Michael Barbella10.27.08
Succeeding in Outsourcing With a Small to Midsize Solutions Provider
In the first article from our two-part series, smaller contract manufacturing firms explain the benefits of partnering with a provider that can offer truly personalized service.
By Michael Barbella, Associate Editor
There is an old but well-known adage in the business world that says “timing is everything.” Gary Pond can personally vouch for the veracity of this adage—the success of his contract manufacturing company was based largely on good timing.
Pond, the CEO of Inter-Med OEM, established a manufacturing base in China during the mid-1990s, at a time when outsourcing in Asia was neither popular nor profitable. As a new company with operations overseas, Pond had a tough time attracting customers. But with time, his decision paid off.
“I started this company as a contract manufacturing firm with its base in China, and 15 years ago it was a difficult sell because the [outsourcing] climate was not there. The stars were not aligned for a successful contract manufacturing effort,” he said. “So I deviated from my original business plan and moved into the dental arena. I developed products for the dental industry and started my own company. Almost everything was outsourced then. As time went by, our dental products got brand recognition and our reputation began to grow. And at the same time, the climate toward outsourcing . . . began to change.”
Photo courtesy of Ximedica LLC. |
While Pond’s foresight into the benefits of outsourcing could be considered visionary, he likes to think of it as good business judgment. “I knew back then the answer for companies like us was [outsourcing],” he explained. “That was my vision and I stuck to it like most savvy entrepreneurs would do, and fortunately, I was correct. I started out with contract manufacturing, but I took it off my plate and went about it in a different way. And now I’ve come full circle.”
Outsourcing is not a new concept. The term was first tossed around business circles in the 1980s, though economic historians have argued that the practice has existed for as long as there has been trade.
While it long has been aware of the concept of outsourcing, the medical device industry has been slow to embrace the idea. Only now, as the industry matures, are companies truly beginning to understand the role outsourcing plays in the global market. An online survey conducted by HCL Technologies, a global IT services company headquartered in Noida, India, and Knowledge@Wharton, an online business journal of The Wharton School at the University of Pennsylvania in Philadelphia, concluded that most device manufacturers (97%) consider outsourcing to be beneficial to their business. But a majority of these manufacturers (72%) indicated that they have never outsourced any product development work. Industry analysts expect that number to drop significantly during the next few years as more medical device firms realize the benefits of outsourcing and incorporate it into their business practices.
One of those benefits is the $100 billion medical device market up for grabs in the United States, along with the multi billion-dollar markets in Asia and Europe. To effectively compete for these dollars, industry experts said, medical device companies must create improved and innovative products and get them to market quickly. Outsourcing design, engineering and manufacturing functions can make room for brainstorming new product ideas and help companies better compete in the global marketplace, the experts added.
“Given the amount of innovation that goes on in the world, it’s very hard to not take advantage of outsourcing,” Saikat Chaudhuri, a professor at Wharton who studies outsourcing management, said in a report detailing the survey’s findings. (To access the report, visit http://executiveeducation.wharton.upenn.edu/resources/knowledge-at-wharton.cfm).
Companies that have taken advantage of outsourcing have found the practice helps reduce their margin pressure, increase their return on investment in research and development, and get products to market sooner. Outsourcing also can help ease a company’s entry into emerging markets.
The potential for reduced margins may help explain the trend in recent years for medical device OEMs to outsource manufacturing services. David C. Robson, vice president of development for Ximedica LLC, a medical device designer, developer and contract manufacturer based in Providence, RI, said he has noticed more of his company’s customers outsourcing all services except for sales and marketing.
Outsourcing today is all about promoting efficiency in a cost- and time-sensitive industry. Photo courtesy of Proven Process Medical Devices. |
Another factor contributing to the glut of requests for manufacturing services, industry analysts said, is the realization among large medical device companies that product design firms usually know the most efficient way to manufacture a product.
It’s Not Easy Being Small
With such a wealth of potential benefits at stake, the competition for business in the medical device industry is high. OEMs have been meticulous in choosing their outsourcing partners, usually selecting one that can deliver the most services in the most cost-efficient way. But there are many options available, and it may not be apparent to a less-experienced company looking to outsource work as to which type of solutions provider would best suit its needs. Many OEMs turn to large contract manufacturers, given their massive presence in the industry and their ability to provide soup-to-nuts services and handle large-scale production requests.
That said, in spite of their massive presence at trade shows and other industry events, the number of small to midsize firms outnumbers that of their larger counterparts.
“The medical device industry is still largely a mom and pop industry,” Robson said. “Except for a few big players, most of all contract manufacturers are little, regional and have just a few clients.”
To compete with larger firms, many smaller and midsize contract manufacturers have had to evolve into “one-stop shops” as well, offering customers design, engineering, product development, manufacturing and packaging services. In doing so, they are evening the playing field for outsourcing business.
Not all of these manufacturers, however, can deliver all those services at as reasonable a cost as, perhaps, their larger competitors can offer. But in being highly focused without some of the distractions larger contract manufacturers may deal with, these companies do have the advantage of having more time to be both creative and proactive in serving customers’ most minute needs. Ximedica, for instance, offers its customers the basic “one-stop shopping” services but also goes beyond design through production by providing idea development, concept exploration, market research and product tracking.
As a relatively new company, Ximedica may not be able to compete with larger contract manufacturers on labor costs, but the two-year-old subsidiary of Item Group, a consumer and industrial product development firm, emphasizes to potential customers its strength as an outsourcing partner in the very early stages of the product development process and plays up its knowledge and systems related to the other chief necessity of OEMs: quality.
