Problem Solvers
Industry executives discussthe issues, obstacles andopportunities in tacklingthe full-service outsourcingpuzzle.
Editorial Director, Medical Devices
Managing Editor
Most people ride roller coasters for the fun of it. It is unlikely, however, that most medical device manufacturing professionals welcomed the ups, downs, twists and turns of recent economic times. The medical device industry has fared better than most, but the past few years haven’t come without their share of obstacles for device makers—shrinking pools of capital, regulatory unknowns, increasing cost pressures, just to name a few.
For the most part, outsourcing providers remain an optimistic lot—positioning themselves as problem solvers for their OEM partners. And most, despite some of the challenges that remain, continue to see light at the end of the tunnel.
To gain some insight into the full-service outsourcing market and help identify the trends shaping the sector as well as the challenges currently facing companies, Medical Product Outsourcing spoke to more than a dozen industry professionals over the last few weeks.
They included:
• Jessica Adler, marketing manager at Ranfac Corporation, an Avon, Mass.-based developer of precision medical instruments.
• Tom Black, vice president of OEM sales and marketing for B. Braun Medical Inc., a medical device manufacturer and contract service provider based in Bethlehem, Pa.
• George Blank is chairman of the board of Vention Medical, which recently was formed through the combination of The MedTech Group, TDC Medical and Advanced Polymers. The newly combined firm creates an integrated services solution for the design, engineering and manufacturing of complex medical devices and components.
• David Cocke, general manager at NuPak Medical Ltd., a contract manufacturing and packaging firm based in San Antonio, Texas.
• John Ducaji, sales and marketing manager at Phase 2Medical Manufacturing Inc., a Rochester, N.H.-based contract manufacturer of single-use disposable medical devices.
• Liam Farrissey is head of business development forCreganna-Tactx Medical, which is headquartered in Galway,Ireland. The firm specializes in the design and manufacturing of
delivery devices for minimally and less-invasive therapies.
• Peter Harris is CEO of Cadence Inc. in Staunton, Va. Cadence provides outsourced design and manufacturing solutions for surgical devices and scientific applications.
• Sandra Ketchen is vice president for the Healthcare division of Celestica Inc. Headquartered in Toronto, Canada, Celestica provides design, manufacturing and supply chain solutions for customers in a variety of industries.
• David Robson, vice president of development at Ximedica LLC, a contract manufacturing company based in Providence, R.I.
• Barry Sos is director of global sourcing for SMC Ltd. in Somerset, Wis. SMC offers complete design, molding services and finished devices for the medical and pharmaceutical industries.
• Treasa Springett is president of New Brighton, Minn.-based Donatelle, which has provided medical device product development and manufacturing services for more than 40 years.
• John Walter, director of business development at Florida Production Engineering Inc. The Ormond Beach, Fla.-based firm engineers and manufactures plastic injection-molded components and assemblies.
Have you seen a change in requests for full-service outsourcing over the last 12 months? What factors contributed to the change?
Tom Black: The biggest change is how customers are asking us to provide support data. They want to make sure their outsourcing partners manage risk through managing their supply chain all the way down to their raw materials. They don’t want to get hit with any [U.S. Food and Drug Administration (FDA)] or ISO violations, so they’re counting on us.
George Blank: The component business continues to grow in proportion with industry growth. Since the contract manufacturing industry is very fractured, there is some component-supplier consolidation, especially by the large OEMs. Finished product outsourcing has increased, however, for reasons we will cover, this is to a more limited number of suppliers.
David Cocke: Most of the inquiries we’ve gotten in the last year relate to full-service outsourcing opportunities. We see the smaller companies that want to focus their capital where it will yield the highest return, and they have little desire to “recreate the manufacturing wheel” when their main focus is driving market demand, and to a lesser extent, development of new products.
John Ducaji: We have realized a significant increase in the number of requests for our contract manufacturing services. OEMs are evaluating their supply chain and consolidating the number of suppliers while in parallel looking to outsource more of their manufacturing activity.
Liam Farrissey: Both requests and active projects for full-service outsourcing are rapidly increasing. Medical device companies are actively seeking alternative routes to get products to market quickly and cost effectively. The rise in requests at Creganna-Tactx Medical may also be attributable to our expanded range of capability and increasing global operational footprint.
Peter Harris: It depends upon where you currently live in the food chain. If you are a top-tier, premier-level company the requests are definitely on the increase. Part of this increase is the general trend toward more outsourced activity as has been documented and discussed time and again throughout the industry. A bigger factor currently driving activity for top companies is supply chain consolidation, which is causing an accelerated movement of projects and competencies from low- and middle-tier suppliers to top-tier suppliers. For companies that have made the cut, there is a large wave of activity pushing their way. For those not making the cut, opportunities are slowly but surely on the decline.
Sandra Ketchen: Full-service outsourcing requests are on the rise. Medical device companies are generally feeling a profit pinch from lowered reimbursement rates in many areas, increasing competition and higher supply chain costs for components and raw materials. The medical device excise tax on the horizon in the U.S. is certainly an additional concern. In terms of competition, while China represents a high-growth market opportunity for most device companies, it seems inevitable that, over the longer term,Chinese domestic original equipment manufacturers will improve their products for Western markets. Indeed, there are already examples of this happening. Established OEMs in the West must prepare to meet the challenges of increased competition, both with innovative new products and improved cost structures. We would characterize most new business opportunities coming from two areas.
First, there is a steady stream of interest from early stage “virtual” companies that intend to outsource full device production from the beginning of the life cycle. Although venture capital funding for such companies has yet to fully recover from the economic downturn, these companies have been making inquiries on outsourcing in 2010. Secondly, more established and multi-product companies are beginning to recognize the benefits of full-service outsourcing, particularly where they can utilize the outsourcing community to gain resources on more stable products in need of an upgrade to meet new market demands.
David Robson: Yes, definitely. Ximedica clients understand that bringing all outsourcing services to one partner provides a reduction of risk and time to market. Having one partner also provides a clear line of responsibility and accountability. In addition, I think client companies are still holding back a bit on hiring their own permanent staff and would prefer to fund temporary outside resources.
Barry Sos: It certainly is on the rise. In the last few years there has been a trend from OEMs toward full-service providers, and we certainly see this trend continuing. Medical device companies are looking for companies that can offer full product solutions from design through final distribution and everything in between. With the economy turning around, OEMs are releasing more projects and continuing to develop R&D projects. Finding suppliers that can fulfill full device production needs alleviates the need for in-house capital spending.
Treasa Springett: Full-service outsourcing is on the rise. One factor contributing to this increase is that OEMs are utilizing their resources to focus on product development, marketing, and gaining product approvals. In addition, they are looking to their supply chain partners to be accountable for more of the component and finished device manufacturing responsibilities. OEMs are embracing risk mitigation and alternate sourcing strategies to ensure supply chain continuity and competitive cost across a broader range of components and devices.
John Walter: Yes. The full-service supplier provides a single point of contact and allows the customer to source the assembly, not pieces and parts. The customer can leverage the full-service supplier for both resources and supply chain management.
What services are popular with customers? Why are these services so important to customers?
Jessica Adler: The overall experience and attention to detail is what is most important to our customers. It’s the reason they come back. Additionally, validations, proving the process, testing, etc., allows the customer to come out feeling satisfied and knowing their product is exactly what they want and up to any and all standards.
Black: We’re seeing interest in everything from injection molding all the way though assembly, packaging and sterilization. At each level, they want their partners to have a clean track record with the FDA, especially in terms of change control. If there is a change, they want to make sure their partner is mitigating risk.
