Want to Outsource Your Supply Chain?

Defining business requirements and performance benchmarks can help ensure success.

Marc Tanowitz and J.P. Baritugo, Pace Harmon

Just as increased globalization, cost, regulatory and other market pressures are driving companies in all industries to look at new ways to enhance competitive value, medical device industry leaders are focusing on core differentiating processes—research and development, regulatory compliance, demand and customer management. They are evaluating ways to streamline their supply chain functions, including manufacturing, distribution and logistics. One option is outsourcing the supply chain network, a non-core but essential function that enables the efficient flow of goods and information—from raw materials to customer delivery. The most basic supply chain elements include:

• Demand and supply planning

• Sourcing materials and services

• Transforming/manufacturing the raw materials to finished goods

• Storing and delivering the finished goods to customers through a logistics and distribution network

• Managing returns of finished goods due to product defects, obsolescence, or other reasons

While supply chain outsourcing offers significant benefits, namely freeing resources that can be redeployed to focus on core, differentiating services, the medical device outsourcing space is relatively fragmented, with most providers focusing on a limited range of supply chain processes. In addition, because each medical device type (cardiovascular, orthopedics, medicine delivery systems, etc.) has unique technical attributes and requirements, and specialized subject matter expertise is required to manage the complex global regulatory regimes, there is no true, global end-to-end supply chain supplier. This means medical device companies must utilize multiple providers to achieve a global supply chain footprint that has deep, functional expertise as well as the required regulatory provisions.

Supply Chain Outsourcing: Why It Matters

While managing multiple providers presents significant challenges, select medical device companies have realized substantial benefits from supply chain outsourcing, including:

• Accelerated introduction of new devices and accelerated innovation of existing devices, since the organization can now focus its resources on product innovation, research and product development, regulatory compliance management and demand management.

• Decreased cost of goods sold driven by the outsourced manufacturer’s expertise in securing manufacturing efficiencies and the ability of the outsourced partner to leverage materials spend. This allows a provider to aggregate raw, packaging and incidental material requirements across its other customers that use similar materials—a key benefit in an industry where materials represent 60 to 70 percent of the total cost.

• Improved fixed assets performance and utilization, since a significant portion of a medical device firm’s manufacturing and logistics assets are no longer reflected in its balance sheets.

Many global providers have supply chain process specialties that the medical device marketplace can leverage. For example, a number of outsourcing firms show significant maturity in medical device manufacturing. These providers offer Type I, II and III device class production capabilities, utilize lean Six Sigma processes, have operations in low-cost manufacturing countries such as China, possess FDA Quality System (QSRs) 21CFR 820, ISO 13488 and ISO 9002 certifications and rely on in-house experts to ensure compliance with regulatory requirements in the United States, Europe and other markets. However, these firms typically offer such comprehensive services only for a specific device type. In addition, most of these providers are not strong logistics players, so they largely rely on other logistics providers to store and distribute the medical devices to customers around the world.

Other supply chain outsourcing companies have noteworthy expertise in medical device logistics and distribution, but offer no manufacturing services. These firms provide storage, required licenses and pedigrees, ingress/egress controls, import and export management and returns management. Providers often have a limited geographic market presence with strong offerings, typically in more mature markets such as the United States and Europe.

Still other outsourcing companies possess intellectual property rights that offer product design advantages. Firms have differentiated themselves by providing strong product design, prototyping and premarket regulatory studies services, but may have limited manufacturing capabilities to satisfy global demand.

Outsourced, Extended Supply Chain—Keep Eyes Wide Open

Given there are no true global end-to-end supply chain providers for this industry, depending on the nature and scope of what is being outsourced, the medical device firm will need to partner with several providers to support its outsourced supply chain processes. There are a number of considerations in a multi-sourced supply chain:

• Secure vendor capability guarantees. The medical device firm needs to be assured that the outsourcing partner truly has the capability to perform these functions consistent with the company’s specifications and requirements. This is especially important for complex and critical processes such as the manufacture of cardiovascular stents.

