investment, and reduces vulnerabilities in supply chains. “The National Free Zones Council, as the institution that regulates and promotes the free zone sector in the Dominican Republic, together with the Ministry of Industry, Commerce, and MSMEs and the Dominican Association of Free Zones, have worked to design a strategy to strengthen and improve ease of doing business, promotion of investment, education, infrastructure, and industrial linkages,” said Yarisol Lopez, deputy executive director for the National Free Zones Council of the Dominican Republic, located in Santo Domingo.

Advantages of Nearshoring/Reshoring

Significant benefits await MDMs that nearshore. When the pandemic began, the big driver for nearshoring/reshoring was a more stable and efficient logistical system. Some overseas governments forced their MDMs to prioritize domestic production, as well as closed ports, which extended lead times by months and even years. Huge supply chain fluctuations created such business continuity risks for some companies that they decided to leave these low-cost countries. “Companies that want to stay competitive and be sure they can support customer needs should seriously consider nearshoring,” said Anderson.

In addition to reducing risk, companies that nearshore can enjoy the following benefits:

• Improved product quality and reliability (better quality systems, communication, decision making)
• Easier and more frequent travel, allowing manufacturing teams to communicate more effectively
• Higher-quality infrastructure—the business infrastructure in Latin America is more reliable than many offshore locations, such as Europe and India
• Less working capital required to support customer requirements
• Reduced freight costs with a shorter supply chain
• Better flexibility for handling change orders and scheduling adjustments
• Reduced turnaround for product development and rollout
• Reduced shipping and transportation costs (and no import tariffs if reshored to the U.S.)
• Lower energy costs—reduced consumption of energy for operations and shipping has positive environmental impacts
• Greater supply chain control results in faster delivery and reduced warehouse space
• Being geographically closer to the end customer shortens delivery times, simplifies scheduling, and decreases transportation costs

A skilled and plentiful workforce is high on the list of any MDM. Nearshore manufacturing locations in Latin America are known for their highly skilled workers because of the national emphasis on technical degrees. For example, engineering programs in Mexico educate thousands of engineers and technicians every year, providing MDMs with plenty of efficient and innovative talent. Costa Rica also has a highly-educated workforce where “98% of the population is literate, including a wealth of engineering talent that is bilingual,” added Colantuoni.

Challenges to Nearshoring

Making the right nearshoring decision can be complicated and relies on a number of factors that must be accurately evaluated. An MDM needs to determine if it will be manufacturing a product, sourcing a domestic supplier, or both. If the company manufactures, it will need to source raw materials, components, or ingredients. It is also possible that materials will be required to be sent to outside suppliers, which will need sourcing and purchasing expertise. “From a manufacturing standpoint, the complexity of the operation will depend on if the company manufactures elsewhere in the world, where it can pull people with the expertise to set up new manufacturing,” said Anderson. “If not, the company will need to hire talent.”

The difficulty of establishing a new supply chain for nearshoring/reshoring depends on an MDM’s current supply chain network, partners, and capabilities. In general, it is easier to find a compatible, qualified partner in the U.S.; “however,” noted Anderson, “if there is significant volume to reshore, it is harder to find a supplier that can take on additional volume. This might then require developing a strategic partnership and jointly investing in expansion.”

According to Harry Moser, president and founder of the Reshoring Initiative, a Sarasota, Fla.-based organization that helps U.S. manufacturers navigate the decision making process for reshoring their operations from low-cost countries, companies source products and locate their factories abroad at least 70% of the time based on FOB (free on board) price/manufacturing cost (“price”) comparisons of the offshore versus the domestic source. FOB costs “exclude transportation of goods, loading, marine freight transport, insurance, and unloading and transporting the goods from the arrival port to the final destination plus 20 other costs and risks,” said Moser.

When companies make sourcing decisions based solely on price, and not on a more carefully calculated total cost of ownership (TCO), it can often result in a 20% to 30% miscalculation of actual offshoring costs, noted Moser. The Reshoring Initiative provides a free online tool called the Total Cost of Ownership (TCO) Estimator that helps companies account for all relevant factors—overhead, balance sheet, risks, corporate strategy, and other external and internal business considerations—to determine the true total cost of ownership.2 “This way, companies can better evaluate sourcing, identify alternatives, and even make a case when selling against offshore competitors,” Moser said.