Blank: Customers want technology and engineering resources to support their more advanced products. The demand for original product design continues to grow, while the need for design for manufacturing is growing as well. Price pressure on established products is beginning to create a demand for product redesign.
Ducaji: Our design, material procurement, manufacturing, testing, packaging and order fulfillment services are most popular with our clients. Many of our customer partners do not have the manufacturing capability or they choose to allocate resources more heavily on product development and sales instead of manufacturing.
Farrissey: There is an increase in popularity for an integrated service approach—all service steps that get a product from concept stage to the market or a “soup-to-nuts” approach to products. I think this approach is important to customers so that they can focus on adding real value to the bottom line through well-executed product strategies and intellectual property accumulation. Outsourcing companies are reaching new levels of maturity to take full responsibility for the physical product in all aspects. For example, we recently added clinical and regulatory consulting to our capability mix so that we can take further responsibility for the product on behalf of our partner-customers when appropriate.
Harris: We find the most critical services to be high-quality engineering assistance in the early stages of migrating device concepts to device realities.Top-level partners drive a tremendous amount of value for their medical device customers through ultimately helping them create and take to market products with improved functional performance. Project management is also a critical and often overlooked service, but as medical device companies strive to achieve more with fewer resources, outsourcing partners can greatly aid in keeping projects on time and on budget through good basic project management skills. These services are two examples of things companies with sufficient scale can bring to the table where the historic sub $20 million companies will struggle.
Ketchen: Many OEMs are facing the dilemma of deploying their finite resources between sustaining their existing lines of products and continuing to invest in developing innovative technologies. We have received a lot of demand from OEMs to help them assess their existing products and seek new ways to upgrade the ones that continue to deliver commercial value. This can be accomplished in a number of ways, such as more efficient design or better strategic planning of the supply chain. These services are important because they enable OEMs to generate additional value from their existing products and allow them to continue to innovate.
Robson: We’ve seen an increase in service work across all departments, including research, human factors industrial design, engineering, regulatory and new product introduction services. Recently, usability testing has had the most interest. The federally endorsed AAMI’s HE-75 Human Factors standard is still a new concept to many of our client companies, both big and small. Many don’t have the resources or the practices in place to conduct and validate human factors and usability testing early on in the design process.
Sos: Customers are looking for providers that have the ability to offer full services— everything from concept, design, prototyping, full manufacturing, through the launch of the product, and not to mention everything in between, such as sub-assemblies. Along the way, suppliers need to have expertise in each area to support the needs of the customer. Why would an OEM need it all vs. finding individual specialty suppliers to fulfill their needs?It comes down to continuity. If you only give each supplier one portion, they are unable to contribute in an extensive way to the success of the overall product. The fully integrated model is appealing to OEMs who have found success when working with a supplier who is able to contribute to the “big picture” from concept to fruition.
Springett: We find our customers utilizing full-service outsourcing value suppliers with strong skills and capabilities to manage the entire program, including all technical, manufacturing, and commercial aspects. In addition, it’s important for customers to receive product design support to complement their product design teams. This support includes design for manufacturing and design for reliability, complete validation execution, and a fully integrated quality management system from product development through complete program life cycle that is compliant to FDA regulations and ISO 13485.
Walter: Design for manufacturing, prototyping, logistical assistance and warehousing have been popular as customers look to improve time to market, reduce costs and utilize the available resources of the supply chain.
Customers are expecting a full service of capabilities from their manufacturing partners. With supplier lists shrinking, how do you stay innovative to remain on those preferred vendor lists anddifferentiate yourself from the competition?
Adler: Being that everything from beginning to end is done under one roof in our facility, we have the ability to create and innovate. We can customize anything to our customers’ needs, leaving no need for a middleman. This allows us to stay innovative and differentiate ourselves from other manufacturing companies.
Black: Customers are looking to gain control and predictability by using a reliable, single-source supplier. It improves communication, simplifies oversight and reduces risk exposure. We’re positioning B. Braun OEM Division to provide complete outsourcing services from molding to sterile finished product and offering expertise in each step to add value. Additionally, we see that customers want expertise-to-expertise communication with their outsourcing relationships; so, for example, QA (quality assurance) speaks to QA, regulatory speaks to regulatory.
Blank: It has become more difficult for small contract manufacturers to be competitive, and the preferred supplier lists are getting smaller. To some extent this has occurred by a much more demanding regulatory process. To be competitive, suppliers need size to support complex quality systems, have extensive engineering resources, risk mitigation capabilities, available manufacturing capacity, evidence of continuous improvement and low-cost country options. While Vention Medical has all of these features, our approach is to continuously add capabilities and technologies to further support our customers and the industry. An example of this is our recent addition of technology to support interventional product design and manufacturing with complex balloons and shrink tubing. We continue to invest in manufacturing capacity, advanced equipment and engineering process development. Our 32 years of experience has helped us develop very open communications with our customers, allowing us to understand and plan for their future needs. We believe that to stay on customers preferred lists, we have to stay ahead of their needs.
Cocke: Our product focus is our customers. We target an under-served niche in the medical products outsourcing business — the entrepreneur and startup. Our greatest innovation is attention to our customers, and becoming an extension of their company. So when they have an urgent need, they don’t think, “I better call NuPak Medical,” they think “I better call Cindy.”
Ducaji: We have the pulse of the industry and are adaptive of new technologies. Our customers know that we will embrace their project and utilize our extensive expertise to help them achieve their objectives. We build finished devices, but we also build confidence that our partners can count on.
Farrissey: While preferred vendor lists are important and outsourcing companies need to tick all of the boxes to make these lists, the future of outsourcing relationships go beyond anything that can be captured on a list. Vendor lists suggest transactional type relationships whereas our experience indicates that customers want the basis of the relationship to be very different — a shared understanding of market challenges and opportunities and a more collaborative or joint approach to achieve market success. In this context, customers will expect their outsourcing partner to firstly bring deep technical expertise to the relationship. After that, they will look to their partners to manage and deliver a full product solution. The total outcome is the focus with adecreasing concern with the intricacies of how that is achieved be it through organic growth, via technology acquisition or by managing a supply chain. The optimal way to remain on preferred vendor lists is by demonstrated performance that hascontributed to the customer’s growth.
Harris: I could write my Ph.D. dissertation in answer to this question, but suffice it to say I see there being two different forces at work that need to be treated separately. To remain on the preferred vendor list, the recipe is simple, at least for now. Device companies have some basic math they are facing requiring X number of suppliers to be reduced to Y suppliers by year Z. By definition, the suppliers remaining on the list are simply going to have to be larger and deliver a broader range of services and competencies. Therefore, scale and scope are the two primary requirements to make the cut.
To ground this in some numbers, imagine that 150 top-tier outsourcing companies are currently doing about 70 percent of the $8.5 billion outsourced medical device work in the United States.Average top-tier company size is therefore around $40 million.While medical device companies are talking about reducing their supply bases by more than 50 percent, I don’t think this is a realistic number in the top tier.However, imagine the 150 goes to 100 through both weeding by the med device companies and by consolidation in the industry itself—note aggressive private equity interest. At the same time, the percentage the top tier is going to do will increase and the market itself will grow. We tend to think the top group will end up doing about 85 percent of the work and the market will top $15 billion by 2015. With 100 firms left, this puts the average size at more like $125 million in the top tier. If you don’t like my numbers, substitute your own; I don’t think the story will change.
Companies looking to be in the mix have to be thinking about substantial gains in scale and scope over the next five years or expect to be tiered down or cut out. I don’t think you want to try to provide all of the services that will be expected of $125 million companies if you are only $30 million in size. For example, it is just a mathematical fact that $125 million companies can afford a higher level of quality and regulatory support infrastructure than small enterprises. The med device companies know this and as a part of increasing compliance requirements, the small guys will eventually wither up or be consumed by larger predators.
