Feature Article
Published: May 5, 2010
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Looking Beyond Outsourcing to True Partnerships
Strategic long-term partnerships with suppliers can help medical device manufacturers increase innovation, improve instrument performance and leverage their own unique expertise.
Real integration
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| Fluidics platforms are often used in medical applications such as clinical chemistry instruments, hematology instruments, and urine analysers. |
Medical and diagnostic device manufacturers often look to outsourcing and contract manufacturing to reduce labour and assembly costs per unit. The difficulty is that it could take so much money and time to train the contract manufacturer, validate the process and performance and ramp up the production, that savings are only realised on large volumes of commodity components. Device companies that need the flexibility to design and produce specialised devices in relatively small quantities (thousands instead of hundreds of thousands) are not able to realise the savings that come from traditional outsourcing.
Today’s dynamic market forces put tremendous pressure on medical device companies to leverage scarce resources and maximise their own core competencies. To do so, they must look beyond outsourcing to a strategic supply relationship. This means developing relationships with partners that can design, manufacture, service and support critical components and integrate their processes with the device company’s requirements.
Outsourcing versus codevelopment
Traditional outsourcing is typically a financial decision (cost reduction) or a quality decision (yield rate). Unfortunately, the decision to outsource often occurs after internal production has begun and problems appear. When this happens, representatives from different departments trigger an outsourcing push based on their own analysis specific to their function. For example, perhaps quality control decides that the quality rate is not comparable to the industry standard or the device company’s own measurement criteria. Such an event may propel a company to look to outsourcing to solve problems that could have been avoided before they consumed time and resources.
In contrast, codevelopment with a long-term supply partner starts before the instrument is designed. It goes beyond meeting specifications to encompass manufacturability, financial impact, ease of use, adequate supply and regional availability.
Outsourcing is usually a one-way street. The device company provides all the up-front work and carries the inherent risks, thus it dictates how assemblies are designed and manufactured. The supplier, trying to fulfill the requirements, can get disenfranchised in the process. As a result, more often than not, outsourcing activities require an extensive amount of engineering support from the device company, a cost usually not accounted for in the business case analysis. This does not even count the cost of missed opportunities to improve the production process or instrument performance, which can create tension between the device company and its suppliers. Codevelopment is more like a two-way street in which both parties share information, financial resources, engineering assets and technical expertise. The device company benefits from focusing resources on its own core competencies related to the final product. The supplier gains a long-term business relationship, technical and market expertise and the ability to influence design, yield rates and manufacturability for the product.
Another benefit of codevelopment is increased speed to market. The economic recession reduced demand for me-too products, magnified the impact of fierce competition and made it critical to deliver new and enhanced products to market quickly. First entries into today’s smaller markets reap rewards such as increased market share, better customer retention, higher profits and valuable industry experience. They also starve their competition in the process because few opportunities are left for followers to pick up.
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| When this integrated fluidic platform (IFP) began to fail, a partner was able to duplicate the OEM's gravimetric test for accuracy of dispense under the same conditions. It helped the OEM find the cause of the problem and get back online, even though the problem was not with the IFP itself. |
Yet, outsourcing in an attempt to streamline production does nothing to create the fundamental efficiencies or nimble reaction times that help medical device companies get instruments to market first. For example, a device company manufacturing a sampling device with a triple-syringe pump found that the syringes sometimes leak when the pump reaches 100 psi, the pressure required by the current device. It succeeded in finding a new source that can provide syringes that operate up to 120 psi. In addition, it located a supplier that is a codevelopment partner that devoted engineering resources to create an integrated pump and syringe for the device manufacturer’s next-generation device that can operate at significantly higher pressures.
It is conceivable that, in the future, complete supply chains will compete against each other for market share, rather than medical device companies competing individually against each other. The consequences for outsourcing versus codevelopment are clear. The sooner the codeveloping supply partner becomes responsible for its unique contribution to the overall application, the sooner the device company can focus its resources on specific challenges such as building better prototypes.
