International Outsourcing: Is It Right for You?

Originally Published MDDI March 2003

GUIDE TO OUTSOURCING

Experts in contract manufacturing and their device-company clients offer advice for those considering an offshore move.

by Lori Bryan

Increasingly, medical device manufacturers are letting things go—offshore, that is. That's not to say they're becoming any less protective of their processes. Rather, they have a broader array of options available to them for meeting their high-tech and quality needs. Contract manufacturers worldwide, some dedicated exclusively to the medical industry, are providing those options, and device companies appear more open to the idea of international outsourcing than ever before. To most, if not all, outsourcing is attractive for its potential cost savings. Some companies may wonder what a strategic partner can do for them in terms of accessing a new market. Others may seek engineering expertise not available within their own firms.

Whatever its motivations, a company mustn't take lightly moving some or all aspects of production offshore. Device manufacturers need to consider a host of issues in making the decision and, if the decision is yes, in making the move. Experts recommend the following steps for optimizing the potential for success. 

Assessing Relevant Costs

When medical device manufacturers begin considering outsourcing, it's almost entirely a mattter of cost, according to Bill Gaffney, vice president of marketing and international sales for contract manufacturer UTI Corp. (Collegeville, PA). “They're really looking to lower their production costs on the products they choose to send outside for manufacture,” Gaffney says. 

No doubt cost is a critical issue, permeating all areas of decision making where offshore contract manufacturing is concerned. Areas for examination include (but are not limited to) the offshore facility (e.g., does one exist or will it need to be built?), transportation and warehousing (e.g., is the product bulky or small? heavy or light?), and critical mass (i.e., how many production workers will the operation employ?).

That a firm's offshore labor force is affordable is imperative, but there's more to it, say experts. Companies must determine where they can get the least-expensive labor force that is capable of producing their particular product, says Ames Gross, president of Pacific Bridge Inc. (Washington, DC), a consulting firm assisting medical companies in Asia. “For some sophisticated technologies,” says Gross, “the cheapest labor might be in Vietnam, but Vietnam's subcontract manufacturers might not have the skill level to make these particular medical products.”

The bottom line is that companies venturing offshore are seeking much more than a low-cost manufacturing site, says Ron Earle, group senior vice president of healthcare company and contract services provider B. Braun, OEM Industrial Division (Bethlehem, PA). “You're looking for added value; cost-effectiveness has to add value,” says Earle. The right offshore partner, depending on a company's focus therapy and target market, he says, can help provide that.

Determining Product Requirements

A device company must ask, for example, how sophisticated are my product's assemblies or components? Is the skilled or unskilled labor necessary for building my product available offshore? How stable is my product design?

For Coalescent Surgical (Sunnyvale, CA), answering such questions before taking production of its U-Clip anastomoses device to Mexico was critical. “U-Clip contains roughly 15 components, and the whole thing weighs only about 6 milligrams,” says Peter Martin, vice president of operations for Coalescent Surgical. During the product's development, the company realized that not only almost all the manufacturing processes were going to be very precise, but also that none of them already existed.

So Coalescent decided to produce the sophisticated U-Clip, whose primary market is coronary artery bypass surgery, outside—but not too far outside—California, the company's home base. “We knew that tight communication was going to be important, which is one of the reasons we chose Mexico,” says Martin. 

But the complexity of the U-Clip meant Mexico had to offer more than proximity. For one thing, Coalescent Surgical needed a Class 10,000 cleanroom in which to produce the device. And securing one wasn't easy. “Cleanrooms were not readily available south of the border,” says Martin. “One of the first things we had to do, and quickly, was locate a facility where we could get a Class 10,000 cleanroom built.”

Coalescent also needed a skilled workforce. It found capable workers with the aid of The Offshore Group (Tucson, AZ), a shelter program that helps medical and other manufacturers initiate operations in Mexico. 

The Offshore Group found key managerial talent—Mexican professionals who, according to Martin, helped operators overcome hurdles. “The assembly we do is small, under a microscope,” says Martin. “When the operators first saw what we were asking them to do—a lot of them had never seen a microscope before—they were doubtful that any of it was possible. This is where the strength of our Mexican managers came into play—the relationships they built, how they related to the direct labor we were hiring.” As a result, the workers became confident, even excited, because they knew they were working on a medical product made to help people, Martin explains. 

The high-tech device's relatively unstable design was also a major consideration. Generally speaking, it's not uncommon for device firms to keep early-development-stage products at home. In that respect, Coalescent took the road less traveled, launching the product in the United States in August of 2000 and starting production at the Mexico facility less than two months later. But the company did so only after serious thought. 

