This article examines the growth drivers MPOs are seeing, key priorities for 2020 as identified by MPOs and the implications for their ERP implementations, and how MPOs need to integrate their ERP software with other systems managing the product lifecycle to achieve higher growth.
Growth Drivers in 2020
The majority of MPOs expect to grow this year, despite the slowing growth of medical device manufacturing globally. Research firm IBISWorld predicts the global medical device manufacturing market will be $41.6 billion this year, growing at a compound annual growth rate of 2.3 percent.1 MPOs are expanding the scope of their services to capture more revenue from medical device manufacturers, many of whom are entrenched in costly price wars. They’re also looking to excel at short-notice production runs and free up more of their production shift, design, and supply chain team time, so it can be offered to new prospects and customers. To accomplish these goals in 2020, MPOs will increasingly rely on their ERP systems.
At the same time, medical product manufacturers seek MPO partners who can help them to accelerate new product development, speed the delivery of existing products under co-development to market, and provide greater supplier and product quality expertise. In particular, North American manufacturers are choosing MPOs who can deliver development, engineering, technical, and quality expertise over and above basic production. ERP is playing a central role in enabling MPOs to meet these demands.
A third factor is the majority of MPOs are concentrating on manufacturers of Class II medical products, ranging from high-tech X-ray machines and picture archiving and communication system (PACS) solutions to low-tech surgical drapes and acupuncture needles. These product companies want to reduce their manufacturing footprint as much as possible to increase their time-to-market, while also reducing operating costs. MPOs who augment their ERP systems to gain greater control, visibility, and ownership across the entire production process have the potential to grow faster than their peers who only focus on one aspect of a Class II medical product manufacturer’s production.
Identifying the Trends
Despite a generally positive outlook for growth among MPOs, the forecasts of individual outsourcers can vary significantly. To better understand MPOs’ priorities, as well as the impact on their optimism and ERP implementation requirements, Decision Analyst, in conjunction with DELMIAWORKS Dassault Systèmes, conducted a survey of manufacturers across North America in December 2019 and January 2020. From the responses of MPOs, five key trends have emerged.
1. In 2020, 72 percent of all MPOs expect their businesses to grow. MPOs are among the most optimistic of the 14 manufacturing segments surveyed, and the highest optimism is among those outsourcers with annual revenues of $50 million or less.
The MPOs most confident about their future growth have learned how to use ERP systems to find and sell what medical device manufacturers want most, which is greater production flexibility at consistently high quality levels. By successfully integrating ERP, customer relationship management (CRM), and product lifecycle management (PLM) systems together, these organizations are able to provide lifecycle-based services to clients while enjoying greater control and visibility over production processes. The cross-functional visibility enables MPOs to anticipate when customers will need to repurchase from them, as well as track to ensure products and parts being produced comply with established quality parameters. Additionally, MPOs who have tailored their ERP systems to provide real-time product and process monitoring can identify when gaps in production schedules are available to support customer requests for short-notice production runs.
2. MPOs rely on multifaceted strategies to attain their growth objectives. Among MPOs, the top four priorities are increasing sales to existing and new customers (55 percent), improving operations (44 percent), growing revenues (39 percent), and reducing or optimizing costs (37 percent). In pursuing these strategies, the most successful outsourcers have implemented an integrated ERP system that scales across the entire product development, launch, and delivery process—from the back office to the supply chain and shop floor.
MPOs with $50 million or less in revenues see the greatest benefit as having an integrated ERP strategy in place, as 72 percent of them say it helps keep existing customer deliveries on track and earn repeat orders. Over 90 percent of the manufacturers with revenues in this category are suppliers to larger, more diverse brands, making supply chain visibility essential for any MPO that seeks to partner with them. Smaller MPOs’ go-to-market strategies rely heavily on ERP system flexibility and scale to meet delivery deadlines while ensuring excellent product quality and keeping medical device manufacturing customers informed on their project status in real time.
3. MPOs are most optimistic about their ability to gain repeat orders, excel at product quality, and deliver positive customer experiences. The overwhelming majority of MPOs (85 percent) expect customers to continue their ordering levels into 2020. Additionally, 81 percent are confident in their ability to ensure product quality, and 77 percent have confidence they can deliver an excellent customer experience.
The MPOs’ business confidence is not grounded on gut feel or anecdotal feedback. Instead, it is based on data from their integrated ERP, CRM, PLM, and supply chain management solutions to gain a unified view of every client’s respective product lifecycle and a true 360-degree view of the shop floor. Equally important, they can see how decisions on the shop floor impact both their ability to deliver on customers’ demands and their financial performance for each contracting project. The 360-degree visibility also provides the insights needed to preserve and grow sales pipelines.
4. A lack of skilled labor is the main reason many medical device manufacturers and MPOs don’t expect to grow more in 2020. Among MPOs, 48 percent state they are unable to meet production demand due to a lack of skilled labor, causing them to leave money on the table. Meanwhile, 86 percent of all North American manufacturers surveyed agree if the chronic labor shortage could be solved, they would be predicting stronger growth in 2020.
On one hand, MPOs are turning to robots or collaborative robots (i.e., cobots) to replace or assist employees on the shop floor. That’s particularly true among manufacturers making $50 million or less, where 40 percent report they are purchasing robotics in 2020.
