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Outsourcing: A Process, Not a Destination


Posted in Contract Manufacturing Services by bmichaels on July 17, 2014

In an increasingly globalized economy, outsourcing helps medical device manufacturers increase capacity without additional capital investment costs, safeguard their IP, and gain access to new markets.


At last year’s MD&M Minneapolis conference, Jack Sandahl, Fellow Commodity Specialist at Boston Scientific, explained that companies outsource operations for three primary reasons: to reduce costs, focus on core competencies, and ensure growth and flexibility. Continuing this theme in the following Q&A, Sandahl discusses how and why medical device companies should develop flexible and robust supply chain management strategies.

By relying on economies of scale, leveraging volume discounts, and maintaining quality systems, outside suppliers can reduce the OEM’s production costs, enabling it to reduce capital investments and focus on core competencies. Outsourcing enables the OEM to achieve growth and flexibility goals by increasing capacity without adding capital investment costs, safeguard its proprietary technical expertise, and gain access to new markets. To determine its core competencies, the OEM must ask itself: What do we do well? Where is the business going? What differentiates us from our competitors? What value do we add that is visible to our customers?

To make or not to make: Determing whether to insource or outsource depends on a company's core versus noncore capabilities.

A medical device OEM’s primary focus should be to determine what is important to the customer, what provides the company with a competitive advantage, and what negative consequences can ensue if these goals are not done well. To answer these questions, the company should determine which processes or components are central to the company’s business. Then, it should decide whether these processes or components are core capabilities. If they are, the company should insource. If they are not, it should reassess its internal capabilities or develop an outsourcing partnership with a supplier.

Emphasizing that companies should strive to understand the processes required for driving sound sourcing decisions, Sandahl notes that the OEM’s ultimate goal should be to create the organizational connections required for managing its business, ensuring quality performance, and increasing value for customers.

MDDI: How has an increasingly globalized economy put pressure on companies to optimize their supply chain capabilities?

Sandahl: Medical device companies are under increasing pressure to drive innovation, efficiency, and cost reduction to satisfy customer needs. This trend is being driven by changes in the U.S. healthcare system and also by global market growth opportunities where the technologies are being adopted but with limited economic resources to support the needed therapies. The most successful medical device companies will be the ones that can deliver to the customer the most innovative therapies at the best value. Medical device companies increasingly need to identify supply chains that can effectively deliver innovation and value. All factors considered, the acquisition of supply chain capabilities can result in a combination of outsourcing and vertical integration strategies depending on the technological, economic, and logistical advantages.

MDDI: What are some of the organizational measures that companies can take to optimize supply chain management?

Sandahl: Supply chain management is not just the movement of materials through the system. To be effective, it must be seen as a much broader concept. Organizations need to be structured to best connect market research, product development, design, and manufacturing operations to provide the products that the customer needs—at a great value, at the right time. The process for delivering a medical device to market is a long one because of the clinical and regulatory requirements involved. At each stage of the supply chain, from start to finish, there needs to be a high level of communication and speed. Setting up an organization in which people can most efficiently engage with customers and suppliers inside and outside the company will have the best results for optimizing supply chain management.

MDDI: Please give some examples of how companies can optimize the allocation of resources between insourcing and outsourcing activities.

Sandahl: Cross-functional teams combining resources from both external sourcing and internal manufacturing operations are an effective method for balancing resources. The best decisions are made by people who understand the challenges involved in performing both insourcing and outsourcing activities. Because the people involved in managing external and internal supply chains have similar skills and knowledge, blending these resources into one team facilitates the flexibility required for implementing both insourcing and outsourcing strategies. Most companies have strategies for both insourcing and outsourcing materials, processes, and technologies, so it is best to utilize these resources in the most flexible manner possible by creating a combined team.

MDDI: Why do you think that the decision to outsource is a process, not a destination? How does this work out in practice?

Sandahl: Manufacturing technologies, the global business environment, and corporate goals are in a constant state of change. The most successful organizations and people are the ones that adapt to change in the most effective and efficient manner possible. The process is never complete. To be sustainable, it needs to follow and respond to signals found during the classic plan-do-check-act cycle. Outsourcing decision that may make sense today will be different tomorrow with the changes in the environment. Thus, the process needs to respond, or it will become obsolete.

 

Jack Sandahl has more than 25 years of manufacturing operations experience in the medical device industry, including in the areas of production planning, manufacturing team leadership, contract manufacturing, purchasing, and global supplier management. He has managed complex high-technology component supply chains in an environment with demanding quality, reliability, regulatory, and cost objectives. A Fellow in a supplier and materials management role at Boston Scientific, he is engaged in make/buy decisions. He is also a course developer and instructor in the Manufacturing Operations Management program at the University of Minnesota. Sandahl received a BS degree in business finance from the University of Minnesota and an MBA in manufacturing systems from the University of St. Thomas in St. Paul, MN. Reach him via LinkedIn.


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