Risk Factors: Deciding to Outsource Product Development

Originally Published MDDI March 2005

Tilak M. Shah

March 1, 2005

13 Min Read
Risk Factors: Deciding to Outsource  Product Development

Originally Published MDDI March 2005

Guide to Outsourcing

Risk Factors: Deciding to Outsource Product Development

Outsourcing product development can be an attractive option for medical device OEMs. For certain devices, outsourcing partners closer to home can be just the ticket.

Tilak M. Shah

Outsourcing solutions for medical device OEMs are as varied as the devices themselves. Some manufacturers need to reduce manufacturing costs, while others are seeking some other competitive advantage.

Many large OEMs look to low-wage countries as alternatives to in-house production to reduce manufacturing costs. However, they often overlook the time and money spent on their in-house product development. Depending on the type of product, better options can often be found by working with small technology companies. Such specialized companies offer core competencies in the medical device industry that can meet a broad range of product development and production needs. Often, it is the type of device that is the key factor that determines the viability of outsourcing.
This article examines the risk factors involved in deciding whether to outsource offshore or close to home. It provides methods for helping manufacturers assess these factors and integrate them into the decision process. With these factors in mind, OEMs can make a much more informed choice.

Categories for Outsourcing

Certain types of mature medical devices, as well as high-volume commodity-type products, can be successfully outsourced to offshore production facilities in Asia and elsewhere. However, new devices that are still evolving are better kept within the United States, with outsourcing partners that are closer to the OEM.

Mexico and other countries that are closer to the United States are also better choices than Asia for manufacturing operations that require frequent visits. For the purpose of this discussion, medical devices and equipment can be grouped into six categories, each with its own outsourcing considerations. The categories are as follows:

• Capital equipment. This category includes a broad range of products, including sophisticated electronic equipment such as ultrasound, MRI, and x-ray machines, and computerized electronic devices. These are mature, stable products that undergo few design changes.
• Surgical instruments. Scalpels, clamps, and other reusable instruments made of stainless steel that can be steam sterilized make up this category. The designs of these devices are usually long established, but high-quality workmanship is required.
• Disposable supplies. These are commodity goods. They include devices such as single-use surgical drapes and gowns; surgical gloves; various types of bags, diaphragms, slings; and other disposable high-volume, low-margin products. Their designs are typically mature and not often changed.
• Long-term implants. Artificial limbs, hearts, breast implants, knee and hip joints, and other implantable high-risk devices are grouped together in this category. The manufacture of these devices leaves little room for error. Their manufacture is closely controlled and regulated.
• Diagnostic and therapeutic devices. This group consists of balloon catheters, barrier sleeves, and similar Class II and III disposable devices that are in a constant state of development and change. These high-risk products are closely regulated and are manufactured under high quality standards.
• Drug-coated devices. Drug-eluting stents, drug-coated balloons, patches, and similar products coming under strict GMP regulations and pharmaceutical controls make up the last group. Tight restrictions are placed on these products.

Capital Equipment. Manufacturers of major instrumentation and devices equipped with sophisticated electronics frequently outsource production operations. To reduce production costs, other low-risk, low-volume capital equipment is also frequently outsourced to contract manufacturers in low-wage countries.

Some of this work does go to large U.S. contract manufacturers. However, much goes to contract manufacturers in other countries, especially Asia, where about one-third of all electronics hardware worldwide is manufactured. Electronic components for these medical products are often outsourced from Asian manufacturers and assembled by outsourcing partners in the United States.

Surgical Instruments. Surgical instruments with mature designs are frequently sent offshore for production.
Disposables. High-volume, low-margin commodity disposables are good candidates for offshore production because they involve low risk. However, the contract manufacturer must be able to meet quality and safety requirements associated with the products.

Long-Term Implants. Long-term implants are not considered good prospects for offshore outsourcing. Implantable devices are strictly controlled and carry high risk in the case of product defects. OEMs must be able to determine the causes of failures and track them efficiently to avoid costly recalls. For that reason, the production of these devices must be closely regulated. Typically, OEMs keep the production of implantables in house at either U.S. operations or in tightly controlled facilities in Europe and Mexico.

Diagnostic and Therapeutic Devices. A number of small U.S. outsourcing companies have developed expertise in developing disposable noncommodities such as diagnostic and therapeutic devices. Because of their evolutionary nature, such products are not good prospects for outsourcing to offshore facilities. They are characterized by frequent design changes and ongoing development. The key initiators of changes to these products are doctors and engineers. They are seeking to improve their designs to speed up surgical procedures and make them less invasive, and are developing solutions for other unmet needs.

