Originally Published MDDI February 2005

Cover Story

Making the Right Call on Contract Machining

A number of factors can help you decide whether or not to outsource machining work.

William Leventon

When it comes to machining, there's a lot to be said for outsourcing. Then again, there's also a lot to be said for not outsourcing. So what's a medical device manufacturer to do? Of course, there's no single right answer. It depends on the particulars of the job, the type of machining, and the concerns and capabilities of the OEM itself.

But good calls on outsourcing are likely to come after OEMs carefully consider both sides of the issue, take advantage of help offered in making the decision, and answer some fundamental questions about themselves.

The Case for Outsourcing

When OEMs don't have an in-house machining operation, they have to incur substantial costs to set one up. These costs include the price of purchasing machines, hiring people to run them, and allocating facility space for the work, says Steve Kappers, president of American Micro Products Inc. (Batavia, OH), which does contract machining work for medical device companies.

A single machine and the tooling it requires can cost half a million dollars, notes David Drechsler, vice president of sales and marketing for Huffman Corp. (Clover, SC), which sells machining equipment. An expenditure of that magnitude may be particularly unwise if the OEM is making a new product that could “bomb in the marketplace,” explains Drechsler. “So smaller companies will usually outsource machining work until they have enough volume to justify investing in the equipment and infrastructure to do it themselves.”

At the outset of their ventures, the heads of many start-up companies decide against large capital expenditures for equipment. These companies are designed to outsource machining and other manufacturing processes, according to Jack Fulton, vice president of sales and marketing for Specialized Medical Devices Inc. (Lancaster, PA), a contract manufacturer for the medical industry.

Besides eliminating the costs of an in-house machining operation, OEMs that outsource machining work don't have to worry about hiring skilled equipment operators. Even finding such people can be difficult, Kappers says. “We try to recruit from Switzerland and other countries that have a pool of talented labor. But it's difficult to get people [into the United States] with today's tightened immigration laws.”

Outsourcing can also help companies get products to market faster than they would if they had to set up a machining operation first, notes Bob Lamson, vice president of business development for Microgroup Inc. (Medway, MA), a firm that machines medical parts. “If you're looking for speed to market, you've got companies out there that already have the core competencies and the proper equipment to make complex components,” he says.

What's more, he adds, companies that choose to outsource machining “save on the knowledge base, which we've invested in here so you don't have to invest in it.” That knowledge base, built up during many different machining projects, allows contract firms to bring “extra value” to a job, Kappers says. With their experience, he notes, contractors may be able to alter a part design slightly to make it easier and less expensive to manufacture, without affecting the functionality of the component.

Experience with a wide variety of machining jobs gives contract machining firms another important edge over OEMs, Kappers maintains: “Say an OEM trains guys to run machines to make a certain part. And that's all those guys know. Then the part design changes. That would mean the OEM would have to retrain those guys or find new ones to run a whole different setup. But contract manufacturing firms run dozens of different parts all day long, which gives them the ability to adapt to change more quickly in the rapidly changing medical device industry.”

In addition to doing machining work for customers, some contract firms will assume responsibility for related secondary operations, as well as such tasks as inspection, packaging, and transportation. Contractors will perform some of these tasks in-house, while outsourcing others. But from the OEM's standpoint, Kappers says, the important thing is that “an outfit like ours will manage the whole process for you, so you don't have to coordinate and track all that activity.”

The result: Instead of writing a number of purchase orders, OEMs that farm out machining work and related tasks to a single firm “can send out one purchase order and get back one shipment of components,” Lamson says. Besides being more convenient for OEMs, this arrangement can save them hundreds of thousands of dollars that they would otherwise spend to manage multiple suppliers, Kappers claims.

The Other Side of the Story

Despite the advantages of outsourcing machining work, many OEMs opt to do machining in-house. In some cases, Fulton says, these companies will still outsource machining work when it exceeds their in-house capacity, either because of tight deadlines or growing demand for their products.