Now the differentiation piece is a different question. Ultimately, scale and scope may help you get a seat on the bus, but they won’t get that attractive prospect walking down the bus aisle to sit in your bus seat with you. Eventually, top-tier players will need to find ways to differentiate from each other. I don’t think this is the most pressing current issue during the massive industry weeding campaign, as top-tier companies all can win and not do so at each other’s expense. Eventually, however, differentiation will be required. I personally think meaningful differentiation will take place larger along knowledge lines rather than on universally expected competencies like quality, cost and delivery.
Ketchen: Of the customers who demand full-service capabilities from contract manufacturing partners, many are no longer taking a vendor list approach. They are investing in building a unique and deep relationship with a strategic partner to meet immediate and long-term business goals. They are reexamining what is core to their business. They need to ask themselves what is it they want to outsource and why, and find the right partner that fits their needs.
When it comes to strategic partnerships, one size definitely does not fit all.This is really what differentiates our approach. We invest significant time at the outset of each relationship to understand the unique complexity of each customer’s business and then develop customized solutions to drive product innovation, cost savings, supply chain efficiencies and improved time-to-market. In today’s patient-centric market, we help our customers focus on core activities, improve their time-to-market, lower manufacturing costs and mitigate risk by maintaining a relentless focus on quality and compliance. We continue to invest in the infrastructure, relationships and technologies required to help our customers innovate, meet market demands and expand their business.
Robson: There’s no substitute for experience in these circumstances. We stay ahead of the competition by offering one of the largest and deepest brain trusts in the industry. We hire a significant portion of our staff from the medical device and scientific products industry. This provides a wide perspective on how best to solve complex design and development problems, efficiently navigate through design control, guide clients through regulatory submission processes, and translate short-run pilot runs into full-scale production. In addition, Ximedica staff has fostered close relationships with hospitals, researchorganizations, and academia to help provide a constant flow of innovative ideas.
Sos: One word sums it up: Performance. A number of suppliers claim that they offer total solutions, but at the end of the day, have you provided services at the highest level of quality, at the speed to market required, and ultimately at a price that is competitive? Those that provide these three items to the OEM will differentiate themselves in the marketplace. The next question becomes what does it take to have the highest quality? From a quality perspective it means not only having the most robust systems and processes internally, but ensuring that the supply chain is secure as well. With today’s regulatory environment, it’s not enough to have the specific medical requirements yourself; you must also provide the same level of security through the full supply chain.
Springett: We continually communicate with our customers to understand their needs and ensure our current offerings and services are fulfilling their short- and long-term requirements and expectations. In addition, we keep close attention to quality and regulatory requirements, and ensure our systems and procedures provide solid execution of the complete supply chain capabilities we offer to our customers.
Walter: It is important to establish a value proposition—i.e., what you are offering to your customer and continue to refine it as the needs of the customer change.
Trust is one of the key components of a good outsourcing partnership. In what ways can companies establish trust with their outsourcing partners?
Adler: We ensure trust by making sure the customer is always informed. By assigning product managers to each project that comes through our doors, we open the gateway of constant and personalized communication, thus alleviating any doubt in the company and reassuring the customer that they will be informed about what is happening every step of the way.
Black: Trust grows from consistently meeting customer requirements on a lot-to-lot basis. You can have great processes and models, but ultimately the results matter. We also look for face-to-face communication as well in-person visits to facilitate understanding at each discipline.
Blank: For established companies, reputation is critical. In our case we are fortunate to have established a reputation for ethical business conduct and a focus on our customers. However, in new relationships and for companies without an existing track record, trust begins with the initial customer contact. It is built at each step of the business process. Customers can gauge the level of trust from the level of honesty in the capability presentation, the openness of business discussion and throughout the quotation and negotiation process. Do the partners always do what was promised or agreed to? Do they stand by their word even when it is no longer favorable to them? Are both parties open and honest during problem periods, and is there a timely and sincere effort to correct problems? Real trust is more often developed during a crises period than in normal times.
Cocke: I think the best way to establish trust with a customer is by showing them that we have their best interests at heart.We often build trust by creating savings opportunities for a client. For example, if a start up comes to us asking for pricing on an 8-cavity tool for their new device, which has zero sales and a fair amount of market risk, we’ll often convince them to start with single cavity tooling to prove out the market opportunity before moving into high-cavitation production tools. In other situations we have performed a design review (from a manufacturability perspective) that replaced expensive custom parts with off-the-shelf alternatives. We look to establish long-term relationships with our customers; we want them to think of us as an extension of their company versus being a vendor. From our perspective, that pushes us to think of the relationship as a series of interactions vs. on a per-transaction basis.
Ducaji: Trust and integrity are cornerstones of our organization and we pursue partnerships with companies that share the same values. Companies establish trust with us by demonstrating a true willingness to engage in a mutually beneficial partnership. They make a considerableeffort to get to know us and we become an extension of their organization over time.
Farrissey: Nothing is as powerful as reputation. Where the outsourcing partner has a long history with the customer, there is an inherent level of trust between the two organizations. A positive reputation in the market will also assist to build initial trust. Demonstrating an understanding of what is really important to your customer-partner and taking steps to address these issues builds trust. In the context of ongoing projects, integrity of the outsourcing partner combined with open and honest communication will strengthen the trust between the companies.
Harris: Trust is earned, not expected or requested. It comes from demonstrated behaviors rooted in well-articulated values. Companies just beginning their relationships can speed the trust-building process by openly expressing their tenets of business, having missions they really believe in beyond just making money and walking the walk at every step of the journey.
Robson: Trust is grown through open communication. Companies that have successful outsourcing experiences typically discuss their plans openly with their partners, enabling the outsourcing team to become a temporary extension of their organization. Open communication also allows the partnership to adapt to changes in priorities, objectives, and goals for the outsourced program. This helps both organizations openly discuss and agree upon expectations and the impact of changes to the original plan. This in turn provides a greater chance of success in meeting expectations, and regularly meeting expectations is the greatest way to cultivate trust.
Ketchen: Trust is built between people. Therefore, having the right people on the team is critical both for OEMs and contract manufacturers. The teams’ expertise and experience need to complement each other, sharing a clear understanding of mutually agreed and measurable goals. The key questions to ask when selecting a partner may include: How should a good fit be defined by your organization? Is the contract partner willing to collaborate with you on goal-setting? Are they flexible enough to customize the right solution for your business with the right metrics to achieve desired outcomes? Also, trust will continue to develop with ongoing communication and regular reviews to ensure that the metrics you have established with your partner are evolving with your needs. As your priorities change, you need to ensure that your partner is aligned to help you meet your objectives. Lastly, open and honest communication is essential to the development of trust and the success of any partnership. Successful partner relationships require a high level of communication and collaboration throughout the relationship. Having that communication ensures continued success in addressing issues or problems amid changing conditions. As priorities change over time, it is also crucial to ensure through communication that the partners are aligned in meeting new objectives.
Sos: Trust comes over a period of time when all parties perform to the expectations initially agreed upon. This is true for the contract manufacturer, supply chain, and the OEM. Trust comes slowly and builds over time. When I worked for a large OEM, we would give suppliers incremental projects and monitor the performance to the expectations given, and over time that trust builds. Trust is not a given; trust is earned.
Springett: To establish trust in any partnership, it’s imperative to keep all lines of communication open. Through sharing continual and honest communication, we are given the opportunity to discuss how we are meeting our customers’ needs and utilize feedback to gauge and improve the relationship at all levels.
