Medical device manufacturers are taking a closer look at outsourcing and the benefits it can provide—not only in direct costs but in organizational flexibility and product quality. But not all functions or products are equally suitable for outsourcing and rushing blindly into an outsourcing agreement can cause problems. What, when, why, and how to outsource are the critical questions a medical device manufacturer needs to answer completely before such an undertaking.
The most basic reason that any company considers outsourcing is simply money. “Medical device companies are finally under the same kind of cost pressures that pharmaceuticals and other industries have been under for some time,” says David Busch, VP of medical segment at Solectron. At the same time, he continues, “they’re under pressure to grow their top line more rapidly.” Outsourcing can help in both these areas.
When it comes to cutting costs, says Vicki Tauscher-Phelan, managing director of life science practice, EquaTerra , outsourcing is a way of getting rid of people, especially for companies that have grown through acquisition. “I don’t want to sound too harsh,” she says, “but . . . the true way you save money is to relieve yourself of real estate and headcount.” And she adds, that doesn’t mean shifting people from one department to another, it means getting rid of them. However, she continues, this doesn’t necessarily mean throwing people out of work; while outsourcing can be a good way to cut deadwood, “if they are good people but you’re just eliminating jobs, very often the service provider will take on those people.”
When it comes to growing the top line, there are two approaches: “inorganically, buying other companies,” says Busch, “or organically, which is crank out more products faster and enter new markets.” Both of these require cash, he says, and CFOs are looking for places to find it. One place is in the vertical supply chain. Many medical products, for example, now have pharmaceutical, consumer disposable, and hardware components, which can mean three separate supply chains that tend to get out of sync and delay product introductions. A contract manufacturer, says Busch, can simplify things and at the same time help with product life cycle management: finding sources of supply and arranging for manufacturing locations. “Since a medical device is 65 to 70% material, you don’t save a lot of money on labor,” he says. “You don’t move to China to save a couple of bucks an hour in labor, you move to a lower cost supply base so that you can take costs out year over year in that product.”
Another reason to outsource, says Dan Adlon, VP, strategic business development, Integrated Biosciences, is that it can allow you to take a leap technologically that you cannot do yourself, either “because you politically and organizationally and skill-wise can’t do it, or it’s too dramatic a jump for your organization to handle. For you to do it would take three years and if you outsource it to service provider, they could do it in a year.”
Which Functions to Outsource
Outsourcing allows a company to focus on its core competencies. “If your core competency is product design,” says Adlon, “you’re not necessarily up on what is the latest assembly method or even what’s the best assembly method. Whereas somebody who’s core competency is that manufacturing obviously stays abreast of developments.”
Outsourcing may begin with manufacturing, but IT, finance, accounting, human resources and procurement are also likely candidates, and some companies may not stop there. Tauscher-Phelan cites a pharmaceutical company that outsources all its research, along with manufacturing. While few medical device companies are willing to go that far, J. Randall (Randy) Keene, president & CEO, Avail Medical Products, thinks it may be in the cards. “I think it’s coming,” he says, “I just don’t know how fast.”
Semi-automatic assembly work cell (Photo: Integrated Biosciences)
A company that grows organically, says Keene, can outsource sustaining engineering and managing older products to focus on breakthrough concepts on new products. Companies “don’t want people [and] facilities tied up supporting . . . older products,” agrees Busch, and they may ask a service firm to take them over, “do the sustaining engineering, do the refresh design, switch it to lead free if need be, manage the end of life, all that stuff.” This may, he adds, mean moving it to a lower cost environment. “We’ve been asked to take products coming off a lease or coming to end of life in North America or western Europe and sending them to China to be refurbished there for the Chinese market.”
But shifting to overseas isn’t always a slam dunk. “China does not have a supply base that is ready to make complex medical instruments in low volume high mix,” says Busch. “Their supply base is much more geared toward high volume low mix cell phones and things like that.” In addition, says Adlon, there can be problems with quality. “We’ve had programs,” he says, “which are actually transfers back in from overseas. The reason they want to bring them back in, they can’t get the quality.” And, he adds, there are logistics and delivery: “you have to plan on 12 to 16 weeks for any delivery from over there.”
Protecting Intellectual Property
Low labor costs can make manufacturing in places like China attractive, but IP theft remains a serious problem. U.S. Secretary of Commerce Donald Evans, in a keynote address to the ambassador’s forum on International Property Rights Protection in Beijing January 13, said that widespread piracy and violations of intellectual property rights has cost American companies billion of dollars in sales and has damaged the reputations of their brands.
How can a company protect itself? One method, says Busch, is to be careful about where you do the outsourcing. His company has two Asian facilities, one in Singapore and the other in Suzhou China. Singapore, he says, has good IP protection, so that’s where they send work with significant IP. So-called low-IP work—circuit boards, enclosures, and the like—goes to Suzhou. “Worst case,” says Dick Rubin, director of marketing, medical, at Solectron, “should something be stolen, it could be ten year old technology where they’ve moved on to the hot new stuff.”
China has done one thing that helps: dropped the requirement that outside companies have a Chinese partner. “Most of the IP theft that we’ve seen has revolved around one of the Chinese partners taking the wisdom that was given to them by their U.S. partner and reapplying it under their own label or their own whatever in a separate organization,” says Keene. Not having to have a Chinese partner, he continues, “is the single biggest barrier to IP theft.” Mexico, he adds, has done the same thing in this regard.
What to Know Before You Start
If there is a single most important thing a company should have before even considering outsourcing, says Tauscher-Phelan, it’s a clear view of its objectives. Is it to save money, to gain flexibility, or what? “If your objectives are to save money,” she says, “make sure you understand exactly how you’re going to do that and do the course of the whole deal.” It’s essential, she continues, to have all the steps mapped out in advance. “You want to understand the market; you want to understand your service deli