• Understand transition implications, from “in-house” to outsourced. There is increased risk that some required transition activities (for example, asset transfer tasks, process validation tasks, knowledge transfer tasks, etc.) and the associated costs may not be comprehensively captured. Even if these data elements are completely captured, there are still transition risks—such as the inability of the provider to ramp up manufacturing efficiencies within the allotted time—that the firm needs to plan for.

• Maintain data visibility and consistency. Having numerous partners may make it challenging to ensure data visibility and consistency, especially in partnerships that utilize different systems and information flow architectures. Inconsistent data, or worse, unavailable data due to time-zone differences, and/or system synchronization issues, will impact the firm’s ability to properly develop its demand and supply plans. This may result in suboptimal inventory positions that are either not sufficient to meet customer demands or too high, resulting in increased working capital requirements as well as increase risk of product obsolescence.

• Control processes to ensure regulatory compliance. As the firm outsources its supply chain processes, maintaining process control to comply with regulations becomes more paramount to reduce the risks of product recalls and non-conforming devices. For example, the U.S. medical device firm and the outsourced manufacturer must comply with the good manufacturing practicesm provisions set forth in Title 21, Code of Federal Regulations part 820—Quality System Regulation. Process documentation and control is required for effective compliance, and clarifies the regulatory responsibilities of each of the partners.

• Manage multiple supply chain partners. Vendor management becomes increasingly challenging as more participants and stakeholders are involved. Managing multiple partners requires extensive tools, processes and structure to effectively coordinate the firm’s various initiatives, ensure objectives alignment, ensure that performance is consistent with—or better than—expectations, clarify decision responsibilities, and carry out other aspects of effective governance.

How To: Implementing the Outsourced Supply Chain

To effectively address these challenges, progressive firms and strong supply chain providers employ a number of best in class practices to maximize the value of the outsourced relationship. The overall goal of these practices is to develop more collab-orative outsourcing relationships by focusing on agreed upon business out-comes, aligned goals and clearly defined roles and responsibilities that enable effic-iency and effectiveness.

Before embarking on a supply chain outsourcing initiative, it is critical understand what is being outsourced and recognize the transition, control, costs and management implications.

1. Explicitly define requirements: Understand, develop, and clearly articulate business and technical requirements including system integration, data structure and data synchronization requirements. Explain to the provider exactly what is needed—including process control specifications, document specifications, etc.—as opposed to asking for its capabilities. This enables the medical device firm to validate specific vendor capabilities and the provider’s willingness to apply those capabilities to specific company needs. To do this effectively, the company needs to organize its resources to thoroughly collect and validate the business, functional and technical requirements of the processes. The company can negotiate from a strong position when it is able to comprehensively and unambiguously “spec out” the requirements for which the supplier must develop a solution.

2. Explicitly define the performance benchmarks: It is difficult to make separate organizations work together in the best interests of the partnership without a common understanding of the broader goals. Thus, clearly articulate and agree on the objectives of the partnership and explicitly define the performance parameters of the outsourced relationship. In addition to the operational indicators, the performance parameters also should include various measures that pertain to the financial and strategic value of the outsourced services, as well as the overall quality of the relationship.

3. Develop a comprehensive cost model: In addition to steady-state financial analysis, include realistic estimates for transition costs in the financial model used to drive decision making, to move from the current state to a new state (from an in-sourced to outsourced solution). The transition estimate should include incremental internal labor, equipment, and services costs that would need to be deployed to mitigate transition risk and should also include “soft” costs such as change management implications and productivity loss during transition.

4. Invest in vendor and contract management: The value of the partnership—which includes cost savings, enhanced service levels and innovation—is obtained during the life of the contract, not only at contract execution, where customer leverage is at its peak. Invest in vendor and contract management team resources, policies, processes and tools to increase the likelihood that the outsourcing produces the value identified in the business case.

The job doesn’t end after the outsourced supply chain is in place as it is important for the firm to maintain—and enhance—the key benefits that were considered in the outsourcing business case. Failure to effectively manage the vendor relationship, control critical processes and address risks may diminish the value of supply chain outsourcing.

