Originally Published MDDI October 2004
Originally Published MDDI October 2004
One-Stop Shop versus Mom-and-Pop
Big contract manufacturers seem to offer everything, but their small counterparts still prosper.
|Large firms such as Avail may have an edge over small firms in terms of personnel, often having more engineers and technical employees available to solve problems.|
Executives at large contract manufacturing firms hear it all the time. Potential customers have 6, 8 or 10 vendors on a project right now, but they're looking for a single contract partner that can handle everything.
Besides manufacturing, large contract firms now offer OEMs product design, assembly, packaging, and distribution. With their soup-to-nuts menu of services, the big players have come to be known as one-stop shops.
Not surprisingly, the emergence of one-stop shops has had an effect on what medical industry consultant Bill Ellerkamp calls “mom-and-pop” contract manufacturers. Nevertheless, small contract firms are surviving—and even thriving—in the shadows of the giants.
Why One-Stop Shops?
Besides the relative simplicity and convenience of dealing with a single vendor rather than many, there are other reasons for the appeal of one-stop shopping. For one thing, the production schedule becomes more predictable when a single contract manufacturer handles an entire project in-house, says Mike Kartsonis, president of Dynamic Fabrication Inc., a small metal fabrication and machining firm in Santa Ana, CA. Unlike manufacturers that farm out parts of a job to different firms, the one-stop shop “doesn't have to rely on anyone else,” he notes. “So they can say, ‘This product is scheduled for this date.'”
One-stop shops also offer “seamless transitions” from one project phase to another, says Josh Rose, director of marketing for TriVirix (Durham, NC), a full-service contract firm for the medical and life sciences industries. At TriVirix, Rose notes, products proceed smoothly from design to manufacturing because development teams include the company's factory personnel, who ensure that products are designed for manufacturability.
In addition to design and manufacturing, TriVirix handles product support functions such as service and repair. According to Rose, this combination of manufacturing and support is particularly important when dealing with repair problems that can be traced back to the manufacturing process.
For such problems to be corrected, information must be passed from repair to manufacturing personnel. This is complicated when different contract firms handle repair and manufacturing, he maintains. In cases like this, the OEM is responsible for making sure that the manufacturing firm gets the repair information needed to fix problems.
But with a single contract firm in charge of the whole job, manufacturing personnel automatically get critical repair data without OEM involvement, Rose notes. What's more, he adds, the OEM is relieved of the job of refereeing finger-pointing matches between different vendors who blame each other when problems arise.
Then there's the issue of risk. J. Randall Keene has heard the argument that medical device companies reduce risk by breaking projects into many pieces that are handled by different vendors. But this actually increases the likelihood of problems because of the risk at each “pass-off” in a multivendor process, says Keene, president of Avail Medical Products, a one-stop shop based in Fort Worth, TX. In addition, he notes, “a chain is only as strong as its weakest link. So if one component manufacturer is a weak link, that can shut down the whole process.”
Keene also points out that large one-stop shops offer more resources than their smaller competitors. With multiple plants in different locations, large contract firms can meet a variety of manufacturing needs. For example, Keene says, many large firms can accommodate customers who want their products manufactured in low-cost offshore facilities. This option isn't on the menu of small firms with a single manufacturing location. Larger firms may also have several U.S. facilities for customers in different parts of the country who want to stay close to the manufacturing of critical components. By contrast, Keene notes, a small contract manufacturer with a single East Coast facility can't satisfy a West Coast customer who wants to be near the production process.