What are some of the risks both sides of an outsourcing partnership face when creating such a relationship? What can be done to minimize those risks?
Adler: In any working relationship there is risk for both parties. This is no exception in medical manufacturing outsourcing. For the customer, it could be lack of communication, leading to eventually finding the outcome is not initially what they presented to the manufacturing partner. For us, assigned product managersalleviate that worry by constantly communicating with the customer to make sure everything meets with their exacting standards. Additionally, the manufacturing partner could invest time, money and other resources into a project only to see it not come to fruition. Though these risks do seem severe, with communication these risks can be minimized, if not, eliminated.
Black: One of the most important things both parties can do at the outset of a relationship is to articulate expectations. Share as much information as possible. Communicating thoroughly can eliminate problems with testing protocols, documentation and project timeline, for example.
Blank: The key to risk avoidance is open and ongoing communications. Suppliers are often frustrated when customer promised forecasts are not met. Decisions within the customer’s organization, which have a significant effect on the suppliers, are often not communicated, or discussed until it is too late to help. Customers are often surprised by supplier organizational or ownership changes. Potential quality problems can result from unannounced materials or process changes at a sub-supplier. Many, if not all, of these stress points can be avoided through a trusting and ongoing dialogue about the details of the mutual business.
Cocke: Entering into an outsourcing partnership creates risk for both the client and the contract manufacturer. The client must ensure the quality and production capacity of the contract manufacturer meet their expectations and production schedules, and the contract manufacturer must ensure that the client can meet its financial commitments. Typically, our customers underwrite our abilities through audits and reference checks with other current customers. In addition, our ISO certification shows them that there is a foundational quality system in place, and that the system is periodically reviewed by external experts. We use standard credit reporting services to monitor its customer’s payment histories. And finally, we have always believed that good contracts make for good partners. So we have an extensive written contract that covers all aspects of the business relationship. This protects both parties and goes a long way to eliminating confusion with respect to which party is responsible for what.
Ducaji: A lot of cards are on the table for both sides when we pursue a partnership. Proper vetting of potential new partners is critical in minimizing our exposure as we proceed down the path of partnership. Defining expectations up front and having clarity on all aspects of the project while maintaining open communication is critical.
Farrissey: The greatest overall risk in such partnerships are those that ultimately impact the product such as delivering a product to market that does not meet user needs, a product that is not commercially viable or a defective product that damages the reputation of both partners. If each partner is united to focus on the product it will ensure that optimal decisions are always taken by each partner in the combined interest of product success. This shared focus minimizes risk. If the partners commercially share in the product there will be an even stronger motivation by each partner to manage risk more effectively.
Harris: Ironically, if trust overrides process it can lead to misalignment and mistakes. Some amount of process disciplines are required, not so much to prevent untrustworthy behaviors from having negative impacts, but rather from preventing unforeseen events and changes of plans from asymmetrically impacting one partner negatively. For example, if I trust the key players at a customer and have no project controls as a result, their situation can often shift and a project can be killed, leaving me with invested resources with no destination. This has nothing to do with not being trustworthy, but rather is rooted in the real dynamic circumstances we all face. If we operated solely on trust, it would allow too much risk to creep into shared processes. With this said, no trust, no dice.
Ketchen: Risks need to be clearly defined at the outset of the partnership and in the context of the business landscape that an OEM faces. An honest discussion on your needs and your partner’s manufacturing capabilities and limits is important to set the right expectations. Mitigating risks is 80 percent planning and 20 percent execution. Both parties need to ensure that all eventualities are considered. To minimize risk at the outset, an OEM should start by choosing a partner with capabilities and experience across all classes of devices, as well as a proven track record of delivering best-in-class quality results. When choosing a manufacturer of record, an FDA-registered partner further helps minimize risk. Device OEMs should also look for certifications, such as the medical quality management system certification, per ISO 13485:2003 and ISO 14971, which ensures that risk management standards are met.
Seeing is believing. To get a better understanding of a partner’s capabilities and the resources that would be dedicated to your business, start by visiting the facility and meeting in person with the project teams before selecting the partner. From a product launch standpoint, partners must have a proven new product introduction process. As always, measure the right things. We set the metrics with our customers and measure and manage progress regularly to keep our customers’ executive level abreast of progress or alert them to situations early so that we can respond and mitigate risks.
Sos: I believe there are two areas: communication issues and quality expectations. On the communication side, making sure the right players from both sides are involved and making sure that the expectations are clearly set up front. Too often, expectations aren’t clear. Issues can stem from bad assumptions and lack of communication. The same can be said about quality. If quality expectations haven’t been discussed, this too can create major stress on relationships between OEMs and suppliers.
Springett: Significant effort, resources and costs are put into these types of relationships. Typically to design and manufacture complete medical devices, there tends to be a long development cycle prior to realizing revenue growth. This lengthy development cycle and the challenges related to the intense FDA scrutiny and product approvals can result in difficulties in predicting accurate forecast for program launch timing and production. Often, these up front investments require both sides to take risk prior to realizing the revenue generation to gain the returns on these up front investments. To minimize risk, it’s important to understand theconsumer demand and market for the product, ensure quality design and manufacturability so the product meets FDA and regulation approval, and timely delivery for the product to hit the market.
Where do the smaller job shops and niche players fit in to the outsourcing equation?
Black: There are instances where the OEM needs a unique manufacturing process that is outside of an integrated contract manufacturer’s expertise. Still, a smaller, niche shop might not have some of the documentation or quality personnel, so it could be up to the OEM to do the work themselves or find a third-party consultant.
Blank: There are still good business opportunities for small component manufacturers. They are still important in supporting ongoing developments and changes in device products technology. Small suppliers have the advantage of speed of execution, especially during the product development cycle. While they have a more limited range of capabilities, if their capability fits thedesign requirement, they are critical to the OEM’s success. For example, a precision machining supplier with good micromachining capabilities is extremely valuable to customers developing neurologicalproducts. In this respect, small contract manufacturers with good skills have a strong place in our industry.
Cocke: As a smaller contract manufacturer, our niche is the company that is too small to get the attention or focus of the industry giants. We exist for the sole reason that a key customer was not able to get the service or turnaround time from its existing, larger contract manufacturer. We understand that our competitive advantage is helping small companies grow, and giving them the focus that larger contract manufacturers can’t or won’t.
Ducaji: We consider ourselves to be a niche player in the market in the sense that we pursue projects that are complex and require a lot of added value during the manufacturing process. We have nearly doubled our employee base to 125 within the last two years and we were named “Up and Coming Business of the Year” by the New Hampshire Bio/Medical Council in 2010. The vast amount of devices in development and on the market will assure smaller specialty shops and niche players have a seat at the outsourcing table so long as they remain really good at what they do.
Farrissey: Specialist technology providers will continue to have a role to play in the outsourcing equation, however, in our experience; the opportunities for a niche player to become a direct supplier to the medical device company are becoming more limited. Instead, it is more likely that such companies will enter the supply chain via the outsourcing partner. For example, we often manage a complex supply chain of peer companies at the request of and on behalf of our customers.
Harris: Soon they will mostly fit neatly below the top tier, unless their capabilities are outrageously specialized and mission critical for the devices they service.
Ketchen: Traditionally, medical device firms have engaged smaller regional players for their deep technical expertise in product development and final assembly and their close proximity to the OEM’s own engineering resources. The challenge for these smaller, more regional players, however, is that they are generally inhibited in their ability to scale product
manufacturing globally. Celestica’s view is that medical device companies need both. We have focused on building an offering that combines the deep technical and regulatory expertise of a smallspecialized firm backed by a global tier-one manufacturing network.
