Looking Beyond Outsourcing to True Partnerships

Medical and diagnostic device OEMs often look to outsourcing and contract manufacturing to reduce labor and assembly costs per unit. The difficulty is that it could take so much money and time to train the contract manufacturer, validate the process and performance, and ramp up the production, that savings are only realized on large volumes of commodity components. OEMs that need the flexibility to design and produce specialized devices in relatively small quantities (thousands instead of hundreds of thousands) are not able to realize the savings that come from traditional outsourcing.

Today’s dynamic market forces put tremendous pressure on OEMs to leverage scarce resources and maximize their own core competencies. To do so, they must look beyond outsourcing to a strategic supply relationship. This means developing relationships with partners that can design, manufacture, service, and support key components and integrate their processes with the OEM’s requirements.

Outsourcing versus Codevelopment

Traditional outsourcing is typically a financial decision (cost reduction) or a quality decision (yield rate). Unfortunately, the decision to outsource often occurs after internal production starts and problems appear. When this happens, representatives from different departments trigger an outsourcing push based on their own analysis specific to their function. For example, perhaps quality control decides the quality rate is not comparable to the industry standard or the OEM’s own measurement criteria. Such an event may propel an OEM to look to outsourcing to solve problems that could have been avoided before they consumed time and resources.

In contrast, codevelopment with a long-term supply partner starts before the instrument is designed.  It goes beyond meeting specifications to encompass manufacturability, financial impact, ease of use, adequate supply, and regional availability.
Outsourcing is usually a one-way street. The OEM provides all the up-front work and carries the inherent risks, so it dictates how assemblies are designed and manufactured. The supplier, trying to fulfill the requirements, can get disenfranchised in the process. As a result, more often than not, outsourcing activities require an extensive amount of an OEM’s engineering support—a cost usually not accounted for in the business case analysis. This does not even count the cost of missed opportunities to improve the production process or instrument performance, which can create tension between the OEM and its suppliers.

Codevelopment is more like a two-way street in which both parties share information, financial resources, engineering assets, and technical expertise. The OEM benefits from focusing resources on its own core competencies related to the final product. The supplier gains a long-term business relationship, technical and market expertise, and the ability to influence design, yield rates, and manufacturability for the product.

Another benefit of codevelopment is increased speed to market. The economic recession reduced demand for me-too products, magnifying the impact of fierce competition and making it critical to deliver new and enhanced products to market quickly. First entries into today’s smaller markets reap rewards like increased market share, better customer retention, higher profits, and valuable industry experience. They also starve their competition in the process because few opportunities are left for followers to pick up.

On the other hand, outsourcing in an attempt to streamline production does nothing to create the fundamental efficiencies or nimble reaction times that help OEMs get instruments to market first. For example, an OEM manufacturing a sampling device with a triple-syringe pump found that the syringes sometimes leak when the pump reaches 100 psi, the pressure required by the current device. They succeeded in finding a new source that can provide syringes that operate up to 120 psi. Additionally, they located a supplier that is a codevelopment partner and devoted engineering resources to create an integrated pump and syringe for the OEM’s next-generation device that can operate at significantly higher pressures.

It is conceivable that, in the future, complete supply chains will compete against each other for market share, rather than OEMs competing individually against each other. The consequences for outsourcing versus codevelopment are clear. The sooner the codeveloping supply partner becomes responsible for its unique contribution to the overall application, the sooner the OEM can focus its resources on specific challenges such as building better prototypes.

Defining the Relationship

OEMs that choose codevelopment partnering over outsourcing face long-term relationship issues like trust, risk taking, honesty, and give-and-take. There are several characteristics required for the relationship to succeed for both parties. One characteristic is the ability of each to define and communicate their needs. This includes being honest about vulnerabilities and weaknesses. The supply partner can only add value and drive success when they understand what the OEM is up against.

