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Perspectives on Outsourcing

Originally Published MPMN May 2002

PRODUCT UPDATE

Perspectives on Outsourcing

The qualities you seek in a supplier should be dictated by the type of device under development

Norbert Sparrow

Bill Wood, Colorado MEDtech
Sourcing a supplier of contract services, in some respects, is no different from selecting a plumber or a roofing contractor. Applying some basic principles of common sense can go a long way toward building a mutually beneficial relationship. In all instances, you want to be sure that the person you hire is reliable, has the expertise and resources to do the job properly, and that the rate is competitive. Of course, the analogy has its limits, not the least of which are the technological challenges and regulatory requirements that a supplier to the device industry must master.

Bill J. Wood, senior vice president, product development and technology, at Colorado MEDtech Inc. (Boulder, CO), presented a paper titled "Developing and Maintaining the Outsourcing Partnership" at this year's MD&M West show. During that session, he addressed both common sense and industry-specific issues that are built into the OEM-supplier relationship. He agreed to expand on some of the points he made at the conference during a recent telephone interview with MPMN.

The reasons to outsource are legion, notes Wood. Drivers may be a loss of confidence in internal capabilities, speedy access to a QSR-compliant process or leading-edge technology, accelerated ramp-up, an overall reduction in costs, or a combination of these and other factors. "The decision to outsource is situational," sums up Wood. It is also an evolutionary process, as illustrated by the changing attitude of device OEMs toward the use of externally developed technologies.

The medical device community used to be behind the curve in terms of striking up outsourcing agreements to leverage leading-edge technologies, notes Wood. "It was pretty scary to them," he says. "That has changed during the past five years. With aerospace falling apart and technologists moving to the device sector, the medical device industry has become more progressive and aggressive. Gaining access to advanced technology is a very valid reason to outsource today," says Wood.

The demands of the marketplace, including accelerated time to market and shrinking product life cycles, continue to push device OEMs to outsource design and manufacturing operations. According to some recent studies, medical companies have more products in the pipeline than they can actually make themselves, notes Wood, "so faster start-up and the ability to produce more products at lower risk is a key factor in outsourcing."

Contract manufacturers benefit from reduced layers of bureaucracy and more streamlined procedures. "When customers ask us at Colorado MEDtech how long it takes to turn around an engineering change order," says Wood, "frankly, I think three days is a long time. In their facility, they may be lucky to turn around an ECO in a month." Blame it on signoff authority and corporate culture, says Wood. "I know of large corporations that reward those who are agile at company politics versus getting new products to the market." This is not always true, adds Wood, who cites Boston Scientific as a large company that is both nimble and aggressive. "But you're not going to find that at some of the older, larger, more conservative companies."

Finding the right fit

The more than 50,000-sq-ft medical device production facility at Colorado MEDtech includes a Class 10,000 cleanroom.

The qualities you are looking for in a supplier are in large part dictated by the type of product you're working on. A derivative device calls for a solid manufacturing base and a successful track record with similar products. On the other end of the spectrum, a breakthrough product requires an innovative and flexible supplier with a technological edge and clinical experience, notes Wood. Companies that specialize in breakthrough devices may, in fact, have a history of projects that don't make it out the door, and that is not necessarily a bad thing.

"These companies are challenged to be absolutely hot on the engineering end," says Wood, and the inability to bring a product to market may not be their fault. "Someone came to Colorado MEDtech several years ago with a project to build an infusion pump that would sell for $150," recalls Wood. "We came up with some interesting solutions, but ultimately we couldn't meet their price point." OEMs should focus on the percentage of products that do make it to market, says Wood. "When you're looking at breakthrough products, the metric has to be taken with some sort of filtering." Conversely, when evaluating a supplier for the manufacture of a derivative product, all of the devices should make it to market, adds Wood.

Bad beginnings

Miscommunication and indecision can often derail a partnership at the beginning of the process. A common occurrence, according to Wood, is a sloppy preapproval process that results in a fundamental misunderstanding of the nature of the device at the outset. Later on, "when there is a full and open discussion with the client, the team suddenly realizes that the instrument it thought it was going to make is different from what the OEM had in mind," says Wood. "Then the question becomes, can we rethink the solution?" Not an auspicious start for a project.

Long delays between sourcing a supplier and actual start-up can also have unfortunate consequences. "The outsourcer may go ahead and prepare a project profile for the lead engineers, name the engineers assigned to the project, and even introduce them to the client. The OEM may take an extremely long time finalizing the decision, and by the time he does, there may be a set of different people around the table," says Wood. That could be a critical issue if the company was "banking on the chemistry of the team," he notes. OEMs must recognize that custom developers measure their pipeline, says Wood. "They can't have a team just sitting around waiting for the next project to come through the door and still stay in business."

Single-source versus niche suppliers

Gaining access to advanced technology, faster start-up times, and reduced manufacturing costs are among the key reasons that device manufacturers outsource production.

The proliferation of companies positioning themselves as single-source suppliers to device OEMs might, at first glance, suggest that the days of niche activities are over. Not so fast, says Wood. "It depends on the economics of your instrument. If your priority is to accelerate time to first revenue or time to profit, then a custom development company that also has manufacturing capabilities makes a lot of sense," he says. "You can never transfer a project from a development house to a contract manufacturer without suffering a loss in time."

On the other hand, parceling out the project may be beneficial from a cost perspective. "If you're willing to take the time, you can play off companies against each other up front and at the manufacturing stage," says Wood. "That can be to your advantage in terms of pricing."

A third scenario that is not uncommon involves signing up a company with an innovative bent to provide engineering and manufacturing expertise for the first year or two of a product's life cycle. Once the product is on the market and the OEM is under cost pressure, he can move manufacturing to another supplier, suggests Wood. "Clients in that situation need to be careful, though, and know what the exit strategies are. The nonrecurring engineering cost to transfer the product to another manufacturer can be significant," cautions Wood.

Whatever outsourcing strategy best suits your needs—and it's important to note that the strategy may shift as new products come through the pipeline and existing products mature—we hope that you find the Buyers Guide on contract services starting on page 48 to be a useful tool in your search for a perfect partner.

Copyright ©2002 Medical Product Manufacturing News

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