Robson: We are a systems developer and systems manufacturer. We don’t fabricate components out of raw material, and we use pre-existing technology whenever it’s available and appropriate. We are constantly looking for subsystem suppliers or particular subject matter experts to assist us in the design, development, and manufacture of complex systems. This spans the gamut of components and subsystems, including electronics, motors, specialty plastics, coatings, precision machining, etc. In short, there is an unlimited set of opportunities for the industry around systems outsourcing organizations.
Sos: The small job shops and niche players can often benefit from aligning themselves with a supplier that offers full service to the OEM. They are often operating under a very limited infrastructure, which does not allow for the robust systems needed by the OEM. By partnering with a full-service supplier or contract manufacturer they can gain the benefits that come with a larger company.
Springett: Niche players fit well in offering specialty processes and capabilities. These suppliers are commonly sourced and managed by larger, preferred suppliers to the OEMs.
Walter: Smaller job shops and niche players fit in nicely as it is impossible to be everything to everybody. With an established network of partners, we can manage the total solution without having to do everything in house.
Please discuss the importance of having a low-cost country option in a full service outsourcing menu of capabilities.
Adler: It is, in any case, less costly to use a low-cost country to outsource a product. However, in doing that, you open your product to the world of the unknown; unknown people making the product, unknown cleanliness, unknown everything, really. We believe by not only manufacturing our products domestically but under one roof, we save the customer the worry of the unknown.
Black: As with most manufacturing processes, it’s important to balance the complexity (or lack thereof) of a medical device with the ability and cost of a particular country’s workforce. As important as it is to have a low-cost option, it’s equally critical to have a low-risk, high-quality option.
Blank: After a successful relationship is established and the goals of quality, production levels and ongoing improvements are met, customers often look to further profit margin improvement. Strategies to do so can included automation, advanced tooling and leaning the supply chain. However, for many products and customers, further improvement requires low-cost country capabilities. Today, the top contract manufacturers have to offer not only the low-cost country option, but one that is also low-risk. Having both is more complex and costly to attain and requires experience and the financial resources, which only a limited number of us have.
Cocke: Our customers have often found overseas cost savings illusory. The economics are enticing, but we have seen customers miss out on entire product life cycles due to an inability for a Chinese manufacturer to produce conforming parts. We recently received a first article package for a customer from an overseas partner showing outstanding CPKs. The only problem was that the luer connection was missing on half the parts. Although overseas manufacturing can work, for our smaller customers, it’s difficult to get the focus and effort that the larger device companies can command. In addition, the long lead times associated with overseas suppliers complicate supply chain planning and require a higher inventory level, which sucks up critical working capital.
Ducaji: We continue to gain new partners and experience exceptional growth in a challenging economic climate having a single manufacturing site in Rochester, N.H. People ask us often how we are not only able to compete, but thrive. We pursue the right partners and the right projects. We are not able to compete with $6 a day labor. We know that. Our partners know that. We may look at a low-cost country option in the future if our business needs change.
Farrissey: To be a full-service outsourcer and a true partner you have to mirror your customer’s strategies. The equations are simple. If your customer is internationally focused you have to be, too. If your customer is seeking offshore manufacturing options, you have to deliver those options, if your customer needs an in-region manufacturing solution you need to be in that region with that solution. Creganna-Tactx Medical spans three continents. We know that the flexibility and options available within our global network is highly valued by customers.
Harris: This is a topic that is in vogue right now, as med device companies come up with lists of criteria for people to make the cut. Ultimately there are two reasons to have an out of U.S. operation: cost reduction and higher proximity to appealing non-U.S. markets. Most of the thrust in the outsourcing world has been cost focused, but eventually as markets like China and South America pick up steam in demand there will also be pressure for top-tier outsource partners to localize. On the cost reduction front, an O.U.S. (outside the United States) presence is widely thought to be a requirement, but ultimately I am not sure it matters how you do it as long as you deliver cost reductions. Will device companies prefer an O.U.S. supplier reducing cost at 3 percent a year or a domestic supplier reducing cost at 5 percent per year? I think the money will talk louder than the location, until market localization forces take off.
Ketchen: It is very important, but not necessarily the most important consideration in choosing a partner. The solution needs to be all about the right fit for the product.
Robson: As a full-service provider, we offer client companies the best option for their unique technical or manufacturing needs. Some of our clients’ programs require low-cost labor to meet the success criteria established at the beginning of the project. So it’s essential to have a low-cost labor option in place. However, it is also critical to have staff in place who can handle the complexities of manufacturing outside of the United States. Having short-term or early stage manufacturing capacity at the development site is also critical. This allows us to initially manufacture products under the eye of the development team, which reduces the risk and lag time in perfecting the supply chain and the manufacturing process. One of the differentiators of doing business with us, for example, is customized development. There are some suppliers who often mold their clients’ programs into existing solutions, limiting the options they can offer. However, we thrive in offering the best solutions for our customers, including full service development, to fit their unique needs.
Sos: Low-cost countries can often be good options for products being distributed within the same region of the low-cost country, where the savings can be seen in freight and logistics, or where a highly manual process is required. Recently we’ve started seeing manufacturing return to the U.S. from Asian locations due to the rising costs of manufacturing and fuel. If you look at a process that is fully automated, there is no advantage in a low-cost location. The process is the same, the equipment cost is the same, the raw material cost is the same; where you place it doesn’t have much bearing on final production costs. If you have optimized everything from a processing standpoint you need to question the need to go to a low cost country.
Springett: The obvious benefit relates to products and services that can benefit from low-cost labor and efficiencies that come from freight and logistics as they would apply to customers located in these regions. Benefits beyond these may include having the close proximity to a customer to react to shortened lead times and respond quickly to demand fluctuations andmarket needs.
How do you maintain quality in a full-service outsourcing setting, given the FDA’s more critical examination of device approvals and uncertainty among manufacturers about the regulatory environment?
Black: That starts with making quality part of the company’s culture. As a conservatively managed company, we anticipate that regulations will become increasingly stringent, so we almost always go beyond the requirements to reduce the uncertainty.
Blank: A quality culture takes leadership and time to develop. It requires a core of trained and experienced professionals, the willingness and ability to invest in quality related technology, ongoing training and motivation of all operational personnel and the experience to apply sound judgment. Major contract manufactures also have the benefit of ongoing interaction with the staffs of world-class OEMs. This interaction creates a give and take dialogue on a range of regulatory and risk mitigation issues. Both sides contribute solutions and improvements, which result in a stronger, more compliant quality performance.
Ducaji: Phase 2 is committed to quality at all levels of our organization. Quality and regulatory compliance is the responsibility of every employee and is driven by management through our quality objectives. We place great emphasis on communication, invest significantly in training, and empower all of our employee associates while maintaining a high levelof transparency.
Farrissey: As outsourcing companies get closer to the patient, quality focus and standards must be equivalent to that of their partner. The outsourcing partner must be in a position to share in the regulatory responsibility for a product when called upon to do so and must provide this option if they wish to offer a credible full-service alternative to their customers. Over the last number of years, the FDA has bolstered their resources to enforce standards and their focus is certainly turning towards the complete supply chain for a product including suppliers and outsourcing partners.
Harris: Work with the most stringent device companies and embrace all of the quality system overhauls they constantly feed you. While it may make the hair on your neck stand up to continue building overhead and loading up on quality infrastructure, and some of the requests may seem only marginally rational, by following the leading device company requirements you will create distance between you and those outsourcing businesses who are more hesitant to face the challenge. The industry is definitely not in Kansas anymore, so don’t stand around in your Jayhawks sweatshirt during the tornado.
