Electronics Outsourcing

Photo courtesy of TriVirix.

Outsource manufacturing growth is as much a return to core competencies as it is an effort to cut costs. The leveraging of outside expertise has been especially evident in electronics manufacturing, which has largely transformed into an outsource model. From circuit boards that offer an increasing number of functionalities to wireless communications modules to the inclusion of microelectromechanical (MEM) sensors in a plethora of diagnostic devices, more and more electronic components and finished devices are being contract manufactured. This allows device makers to focus on what they do best—addressing the clinical needs of customers.

Prompted by a variety of market changes, device original equipment manufacturers (OEMs) are increasingly turning to electronics manufacturing service (EMS) providers to make their products. While cost reduction remains a key driver, other reasons include speed to market and the availability of outside knowledge. In many instances, disposable device manufacturers rely on EMS providers to design and manufacture the meter or diagnostic tool that will be used with their products. Some look to their vendors to manufacture parts that would require heavy capital investments to produce. Still others see EMS providers as a resource for meeting high production requirements. For these and many other reasons, electronics contract manufacturing is in high demand.

Outsourcing on the Rise

“In general, it’s increasing,” Aijit Singh, the president of Concorde, CA-based Siemens Medical Solutions Oncology Care Systems Division, said of electronics outsourcing for the medical device industry and his division. Singh attributes the rise to many factors, particularly as device companies examine their strengths and weaknesses. As competition grows, they are focused on on-going efforts to cut costs, improve quality, speed product cycles and look for technological improvements. At the same time, he noted, EMS providers have also improved their capabilities and expertise in medical device manufacturing, offering OEMs a broader array of vendors, manufacturing locations and services. The result is more market choices.

“The fact that there are more choices from the standpoint of device vendors and more candidates to choose from will increase competition,” said Singh.

His assertion that outsourcing in medical device electronics is growing is backed by at least one report. According to Merrill Lynch’s 2003 EMS Outsourcing Survey published last September, the percentage of OEMs planning to increase outsourcing was highest among medical device manufacturers; 88% of device OEMs said they expected to increase hardware outsourcing, compared with just 41% in 2002. Furthermore, the report found that the value of electronics contract manufacturing across all industries would be greater, rising to $23 billion in the next 12 months from $13 billion in the previous year.

Medical device manufacturers and their outsourcing vendors say a critical driver has been the OEMs’ efforts to focus on core competencies. In many instances, device companies are homing in on high-technology, high-margin disposables that provide a steady stream of revenues. Designing and building “the box”—the hardware that accompanies the disposable—have become secondary tasks. In fact, contract manufacturers say hardware revenues sometimes may not even cover manufacturing costs.

“In most cases, except for large capital equipment, they’re giving the boxes away,” said Bob Kundinger, director of medical business development at Sparton Medical Solutions, a Jackson, MI-based electronics design and manufacturing firm. “They (device makers) don’t know the black box side of it. Their strength is the disposable.”

Kundinger, whose company makes circuit boards, encasements and other electronic products, said that many disposable device makers find it more efficient to outsource the manufacturing—if not the design—than to develop the platform on their own. Clients who are experts in clinical indications sometimes can’t find their way around a circuit board. By turning over hardware responsibilities to an EMS provider or original design manufacturer (ODM), they focus on patients instead of printed boards.

CardioNet’s monitoring device is one of many applications using wireless technology to enhance patient care. (Photo courtesy of Qualcomm.)

That’s the strategy for Alameda, CA-based TheraSense, a maker of the FreeStyle line of glucose monitoring products. John Purlee, director of global sourcing, said the company’s crucial intellectual property, its test strip, is manufactured internally. The meters, however, are outsourced to its contract manufacturer, which has since moved production from the San Francisco area to China to lower costs.

“Speed to market is huge for us,” Purlee said of the company’s decision to outsource hardware manufacturing. “All of our competitors are extremely large with billions of dollars [in revenues] so we try to be smarter technologically, and we’ve got to be faster.”

Expected of any manufacturer who has turned over a critical part of its operations, good and bad experiences have accompanied its outsourcing strategy. The company now relies on a large EMS provider with a wide-reaching global presence for its meters. Ironically, product quality improved after the vendor moved production overseas, Purlee said.

Firms that cater to life science clients offer an enticing alternative to in-house manufacturing. They have an understanding of Good Manufacturing Practices (GMP) and are familiar with FDA regulations, willing to forfeit intellectual property to the client and capable of producing devices much faster.

