Neal Walters, Partner, Kearney01.31.24
COVID-19 and the ensuing supply chain crisis created a watershed moment for the medical device industry, as contract manufacturers were more susceptible to supply chain disruptions than original equipment manufacturers (OEMs) had anticipated. Accordingly, OEMs should now conduct more stringent supplier viability evaluations to identify the suppliers who can transition from their historical, more transactional role to that of a true strategic partner.
The potential for future “black swan” events and supply chain disruptions has prompted the development of a more rigorous supplier selection process, with many more boxes to check off. The ideal strategic partner will have secured their supply chain ecosystem. However, ensuring a secured ecosystem requires a thorough vetting of the contract manufacturer and every participant in the value chain, stretching all the way back to raw materials sourcing. If any single node is not de-risked, the entire supply chain can be compromised.
As a result, these relationships are starting to become longer lasting, more exclusive, less transient, and less based on the exigencies of the moment. At the same time, the balance of power has shifted. It no longer is as heavily in favor of the OEM. In this new relational dynamic, profit sharing is also evolving from a primary focus on obtaining the lowest possible price to more open-book, transparent assurances that each party make a fair profit. In some cases, contract manufacturers have been using their newfound capital to invest in startups, whereas before, this function might have been more limited to major OEMs.
The contract manufacturer’s evolving relationship is helping increase the margins of the strategic partner and enabling legacy OEMs to abandon their cost-driven focus in favor of a reliable, compliant supply, which can ensure top-line growth and profitability. By allowing this change to happen, OEMs have realized it’s possible to increase agility while still retaining the same quality and efficacy. Maintaining these agile partnerships results in faster cycles—the best results ensue when the meticulously patient nature of legacy OEMs is combined with the speed and efficiency of strategic partners.
In the new environment, the strategic partner plays a more end-to-end function than the typical contract manufacturer, being involved from design to final manufacturing, and occasionally even to delivery. Often these contract manufacturers are recruited during the design phase for their experience developing electrical components or other design elements the OEM lacks. By having a strategic partner during the design stage, OEMs can proactively mitigate risk by collaboratively designing for a resilient supply chain, rather than reactively solving supply chain disruptions.
Having a strategic partner contribute to the design process can also ease regulatory compliance, which is critical when distributing a product with components that cross many international boundaries and are subject to strict medical device regulations. However, success with an end-to-end strategic partner is only possible if an OEM prioritizes integrated teams from the very beginning. R&D, third-party design partners, third-party manufacturers, and the OEM supply chain team must work together as a cohesive unit from the concept stage. There is a paradigm shift happening—no longer are these individual roles isolated because the desire for supply chain visibility has increased across the value chain.
Diversification can create a false sense of security without supply chain visibility. Case in point: Some OEMs that intended to mitigate risk by choosing separate outsourced partners for various steps in production never followed through on their objective. Consequently, the separate partners received base materials from the same origin, meaning they would have to delay or halt production if that source was jeopardized.
Many OEMs and final manufacturers were assembling multiple distinct subassemblies, completely blind to what went on two or three steps before their own. It's no longer acceptable to merely be aware of a contract manufacturer or component supplier’s inner workings. OEMs need visibility into all steps in between. Hence, OEMs are selecting strategic partners located in or close to their home country to mitigate risk. Costa Rica, for example, has become a popular destination for American OEMs due to its political stability, efforts to protect IP, free-trade agreements, and proximity to North America.
Increased electrification means contract manufacturers have had to adapt to increased operational complexity. Electrification takes a one-step system and makes it a two-step system: Manufacturers are now producing both the robot and the physical instrument it operates, and are tasked with ensuring they interact seamlessly. Because of the synergy required between the robot and device, it’s significantly more practical for OEMs to manufacture both elements instead of producing a robot and hoping it fits in with another OEM’s device, or vice versa. Because the industry currently lacks standardization, strategic partners are necessary to fill in the gaps in design and production that this emerging and multifaceted technology has created.