Outsourcers are also placing more demands on their ERP software to increase productivity among their existing teams. When MPOs were asked about their most requested features in ERP systems, 37 percent listed more intuitive user interfaces and more flexible role-based screen designs. Through greater ERP usability, MPOs hope to increase employee adoption across all their locations. At the same time, outsourcers are also relying more on the ability of their ERP systems to pull data from robots, smart machines, and sensors, then applying analytics to help their teams make more informed, timely decisions whether managing production, making a sale, or proactively planning maintenance.
5. MPOs are taking a pragmatic approach to expanding their ERP systems. MPOs ranked scheduling and inventory control/evaluation as the most important ERP modules at 45 percent each. Following close behind was production reporting at 39 percent. Further, consistent with manufacturers seeking to increase sales to new and existing customers, the fourth most listed module was customer service at 19 percent.
Particularly among MPOs with $50 million or less in revenues, the focus was on ensuring they can maximize production capacity, manage expenses, balance their books faster, and deliver financial statements that reflect production activity. There is, however, a significant disparity among this group of outsourcers. More than two-thirds rely on best-of-breed ERP systems purchased from vendors, but some 30 percent still rely on homegrown production, manufacturing execution system, and manufacturing resource planning solutions. Significantly, this latter group of MPOs reported less certainty they would be able to grow in 2020.
Software Systems Integration
Fighting price wars and competing only on price and availability are sure signs an MPO isn’t going to grow in 2020, while expanding services to encompass the entire configuration lifecycle of each medical device is. In this context, it’s not surprising that 72 percent of MPOs relying on ERP systems to enable a configuration lifecycle management approach to their operations are the most optimistic about revenue growth in 2020.
One of the most noteworthy findings from the survey is how those MPOs best positioned for future growth have already integrated their PLM and ERP systems together or have immediate plans to. PLM solutions have become one of the foundational elements MPOs rely on to expand the scope of the services they provide as they take deliberate steps to own the entire process of designing, developing, producing, and supporting products. In follow-up interviews with survey respondents, five strategies emerged, which are key to expanding an MPOs’ services in order to grow in 2020 and beyond.
1. Use customer and configuration intelligence to drive product planning. Building product roadmaps that capitalize on medical device manufacturing configuration intelligence makes MPOs stronger competitively, more trusted by manufacturing partners, and better positioned for revenue growth than those that are purely cost driven. Look at the manufacturers who dominate the industry—their roadmaps bring a new level of intensity to using customer and configuration intelligence to fuel future product development.
2. Provide recurring real-time feedback in R&D to maintain customer focus. MPOs aim to become stronger with each research and development (R&D) cycle of a new product by gaining greater customer insights and configuration intelligence. Greater customer and configuration intelligence extracted from ERP systems and applied to PLM can bring an entirely new intensity to each R&D cycle—reducing wasted R&D cycles and increasing the potential for greater revenue growth.
3. Define quality and compliance using customer and configuration intelligence. Six Sigma excels at amplifying what matters most to customers. Strengthening the popular quality management framework with customer and configuration intelligence from the ERP system makes an MPO more relevant to customers and establishes a position for revenue growth. Outsourcers who embrace the quality and compliance strengths that customer and configuration intelligence offer will have higher customer lifetime value, as well as higher upsell and cross-sell rates compared to other competitors.
4. Develop product specifications that capitalize on configuration intelligence. Getting a new level of focus on how to bring customer and configuration intelligence from the ERP system into product specifications is the future of MPO manufacturing. Be a leader and choose to excel at making products medical device manufacturers need if they want to grow on margin, not just price and volume.
5. Improve product modeling and manufacturing execution across all plants. The most competitive manufacturers are choosing to maximize the value of configuration intelligence by taking the extra step of managing global feature families, engineering configuration rules, engineering-based product efficacy, and bills of materials. They’re also using customer and configuration intelligence from their ERP systems to validate configurations, analyze how customer demand impacts component supply, and prepare for component substitution in product development planning. Among the most valuable areas of manufacturing execution based on customer and configuration intelligence are the data insights used to identify low-runners and no-runners for global or regional markets.
In MPO manufacturing, 2020 is going to be a pragmatic, results-driven year where the majority of organizations with annual revenues of $50 million or below refocus on what made them successful in the first place. In the wake of ongoing skilled labor shortages, MPOs will target improvements in production efficiency, better control, and greater visibility on their production floors. To do so, they will rely on their ERP systems for improved scheduling, inventory control and evaluation, and production reporting.
The most successful MPOs will invest in integrating their ERP, CRM, and PLM systems to manage the entire lifecycle of each product they’re producing for customers. In doing so, these outsourcers will position themselves for greater growth by differentiating the value-added services they can deliver and become true strategic partners to the manufacturers they serve.
Louis Columbus is currently serving as principal at IQMS/DelmiaWorks. Previous positions include director product management at Ingram Cloud; vice president marketing at iBASEt, Plex Systems; senior analyst at AMR Research (now Gartner); and marketing and business development at SaaS startups. Columbus’ academic background includes an MBA from Pepperdine University and the Strategic Marketing Management and Digital Marketing Programs at Stanford University Graduate School of Business. He also teaches MBA courses in international business, global competitive strategies, international market research, strategic planning, and market research. Columbus currently is a member of the faculty at Webster University and has taught at California State University, Fullerton; University of California, Irvine; and Marymount University.