In addition to their facilities advantage, large one-stop shops have an edge in personnel, says Ellerkamp, formerly a vice president for MedSource Technologies Inc., the contract manufacturing giant recently acquired by fellow industry heavyweight UTI Corp. (Collegeville, PA). With more engineers than small contract firms, large shops won't be overtaxed when multiple projects are under way simultaneously. One-stop shops also have the management resources and infrastructure to handle business excellence or six-sigma projects that may be beyond the capabilities of smaller players in the field, Ellerkamp notes.
|Some smaller firms have responded to large one-stop shops by imitating their range of services. For example, Polyzen Inc.'s services include product development, assembly, and packaging, in addition to manufacturing disposable components.|
When questions arise during a project, Avail can turn for answers to the 150 engineers and technical advisors on the company's payroll. Such engineering resources dwarf those offered by small firms, which “don't have a deep enough bench to call on a broad base of talent,” Keene says.
But if a small firm has the resources you're seeking, why go to a large one? “When you're working on a project, you might not know what kind of talent you need until you don't have it when an issue comes up,” Keene notes.
Large but Limited
Still, there are limits to the knowledge and experience of even the largest technical staffs. Given the unique or unusual aspects of new medical products, “It's rare that we've done 100% of what a customer wants us to do,” Keene admits. That means part of most jobs must be learned with the help of customers.
But not too big a part. Keene is only comfortable taking a job when Avail has prior experience with at least 80% of its requirements. So the firm has passed on many jobs that didn't reach this experience “hit rate,” Keene reports. “We tell the companies, ‘We're not a good fit for this. You need to find someone else.' Sometimes this makes them mad, but it's the truth.”
But some one-stop shops may not walk away from jobs that don't fit well with the company's experience, Keene warns. As a result, he says, “six months or a year down the road, [the OEM] might realize that the manufacturer can't get over the hump on the most critical part of the whole job. So it's up to OEMs to make sure the one-stop shop they pick has a pretty high-percentage ‘been there, done that' hit rate.”
When OEMs decide on the one-stop shop they want, they may be surprised to find that the one-stop shop doesn't want them. “The bigger one-stop shops become, the hungrier they are for bigger-revenue projects to drive the growth they need,” Ellerkamp says. As for small jobs, big players may not actually turn them down, he adds, but they can take themselves out of the running in other ways, such as making “noncompetitive” bids.
Many times, Advanced Polymers Inc. gets calls from small OEMs that were referred to the firm by MedSource, reports Mark Saab, president of the New Hampshire–based component maker. According to Saab, such calls are a surprising result of the creation of giant contract firms made up of many smaller companies with expertise in specific areas.
“In the beginning, I think [one-stop shops] thought they'd be all things to all people,” Saab says. Instead, however, the behemoths have focused their acquired resources on large OEMs with high-volume jobs. This leaves out start-up OEMs with small projects—OEMs that used to outsource work to small manufacturers absorbed by the one-stop shops. So the start-up OEMs turn to Advanced Polymers and other small contract manufacturers that have retained their independence, Saab explains.
Besides small projects, some one-stop shops also tend to shun discrete tasks that are part of a larger manufacturing job. According to Keene, “If someone came to us looking for injection molding, we would say, ‘No thank you. If you're just looking for injection molding, you should go talk to an injection molder.'”
Rather than parts of a larger project, one-stop shops want the entire job of making a finished medical device. “We have developed systems and expertise focused on handling the whole process,” Keene says. “If you're just going to use an extremely small subset of our expertise, then we're really not bringing much to the party.”
|One-stop shops often have several facilities that are equipped to handle the entire manufacturing process.|
Though one-stop shops offer a variety of services to handle the entire manufacturing process, they offer just one of each. So, for example, an OEM that goes to a one-stop shop for molding and assembly services must use the firm's one molding department and one assembly department. Some OEMs don't like this arrangement because it doesn't allow them to “shop around,” according to Mike Badera, president of Precision Extrusion Inc., a small contract manufacturer located in Glens Falls, NY. One Precision Extrusion customer says he prefers to work with small companies “because he can talk to three different molders and get three different opinions and three different quotes,” Badera reports.
OEMs with the freedom to shop around can also choose the manufacturer they believe is best for each part of a job, notes Al LaVezzi, president of LaVezzi Precision Inc., a contract machining firm in Glendale Heights, IL. But customers who chose a one-stop shop but find its molding department does inferior work are still stuck with that department because it's part of the package offered by the contract firm, LaVezzi notes.
