GUIDE TO OUTSOURCING: partner selection

The confluence of the entrepreneurial drive to develop sophisticated medical equipment and increased market demand has brought greater attention to contract manufacturers. Many creative people, from large companies to innovative doctors, are developing ideas that improve treatment. Physicians lack most of the required resources to manufacture and bring a product to market; corporations often do not have the specific expertise to develop and manufacture a product. Additionally, the core manufacturing strength of the potential customer, which in this context is the OEM, may not lie with capital equipment. Also, contract manufacturers can focus their energies to reach the identified and agreed-upon goals without distractions that may deflect the in-house team's focus.

These factors have naturally brought about a surge in contract manufacturers. After the initial creative flourish and concept, choosing the right contract manufacturer has the greatest effect on the success or failure of a product. The wrong choice can lead to catastrophic results, such as a product failing when it reaches the market, or even beforehand, if the process suffers significant delays and added expenses that impede commercial success. Although no system is foolproof and no two experiences are the same, the following tips can offer OEMs the greatest opportunity for success

1. Understand the Product and the Market before Seeking a Contract Manufacturer.

It is extremely important to understand the benefits of the product, where it fits in the market, the demand for it, the target buying audience, and how the market can be expanded. Corporate America, including medical device companies, is rampant with examples of products that failed because the manufacturer failed to understand the market, the expected demand, or the benefit (or lack thereof) of its product. If the company's strength is in marketing and sales, this will not be an issue. Otherwise, the OEM should consult with the contract manufacturer and see whether it has the expertise to assist in this area. The OEM can also work with an additional company that specializes in marketing a specific type of product.

2. Be Certain the Contract Manufacturer Has a Methodology to Select and Manage Suppliers.

Similar to the chain only being as strong as its weakest link, the quality of a product is dependent on the quality of its components. A single inferior component can undermine the operation of the product and cause significant financial and reputation damage for the manufacturer and distributor. Therefore, the medical device OEM should review the contract manufacturer's quality control program for selecting vendors and components. Vendor selection needs to be a disciplined process that leads to repeatable, high-quality fabricated parts and components.

One issue to raise during the vetting process is the contract manufacturer's relationships with the vendors supplying components for the product. If there is no established relationship, the OEM should ask about the process used to identify and vet new vendors. The contract manufacturer should have a robust system in place for monitoring vendors for quality shipments and on-time performance. The contract manufacturer's inspection department needs defined incoming test criteria for all components purchased as well as those supplied by the OEM. Components should be traceable by lot. A red flag is raised if the contract manufacturer lacks the resources for a properly staffed inspection department. The contract manufacturing partner should also be CGMP compliant. It is important that the contractor has robust internal quality procedures that are compatible with the customer's quality system.

Other issues that the OEM should consider up front include whether the contract manufacturer has previous experience in the specific medical specialty or previous experience with similar technologies. A limited audit should also be conducted, which can be based on a checklist developed by the customer. A standard supplier questionnaire may ask for information such as the following: names of key personnel, a list of equipment and the condition, and details on maintenance of the manufacturing facility. It should also ask for current customers and products manufactured. In addition, OEMs should also ask for an organizational chart and the company's quality manual.

This limited audit and vetting process should suffice during the preliminary review of a short list of potential contract manufacturers. The OEM, however, should perform a full in-plant audit with special attention to the procurement and inspection departments before the contract is awarded. A full audit can involve a two-day session including plant tours and assessment of manufacturing and inspection equipment. It is critical to have a full audit prior to retaining the contractor to ensure that the manufacturer's quality system can meet the OEM's needs over the long haul.

The audit should also include a review of document and data controls and retention, quality record controls, training requirements, receiving controls, the calibration program, and preventive maintenance.

3. Don't Automatically Select the Lowest Bid.

Contract manufacturers provide a variety of services that ultimately affect the cost structure. If the OEM has an accurate and precise set of drawings and only needs the product assembled, it does not require a contract manufacturer with strong engineering capabilities. However, a program that begins with specifications and functional product requirements requires a partner that can realize the product and create the necessary documentation.