Endorsed by the U.S. Department of Commerce, the TCO Estimator is designed for businesses of all sizes and allows users to determine which sources best meet the company’s profitability and strategic objectives. The analysis includes:

• Calculations of 30 cost and risk factors for each source
• An accumulation of all costs into cost categories
• The TCO for each source
• Line charts showing each source’s current price and TCO and a five-year TCO forecast
• Line charts showing your cumulative cost by category for each source

Another resource offered by the Reshoring Initiative is the Import Substitution Program (ISP), which identifies and qualifies major importers of the products a U.S. company produces.³ Instead of competing with other local companies for work, ISP can identify new opportunities with no local competition.

“We also publish comprehensive data on thousands of reshoring cases annually to show companies that their peers are successfully reshoring and that they should re-evaluate their sourcing and siting decisions using TCO and seek customers using ISP,” said Moser.

Although this all sounds straightforward, the direct costs expectations may require a mind shift.

“Labor costs overseas and nearshore can be equivalent, but in order to reshore manufacturing, new technologies may need to be explored to mitigate U.S. labor costs,” said Attly Aycock, CEO for Remington Medical, an Alpharetta, Ga.-based contract manufacturer of medical devices with a 30,000-square-foot facility in Santo Domingo, Dominican Republic. “Therefore, a mind shift may be required to look at the total cost of generating a product. The reduced logistics, decreased lead times, and other cost reduction factors must play into the equation.”

Another nearshoring challenge is how to strategically exit from an overseas manufacturer. This is usually done gradually—as the new location ramps up, the previous location gets less work. This can take some time and is a balancing act for all parties involved. MDMs that nearshore/reshore must also be sure all the appropriate rules and regulations are met. “At Remington, we have a dedicated staff to aid in any regulatory hurdles that may be in the way,” said Aycock.

Technology Advantages

The bottom line for the viability of nearshoring/reshoring is profitability and competitiveness. In order to successfully manufacture medical devices in nearshore/reshore locations, MDMs must find ways to cut costs and still maintain decent margins. COVID-19 forced many U.S. manufacturers to try Industry 4.0/Internet of Things (IoT) technologies, which greatly improved efficiency and reduced costs. With this positive experience, MDMs know these technologies, when utilized in nearshore/reshore operations, can go a long way toward making them cost-competitive with low-cost countries.

“The smartest companies will get ahead of the technology curve immediately,” said Anderson. “They are already upgrading their enterprise resource planning systems and planning software and processes, as well as implementing automation, robotics, and other technologies. As these companies automate, they need fewer people to run the machines, which is essential for reducing labor cost and making adjustments on the fly.”

For nearshoring/reshoring locations, all modern technologies must be evaluated to see if they can make these locations competitive with low-cost countries. This also includes analyzing current production methods. In some cases, a complete design for manufacturability study may be required. “This could lead to small design changes that greatly reduce the labor input required to make a device,” said Aycock. “When launching a device from a low-cost country, ease of assembly is sometimes an afterthought because the idea is that you can always throw more cheap labor at the problem. But if you can make the small changes that reduce the inputs, you can often find a way to make that product locally, while still protecting margins.”

IoT and 4.0 are essential for creating very robust and repeatable processes and nearshore countries are active in making these technologies available to MDMs and other companies that want to relocate their operations to their free zones. “It is critical to provide access to the technologies needed for creating very consistent processes,” said Omar Jimenez, general coordinator of the medical device manufacturers cluster of the Dominican Republic. “These include sensors that alert maintenance technicians of a potential failure in critical equipment, vision systems that can detect defects in the micron range, artificial-intelligence-enabled cameras that improve assembly procedures, and automated equipment that replaces labor on key processes where consistency is critical.”

Nearshoring Through a Contract Manufacturer

Nearshore countries have proven to be innovative industrial hubs that attract a large number of U.S. manufacturing companies. For example, a variety of well-known U.S. manufacturers operate in the Dominican Republic, including Jabil, GE Energy, Johnson & Johnson, and Cardinal Health. In 2021, Costa Rica exported medical devices worth a total of $5 billion4 and 2022 is off to a good start (20% year-over-year growth compared to 2021). In fact, during the COVID-19 pandemic, the Costa Rican medical device sector successfully maintained operations, boosting production in 2020 by 8%, which reflects a remarkable level of expertise and resiliency that continues to impress MDMs. For example, in June 2021, Lakewood, Colo.-based Terumo Blood and Cell Technologies announced plans to open a medical device manufacturing facility in Costa Rica, creating 700 new jobs.