Why Think Small?
When it comes to outsourcing, there are many reasons for OEMs to think small, according to people in the industry. In the area of communications, customer messages to a one-stop shop may be passed along several times before reaching the right people on the plant floor, according to Kartsonis. But if a customer calls his firm with questions about a job, he can put him right through to the person working on the part. Or the customer can drop by the plant and resolve the issue directly with the plant personnel involved.
OEMs may also think small because they believe small contract firms are more responsive than large ones, according to Saab. “Their project might be 5 or 10% of a small company's business, but less than 1% of MedSource's business,” he says. “So they're probably going to have a lot more leverage over a small guy.”
Small manufacturers also can be especially good on rush jobs, Kartsonis maintains. Large firms can take days just to process an order, he notes. But if one of his customers needs a product in a couple of days, “I can walk out onto the shop floor and tell my foreman, ‘Drop what you're doing, and put three guys on this project,'” he says. “So I can have the product delivered before I even get a purchase order from these places.”
According to Badera, a couple of customers have complained about the many meetings and delays in their dealings with contract firms that coordinate all aspects of a job. In addition, he reports, a customer who had dealt with both large and small contract firms praised the small firms for getting to a bottom-line answer faster than the one-stop shops.
With their big engineering staffs, large one-stop shops are able to provide design services to their OEM customers. But these engineering staffs constitute costly overhead that will add to the cost of a project—whether or not it requires engineering input, LaVezzi notes. He adds that his customers may need some help with part manufacturability issues, but they're not looking for design help. With no design engineering staff, he says, LaVezzi Precision can offer customers better prices than big firms with heavy engineering overhead.
Even in these days of Federal Express and e-mail, proximity also influences the choice of a contract manufacturer, Saab says. If there's no one-stop shop facility in their area, some OEMs will choose small contract manufacturers close enough to visit. “Engineers like being close by so they can come over, check on their projects, and change things,” explains Kartsonis, who has many customers located within visiting distance of his firm.
Whether or not they're close to a one-stop shop, OEMs concerned about the protection of product secrets may be better off working with small manufacturers, according to Ellerkamp. He adds that one-stop shops do their best to protect intellectual property, using nondisclosure agreements and separating different products into “buckets” so there's no information transfer. Nevertheless, he says, critical information can “migrate” because a one-stop shop deals with multiple competitors and people leave the company.
This possibility doesn't sit well with some of Badera's customers, many of whom started small medical companies based on proprietary information. These people have told Badera that they're afraid to go to one-stop shops because product information might be “misused” by one of the many people employed at a large firm. Badera adds, though, that he has no “concrete” knowledge of anyone at a one-stop shop misusing proprietary information.
Ellerkamp also advises OEMs to consider small contract manufacturers when they're looking for unique technologies that will differentiate their product from others. “Technology investment is an area where the mom-and-pops really excel,” he says. “They built their businesses around a specific technology platform and grew by looking for new applications for the technology.”
On the other hand, he notes, large one-stop shops focus on acquiring more work. “So they may not invest in pushing the technology envelope the way the small companies do.”
According to Saab, one-stop shops can do a good job on a cutting-edge product if they have an in-house expert on that type of product. But there's no guarantee big firms will have someone like that on staff. In some cases, therefore, a contract manufacturer and OEM may embark on a project with both parties unaware of the complexities and nuances involved in making the product.
The bottom line: “To make a sophisticated type of product, you want somebody who has specific expertise in that area, not general expertise in the industry,” says Saab. “If you can find an expert in a big company who's going to manage your project, fantastic. But if you can't or don't know whether one will be available, you're better off [going to] a smaller guy with a lot of experience in that niche.”
Small Guys Stay Focused
|The emergence of large firms has kept some smaller firms, such as
Advanced Polymers Inc., keenly focused on their core competencies.