For example, this type of open communication paid off when an integrated fluidic platform (IFP) supplied for several years by a co-development partner began to fail an OEM’s internal tests. The supply partner had the same testing equipment at their site. Because they knew so much about their customer’s processes, they were able to test the IFPs under the same conditions and determine that the issue was with the OEM’s instrument, not with the IFP. The supplier was able to resolve the problem and restore the revenue stream for itself and its OEM customer.

A related characteristic is a willingness to take risks. Partners need to trust each other with sensitive information. One OEM looking to increase market share beyond its traditional customer, the government of China, decided to risk sharing proprietary information to find a codevelopment partner that could give them a competitive advantage. The OEM gave its potential partner a fluidics diagram. The fluidics supplier analyzed it and saw an opportunity to combine the loop valve and the distribution valve, reducing size and cost while increasing efficiency. Now the two companies are exploring new market opportunities together.
 

Sometimes sharing information evolves to visiting or even housing employees in each other’s facilities where they can see everything about operations and technologies. This mutual trust creates an atmosphere where both parties can make improvements and solve problems more effectively.

Another aspect of trust is allowing the supplier to do what it does best. When entering a codevelopment relationship, an OEM accustomed to the detailed oversight that outsourcing requires, needs to allow its partner to feel ownership over its speciality, whether it is precision fluidics or electronics or some other function.

A Value-Based Process for Supplier Selection

Clearly the process for choosing a codevelopment supply partner covers many more factors than the simple cost-based selection typical of outsourcing. A matrix can help the OEM use factors most critical to their own success to compare suppliers and select the right long-term partner. Table 1 shows an example of this approach using four typical OEM areas of interest—the function of the component or subassembly to be codeveloped, requirements specific to the OEM application, logistics, and other nontechnical factors. The potential partner may be assessed on the basis of functional core competencies, as well as its range of products, technologies, processes, and primary customer support services. Specific criteria are listed in each box created by the resulting matrix. An OEM may choose only some of these criteria or add others but, in general, these criteria have proven valuable over the years.
 

With specific selection criteria articulated, OEMs can further refine the process by assigning a weight to each one. For example, in the sample matrix in Table 1, functional expertise may be more important than special packaging, so the OEM assigns a higher multiplier to functional expertise. Then as it gives potential partners points for each criterion, those points are multiplied for the most important ones, clearly distinguishing differences between suppliers.
 

Improving Performance Metrics

Once an OEM has selected a partner using the value-based assessment described above, the key is to link these values to the primary enterprise metrics for its own business and operations. This brings the supplier into a strategic partnership role that goes beyond outsourcing and gives the OEM a basis for evaluating the partnership going
forward.

Conventional metrics applied to outsourcing include on-time delivery, inventory turns, cost of poor quality, labor, overhead costs, and purchase price variance. These are just a starting point for evaluating the performance of a codevelopment partner. Other performance benchmarks should measure OEM engineering hours saved, length of design cycles, and time to market.
 

The codevelopment partner also should be working toward and evaluated on the same strategic metrics used to measure the performance of the OEM enterprise. A partner in this context acts like an extension of the business, an economically independent department within the organization. The supplier contributes its part to the success of the overall application, working with other departments focused on one common goal. It helps to measure the success of a strategic partnership with the same rigor and metrics used internally to meet deadlines, budgetary constraints, inventory considerations, and performance specifications.

Conclusion: Beyond Outsourcing

Choosing outsourcing solely to reduce labor or assembly costs is a short-term, limited approach to improving OEM business, financial, and technical performance. It ignores all of the opportunities for competitive differentiation, quick time to market, and lower total cost of ownership that come from working with a strategic co-development partner. Outsourcing alone deprives OEMs of further opportunities to advance their market position and competitive advantage. Codevelopment is all about providing application-specific solutions and enhancements more quickly and efficiently. These advantages can make the difference between gaining or losing market share as the economy begins to recover and grow again.
 

Michael Marshall is president of Kloehn Inc. (Las Vegas), and Steve Szabo is business development manager for the company.