In other cases, though, medical device companies do all of their own machining. According to Kappers, it often comes down to one word: control.

When OEMs control their machining process, they can be fairly sure about the security of proprietary product information. On the other hand, Kappers says, some medical device companies worry that secret product data could leak out of a contract manufacturing operation—particularly if they use a manufacturer that's also doing work for one of their competitors.

So most of American Micro's customers require the firm to sign confidentiality agreements. In addition, Kappers says, contract manufacturers can allay customer concerns about intellectual property by providing adequate security on the plant floor. This can include housing some jobs in cells that are segregated from the rest of the facility.

But this won't satisfy companies that want to maintain the tightest possible control over product quality and delivery times. Many of these companies were launched by “entrepreneurs who are staking their entire business on a product,” Kappers says. “So they're legitimately concerned that everything goes well.”

One company that fits this description is Atlantis Components Inc. (Cambridge, MA), which sells metal abutments used in dental procedures. “We make custom products with very short cycle times,” explains Tom Cole, cofounder and president of Atlantis. “We get an order for an abutment, and within a couple of days we ship out the finished product to a dentist or dental laboratory.”

Cole and his colleagues started their company with the intention of outsourcing the abutment machining. Since their business was based on meeting tight deadlines, the contract machining firm they used “would have to dedicate a group of people and machines to us and always be willing to work when orders came through,” Cole says.

But it didn't work out that way. Instead, Atlantis found that its contract manufacturer was unable to reliably meet deadlines due to the demands of jobs from other clients. From this experience, Cole drew a lesson about relying on an outsourcing partner: “A vendor will have a spike in demand when everyone needs everything. And then he just can't support you. So when delivery is your competitive advantage, you should keep machining in-house, where you have absolute control over when a part gets done and the resources applied to producing it.”

So now Atlantis makes its own abutments, forming them from blocks of titanium using four CNC milling machines. The company turns out a couple of hundred abutments a day at a cost that nationally known contract machining companies can't even come near, Cole maintains. He knows this because he got quotes from some of the big operations back when Atlantis was shopping for a contract manufacturer. “Both their per-piece costs and their upfront development costs were prohibitive,” he reports.

Atlantis also machines its parts more cost-effectively than the smaller firm it originally hired to do the work, Cole adds. How did the company create a top-notch machining operation from scratch? “We have completely configured our system and equipment to make one product,” he says. “And now we have an incredibly efficient machining process that no one can match.”

Besides focusing on a particular niche, medical device companies can do cost-effective machining by turning out parts in volumes large enough to produce economies of scale, Drechsler notes. In-house machining can also make economic sense when OEMs are certain of a steady and long-flowing stream of work that would justify the costs of a machining operation. “If you know you're going to be making 500,000 parts a year for the next five years, and that there aren't going to be a lot of changes to the job, it might make sense to set it up in-house,” Kappers says.

Doing so can be preferable to outsourcing. “We could set up the same thing for the OEM in our house—buy the same machinery, staff it, and run it for five years producing those parts—but we're going to tack a little profit onto our operation,” Kappers explains.

An in-house machining facility can have other advantages as well. For one thing, it allows OEMs to respond quickly to customers who want to modify a product or need an emergency shipment, notes John Memmelaar Sr., president of Royal Master Grinders Inc. (Oakland, NJ), which sells machines to medical device companies and contract manufacturers.
Machining capability also gives OEMs more flexibility in product development. “If you have your own machine shop, you can just go in on a whim and try different things,” Lamson says.

