GUIDE TO OUTSOURCING: SUPPLIER SELECTION

Few decisions are as important to medical device companies as the choice of an outsourcing supplier. These suppliers, which take on critical jobs once handled by OEMs, have both an immediate and long-lasting effect on the fortunes of their customers.

OEM-supplier relationships “tend to go on for a long time. When you choose a supplier, you're probably making a three- to five-year decision,” says Jeff Somple, president of northern operations for Mack Molding Co. (Arlington, VT).

So, how does a company choose the right outsourcing supplier? The keys to making a sound decision include understanding each of the following: the needs for a specific project, what work will be outsourced, and the suppliers vying for the job. How the selection process is developed and implemented are also crucial.

To help companies become better shoppers for outsourcing services, this article poses a dozen questions that should be answered before signing on with a supplier.

1. What Am I Looking For?

A company should define what is wants from a supplier, advises Dirk Smith, vice president of business development for Minnetronix Inc. (St. Paul, MN). The document can be as detailed as a request for proposal, or it can simply be a general statement of what the company expects from an outsourcing partner.

Once a company has a document stating its requirements, it can begin the search for a supplier. “Many companies say they do medical device design and manufacturing, but that can mean a lot of different things,” says Smith. “You have to do some work up front to narrow down your list of prospective outsourcing providers to those that actually do what you're looking for.”

After identifying a number of vendors, a company must find out which of them have the specific competencies required by the project, according to Bill Ellerkamp, CEO of ExtruMed (Placentia, CA). For example, the product may require a degree of tolerance control that can only be provided by certain suppliers.

2. What Phase Is the Project In?

According to Ellerkamp, there are four major factors to consider when evaluating a supplier—cost, quality, speed to market, and volume, or capacity. The importance of each of these factors depends on the phase in the product life cycle in which the supplier will be getting involved. Ellerkamp breaks up the product life cycle into the following five phases.

Design. At this stage, don't focus on a supplier's capacity or production cost. Instead, a company should be concerned about speed to market and how well the supplier can comply with quality requirements.

Development. Speed to market and quality is a primary concern at this stage. Cost is beginning to matter, but volume does not yet.

Manufacturing. Quality will probably jump to the top of the list. Cost and volume also become more important, but speed to market becomes less of a factor.

Maturity. At this point, the product's sales growth has probably peaked, and cost becomes the OEM's top concern. “When you've got two or three competing products on the market, it's all about who can sell the product at a lower price and still get a good margin out of it,” Ellerkamp says. Quality and volume remain important in the maturity phase.

End of Life. There's still enough of a market for the product to make it worthwhile to produce, but the OEM is no longer putting any focus on it. Although quality is still important, cost is now the major factor. Therefore, the OEM may be thinking about moving manufacturing offshore to cut costs even further. “Today, there are products on the market that may have reached the end-of-life stage 10 years ago but were moved to Mexico and found new life, because they're manufactured at a cost-competitive level,” says Ellerkamp.

Some integrated suppliers can handle all five phases of the product life cycle. There are also many suppliers that only assist OEMs in one phase. Therefore, products sometimes shift from one supplier to another as they move through their life cycles.

3. Who Will Size Up Suppliers?

Potential outsourcing partners should be evaluated by people from a number of different departments of the OEM's firm, advises Robert Scott, vice president of manufacturing operations and information technology for Possis Medical Inc. (Minneapolis). In addition to manufacturing, departments that should be represented during the selection of a manufacturing supplier include these four:

Engineering, the group that knows the product best.

Quality, the department that ensures that quality standards are achieved.

Documentation, that makes sure the document systems used by the OEM and the supplier are compatible.

Finance, the group that ensures any deal with the supplier is a sound financial move.

4. How's the Fit?

Is a supplier a good fit for a particular job? To answer this question, the OEM must make judgments about several areas.

