Eric Resnick02.26.07
Why Are More Contract Manufacturers Adding Contract Design Services?
Eric Resnick
To understand why more contract manufacturers are adding contract design to their services, one must look at the relationship between device firms and contract manufacturers. The contract manufacturers always have seen themselves as filling one void or another in the device life cycle. By offering services that appeal to device firms for reasons such as capacity, cost and capabilities, contract manufacturers are positioned to play increasingly significant roles in the development of new devices.
Contract manufacturers have been evolving through physical expansion, by adding services as well as by developing and adopting new technologies. In the past, when medical device firms outsourced manufacturing, they realized that manufacturing, in many cases, was not a core competency; investing in captive manufacturing capabilities was not the best use of their capital. Thus, device firms retained only the processes deemed proprietary or critical to business success, presenting an opportunity for contract manufacturers. These outsourcing partners who invested in quality systems, in addition to manufacturing capabilities, were available to provide both basic and advanced manufacturing services.
Increased opportunity led to greater competition and, over time, competition among contract manufacturers proliferated. The need to differentiate or expand services became critical as a measure of developing a competitive advantage. These expanded services can be found at both ends of the product and project lifecycles. On the product side, contract manufacturers have increased their transactional services to include supply chain management as well as manufacturing services that the contract manufacturer would have considered nontraditional. On the project side, contract manufacturers are evolving by adding design and development services. Based on the needs of medical device OEMs, the addition of design services to contract manufacturing became a viable option that likely would yield success for both contract manufacturers and their customers.
Why Design Services?
Just as device firms viewed manufacturing as an opportunity for outsourcing, some aspects of design and development also were considered candidates for outsourcing. Many OEMs concentrated on the conceptualization and ideation but left design refinement and prototyping to third parties. In a self-proliferating cycle, while design engineers were seeing the advent of design outsourcing, the risk takers saw opportunity and correctly assumed the design consultant could earn more than the captive employee. Thus, while OEM capabilities and capacities were being reduced, contract services for industrial and mechanical design engineering and prototyping were expanding. This led to the creation of the “hydra model” of medical device development: device developer, contract designer, engineering consultant, prototyper, contract manufacturer and others.
Contract manufacturers always have possessed a level of design expertise to ensure designs would be robust to minimize manufacturing problems. Specifically, the contract manufacturer was promoting design robustness to maximize overall efficiency through higher rates, uptime and yields. While these design services were valuable, the contract manufacturer still held that manufacturing was its core competency and economic engine. Thus, this contract service provider weighed requests for design support in the context of the potential manufacturing award. Design and development was the domain of the original device developer, contract design house or a combination of the two.
This mindset has changed.
For example, contract manufacturers realized that the demand for new products has increased because of changing demographics of the population, a burgeoning middle class in emerging markets and the increasing reliance on home health care. This has placed a strain on the resources of the design and development personnel within OEMs. As a result, OEMs have concluded that they neither need to perform, nor do they have the resources for performing, the entire design and development cycle internally.
To meet critical product launch dates, many medical device companies have partnered with contract design houses and outsourced portions or, in some cases, the entire design responsibility. Device design, development and commercialization have become a collaborative enterprise.
As the demand for contract design services increased from consultation to ownership, contract manufacturers, while performing a strengths/weaknesses/opportunities/threats (also known as “SWOT”) analysis, realized the external environment was changing and, to ensure survival, internal changes were necessary. Opportunities for a service provider that possessed both design and manufacturing capabilities were increasing while the threats of offshore competition for many products also were proliferating. For the contract manufacturer, this was an opportunity to thin the competitive landscape further by ratcheting up the barriers to entry.
What Does It Take to Move Into Design?
The contract manufacturer already has made the greatest investment in manufacturing technology, space and equipment. The incremental costs, not to be taken lightly, to expand into contract design services through internal development or acquisition are significantly fewer than they would be for a design house wanting to become a manufacturer. Furthermore, the full-service contract manufacturer is an attractive partner for OEMs as it cuts down on the number of parties involved and establishes a committed and engaged partner who realizes that the sooner the development ends, the sooner manufacturing can commence.
But it’s not just as easy as hanging a sign on the door announcing the contract manufacturer now offers design services. Medical device contract manufacturers need to be certified to ISO 13485:2003 and registered with the FDA. The ISO certification enables the manufacturer to provide contract design assistance, and the FDA will require compliance to CFR §820.30, Design Controls if the contract manufacturer wants to become a design developer. This is a major leap for contract manufacturers, as these regulations require—but are not limited to—any design developer to demonstrate and provide design and development planning, design verification, design validation and, ultimately, the design history file.
This commitment goes beyond investing in the quality system; it includes investments in technical and administrative personnel, data and document management software as well as testing equipment. The medical device contract manufacturer that adds design to its portfolio of services also must add regulatory staffing and infrastructure to its quality and compliance structure as the contract manufacturer moves from behind the curtain to front and center with the regulatory bodies.
This also represents a significant increase in liability for the contract manufacturer, as its responsibility now includes design failures as well as manufacturing non-conformances. The contract manufacturer must be able to explain the what, the how and the why in all decisions regarding the development of the device.
So why would a contract manufacturer go through all of this? It may not choose to do so, if the goal simply is to offer industrial, mechanical, electrical or software design services with the hope of landing a major manufacturing award or expanding service offerings. However, what if the goal is to become both a developer and a manufacturer?
As a developer, a contract manufacturer is positioned to create intellectual property. Whether it is through contractual services (assuming there is an intellectual property provision) or through the development of proprietary products, the contract manufacturer has the ability to realize the revenue and, more important, the profit margins the traditional contract manufacturer cannot achieve. Of course, the risks and liabilities greatly increase for the developer.
Today’s contract manufacturers who offer design services do so because there is an increased demand for which the supply is not commensurate. In doing so, a contract manufacturer can differentiate itself from the competition, increase its revenue streams and position itself to benefit from evolving from a manufacturer to a developer.