On the other hand, if assistance is required with agency approvals, engineering, software, and customer service, an OEM needs a contract manufacturer with the necessary depth to provide support in these areas. Trying to do something in-house when the capabilities are lacking is a sure path to failure. Remember, people often do get what they pay for. Trying to cut corners by choosing a contract manufacturer that lacks the expertise and services needed undermines the project. The OEM needs a quality product, and only a quality contract manufacturer can provide that.

In evaluating prices, the OEM should carefully analyze responses to its request for proposal and specs from each contract manufacturer so that it is certain that all requirements are included in the bid, and that there is mutual understanding of these requirements by both parties. Finally, both the limited audit and the full audit will provide evidence of the contract manufacturer's capabilities and can give a solid indication of whether the lowest bid can, in fact, do the job.

4. Seek Full-Service Contract Manufacturers.

The fewer outsourcing companies involved, the smoother the process. Overoutsourcing—or having too many companies involved in the project—results in missteps, miscommunications, and a slower process. The contract manufacturer should be able to provide all of the services needed from initial concept through design, prototype build, preproduction fabrication, verification and validation, and product manufacturing.

Often medical device projects involve mechanical engineering, electronic design, software development, and ultimately system fabrication. If four separate companies are used, the OEM must have the infrastructure to deal with four different partners, which includes refereeing issues that arise among them. It also often requires balancing egos and competition among the companies. By employing a single-source contract manufacturer that can manage the entire project, OEMs have an increased opportunity to implement the recommendations discussed in this article. The recommendations include a methodology to manage suppliers and the creation of a team to work with the contract manufacturer.

An OEM may choose to contract specialized agents and use a primary contract manufacturer to provide support for the project if the scope expands or additional requirements arise.

However, in some instances, a specialist or small contract manufacturer is more appropriate than a full-service partner. This usually occurs with well-defined, one-concept projects with no latitude for changes—for example, when a product has been fully designed by the customer with good documentation. In such a case, the primary contract manufacturer would only provide build-to-print services.

5. Investigate Several Companies and Rigorously Vet the Finalists.

Outsourcing to a contract manufacturer is a major step that requires the selected company to have the capabilities and expertise to perform up to the OEM's standards. The initial limited audit (see Step #2) provides a good guideline to assess the quality and capabilities of the contract manufacturer. When the field is narrowed down to one or two firms, a full audit should be conducted.

Another consideration is the chemistry between the companies and their personnel involved in the project. Good chemistry is essential. Lack of respect or differences in operating philosophies can doom a project from the beginning or at least lead to miscommunication as well as delays and costly overruns.

As part of the audit, OEMs should get to know both the key executives at the contract manufacturer's company and the people who will be managing the project. Senior management from the OEM should visit the partner's facility to be certain that it is up to the standards claimed and has the capabilities promised. It helps to speak to companies that have worked with the contract manufacturer, if possible. These can include references provided by the contract manufacturer and others that can be identified through an Internet search or industry contacts. The customer should also check on the financial stability of the company by obtaining credit information, annual reports, etc. These partnerships are designed to be long-term relationships, and the financial viability of both parties is a major ingredient to achieving success.

6. When Using Multiple Contract Manufacturers, Blend the Expertise.

Before starting development of the product with a design company, it is essential to choose the outsourcing partner that will manufacture the product. OEMs must determine at the outset that a design can be manufactured cost-effectively in the targeted annual quantities. Not doing so can cause massive and costly delays in transitioning the design to manufacturing. Concepts created by industrial design companies cannot always be manufactured. Rework or repair may require disassembling the entire unit.

A good product design team always includes a representative from manufacturing. If the design firm is reluctant to include the contract manufacturer or says that the decision on the selection of a contract manufacturer can be delayed, this is a warning sign that this might not be the design house to work with.

7. Emerging Companies: Select a Contract Manufacturer Experienced with Start-Ups.

Start-up companies present a unique situation and typically need a partner that is sufficiently flexible to change direction or revisit processes. Start-ups are stretched for resources and the right contract manufacturer can fill in the gaps and provide experience and guidance in design control and product release that a start-up may lack. Such companies need a contract manufacturer that has systems in place to meet the stringent and comprehensive FDA and ISO requirements.