While it’s unclear which model will gain dominance in the medical device industry in the coming years, there is one certainty—an in-depth and uncompromising partner selection process will be fundamental for success as an OEM. If OEMs leverage end-to-end supply chain visibility technology to vet their strategic partners, they can mitigate supply chain risk, compete with emerging foreign OEMs, and swiftly and efficiently provide life-saving medical devices to those in need.
Neal Walters is a partner in global management consulting firm Kearney’s Strategic Operations practice, and co-author of the recent paper, “The great global supply chain reset is here. Are you ready to regenerate?” He can be reached at Neal.Walters@kearney.com.
The potential for future “black swan” events and supply chain disruptions has prompted the development of a more rigorous supplier selection process, with many more boxes to check off. The ideal strategic partner will have secured their supply chain ecosystem. However, ensuring a secured ecosystem requires a thorough vetting of the contract manufacturer and every participant in the value chain, stretching all the way back to raw materials sourcing. If any single node is not de-risked, the entire supply chain can be compromised.
Securing Supply by Forming Long-Term, Mutual, Transparent Relationships
Previously, outsourced manufacturing was treated primarily as a transactional relationship, with a primary focus on cost. Once the pandemic revealed vulnerabilities in end-to-end supply chains, it became necessary for OEMs to treat outsourcing as a more strategic relationship, requiring investment, trust, and open communication. The driving force behind an OEM reviewing and investing in the well-being of its strategic partner is the desire to safeguard supply.As a result, these relationships are starting to become longer lasting, more exclusive, less transient, and less based on the exigencies of the moment. At the same time, the balance of power has shifted. It no longer is as heavily in favor of the OEM. In this new relational dynamic, profit sharing is also evolving from a primary focus on obtaining the lowest possible price to more open-book, transparent assurances that each party make a fair profit. In some cases, contract manufacturers have been using their newfound capital to invest in startups, whereas before, this function might have been more limited to major OEMs.
The contract manufacturer’s evolving relationship is helping increase the margins of the strategic partner and enabling legacy OEMs to abandon their cost-driven focus in favor of a reliable, compliant supply, which can ensure top-line growth and profitability. By allowing this change to happen, OEMs have realized it’s possible to increase agility while still retaining the same quality and efficacy. Maintaining these agile partnerships results in faster cycles—the best results ensue when the meticulously patient nature of legacy OEMs is combined with the speed and efficiency of strategic partners.
In the new environment, the strategic partner plays a more end-to-end function than the typical contract manufacturer, being involved from design to final manufacturing, and occasionally even to delivery. Often these contract manufacturers are recruited during the design phase for their experience developing electrical components or other design elements the OEM lacks. By having a strategic partner during the design stage, OEMs can proactively mitigate risk by collaboratively designing for a resilient supply chain, rather than reactively solving supply chain disruptions.
Having a strategic partner contribute to the design process can also ease regulatory compliance, which is critical when distributing a product with components that cross many international boundaries and are subject to strict medical device regulations. However, success with an end-to-end strategic partner is only possible if an OEM prioritizes integrated teams from the very beginning. R&D, third-party design partners, third-party manufacturers, and the OEM supply chain team must work together as a cohesive unit from the concept stage. There is a paradigm shift happening—no longer are these individual roles isolated because the desire for supply chain visibility has increased across the value chain.
Partner Selection Process Overhauled by COVID-19
The pandemic forced medtech organizations to make alternative transportation arrangements and manage volatility in demand. OEMs quickly realized their traditional contract manufacturing relationships made it difficult to course correct in real-time. Thus, having learned from their past mistakes, OEMs are using supply chain visibility tools to select strategic partners by incorporating factors such as minimizing geopolitical, environmental, and economic risk.Diversification can create a false sense of security without supply chain visibility. Case in point: Some OEMs that intended to mitigate risk by choosing separate outsourced partners for various steps in production never followed through on their objective. Consequently, the separate partners received base materials from the same origin, meaning they would have to delay or halt production if that source was jeopardized.