Special Cases

Besides considerations that apply to machining in general, the outsourcing decision can be affected by issues related to certain types of machining. Take laser machining, which is used to cut very small features in metal parts. OEMs might want to outsource laser machining because of the exceptionally long time it takes to learn the procedure, according to Steve Iemma, president of Accu-Met Laser Inc. (Cranston, RI), a contract laser machining firm. “It takes us at least a year to train [operators] to the point where they're beginning to get a pretty good handle on the technology and how to use it,” he says. For OEMs that don't have that much time to spare, “outsourcing is a quicker way to get the technology working for you.”
Today, however, in-house laser machining is much more common among OEMs than it was a decade or so ago, Iemma notes. Over the years, he says, laser equipment has become more accessible to users, prompting some OEMs to add lasers to their production lines. “It's much faster for them to do all the operations under their own roof than it would be if they had to ship parts out to me for one operation,” he explains.

Many of Iemma's customers have their own laser machining equipment. They send him their overflow work until it reaches an amount that justifies the purchase of an additional laser system. They also outsource to Accu-Met when the job requires laser machining expertise that they lack, Iemma says.

Another special case is chemical machining. Techniques for this type of machining employ acids and masks to form parts without leaving the burrs and stresses produced by conventional machining processes, says George Keeler, president of Tech-Etch Inc. (Plymouth, MA), which does chemical machining for medical device companies.

According to Keeler, the decision on whether or not to outsource chemical machining is usually an easy one. Since the process involves the use of dangerous chemicals, most OEMs are more than happy to turn the work over to companies like Tech-Etch that have the necessary permits and equipment for treating hazardous waste. In fact, he does not know of any medical device OEMs that do chemical machining in-house.

Obtaining Help with the Call

When it's not so easy to make the call on outsourcing, some equipment manufacturers offer help. For example, Royal Master will grind sample parts for OEMs in test production runs. These runs yield data on throughput, cycle time, and setup time, as well as other information that can help medical device companies make an informed decision on whether or not to buy a machine. Royal Master doesn't charge for test production runs, even if the potential buyer decides against making a purchase.

Like Royal Master, Huffman offers test production runs to machine shoppers. In addition, Huffman will work with potential customers to develop production processes for machines before purchase. The company uses virtual simulation and other tools in this process development work, for which it charges an upfront fee that comes to less than 10% of the machine cost.
The product is well worth the fee paid for it, according to Drechsler: “When manufacturers buy a piece of equipment, they're not buying the equipment. They're buying what the equipment does. So process development is what really has value. And you can buy a whole process from us, not just machinery.”

With a process to go with the equipment, Drechsler notes, shoppers have the information they need to make the right decision about buying a machine—whether the answer is yes or no. If the answer is yes, he says, the upfront process work will shorten the customer's project development time. And in some cases, it can even yield results that exceed the OEM's goals.

How? “OEMs manufacture their parts all day. They're very familiar with the part geometries and how the parts work,” Drechsler explains. “We're very good at making machines and developing processes. If we work together with customers on a process for their parts, that's when they can see some breakthrough productivity improvements.”

Making the Decision

Is in-house machining for you? Before you set up shop, experienced machining hands advise you to consider the following questions:

• Do you want the responsibility? Machining in-house means the buck stops with you. “We have the responsibility of making our machines run,” says Cole. “So we have to have the spare parts, the knowledge, the people, the redundancy to make sure we're always able to make parts. We wouldn't have this responsibility if we were outsourcing.”
• How much machining work will you do? Consider how many machined parts you need and how often you need them, Lamson suggests. If you have only an intermittent need for a couple of machined parts, it probably does not make sense to invest in your own machining operation. But if you need many machined parts of varying complexity, an investment in machining equipment and personnel may be justified.
• How much experience do you have? When it comes to machining, Kappers advises medical device companies to “lean toward the proven commodity.” If you have plenty of machining experience, keeping it in-house makes sense. But if you don't, he says, “why try to build the expertise in-house?”

Such a move is hard to justify, Lamson argues, given the number and variety of contract machining options available to OEMs. These options range from “mom-and-pop shops” to multimachine facilities that make everything from simple to complex components for any phase of a job from prototyping to production. “You've got good vendors out there,” he says. “Use them.”

William Leventon is a frequent contributor to MD&DI. He is based in Somers Point, NJ.

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