“We were really trying to do a lot of things concurrently in terms of technology development and cost reduction,” says Martin. “Quite frankly, it was also the tail end of the boom time here in Silicon Valley, and we just knew we wouldn't be able to find the facility space or the operator work base to do anything in Sunnyvale. We had to do it,” Martin says of the move. “There were many late nights and emergency meetings and things we had to work out on the fly.” 

But because the company adapted quickly when things didn't go just as planned, the Mexico operation proved a success. “Initially we tried to set up complete production cells down there, but that was just too much,” Martin says. Instead, learning was done operation by operation, and product was sent back periodically to the United States for final processing. Once the workers in Mexico had the final linkage, they implemented the full production cells on their line. 

“The strategy worked out well for us,” says Martin. “As material issues came up, as we saw problems on the line, as we saw defects we'd never seen before, the entire organization learned at once. Multiple major design changes and multiple new product introductions went well, in part because of our rigorous, thorough manufacturing and engineering department in Sunnyvale, which went down to Mexico and worked very closely with workers there.”

Engineering expertise (be it a device company's own or that of its partner) can make all the difference with such development-stage products, say some outsourcing experts. For instance, “If a contract manufacturer offers an engineering-intensive service, you can make up for the distance of an offshore operation and still achieve the savings,” says Richard West, president and CEO of Trivirix International (Chapel Hill, NC). The contract manufacturer, which focuses exclusively on the medical device business, has facilities in the United States and Ireland. 

J. Randall Keene, president of Avail (Fort Worth, TX), also sees the engineering expertise of contract manufacturers as widening the possibilities for international outsourcing of less-than-stable devices. “We used to say that to move a product offshore, it had to be stable. We're a little less sensitive to that now because we've grown our engineering talent in Mexico so significantly. We can do start-ups and processes that are completely unstable,” he says.

Device companies considering transferring a relatively immature device to an offshore contract manufacturer must be sure the necessary skill set is there. “A mature product with a very-well-developed set of documentation would be ready for the challenge of going offshore, let's say to the Far East,” says Trivex's Richard West. “But if the product is not yet mature and the documentation not quite solid and complete, that would be a recipe for disaster.” 

Investigating Contract Manufacturers

Before entering into an agreement, companies must ascertain whether a potential partner meets their standards. 
“First and foremost, device manufacturers and OEMs are not going to deal with somebody who doesn't have excellent quality and who can't meet all their requirements, whether they are regulatory related, quality related, or whatever the case may be,” UTI Corp.'s Gaffney says. 

With this in mind, what regulatory- and quality-related criteria can firms use to evaluate a potential offshore partner? For starters, U.S. companies outsourcing medical devices internationally should be sure they go to FDA-registered shops, according to Avail's Keene. “The facility absolutely must have been audited by FDA in recent time and have a nice stamp that says everything is appropriate.” 

Gaffney agrees. FDA registration and compliance with ISO guidelines, he says, “are important—probably deal breakers if they're not in place.” 

On the other hand, offshore production of a component (i.e., not a finished device) may not necessitate an FDA-registered or ISO-approved facility, says B. Braun's Earle. What matters most is that “your company's quality people feel comfortable that the contract manufacturer meets these guidelines,” says Earle. “Your company is the one who is going to have to stand up if there's a recall.”

Carrying out periodic quality audits of the offshore facility is also important. “And it would be nice to know,” adds Keene, “that a contract manufacturer's quality system has been audited and approved by other major medical companies.” 

A healthy stack of such approvals may make a device firm comfortable. “One of the things I look for is a contract firm's history in the business,” says Earle. “Anybody can put up a shop and say yes, we can assemble that. What you have to look at is, do they have the integrated structure to support my product?”

A personal visit to the potential offshore facility can help a device maker determine, among other things, whether that infrastructure is there. 

Selecting the Offshore Location

Certainly, proximity to the parent firm or the intended market is a top consideration. Mexico, for instance, may appeal to U.S.-based device makers that want their professionals in the United States to remain in close contact with workers staffing the new offshore operation.

For Coalescent Surgical, its Mexico site being in nearly the same time zone as the company's California headquarters was key. “We are always able to have good phone and other communications with the workers there,” says the firm's Peter Martin. 

But such nearness of operations isn't always feasible. Sometimes the best place for outsourcing, for various reasons, is not the country right next door but rather one across an ocean. In that case, how can a device company and its overseas contract manufacturer bridge the physical distance built into their relationship?

Communication technologies can help significantly, according to West of Trivirix International. The company uses an Internet tool called AllianceNet. It gives the company's clients, however far away they may be, desktop access to what's happening—in real-time—on the production floor, as well as inventory levels, regulatory information, and other data. “If you can get better information from thousands of miles away than you could from your own backyard,” says West, “that can be an advantage, not a disadvantage.” 

Proximity to market is also something device companies should think about. In other words, how close to your target market is close enough? 