Moreover, EMS providers are extending their offerings beyond manufacturing. Numerous companies now claim to offer an entire spectrum of services, from transforming a drawing on a napkin into a prototype to manufacturing the finished product. This strategy is led by customers who want to consolidate the number of vendors as well as vendors who realize it’s easier to sell more services to existing customers than to win over new ones. Not all firms are successful in the transformation, said Pamela Gordon, president of Technology Forecasters, Inc., an Alameda, CA-based consulting firm that advises manufacturers on their outsourcing strategies.

Gordon said following the decline of the telecommunications and internet businesses in recent years, some EMS vendors have set their sights on the medical device industry. Although a much smaller market than computers or consumer electronics, device manufacturing is less susceptible to economic cycles and provides a steady revenue stream.

While some providers are more capable than others in meeting the regulatory demands of the device business, that more vendors are offering services means more choices for OEMs. In addition, competition drives down costs, in turn helping device clients better manage their budgets.

Some device makers and even contract manufacturers say very few vendors can completely satisfy all the requirements of any one customer. A design house may be particularly adept at board design but less efficient in manufacturing and assembly. Likewise, a contract manufacturer may excel in making the finished product but produces cumbersome designs. The consensus among those interviewed is few firms have the resources to meet every customer’s requirements.

“Sometimes you love them (outsource vendors) and sometimes you want to choke them until they pass out,” Purlee said.

Contractual provisions ensure EMS and other service providers meet a customer’s goals. For instance, Purlee added, quality and process audits are a regular occurrence with TheraSense’s vendors. Also, Siemen’s Singh insists, outsource partners need to be closely integrated in an OEM’s design cycle and adhere to the same process imposed on internal departments.

Even as firms tout their full-service capabilities, some OEMs cling to a more traditional model of one vendor for design and another for manufacturing. Although it’s a workflow requiring more oversight—making sure the design can be produced by its contract manufacturer—it’s also a way to select the best talents. Additionally, design and manufacturing can work concurrently to shorten the development cycle.

Mike Wilkinson, CEO of Paragon Innovations, a design firm located in Plano, TX, said a common error OEMs make is not involving the contract manufacturer early on. Often a prototype is made before the EMS provider is consulted.

“If you do it the wrong way, which is the classic way, what happens is the manufacturer gets brought into the game too late,” he said. A better approach, he said, is to involve the contract manufacturer before the first critical internal design review and before the first board layout. Close collaboration in the early phases not only helps the design process but also speeds manufacturing. One clear advantage EMS providers offer over internal development is not only their production efficiency but also their familiarity with the latest technology. An intimate knowledge of new chips, innovative subsystems and miniaturization schemes often stems from working with high-volume industries such as consumer electronics and computer manufacturers.

“You always have to stay on top of the trends,” said Mike McGuire, vice president of worldwide sales and marketing for EMS provider Plexus, Neenah, WI. He pointed out that as new technologies emerge in other sectors, they will have consequences on device development. For instance, with microelectronics making greater inroads in consumer and computer applications, device OEMs will look to integrate the same advances into products such as implantable devices.

“It’s a continuing natural development,” he added.

One hot technology embedded in most consumers’ lives is wireless. Whether it’s wi-fi or cellular or bluetooth, wireless technology is now being considered in just about every medical device that generates data.

Rich West, president and CEO of medical contract manufacturing firm TriVirix, Durham, NC, said nearly all of his clients are considering ways to incorporate wireless technology into their products. They are looking for ways to untether the patient, physician and hospital workers from medical devices. “We don’t see many devices where our customer isn’t at least thinking about how they do that,” he said.

Still, he questioned whether there will be adequate reimbursement for a new wave of wireless devices.

It’s a question that’s about to be answered. Some medical device OEMs are already reaping the benefits of wireless technology. For instance, CardioNet has developed a new generation of arrhythmia monitoring devices that uses cellular technology to constantly track patient activity. The device is sold in conjunction with a monitoring service and is currently available in Philadelphia.

CardioNet partnered with San Diego-based cellular technology company Qualcomm to develop the service. As a wide-area application of wireless technology, the device is expected to reach other major markets in the future, said Don Jones, vice president of healthcare business development at Qualcomm.

Jones said the wireless potential in medical devices is endless, from personal monitors to diagnostic items to even interventional products. The challenge to device makers, however, is developing business models to take advantage of the technology, much in the way that CardioNet has.

And cellular is just one component of the wireless revolution. Wi-fi, which has become ubiquitous in the computer market, could potentially change the way devices in the hospital or doctor’s office communicate.

Whether it’s wireless technology or circuit board expertise, the benefits EMS and contract design firms can offer to device OEMs are driving more outsourcing of electronics manufacturing. However, device makers still need to define their core competencies, diligently map out a strategy, and work closely with their vendors. Only then can they garner the rewards that electronics outsourcing offers.