Ketchen: Certain critical factors should be carefully evaluated outside of the regulations, such as accountability, total cost and resource optimization. This industry is heavily regulated, so it is vital that both sides of the relationship understand the regulations that will affect their partnership. It is also advisable for both parties to obtain background information on each company’s experience and track record for compliance with specific regulations. Finally, it can be helpful to talk to companies that have already outsourced at home and overseas.
OEMs should also ensure their manufacturing partner has at least the same, if not better, expertise in regulatory and quality affairs so their partner can help anticipate and navigate through the complex regulatory landscape.
You need to ensure that you select a partner that puts quality at the center of everything they do, continually challenges their own systems and has a culture of continuous improvement. You want a partner to be an extension of your operation and to treat your product as their own. They need to take a holistic approach to quality management.
Robson: We hire the right people with “been-there-done-that” experience, put in highly adaptable and comprehensive systems, and regularly audit our processes. Our in-house quality and regulatory experts ensure that we are kept abreast of the latest guidelines to ensure that we are in compliance. The ISO 13485 certification audits certainly help keep us on our toes, but the best “exercise” of our system comes from the quality system regulation and design control audits done by our clients. Audits always reveal opportunities for improvement. Having experience with a variety of audit styles, we continually cherry pick best practices from the top original equipment manufacturers.
Sos: For us, quality is established and maintained through full, robust systems such as IQ/OQ/PQ (installation qualification, operational qualification, performance qualification) and validation protocols. We’ve put in place these systems throughout our organization and maintain them throughout our supply base. We maintain quality throughout all aspects of the organization. It would be a mistake for us to believe that the quality department is the only group responsible for quality. Each person in the organization, whether it’s within our walls or with those in our supply chain, plays a role in the life of a program and this starts from the first day a program is awarded. We manufacture products used to improve the quality of people’s lives and making an incorrect decision at any time during a project’s life cycle may have a long lasting implication. Of course having both ISO 13485 and ISO 9001 are a given.
Springett: We maintain the highest quality through commitment to our quality management system by the topmost level of management, which is driven through our entire organization. It is important to staff our operation with people who have the necessary skills and experiences to understand this regulatory environment. In today’s competitive landscape, we see the entrance of automotive and consumer-type suppliers who may not have the experience and understanding required for medical device manufacturing. So, it is very important for the OEM to have a complete understanding of their suppliers’ knowledge and the extent of their experience in the medical device regulatory environment, as it is very different from the automotive or consumer industries.
In a full-service outsourcing partnership, is it important to have an assortment of capabilities under one roof or can strategic partnerships get the job done? Does that (assortment of capabilities) make the supply chain more complex?
Adler: We believe the process is smoother if everything is done under one roof. Passing a product around can lead to mistakes and a product not coming together the way it was intended.
Black: In most cases, our customers prefer to have the capabilities under one roof. It facilitates communication among various processes and, therefore, reduces risk and potential for delays. It also makes it easier for the contract manufacturer to value add because they can see the entire process rather than just a snapshot. Furthermore, it can reduce the amount of risk in terms of quality and logistics, and has potential for reduced costs because of bundling capabilities.
Blank: Strategic partnerships can work, especially where the volume of business between the contract manufacturer and their sub supplier is extensive and ongoing. This condition is, of course difficult to maintain. When all the capabilities are available in house, maintaining a high level of customer satisfaction is easier to attain. Having our own plastic tool building
capability allows us to meet schedulecommitments and be competitive. When manufacturing catheter products, have our own balloon design and manufacturingcapability give us a major advantage.
Cocke: We have been successful using strategic partnerships to meet the needs of our entrepreneurial customer base. When there is an occasional or intermittent need for a service, we have a network of service providers established over the years that allows us to provide a one-stop approach for our customers without the committed overhead expense.
Ducaji: OEMs are looking for a vertically integrated partner. They want the one-stop shop. It is important that a contract manufacturer offer as broad a spectrum of capabilities as possible without reaching beyond their abilities. You can be very successful offering turnkey contract manufacturing solutions while forming strategic partnerships to outsource a key process such as sterilization. Offering numerous capabilities can add a level of complexity to the supply chain. We utilize Kanban inventory management with our partnering suppliers to reduce inventory carrying costs while reducing inventory supply risk.
Farrissey: A blended approach can work best. I think that the full-service outsourcing partner should always have a core competency in a number of areas that are critical to the product and this should ideally be on an under-one-roof arrangement. Many other areas can be managed externally once the core technologies and services of the outsourcing partner are leveraged. We often manage very complex supply chains for our customers from design to logistics for a finished device. Some competencies are in house; others such as, sterilization and packaging are sourced externally. Strategic partners work well for highly specialized competencies. Forexample, we have entered into a jointventure partnership with Boston Biomedical Associates to deliver regulatory and clinical consulting services to customers.
Harris: The best companies will have to deliver myriad services and competencies with a fixed set of resources. To such end, some selectivity as to what will be done internally versus through partnerships is mandatory. If everything were done internal, the outsourcing companies would be setting up their own outsourcing transition down the road.
Robson: The ideal outsource partner has everything under one roof and is expert in every aspect of a program. In other circumstances, having a strategic partnership in place can provide a client company with a wider service offering under a single banner. I’ve joked that today’s full service provider is following the same evolution that created supermarkets. Years ago, you’d buy your bread from the baker, your meat from the butcher, and your fruits and vegetables from the grocer. Now, most folks go to one supermarket where they can get almost everything. In my opinion, that’s where the medical device outsource model is headed, except we kept the baker, the butcher, and the grocer—all of the specialties—right here with us.
Sos: Both are very important. We believe it’s critical for the contract manufacturer to have in-house expertise for all major device components. Further, if key components are vertically integrated there can be speed-to-market as well as cost advantages.
Springett: The important factor is to be able to execute efficiently and effectively to bring all necessary operations together and ensure complete quality throughout the supply chain. The responsibilities for this can be accomplished through vertical integration of these capabilities or strategic partnerships. How well this can be managed from an overall supply chain continuity including lead time and capability is what is important to understand and ensure the right management and disciplines are in place to meet the end-product requirements.
Walter: It is equally important to have both. The strategic partners must compliment the in-house core competencies to add value to the customer, not just another menu item. As a full-service supplier, it is our job to make it transparent to the customer whether the process is done in house or by a partner.
What impact will the medical device excise tax have on full-service outsourcing partnerships?
Adler: Taking 2.3 percent of companies’ total revenue regardless of if the company is making a profit will impact the device manufacturing world severely. Ranfac, as a manufacturer of a product line of our own as well as an outsourcing company, has the ability to be innovative, creative and driven to create the next new technology in medical devices. With this percentage of revenue being taken, it will lessen the ability for Ranfac and other companies to do so because of funding being lessened due to the taxation. Not only is this tax disheartening for outsourcing companies but the development of new and innovative medical devices.
Black: It’s too early to tell. If customer requirements change because of the legislation, they will trickle down to the contract manufacturer. We’ll need to be strong yet nimble to meet their needs.
Blank: If the law containing the device industry excise tax is not overturned or changed, its effect will create stress and opportunity with our industry. The OEMs may not be able to pass on the full cost of the excise tax through price increases. The profit gap will be made up with staff reductions, operational improvements, lowering the cost of component purchases and the outsourcing to lower cost producers.
Cocke: To the extent that this tax forces our customers to look for more cost effective production alternatives, we feel well-positioned to offer a portfolio of manufacturing solutions to our customers.