“We get the client through the initial aches and pains,” Robson noted. “That is a traditionally hard period of time. It can take a couple of months to figure out or it can take a year to figure out, depending on the sophistication of the device. As the new kid on the block, we are not going to be competitive in terms of being the lowest-cost provider. Our value is in qualifying the process and reducing the risk. There’s a ton of value in the risk mitigation process—it’s a very hard thing to find in contract manufacturing.”
Another hard thing to find in contract manufacturing is quality and risk assessment services. Robson said he has noticed a growing number of customers are taking advantage of his company’s quality engineering resources for design verification purposes and to write statistical rationales and test protocols. In addition, customers have become very interested in risk mitigation.
While a focus on specific parts of the product development and manufacturing process can give smaller contract manufacturers a competitive edge in the market, they still face other challenges in battling larger firms for business. A significant obstacle for some smaller contract manufacturers involves capacity. Small and midsize firms typically assume projects that have low-volume orders, making them an unlikely first choice for large, complex assignments.
“From my perspective, the most significant challenge that mid-sized medical contract manufacturers face in competing with larger manufacturers is convincing large OEMs that the company has the capacity to meet the OEMs’ needs,” explained Kenneth A. Fine, president and co-founder of Proven Process Medical Devices, a Mansfield, MA-based medical device development and manufacturing firm. “From my experience, except perhaps for disposable devices, the issue is more one of perception than reality.”
Low-volume projects, however, can prove to be a mixed blessing. While they may put smaller contract manufacturers at a disadvantage for the large projects, they also give these firms an edge over their competitors in delivering personalized service to customers.
In a way, low-volume projects help small contract manufacturers justify their existence. Many large contract manufacturers compete mostly for the high-volume jobs, ignoring work that involves low production volume and high maintenance. Firms that focus on the smaller projects will always find work, contract manufacturers who spoke to Medical Product Outsourcing said.
Plus, contract manufacturers that assume low-volume jobs can better control the production process and minimize interruptions, thereby increasing the efficiency of their time-to-market process, industry experts agreed. Larger companies, they explained, can become too involved in bureaucratic affairs that slow the production of a device and increase the time to market. Often, these large firms have overbooked their product development teams, and their manufacturing facilities and resources are stretched, rendering them unable to accept new projects.
By concentrating on low-volume projects, small and midsize contract manufacturers also can ensure that no phase of the production process falls through the cracks and better manage its way past rough spots.
Fine’s company usually takes on projects that do not require high volumes of production. The 14-year-old firm undertakes complex projects that require less than 5,000 units of the product to be manufactured annually or simpler products that require a maximum of 50,000 units to be made.
Inter-Med OEM also limits itself to low-volume production. The Racine, WI firm considers its market to be OEM customers with annual revenues of $5 million to $50 million. As with other midsize contract manufactures, Inter-Med OEM does not have the market recognition or the vast resources associated with its larger counterparts in the industry. Instead, it provides customers personalized project management and a more efficient product development process.
Small Factors Make a Large Impact on the Bottom Line
Regardless of what type of company an OEM selects as its service provider, one of the keys ingredients to a successful outsourcing strategy is communication. Small and midsize contract manufacturers agreed that communication between the OEM and outsource provider must be strong for the partnership to work.
Beyond this common-sense ideology, however, the experts said a strong sense of commitment to the relationship (and project) must be present as well.
“You have to have a commitment internally to the concept and you have to have a real thought-out vision,” Inter-Med’s Pond said. “A lot of people play in it—they test the waters and approach contract manufacturers for the purpose of collecting data. You must define the reasons you want to outsource—what are the targets? What is the time frame and what is the level of investment? Then get committed to make it happen.”
Pond said a company should not involve a contract manufacturer until it has fully committed to an outsourcing project. After a commitment has been made, the company then should involve all major departments and begin planning for the project. “Do that up front as opposed to at the end of the process,” Pond warned. “I had a company approach us, and we spent a lot of time giving them design input and costs. Marketing was all hyped about this project, and at the last minute it was killed by the company’s regulatory and operations group because they were not involved and had some concerns that marketing was not aware of. That could have been avoided had they involved all the departments in the planning process.”
Another task that must be completed at the start of any outsourcing project is gaining an understanding of its chances of success. Before an OEM and contract manufacturer enter into an outsourcing relationship, both sides should determine whether the product being made will succeed in the marketplace, Robson said.
It also is essential for companies that outsource the manufacturing of a medical device or component to retain a thorough understanding of the product’s customer base and conduct market research to determine whether there is a need for the product before proceeding with the product’s development, manufacturing and production.
In addition, both partners in an outsourcing relationship need to clearly define the responsibilities each expects from the other. Robson warned against divvying tasks among multiple outsourced resources.
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Outsourcing provides medical device manufacturers with the opportunity to increase their return on investment and introduce their products to developing markets. The once uncommon practice is growing by double digits, attracting investors and companies from other industries. The small and midsize contract manufacturers sometimes may stand in the shadows of a large competitor, but make no mistake—they often are an optimal outsourcing partner due to the personalized attention they give their customers as well as their focus on specific parts of the production process. These smaller firms also can have the experience to provide top-notch quality assurance and risk management services, a chief concern among OEMs.
As more companies realize the benefits of outsourcing, the practice most certainly will grow. As Proven Process’ Fine predicted: “Increased demand from the OEMs is leading to the need of contract outsource providers to reach the critical mass needed for the consolidation and globalization that will happen in our industry.”
Editor’s note: In the November/December issue of MPO, our series will conclude with a look at the value of partnering with a large provider.