Contract manufacturing in Ireland, for instance, may give a device company what it needs to access the European market. “If a company is selling a device in Europe,” says West, “[Trivirix] can service the device, be the customer's direct contact, drop-ship the device, recalibrate the device, and perform on the ground in Europe whatever logistics or postproduction service is required.” 

Manufacturing close to the target market may also help firms make changes to a product that will help it fit into the marketplace, according to Pacific Bridge's Gross. “If a device company outsources a product close to the market where it's planning to sell the product, the firm normally can get some input from local doctors about how to alter the product so it meets the requirements of the local marketplace,” he says. Disposable products, for example, may need modification to suit body types that can vary from country to country or region to region.

Of course transportation costs also come into play when choosing an offshore location. Freight and duty are among the host of cost-related issues a device firm must consider, according to B. Braun's Earle. 

“In some cases, I can manufacture solutions cheaper in other plants, but the problem is the freight,” says Earle. Whether or not to take the production of fluids offshore, he explains, depends on the contract manufacturer, its specific capabilities, and the distance. “Shipping a low-cost item, a cost-profit item—shipping water over water, as we say—is not very cost-effective.” 

Where a company buys its raw materials also has cost implications. U.S.-based companies considering outsourcing in Asia, for instance, must decide if they'll buy raw materials from Asian suppliers, says Avail's Keene. If the answer is no, “Will the company buy everything in the United States and ship it over?” Keene asks. 

Risks to intellectual property should also be assessed. Certainly a product's proprietary nature would need protecting whether contract manufacturing is done offshore or just across the street. But regions or countries with different business practices may give U.S. companies more to think about. 

“Intellectual property is a difficult concept in Asia,” says Pacific Bridge's Gross. “First of all, in Asia the society is not built on litigation; it's built on relationships and trust. Having said that, the concept of research and development in Asia is basically equated to the concept of copying.” According to Gross, governments in Japan and Singapore and in one or two other Asian countries have recently become sensitive to intellectual property issues.

But the real question, Gross says, has to do with the enforcement right. “In China the government might say, we're going to put you in jail if you copy a product,” he says. “But the question is, does the Chinese government enforce that regulation? And how much money has to be spent to go to court in China to stop the copying? Unless you're a pretty deep-pocketed company, you're not going to have the resources to get lawyers. . . to fight a battle as a foreign company in China.”

Finally, with international outsourcing comes relationship issues, such as language barriers. A device company going offshore should know what to expect. “If you're dealing with a U.S. company that has a manufacturing facility offshore, chances are you'll probably be communicating with contacts in the United States,” which can make things easier, says UTI Corp.'s Gaffney. If this is not the case (and often it won't be), a contractor or consultant with the requisite know-how can be instrumental in ensuring compatibility.

Using a Shelter Program

Device companies interested in setting up their own operations in a foreign country may want to enlist the help of a shelter services provider in the desired area.

The Offshore Group, for example, helps manufacturers do business in Mexico. Entering Mexico as a department of The Offshore Group, a manufacturer is “able to initiate operations in Mexico quickly and profitably without actually establishing a legal presence there and without making many other expenditures typically associated with such start-ups,” according to the firm. 

“Our plethora of services includes getting the permits to enter Mexico, dealing with U.S. and Mexican customs house brokers, and the logistics of moving materials in and out,” says Gale Thompson, Offshore's vice president of operations. Among the other services are human resources management and administration, handling of payroll and benefits, and environmental and facilities services.

For U.S.-based device maker Coalescent Surgical, entering Mexico through Offshore's shelter program has had its advantages. For example, “we were going to a U.S. supplier for the needle component of our product, which happens to be made from an expensive material,” says Coalescent Surgical's Martin. “We wanted a Japanese supplier for the material, but there was a pretty hefty duty on it because of the way we were classified as a company. Offshore did the leg work to get us reclassified and allowed us to get a pretty drastic reduction in duties from the Japanese side.” 

Offshore also assisted the device maker in claiming NAFTA (North American Free Trade Agreement) status for its products. “NAFTA seems to be constantly changing—a somewhat artistic thing—in both directions, on the U.S. and Mexico sides,” says Martin. Offshore helped the firm keep track of changing requirements, ensuring it brought materials into the maquiladora (Mexican in-bond) program and then back across the Mexican border into the United States in accordance with NAFTA. 

Conclusion

Device companies and OEMs have much to think about before taking some or all aspects of production offshore. And these considerations certainly are not limited to the ones discussed in this article, which provide merely a mental starting point. Where a company's particular medical product actually gets made, whether it's across an ocean or across the street, should be determined by thoughtful, comprehensive analysis and with the advice of trusted professionals. n

Copyright ©2003 Medical Device & Diagnostic Industry