Ducaji: We will not know until it is more clearly defined by the IRS who in the supply chain will be taxed. The excise tax will increase competitive pricing pressures and likely help drive device manufacturing out of higher cost markets and the manufacturing of certain types of devices outside the United States.
Farrissey: The main impact of the excise tax is an increased focus on product costs. Many commentators believe that medical device customers are simply going to pass the tax burden on to their suppliers. While this may be true for transactional “vendor type” relationships, I believe it is an overly simplistic view. With every challenge comes an opportunity and the excise tax challenge has enabled our customers to ask themselves: Can we maintain market effectiveness by approaching our businesses differently? This opens up new thinking on how products get to market. In our experience, since the tax reforms were communicated we have seen a greater openness to collaborative partnerships by our
customers where we jointly find a combined solution to thechallenges ahead.
Ketchen: As discussed earlier, we are mostly seeing the tax energizing discussions of full-system outsourcing as OEMs are trying to plan contingencies to effectively make back that lost 2.3 percent margin if, and when, the tax goes into effect. We would certainly advise companies to start exploring how outsourcing can help them mitigate the effect of the tax. Medical device companies need to prepare now.
Robson: My prediction is that it will have little or no impact. We are already experiencing pricing pressures from the client company, and that will never change. I suspect that OEMs will need to pass these charges on to the patient, hospital, or doctor. It becomes another line item on the cost of goods calculations. OEMs, however, will certainly try to engineer their cost models to minimize the impact of the tax law on their products, and that may imply more work going to outsource organizations.
Springett: The medical device excise tax is another considerable cost burden on the medical device industry. It will be important for the medical device OEMs and their suppliers to work together to drive total cost solutions and continue to be aggressive in creating products from the initial launch with the best possible overall cost position.
Does outsourcing become more imperative in a tight financial market?
Black: Yes. To save money, many current and potential customers cut staff, closed facilities and reduced capital budgets. In tight times, outsourcing becomes an even more attractive option. And with reduced R&D (research and development) budgets, we’re seeing more customers want to adapt an existing device rather than build one from scratch. It’s a way to speed time to market and gain a competitive advantage with the investments in R&D and tooling.
Blank: Difficult times do force changes to occur. Since outsourcing to the right contract manufacturer does generally result in profit improvement, tight financial times do increase outsourcing. Such markets may also imply less capital availability for capacity expansion. Therefore outsourcing to contract manufacturers with the capacity and willingness to partner and invest becomes very attractive to OEMs.
Cocke: In tough capital markets, the need for capital efficiency becomes paramount. As a contract manufacturer, we have made investments in production capacity and quality systems that our customers can leverage, and focus their spending where it will do the most good for their business plan—typically on additional R&D and on product marketing.
Ducaji: Without question. We have seen OEMs across the board take a very close look at their manufacturing processes and evaluate alternatives that make better sense in a challenging economy where access to capital is still tight.
Farrissey: Yes, by looking at deeper levels of outsourcing there are opportunities to find more innovative and cost effective ways of getting products to market.
Harris: I doubt this is a meaningful factor, but I suppose if outsourcing companies had a lower understanding of costs of capital and capital structuring, there could be some impact.
Ketchen: Medical device OEMs plan their outsourcing activities in medium to long-term cycles. While the general economic conditions will have some impact on their business decisions, most OEMs are more focused on how to achieve their business goals through long-term strategic partnership. These relationships help OEMs cope with both economic booms and downturns, as flexibility is part of what they are getting in an outsourced relationship. OEMs who are looking at this the right way take a long-term view and are not making rash decisions based on nearer term economic pressures. A more important question to ask would be, for example, how do OEMs anticipate supply chain risks or respond to changes within the supply chain? How do they leverage their partnerships to start penetrating emerging markets to offset the economic pressures faced in developed markets?
Robson: In general, I believe the answer is yes. Hiring and maintaining full-time staff and the facilities they inhabit is intense from both a capital and cash flow perspective. By using outsource partners, the OEM client can minimize their long-term exposure and capital outlay on a substantial basis. By outsourcing new products and internally handling the older “cash cows,” the OEM can optimize their business risk profile and tune their exposure to variability due to uncertain new products.
Sos: Yes. We work closely with our outsourcing partners to maintain price consistency and find ways to offset increases. In today’s market, managing pricing at the raw material level is extremely critical. The question is how do you manage it?
Springett: Yes. Companies need to focus their attention, both financial and people resources on their core competencies, and rely on contract manufacturers to become an extension of their business by leveraging resources and expertise that these supply chain partners can offer.
Walter: I think it does as it makes sense to outsource when capital investment becomes more difficult due to financial reasons.
Have improved economic conditions impacted your business at all?
Adler: Yes. As in any business as the economic conditions begin to rise, so does the amount of business we see. However, while it has increased as of late, we also saw substantial growth despite theeconomic downfall.
Black: Our business remained strong during the economic slowdown. Meanwhile, we have actively invested in Lean practices and continuous improvement principles. We’re well positioned forcontinued growth.
Blank: Vention Medical has been fortunate in having experienced good organic growth during the recent period. The improved U.S. economy is helping the small and medium-size OEMs. It has increased the demand for product design, components and the market demand for many of the devices, which we manufacture.
Cocke: Given the nature of our customer base, which is focused on the entrepreneur and startup company, macro economic conditions are much less of an issue for our company. If an inventor has a great idea, he doesn’t stop developing it if unemployment is 9.5 percent and the Dow is down 5 percent for the year; he pursues it with zeal. Much more important to our customers is the overall regulatory environment for the device industry. Time is truly money for the folks we deal with, and delays and uncertainty created by unclear government and regulatory priorities can chill any entrepreneur’s desire to invest in a new venture.
Ducaji: We partner with companies often in need of someone to manufacture complex single-use disposable devices. Our business was very strong during the height of the recession, as a lot of the devices we manufacture are used in non-elective procedures. Improved economic conditions will continue to help drive our business growth.
Farrissey: In the last 12 months there is certainly a renewed focus on building new product pipelines in our customer companies, which creates new opportunities for outsourcing companies like ours. Many customers have begun to restart acquisition programs to expand product portfolios, so there is more momentum now within the industry that was lacking in the 2008-2009 timeframe. It is most probable that these trends are also linked to the improvement in general economic conditions.
Harris: Most of our business is driven by the secular trends discussed above rather than the general macro economy.
Robson: They certainly have. Both large and small OEMs are now initiating programs that had been waiting for capital funds to be freed up. In some cases, we’ve seen projects resurrected and funded that were previously mothballed due to budget constraints or reduced sales. It seems like everyone has been holding their breath for the past few years. But now they’re ready to move—and move fast.
Sos: Absolutely. As economic conditions have improved and OEMs are starting to feel more comfortable releasing new programs, we have seen a tremendous amount of growth. The good thing is that we’re ready for the growth.
Springett: Donatelle is seeing an increased level of product development activity throughout our customer base.
Walter: Yes, we are seeing more activity in all segments of our business.
What opportunities (technological, financial, etc.) for growth do you expect for your business this year?
Adler: We expect product development and new business. With new technology, social networking and a younger generation helping to bring the company to the next level it should help to increase our client base and make more people aware of our business.
Black: In addition to focusing on our core strengths—assembly, packaging and component production—we’ll leverage our investments in injection molding and specialty products manufacturing. Our expanded domestic facilities give us the opportunity to meet the volume and flexibility demands of the growing market.
Blank: We are very enthusiastic for our internal and acquisition prospects for this year. We are making considerable investments in capacity, engineering improvements, increased quality consistency, expansion of tool building and product design in Costa Rica as well as several acquisitions of best-in-class technology companies. While the U.S. economy has not returned to full strength and there is some of uncertainty in the world economy, we are very optimistic about our industry, our customers and our own ability to make a significant contribution.