The contract manufacturer can assume these responsibilities, allowing the start-up to focus on design and development. In addition, having an experienced hand manage FDA and ISO compliance and certification testing saves time and money.

The initial device concept may lack a user-friendly interface when modeled or shown to prospective end-users. At this point, a capable contract manufacturer can help analyze the specifications to improve the interface. One effective means of improvement is conducting focus groups at hospitals with potential users to get their input, a process that may be more easily managed by the contract manufacturer.

8. Determine Which Services to Outsource.

This article has already discussed whether the OEM needs a full-service contract manufacturer or can use the services of several. In making this decision, the OEM should analyze its capabilities and determine what services should be performed by the contract manufacturer. The OEM must determine whether its engineering team can create a thorough product specification or will need assistance from the contract manufacturer. The OEM should make a list of the services required from the contract manufacturer and then find one that can provide the missing links. The company must fully understand its role and what support is needed from the contract manufacturer.

9. Work Closely with the Contract Manufacturer.

The OEM should create a team of product specialists to facilitate and expedite the decision-making process for product design and production. This team should stay in place throughout the total product life cycle so that the contract manufacturer always has access to a responsible party at the OEM as issues arise. Otherwise, the OEM, which has ownership for the product sold, could easily lose control over the process and only learn about deviations to its initial concepts when changes are costly and time-consuming. There are numerous issues that can arise such as design changes, component obsolescence, or complaints.

At a minimum, the OEM team should comprise a contracts expert (to deal with the business side of the relationship; this team member may be from purchasing or material control), an engineering liaison, a quality assurance expert, and a marketing representative.

10. Have Realistic Expectations.

Although a good contract manufacturer is invaluable in the development and manufacture of a medical device and can bring specific experience that may not exist within the OEM's company, the contract manufacturer is not the developer of the product idea and marketing concept. The OEM needs to prepare specifications that define what the product will do and then choose a contract manufacturer capable of meeting the specifications. In defining the specifications, the OEM needs to state the requirements of the user and the marketing team has to define how it will market the product. An OEM should not expect the outsourcing partner to figure out what the product is supposed to do.

The contract manufacturer is not responsible for adding bells and whistles to the product; its job is to manufacture the product to the specifications. The contract manufacturer needs this guidance to ensure that the OEM's requirements are met.

11. Do the Gut Check.

When vetting is complete, is the head of the OEM company comfortable with the decision? The leaders should set aside the analysis to see whether they feel comfortable entering into a partnership with the chosen contract manufacturer. Also, the OEM's chief executive should consult the key team members to see whether they have the same feelings. If the OEM has an open corporate culture in which the CEO trusts the judgment of the people in the organization, no further action is necessary. If a frank discussion is not possible, a confidential survey may be needed. Team members should also feel that they can work effectively with their counterparts at the contract manufacturing firm. Even with a partner analysis that is astute and accurate, poor chemistry can easily disintegrate the relationship.

12. Determine Length of Relationship.

All contract manufacturers are excited about getting new business. As the program rolls out, no matter how carefully each party has prepared, there will be problems that neither anticipated. Such issues place stress on the relationship.

The contract manufacturer that is looking for a long-term relationship and not a quick sale will be more responsive and will work more closely with the OEM. It's much like the difference between a couple that is dating and a couple that is married when a disagreement comes up. A couple committed to maintaining the marriage has a significantly better chance of resolving the issue. If, however, the company is looking for a one-time project, this, too, needs to be expressed to the contract manufacturer at the beginning of the project. Finding out midway through the project could create hard feelings and create a hurdle in the relationship.

Conclusion

Following these 12 tips does not guarantee an unblemished relationship; no system can. But, these tips do cover many of the basic issues that are frequently overlooked in the outsourcing process and provide strong indications of the quality of the contract manufacturer. As a safeguard, the contract should define all customer expectations and specifically designate which activities will be controlled by the OEM and which by the contract manufacturer. The OEM should also be prepared to follow up regarding other areas of concern or competency to ensure the manufacture of a high-quality product.

Milton Frank is president and CEO of Nexcore Technology Inc. (Waldwick, NJ).

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