Many OEMs and final manufacturers were assembling multiple distinct subassemblies, completely blind to what went on two or three steps before their own. It's no longer acceptable to merely be aware of a contract manufacturer or component supplier’s inner workings. OEMs need visibility into all steps in between. Hence, OEMs are selecting strategic partners located in or close to their home country to mitigate risk. Costa Rica, for example, has become a popular destination for American OEMs due to its political stability, efforts to protect IP, free-trade agreements, and proximity to North America.
Keeping IP Safe
The pandemic period also created an intellectual property crisis for OEMs, as foreign competitors were reverse engineering or outright copying designs for medical devices and undercutting the market. Therefore, strategic partners are now making more of a concerted effort to preserve OEMs’ IP than their predecessors did. This decade is shaping up to be one of rapid advancement in robotic surgical procedures. OEMs looking to capitalize on this wave of innovation must select an outsourced manufacturer that understands intellectual property regulations in both the country of design and the country where production occurs. A shift to a strategic partnership requires contract manufacturers to have separate, dedicated facilities for each OEM rather than multiple competitors sharing staff, production lines, and resources. OEMs must trust their partners, manage their relationship properly, transfer data safely, and ensure the manufacturing facilities are developed securely—particularly if a facility is serving multiple OEMs.Electrification’s Role in Strategic Partnerships
While COVID-19 was the catalyst for contract manufacturers’ evolution, electrification set the stage for this industry-wide trend. “Electrification” refers to two innovations gaining traction with OEMs—robotic assistance and enhanced sensing and monitoring devices. Robotics can potentially revolutionize the diagnostic process, especially in the pulmonary and urology fields. Robots equipped with cameras and cutting tools can ensure the right tissue segment has been removed and, in the near future, deliver life-saving therapies directly to specific tumor sites (as opposed to manual biopsies, which can be an inexact science). The widespread use of robotics in treatment is still years away, but the potential is promising because the technology can deliver treatment to a tumor directly as opposed to traditional methods that also affect healthy cells. The other area of rapid technological advancement has been in remote monitoring devices—e.g., sensors in physical implants that reduce the need for in-person visits and simplify the recovery process.Increased electrification means contract manufacturers have had to adapt to increased operational complexity. Electrification takes a one-step system and makes it a two-step system: Manufacturers are now producing both the robot and the physical instrument it operates, and are tasked with ensuring they interact seamlessly. Because of the synergy required between the robot and device, it’s significantly more practical for OEMs to manufacture both elements instead of producing a robot and hoping it fits in with another OEM’s device, or vice versa. Because the industry currently lacks standardization, strategic partners are necessary to fill in the gaps in design and production that this emerging and multifaceted technology has created.
Two Paths Forward for OEMs
Due to the new attributes OEMs now require from contract manufacturers, two types of strategic partners have emerged—large, traditional manufacturers looking to alter their business models and the smaller players who already have successfully modified their strategies. Traditional electronics manufacturers whose margins are being squeezed are pivoting to higher margin medical devices. These electronics producers have scale but lack expertise. On the other hand, smaller medical device design and manufacturing houses have expertise but are challenged to scale as demand grows. Neither of these parties have experienced much success, though it remains to be seen which will effectively combine scale and expertise. Perhaps traditional electronics manufacturers can look to leading OEMs’ recent actions as a blueprint, since many have gathered expertise through acquisitions rather than building their OEM capabilities from scratch.While it’s unclear which model will gain dominance in the medical device industry in the coming years, there is one certainty—an in-depth and uncompromising partner selection process will be fundamental for success as an OEM. If OEMs leverage end-to-end supply chain visibility technology to vet their strategic partners, they can mitigate supply chain risk, compete with emerging foreign OEMs, and swiftly and efficiently provide life-saving medical devices to those in need.
Neal Walters is a partner in global management consulting firm Kearney’s Strategic Operations practice, and co-author of the recent paper, “The great global supply chain reset is here. Are you ready to regenerate?” He can be reached at Neal.Walters@kearney.com.