The emergence of one-stop shops has kept Saab's firm focused on the company's core expertise. “You don't want to compete with the big guys,” Saab says. “You want to do things they don't or can't do well.”
Another small contract firm has responded to the one-stop idea by imitating it on a small scale. A maker of specialty disposable components for the medical industry, Polyzen Inc. has added to the menu of offerings available at its new facility in Apex, NC. Besides component manufacturing, Polyzen now offers product development, assembly, and packaging. “A lot of our customers indicated that we received their business because we could provide that type of service,” reports Tilak Shah, founder and president of Polyzen. “They really felt comfortable dealing with one place, rather than having their engineering staff spread out all over.”
Of course, Shah's 40-person one-stop shop doesn't have the resources or capacity of its huge counterparts. So Shah has been careful to maintain focus on Polyzen's core competencies, taking only projects that require the firm's special technologies and expertise. According to Shah, Polyzen's focus hasn't been diminished by its new service offerings, as they're simple operations and natural outgrowths of the company's core competencies.
Occasionally, Shah gets inquiries about his willingness to sell out to larger entities. But he prefers to form what he calls “strategic partnerships” with companies offering supplementary products or services.
Saab also gets calls from companies interested in acquiring his firm. But rather than creating one-stop shops, these companies are seeking to expand by focusing on a specific manufacturing subset, such as tubing technology.
Consolidation at the component level could be the next phase in contract manufacturing, according to Ellerkamp. This type of consolidation would allow firms to offer OEMs a bundle of component technologies needed to produce certain products. So far, though, no one has shown that consolidating at the component level adds value for customers or shareholders, Ellerkamp maintains. “It's just one plus one equals two, not one plus one equals three,” he says.
Partners, Not Competitors
In any case, Saab sees no reason to sell out to a larger firm. In fact, he's become quite comfortable with the new state of contract manufacturing in the medical device industry.
Sometimes he talks to OEMs considering a one-stop shop before they've defined many key technical parameters of their products. He urges these companies to work first with a small niche contract firm like Advanced Polymers, which can quickly and efficiently produce prototypes that will give the product more definition.
Once an initial batch of prototypes has been made, Saab will often send the customer to MedSource for lower-cost, higher-volume production than what his company can offer.
But isn't MedSource a competitor? According to Saab, MedSource and Advanced Polymers rarely compete for projects. In fact, it's much more likely that the two firms will work together on a project than compete for it. MedSource is actually one of Saab's biggest customers, buying critical components and subassemblies that are part of larger devices.
Saab directs customers to MedSource when he thinks the overall projects are too big for his firm. “We tell them we'll do the balloon component and MedSource can do the rest of it,” he says. In these cases, MedSource contracts with Advanced Polymers to supply the balloon for the larger device.
Alternatively, many small suppliers sell specialty components directly to OEMs looking to differentiate their products from others on the market. The OEMs specify these components for products that will be manufactured by one-stop shops. In such cases, the one-stop shop simply takes the list of approved vendors from the OEM, Ellerkamp explains.
After the product-launch phase, he adds, OEMs may give one-stop shops the latitude to substitute for approved vendors.
Today, the contract manufacturing game has a role for both big and small players. But what about tomorrow? “The one-stop shops control the game,” Saab says. “If they could figure out how to do everything for everybody, then I guess they could put all the little guys out of business. But as the big guys get smarter, I believe they tend to narrow rather than broaden their focus.”
Ellerkamp believes that focus will be on the primary growth driver for the one-stop shop: finished medical device assembly currently done in-house by OEMs. So he sees the big players concentrating mainly on the addition of low-cost assembly capacity.
That will leave plenty of work for firms like Advanced Polymers. “When people started buying component manufacturers and rolling them up into big companies, we were a little afraid for our future,” Saab says. “But I think it's actually helped us. It's been a good thing for the big guys and the small guys.”
Copyright ©2004 Medical Device & Diagnostic Industry