Experience. Has the supplier handled jobs like yours before? It's not necessary for a potential outsourcing partner to have experience with exactly the same type of product as yours, Smith says. Having experience with making devices that have the same level of complexity and are produced in the same types of volumes are more important considerations.

“If you've got a design and you're looking for someone that can build the device, I think it's more important to look for expertise in executing on manufacturing—and not necessarily expertise in the technology of an IV pump or whatever the product might be,” Smith says.

Volume. Does the supplier have the volume capabilities to handle the product when it goes into full production? If it can't, and this is discovered after the supplier has been given the job, the OEM is forced to switch suppliers. The OEM must then requalify the new supplier to meet FDA requirements, says Lonny Wolgemuth, medical market specialist for Specialty Coating Systems (Indianapolis).

In addition, the supplier must be able to handle any increases in volume requirements when necessary. John Grecco, senior designer for knee engineering for Stryker Orthopaedics (Mahwah, NJ), says his company expects its suppliers to be able to keep up with Stryker's growth.

Scope of Services. Smith says his company specializes in providing a complete package of services for medical device manufacturing. However, in some cases, “people come to us [and] want a module or component of a system, and they don't need our quality system and our complete documentation package,” says Smith. “So, we point out that we may not be the best fit for that type of project, because they don't need all of the services we provide.”

Cultural. Make sure the corporate culture is in sync with that of a potential supplier, advises Somple. The OEM and supplier should have similar views on key matters such as corporate values and the treatment of employees.

Somple cites a case when four of his customer's engineers were basically living at Mack for the better part of six months. “In that kind of situation, they almost become a part of your team, and you become part of their team,” says Somple. “If your team directives are different—for example, if one group comes from a quality culture and the other comes from a profit culture—there are going to be some clashes.”

Good cultural fit is particularly important during a product launch, when decisions must be made as a team. “When you and your supplier are culturally the same or close to it, you're making decisions based on the same kind of criteria,” says Somple. “But if you're always arguing about what's most important, you find you're spending most of your time wrestling with each other rather than trying to solve problems.”

5. What Else Does the Supplier Bring to the Table?

Many attributes and capabilities can affect the performance of suppliers and the satisfaction of their customers.

Medical Expertise. According to Somple, medical device firms must make sure that potential suppliers understand process validation. The supplier's quality system is crucial as well. “You'll probably want your suppliers to adhere to ISO 13485,” he says. “That puts a lot of emphasis on recordkeeping and processes that suppliers don't necessarily have to do in normal day-to-day operation, but are required in the medical field.”

When a supplier focuses on the medical industry, “it engenders a culture,” explains Gil Reich, vice president of sales and marketing for The MedTech Group (South Plainfield, NJ). Medical device companies should look for suppliers with a medical manufacturing culture. “When you're talking about things like bioburden and pyrogenicity, you should be talking to a supplier that doesn't have to look those terms up in a dictionary,” Reich says.

Why is this important? When a supplier is focused on the medical industry, the OEM doesn't have to spend a lot of time bringing that supplier up to the standards of medical manufacturing, Reich says. For example, a medically focused manufacturing supplier will know that raw materials must have the proper certification and that devices must be made in a controlled environment with low bioburden.

Corporate Systems. What systems does the supplier use to govern how it conducts business? Examples include quality systems such as ISO 9001 and 13485, Ellerkamp notes.

Design and Development Capabilities. These include design for manufacturability and prototype production. “Since most [medical device firms] are instrument designers and marketing companies rather than manufacturers, they look for a company that can do up front development work,” says Frank Jankoski, director of technical services for Micro Medical Technologies (Somerset, NJ).

A Wide Range of Manufacturing Services. The more technologies and operations a single supplier can handle in-house, the less risk that is run by its customers, according to Chuck Edwards, executive vice president of Micro Medical. “If [a contract manufacturer] is buying five different components from five different suppliers and then putting them together to make an instrument, the chances of variability in those processes are much greater than if the manufacturer has the five different operations running in-house, where he has control over them.”