1. Establish a formal governance structure: To effectively manage the outsourced relationship and ensure that it is meeting objectives, the company needs to establish a formal governance structure composed of its internal vendor management team and recognized leaders from the various outsourced providers. In general, the governance structures should have clearly outlined decision making responsibilities, robust information infrastructure to ensure that relevant information is fed to the appropriate governance level and the ability to adapt to the requirements of the outsourced relationship (for example, establishing a three-tiered governance layer to address the strategic, operational and tactical needs of the outsourced relationship).

2. Maintain and control data and process consistency: As the supply chain gets longer and involves more entities, it becomes crucial that all parties have access to the same data and consistently execute well-defined processes across a distributed network. This is important in controlling the enterprise at all stages, from providing accurate customer service to ensuring sufficient raw and finished goods inventories.

Owing to the vast amount of data and processes that must be shared between the company and the various outsourced providers, it is important that the companies conduct a thorough review and assessment of each party’s IT capabilities and integrate these accordingly at the initial stage of the outsourced relationship. Poorly integrated systems, with various integration points resulting in mismatched data and processes, will impede the performance of the outsourced supply chain in every function.

3. Implement sales and operations planning (S&OP) with the various entities: In addition to having access to the same demand data, the entities within the extended supply chain will need to be aware of and understand the implications of the various strategic and operational initiatives that may impact demand, sourcing, resource requirements and regulatory compliance. These initiatives may include new product introductions, specific customer programs, product bleed-downs and exits from markets.

The S&OP is the ultimate statement of a company’s short- to medium-term plans to enable planning for resources. It provides the connection between business planning and day-to-day operations and reconciles the functional business plans—sales and marketing, sourcing, manufacturing and finance—into an integrated plan.

4. Implement controls to ensure regulatory compliance among the various outsourced partners: Globalization has increased the outsourcing of manufacturing of products and components overseas, where different sets of regulations will impact outcomes. In addition, new medical devices are being introduced with an increasing number of configurations and complexities, such as device/drug or device/software combinations that impact pre-market regulatory trials and filings.
Utilize internal resources with specific domain regulatory expertise and processes (e.g., quality assurance, process and equipment validation, internal auditing management, document and design control, etc.) to successfully navigate this complex regulatory environment.

5. Establish supply risk-mitigation plans: A longer supply chain increases the risks of supply disruptions such as changes to regulatory requirements that require significant process changes that the provider cannot immediately accommodate or insufficient manufacturing capacity due to operational issues. To address these risks, develop a comprehensive supply risk-mitigation plan that describes the sources of risk, probability of occurrence, mitigating actions, events that indicate when to execute the action and the overall action owner.

These actions can be short term in nature (expedited air-shipments to the customer) or longer to introduce a backup device manufacturer, initiate design chan-ges to improve manufacturability.

The Long Term

Amplified cost pressures, continued intro-duction of novel devices from competition and changing population demographics will mean more medical device firms considering supply chain outsourcing. Progressive firms and strong supply chain providers manage these multi-sourced relationships effectively and enable the company to focus on core competencies and opportunities to increase competitive value.

As capabilities mature, it is possible that a supply chain provider will one day offer a compelling solution that spans multiple supply chain processes globally—including sourcing, manufacturing and distribution. Moreover, we expect functions that are viewed as critical today—for example, R&D—to be increasingly outsourced to leverage the provider’s technologies and expertise. Already, some firms are partnering with R&D outsourcing firms to enhance existing designs.

Pace Harmon is an outsourcing advisory services firm providing proven guidance to Fortune 500 and high-growth, middle-market organizations on complex outsourcing and strategic sourcing transactions, process optimization, and vendor program governance. Marc Tanowitz has more than 15 years of experience in outsourcing advisory services, strategic sourcing and supply chain process improvement, in which he has served more than 30 Fortune 500 and middle-market clients. J.P. Baritugo has more than 10 years of experience in the pharmaceutical/ medical device and telecom industries with a primary focus on operations management, supply chain, outsourcing and business process improvements.