Ducaji: We expect venture funding in the industry to increase and innovators will continue to innovate. We have seen an uptick in inquiries for our services from companies that were having their devices manufactured in a low labor cost country seeking to have their products manufactured in the U.S. due to a combination of quality, consistency, and intellectual
property piracy issues. We are poised tocontinue growing our business withcompanies ranging in size from startups toindustry leading OEMs.
Farrissey: We expect that the main opportunities for growth this year will come from deepening levels of partnership-based outsourcing with our customers whereby we provide a more expansive range of services to achieve complete product solutions on their behalf. Investment in and financing of early stage companies has also started to trend more positively and we are also seeing continued opportunities in that area. Outsourcing companies that can offer integrated solutions that drive efficiencies or speed and cost advantages in getting products to market are well positioned in the current market.
Harris: We are experiencing a deluge of consolidation driven assembly demand, pushing the limits of our ability to digest it. These opportunities are both an operational challenge as well as a technical challenge, as nearly all of them come with some aspect of pioneering manufacturing technology development to drive improved device performance. It is an enviable problem, but still a problem. Overall we continue to think based upon trends outlined previously, that top-tier companies in the outsourcing space should be able to see double digit organic growth gains for the next five years or so.Execution rather than demand is the big challenge.
Ketchen: We see three key sources of growth. The first area is new and emerging technologies fueled by the resurgence of venture and other funding. Many of these companies require a virtual manufacturing relationship to ensure that the majority of their cash is invested in technology, not bricks and mortar.
The second area for growth is emerging geographies—especially the BRIC (Brazil, Russia, India and China) countries. There is a surge of new device companies in those regions growing and seeking to penetrate western markets. In addition, North American and European OEMs are implementing new strategies to penetrate these countries—around new products, etc. Third, new technologies and products launched by established OEMs and sustaining engineering for established products. Companies want to keep their resources and cash focused on their next generation products, and are looking to a partner to support/sustain their existing technologies in the market.
Robson: We’re aggressively seeking to grow our team with more experts in the industry and more capacity to help ensure our clients are successful. At the moment, the key to our success is in our people, not necessarily in technology—although knowing how to incorporate new technology into our product solutions is key. The financial opportunities are a natural byproduct of doing a great job and delivering high value to our clients. We’ll continue integrating key services into our offerings and enhancing our business model of having all services under one roof and face-to-face collaboration within our expert staff.
Sos: In the upcoming year we expect to continue to see many growth opportunities. In the past two years, we doubled our silicone capacity, doubled our tool room capacity and recently opened our latest facility located in San Jose, Costa Rica. We continue to see growth in our medical micro molding capabilities, as well. As our founder and CEO Chetan N. Patel says, “Our best opportunities are not going to be meeting customers current needs, but in finding solutions they didn’t know they needed.”
Springett: There is an increased level of activity in our product design and product development areas. Our customers are using these capabilities to complement their engineering teams toreduce time to market for new product development. We expect this trend to continue and, at the same time, are working with our customers to develop some new technologies that will expand our current manufacturing capabilities.
Medtech Outsourcing:A Good Bet
Medical Product Outsourcing recently chatted with Marc Tanowitz, principal at Vienna, Va.-based Pace Harmon, a consulting andadvisory services firm that supports companies with critical outsourcing, technology sourcing and transformation programs. Tanowitz and colleagues have authored articles for MPO. He provided his perspective on the current health of medtech outsourcing and prospects for the future.
How has outsourcing changed with fluctuations in world financial markets? Does a down market make outsourcing more attractive? What are the pros and cons of the outsourcing equation?
Marc Tanowitz: Garnering savings is always critical to businesses, but even more so during a down market. And, with it being an especially tough economic environment for raising capital, companies are also very interested in operating flexibly. While outsourcing isn’t a panacea for these elements, it can be a good fit in the right situations. For example, outsourcing can provide access to key technologies that may not be otherwise available without a significant investment. Also, as credit markets tighten, outsourcing can help companies avoid taking on up front capital expenses, as many outsourcing providers will approach the deal as a strategic partnership by providing assets for distribution, logistics, etc., while capitalizing the cost over the life of the deal. Another major benefit of outsourcing is labor arbitrage, as outsourcing providers can often secure cheaper labor in different onshore or offshore locations.
As far as whether a down market makes outsourcing more attractive, the outsourcing market is currently experiencing growth, but the down economy has helped to further additional outsourcing engagements.
The pros and cons apply to both a good and bad economy. I mentioned the positive aspects above. Regarding cons, buyers must realize that the outsourcing provider will need to realize some return on their investment. This can include minimum commitments and/or significant costs for termination. When dealing with a provider that had laid out capital, companies should ensure that the underlying cost of capital is not excessively high and is therefore inherently unattractive. Additionally, they should monitor deals that involve capital outlay, gain-sharing agreements, ora form of commitment over time to ensure the deal remains market-correct for the duration of the contract. For these situations, a mechanism like benchmarking is necessary for re-normalizing the deals to reflect the current market rate, as variables such as the economy, currency fluctuations, cost-of-living adjustments and others, can wreak havoc on a deal’s value over time.
What kind of supply chain issues do companies that pursue a full-service outsourcing option contend with?
Tanowitz: Companies seeking successful long-term vendor relationships must invest the time and energy to ensure that theirsupply chain partners are integrated into the overall planning and forecasting process. This helps to protect against the possibility of short-term unplanned events permeating the physical supply chain, e.g., excess inventory, as there is a risk that the supply chain may not have the short-term flexibility to respond without significant cost ramifications. For example, if a company’s warehouse gets an unexpected surplus of parts, it can make the decision to put products in hallways or even store them in a trailer outside. Conversely, in an outsourced environment, the provider cannot assume risks involved with placing inventory anywhere outside of agreed upon parameters due to contractual obligations to adhere to physical security liabilities and avoid risk. By involving the distribution and logistics provider in planning and forecasting, this issue can be significantly alleviated.
Outsourcing relationships, like many other relationships, evolve over time. How do medical device companies and their manufacturing partners ensure that their business remains effective, innovative and productive?
Tanowitz: The first step is to plan for a relationship built on these elements by evaluating the relationship’s long-term implications and articulating them during the sourcing and contracting phase of the transaction life cycle. Then be sure to hardwire it into the contact. There are many ways to “future proof” your contract to ensure it remains viable over time—this can include cost correction mechanisms to ensure the deal remains market correct and continuous improvement commitments to keep providers focused on continually optimizing operations for the buyer’s benefit. Furthermore, buyers must realize that provider governance and management is a retained responsibility and that a meaningful mechanism to communicate, collaborate and provide both encouraging and developmental feedback to the provider is vital to the provider’s ability to understand, react to, and hopefully meet (if not exceed) the client’s needs and expectations.
When a medtech firm evaluates a supplier partner, what are the primary considerations?
Tanowitz: Primary considerations include regulatory compliance, scale and scalability, technology platform and integration capability, reporting/visibility, risk and cost.
How do both sides of an outsourcing relationship bestestablish expectations?
Tanowitz: Buyers need to spend the requisite time before entering the relationship to define and align internal objectives and requirements with stakeholders and articulate these to their potential providers. SLAs (service-level agreements) then need to be developed to align the provider’s focus with the buyer’s priorities. The buyer should also determine how it will govern the vendor relationship long before the contract is executed. Once engaged in an outsourcing relationship, each side must invest the time required to communicate openly and clearly to ensure needs are met and challenges can be collaboratively overcome. —C.D.