Using a single supplier with many manufacturing capabilities, makes things easier for OEMs when problems arise. Consider a situation where a medical device company is getting components from 10 different vendors and then putting them into a complex medical device. If a quality issue arises, it might not be easily traced back to its source. “Imagine the finger pointing that goes on between the 10 vendors,” says Al Carolonza, Micro Medical's director of marketing. If the company has all of the component manufacturing under one roof, any quality issue “is our problem, and the customer goes to one place to get it resolved,” says Carolonza.

A Special Wrinkle. Does the supplier have a unique capability that will give its customers a competitive advantage? For example, Carolonza points to a patented technology developed by his company that halved the cost of a component in a customer's instrument, thereby helping the instrument gain market share.

Long-Term Engineering Resources. Although OEMs pay plenty of attention to the engineering staff that a supplier initially assigns to the development and launch of a product, they also need to think about the future. “Who's going to be managing your project two years down the road?” asks Jankoski. “Does the supplier have a staff that's going to be working on continuous improvement? Often, I don't think medical device companies look at what the supplier's engineering staff will provide over the long term.”

Engineering Service Capability. Consider a manufacturing supplier that has the technical expertise to service its products during the warranty period.

Financial Stability. Unlike products in other industries that have launch times measured in months, it takes years to roll out medical products. Medical device companies need to know that their suppliers won't be going bankrupt in the middle of the lengthy process of getting their products to market. During that time, suppliers must have “the financial resources to invest in the people and everything else needed to make sure your product is successful,” says Somple.

6. How Was the Visit?

Suppliers can say anything over the phone or in a written questionnaire, so it's imperative for medical device firms to visit the facilities of the suppliers they're considering, Jankoski says. OEMs will see whether the facility is clean and well organized and whether the supplier is working on other medical devices.

Other things to look for during supplier visits include:

Prototype lab. If development work must be done, a company should see an actual prototype lab, not just a few scattered employees who are identified as people who work on prototypes, says Jankoski.
Validation package. This package, which includes device and design history records, shows that the supplier understands validation methods.

Your team. Somple suggests asking the supplier to identify the people who will be working on the project. This includes getting their resumes, if possible. “The team that's assigned to you can be just as important as the company you pick,” he says. “If the supplier assigns you the B or C team, you could be in a lot of trouble.”

Questions from the supplier. During a supplier visit, try to determine how well that supplier will listen while you're working together on a project. Although this can be hard to assess, meeting with the supplier's personnel can provide some clues. For example, are they quick to reach conclusions about the project? “I think technical people have a tendency to jump in and provide solutions, so it's important that they take a step back and ask questions,” Smith says.

7. What Did the References Say?

A chat with references can be a big help in assessing a supplier. “You want to go into this relationship knowing that you're not a guinea pig—that the supplier has worked on similar products and has been successful in helping get them to market,” Somple says.

Of course, suppliers will always provide their best references, Scott notes. “But surprisingly, we get good, frank information from some of them,” he says. He and his colleagues ask references a number of questions about their suppliers, including:

Did they provide on-time delivery?

Did they try to solve quality-related problems themselves, or did they bring the customer in on the solution? The latter is preferable. “If there are any quality issues that may be looming out there, you're not blindsided by them later on,” says Scott.

How did they handle pricing? Did the customer get a lowball estimate but end up paying more?

Do you know anyone else who used the supplier or anyone who may have had a bad experience with the firm?

Where do you think the supplier can improve? This question can elicit very honest feedback. “Everybody can improve somewhere,” says Scott. “If [the reference] doesn't come up with any place where the supplier can improve, you have to question the integrity of the person responding.”

8. Do You Want to Go Offshore?

Many factors go into the decision of whether to seek a supplier with offshore facilities, including the following:

Product volume and complexity. High-volume, low-complexity products are the best candidates for low-cost offshore manufacturing.