The growth of minimally invasive surgery has led to the development of new medical-grade balloons and other specialized devices that evolve continually. Most of the product development in the area of diagnostic and therapeutic devices is funded either by large medical device OEMs or new start-ups using venture capital. Design development is done mostly by in-house design engineers or contract designers. Material selection and polymer formulation development are done primarily by design engineers with some assistance from component suppliers.

Development of critical components such as balloons, bladders, bags, and stents is typically outsourced to the component suppliers, which also provide other components, including tubing, film, wire, housings, and electronics. Assembly of these complex devices is performed in-house by OEMs, for the most part. Most OEMs also handle packaging, marketing, and distribution of the devices in-house. But these activities have also begun to shift to U.S. outsourcing companies that have shown themselves to be competent and reliable partners for the OEMs.

Product design for diagnostic and therapeutic devices is well suited to small U.S. specialty shops that offer financial stability and quality systems equivalent to the OEM's own. They should also offer expertise in the appropriate technologies, materials, and processes.

An ideal outsourcing partner for this category of device will have as a core competency an understanding of the product's functional requirements. They will be positioned such that they can optimize the design. The company's technical staff must understand polymers and be able to provide custom formulations that provide the best properties for the application.
Production of these devices can also be outsourced to some of the smaller one-stop shops, provided that they have the required cleanroom facilities, specialized equipment, and core competencies needed for efficient, cost-effective manufacturing and assembly. OEMs can often benefit from quick turnaround times and cost savings that are possible through manufacturing efficiencies at these facilities.

Drug-Coated Devices. Drug-coated devices and combination products that must comply with stringent regulatory standards are not suitable for offshore outsourcing. OEMs also keep drug-coated devices in house at either U.S. operations or in tightly controlled facilities in Europe and Mexico. Recently, however, combination products have been outsourced on a limited basis to smaller U.S. shops that are well equipped to comply with GMP and pharmaceutical controls. This trend is likely the result of OEMs wanting to avoid the expense of upgrading their own operations to meet the stringent standards. They are finding it more cost-effective to outsource the work.

Some shops specialize in contract R&D for drug-coated devices and other combination products; others are experts in developing specialty polymer formulations. Still others are equipped with the technical staff, facilities, and equipment to take a project from concept to developing the design, manufacturing, molding, assembly, sterilization, and packaging. These outsourcers are able to handle production runs of the product, adhering to precise manufacturing standards—often without the need to develop costly tooling. OEMs are finding that these full-service outsourcing companies can handle many projects faster and less expensively than the OEMs themselves.

Domestic or Offshore Outsourcing?

The recent wave of mergers among medical device OEMs may slow down their ability to develop products internally, forcing them to rely more on outside contractors. The same is true for the many recent medical device start-up firms, which often lack well-equipped labs or development staffs.

Outsourcing product development to smaller specialty companies allows them to avoid the cost of constructing new facilities and the purchase of high-priced equipment, preserving capital. Outsourcing also eliminates the need to hire employees who have the requisite technical expertise.

OEMs outsource product development, and eventually production operations, primarily to cut costs. But other considerations can be just as compelling. These considerations include reducing time to market, gaining access to new technology, avoiding capital spending, and meeting new quality and regulatory requirements. For example, a large OEM might consider outsourcing after acquiring a smaller company that produces a very specialized low-volume device that is not a good fit for the OEM's in-house manufacturing operation. Production can be transferred to an outsourcing partner equipped with the appropriate technology and processing equipment to manufacture the device more efficiently.

The U.S. Outsource Option

U.S. outsourcers provide expertise in areas ranging from product development, prototyping, and specialty material formulation to highly efficient processing, assembly, and packaging operations. Some small shops have created niches for themselves, specializing in certain production processes or custom polymer formulations. Others operate as one-stop outsourcing shops, complete with engineering staffs, laboratories, cleanrooms, and state-of-the-art production facilities. Many are FDA registered and ISO certified.

The OEMs benefit from the competitive advantages provided by these shops, which can function as a seamless extension of the OEM's own operation. The specialty companies welcome the business, which they need to maintain their staffs, R&D capabilities, and efficient facilities.