“We chose Costa Rica for our new manufacturing plant because it is a proven hub for the production of medical devices,” said Chris Williams, senior vice president of global manufacturing for Terumo Blood and Cell Technologies. “Our customers and patients rely on us to deliver high-quality products and outstanding services. Costa Rica has the resources, talent, and solid supply chain infrastructure that we need to fulfill our commitments.”⁵

One way to enjoy the benefits of nearshoring without the headaches of starting up your own operation is to work through qualified contract manufacturers in a nearshore location. These companies are deeply experienced and have well-established local and regional supply chains. Vibrant Mexican and Latin American medical device clusters also attract an abundance of potential supply chain partners that are eager to support these MDMs. For example, the supply chain ecosystem in Costa Rica has expanded greatly since the medical device cluster there began in 1987. “Now, with a cluster of about 70 medical device manufacturers, the supplier base has expanded,” said Colantuoni. “This has made it easier to establish effective supply chains close to manufacturing operations.”

Remington Medical manufactures custom medical devices at its nearshore facility in the Dominican Republic. With its well-developed supply chain, time zone constraints, freight time delays, and IP issues are all minimized.

“We have shifted hundreds of Remington Medical brand name products and products for our contract manufacturing customers to the Dominican Republic location,” said Aycock. “This has allowed Remington to grow in both locations and today, we produce nearly the same number of devices in the U.S. as we do in the Dominican Republic.”

Not every project, however, will benefit from nearshoring.

Before moving an MDM’s project to the Dominican Republic for production, Remington Medical examines all the parameters involved, especially total cost.

“When the materials make up most of the costs, it may be viable to produce it in the U.S.,” said Aycock. “When labor contributes more heavily to the cost, we must evaluate the complexity of the device and determine if the logistics lend itself to production in the Dominican. Sometimes it does and sometimes it doesn’t, but ultimately, it is a strategic business decision that we make together with our contract manufacturing customers.”

Selecting the Right Partner

Ultimately, when nearshoring from overseas, it is paramount to have a thorough, well-thought-out project plan in place, which includes a solid analysis of the regulatory submittal process. “It will take time,” said Aycock, “but it is time that you will get back once the transition is complete. If you are going to nearshore/reshore your medical device, be certain that you have a contract manufacturing partner that is deeply experienced in making medical devices in that location, with an established quality system and history of tackling medical device projects.”

“MDMs must very careful to select a reputable local partner to help them in the process of starting their operations,” agreed Colantuoni. “It is also important to find a skilled local to run the nearshored operation. Having the right person in a leadership position will help the investor to successfully navigate the culture.”

Nearshoring and reshoring represent a new reality that is taking place in not only the U.S., but in Europe and other regions of the world as well.

These manufacturers want greater control of their operations, noted Anderson.

“Companies no longer want to be at the mercy of political, infrastructure, and other challenges facing outside governments, not to mention the logistics nightmares of late,” she said. “A recent survey indicated that 80% of executives expect to be reshoring in 2022, compared to 54% the previous year. It just makes sense to be closer to your operations and, most important, be closer to your customer.”

Having faced widespread supply chain disruptions over the past two years, manufacturers across the U.S. are increasingly sourcing components closer to home to bolster resilience and ensure product reliability.

“All along, our argument has been the total cost of ownership,” said Moser. “Do not just look at the factory price—look at all the relevant costs and risks. That was our argument 10 years ago, and it is still our argument today. The thing is, recent disruptions have made the argument a lot more credible now.” 

References

1. bit.ly/mpo220761
2. bit.ly/mpo220762
3. bit.ly/mpo220763
4. bit.ly/mpo220764
5. bit.ly/mpo220765

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Mark Crawford is a full-time freelance business and marketing/communications writer based in Madison, Wis. His clients range from startups to global manufacturing leaders. He also writes a variety of feature articles for regional and national publications and is the author of five books.