Product size. Big, bulky products are costly to ship.

Communications. There are natural communications hurdles that must be overcome when manufacturing is farmed out to foreign facilities.

Intellectual property (IP). Does production of your device involve valuable IP? IP protection can't be counted on in some countries, Scott says.

Market location. If all of the company's products manufactured outside the United States are manufactured in a certain country, it would be prudent to look for a supplier with a facility in that country, says Reich.

While offshore suppliers can slash manufacturing costs, local suppliers have advantages of their own. For example, Scott and his colleagues have enjoyed the convenience of having their manufacturing supplier close by. “We can just hop in the car and be there in a matter of minutes,” he says. “It's hard to oversell that.”

9. Is the Low Bidder Really the Best Option?

Many times, the process of picking a supplier is guided by price. Other important factors in making the selection “are often overlooked when people are under pressure to meet certain economic criteria,” Ellerkamp says. “It's easy to say, ‘I'm going with Supplier A rather than B, because A is $800,000 cheaper per year.'”

There are many reasons not to necessarily opt for the low bidder. In some cases, suppliers with low cost estimates don't provide all of the services required by projects, Smith says. They might assume that the customer will be handling some of these items, or they might have simply missed them.

Another possibility is that low-bidding suppliers will handle certain tasks but not bring them to the necessary level of completion. For instance, they might produce design documentation as agreed, but that documentation might not be suitable for inclusion in an FDA submission, Smith says.

10. Is the Supplier You're Looking For the One You've Already Got?

Edwards urges OEMs not to undervalue long-term relationships with outsourcing suppliers. “People at some companies are always looking for the next low-priced or sexy outsourcing supplier to come down the road,” he says. “It's a mistake for them not to develop these partnerships long term and make the outsourcing supplier an extension of themselves.”

Why? Once design teams are disbanded, Edwards says, the outsourcing supplier is often the only remaining link back to the early stages of a project. “So, if you have that supplier as a continuous part of the team, that tribal knowledge is maintained and grows over the years.”

In addition, there's a learning curve for a new supplier, resulting in mistakes that wouldn't have been made by a supplier that has previously worked with a company. “You don't want to keep changing suppliers for the same reason you don't change the jobs of your internal people every couple of years,” says Edwards. “Instead, you allow them to grow and learn and bring their accumulated knowledge to every new project.”

11. How Do You Evaluate All of the Information?

When all of the information about a group of potential suppliers is in, it's time to make a choice. In their effort to select the best supplier for a job, Scott and his colleagues weight the different factors that go into the decision. For example, is quality more important than experience or technical staffing capabilities? Is cultural fit as important or more important than quality?

However, Scott warns that these exercises can lead to overanalysis that renders a company unable to reach a decision. Although analytical tools and techniques are useful, “there will always be a certain inherent amount of intuitiveness that will drive you to your final decision,” Scott says.

12. Did You Take Enough Time to Make the Right Choice?

In the end, a company might still conclude that it isn't totally comfortable with any of the finalists. Nevertheless, it might feel obliged to choose one of them because of the time and effort invested in the selection process. In a case like this, however, Scott believes companies should resist the natural urge to bring the process to an end and declare, “We don't need to go with any of these companies. Let's look a little longer.”

OEMs might also feel it's necessary to choose a supplier relatively quickly in order to keep a project on schedule. These companies must remember the importance of making a good choice and the consequences of getting it wrong. “With all the documentation and validation involved, it's very hard to change horses in midstream,” Somple says. “So you have to take the extra time to make sure you pick the right horse at the beginning of the race.”

Conclusion

How do medical OEMs pick the right supplier? As we've seen, there's no easy answer to that question. But asking and answering the 12 key questions above should help medical firms identify their own needs and an outsourcing partner that can meet them.

Copyright ©2008 Medical Device & Diagnostic Industry