An increasing number of OEMs are getting outsourcing partners involved early in the product development process, even outsourcing specialized development work to companies with the expertise to handle R&D activities, prototyping, and design for manufacturing and assembly considerations. This type of specialized product development activity may not be a good fit for outsourcing offshore, primarily because of the long distances and time differences involved, which might unduly delay development work.

Small, specialized product development companies offer core competencies in the medical device industry that can meet OEM outsourcing needs efficiently and cost-effectively. These smaller specialty shops offer expertise in material formulations as well as process and design optimization. As a result, they can often redesign a product to reduce part count or recommend a more efficient processing method to reduce production costs.

Large medical device manufacturers who recognize the benefits offered by these small technology companies are seizing the opportunities to cultivate and fertilize them as outsourcing partners in the United States. By continuing to support this segment of the industry, the OEMs will help ensure that these specialists will be around to provide creativity, speed, flexibility, and other services whenever they are needed.

The Offshore Option

Outsourcing to developing countries, where the low cost of labor is the primary benefit, sometimes means working with an inexperienced, unskilled workforce at a facility lacking the required quality control systems or the ability to meet technical and regulatory requirements. That is not always the case, obviously. Many medical device OEMs have been successful in offshore outsourcing ventures in lower-wage countries in Asia, primarily China. These ventures frequently involve commodity-type products.

The savings are rarely as significant as the sub-$1/hour wages for production workers might suggest. Many additional expenses are associated with manufacturing in Asia. Raw materials typically cost about the same, regardless of where they are sourced, but if the OEM has to ship them overseas from the United States, the additional cost goes straight to the bottom line. Other expenses include the cost of shipping the finished products or components back to the United States. Shipping by sea is costly, and duty and port fees, insurance, and land transportation from the ports must also be included.

A workforce with the required training and technical capabilities must be located to handle the production. The low base rate for labor in China typically is accompanied by a fee paid to a broker to facilitate business dealings.

Quality and all applicable regulatory standards must be met on a consistent basis. The OEM remains the responsible party, regardless of who produces the products, and so it is critical to ensure that the contract manufacturer complies with all standards.

In addition, intellectual property and proprietary processes can be at risk in China. The possibility of patent infringement and product counterfeiting is very real in that region.

Transportation of finished products or components from Asia can easily take 4–6 weeks from the time they are loaded aboard ship for transport until the products get to market in the United States. Congestion at the major West Coast ports is only expected to worsen as shipments from Asia increase. That will mean increasingly longer delays and complicated logistics challenges when the shipments exceed the capacity of the rail and trucking transport system. Long waits at the loading docks that truckers typically are forced to endure will likely reduce the number of trucking fleets that can afford to have their equipment sitting idle at the ports. These factors will translate into higher transportation costs for OEMs outsourcing to Asia.

Communications can also be a challenge between the United States and Asia. Besides the language barrier, there is the 13-hour time difference from the East Coast to Asia. At 2 p.m. in New York, it is 3 a.m. in Beijing, producing scheduling challenges for conference calls.

Other considerations include utilities that can be undependable, political instability, unfavorable currency exchange rates—not to mention the expense of shifting production back to the United States if the offshore project fails to deliver as the OEM expected or if quality concerns exceed a satisfactory rate.

When these factors, along with the additional costs associated with outsourcing production to low-wage countries, are considered, offshore outsourcing of specialty devices may not be the best option. For high-volume, low-margin commodity items, however, the savings can provide a worthwhile competitive advantage.


The decision whether to outsource product development, and where, is not all black and white; many gray areas need to be considered. Outsourcing of product development and the production of certain types of medical devices to small specialty shops within the United States is often preferable when certain risk factors are considered.

Speed is essential in the medical device industry. Being the first to market with new products can be instrumental to a company's success in this highly competitive market. By outsourcing to medical device specialists, OEMs are able to respond faster to the changing needs of the industry while satisfying regulatory requirements.

In this global economy, some manufacturing of products will continue to go overseas, especially production of commodity-type products.

Assessing the risk factors associated with the type of device being developed and manufactured can help companies decide whether to outsource offshore or to start thinking creatively about how to partner with small technology companies close to home. Integrating these factors into the decision process is essential to a successful outsourcing partnership.

Tilak M. Shah is founder and president of Polyzen Inc. (Apex, NC), a manufacturer of disposable components and devices for medical industry OEMs and an independent developer of specialty polymer formulations for latex replacement in low-pressure balloons for devices.

Copyright ©2005 Medical Device & Diagnostic Industry

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