Defining the relationship
Medical device companies that choose codevelopment partnering over outsourcing face long-term relationship issues such as trust, risk taking, honesty and give-and-take. There are several characteristics required for the relationship to succeed for both parties. One characteristic is the ability of each to define and communicate their needs. This includes being honest about vulnerabilities and weaknesses. The supply partner can only add value and drive success when it understands what the device company is up against.
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| This portion of a fluidics manufacturing facility is dedicated solely to production of assemblies codeveloped with OEMs. |
For example, this type of open communication paid off when an integrated fluidic platform (IFP) supplied for several years by a co-development partner began to fail a device company’s internal tests (Figure 1). The supply partner had the same testing equipment at its site. Because the supplier knew so much about its customer’s processes, it was able to test the IFPs under the same conditions and determine that the issue was with the device company’s instrument, not with the IFP. The supplier was able to resolve the problem and restore the revenue stream for itself and its device customer.
A related characteristic is a willingness to take risks. Partners need to trust each other with sensitive information. One device company seeking to increase market share beyond its traditional customer, the Government of China, decided to risk sharing proprietary information to find a codevelopment partner that could give it a competitive advantage. The device company gave its potential partner a fluidics diagram. The fluidics supplier analysed it and saw an opportunity to combine the loop valve and the distribution valve, which reduced size and cost while increasing efficiency (Figure 2). Now the two companies are exploring new market opportunities together.
Sometimes sharing information evolves tino visiting or even housing employees in each other’s facilities where they can see everything about operations and technologies. This mutual trust creates an atmosphere where both parties can make improvements and solve problems more effectively.
Another aspect of trust is allowing the supplier to do what it does best. When entering a codevelopment relationship, an a device company accustomed to the detailed oversight that outsourcing requires, needs to allow its partner to feel ownership over its speciality, whether it is precision fluidics or electronics or some other function.
A value-based process for supplier selection
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| A fluidics diagram has been redesigned with a reduced size and fewer parts. The fluidics partner combined the loop valve with the distribution valve in this two-pump instrument, eliminating the valve driver that would have attached at position C. |
Clearly, the process for choosing a codevelopment supply partner covers many more factors than the simple cost-based selection typical of outsourcing. A matrix can help the device company use factors most critical to its own success to compare suppliers and select the right long-term partner. Table I shows an example of this approach using four typical device company areas of interest: the function of the component or sub-assembly to be codeveloped, requirements specific to the device application, logistics and other nontechnical factors. The potential partner may be assessed on the basis of functional core competencies, as well as its range of products, technologies, processes and primary customer support services. Specific criteria are listed in each box created by the resulting matrix. An device company may choose only some of those criteria or add others but, in general, those criteria have proven valuable over the years.
With specific selection criteria articulated, medical device companies can further refine the process by assigning a weight to each one. For example, in the sample matrix in Table I, functional expertise may be more important than special packaging, therefore, the device company assigns a higher multiplier to functional expertise. Then, as it gives potential partners points for each criterion, those points are multiplied for the most important ones, which clearly distinguishes differences between suppliers.
Improving performance metrics
Once a medical device company has selected a partner using the value-based assessment described above, the key is to link these values to the primary enterprise metrics for its own business and operations. This brings the supplier into a strategic partnership role that goes beyond outsourcing and gives the device company a basis for evaluating the partnership going forward.
Conventional metrics applied to outsourcing include on-time delivery, inventory turns, cost of poor quality, labour, overhead costs and purchase price variance. These are just a starting point for evaluating the performance of a codevelopment partner. Other performance benchmarks should measure the engineering hours saved by the device company, length of design cycles and time to market.
| TABLE I: Sample stratgeic supplier valued based assesement matrix. | |||||||||||||||||||||||||
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The codevelopment partner also should be working towards and evaluated on the same strategic metrics used to measure the performance of the device company. A partner in this context acts like an extension of the business, an economically independent department within the organisation. The supplier contributes its part to the success of the overall application, working with other departments focused on one common goal. It helps to measure the success of a strategic partnership with the same rigor and metrics used internally to meet deadlines, budgetary constraints, inventory considerations and performance specifications.
Beyond outsourcing
Choosing outsourcing solely to reduce labour or assembly costs is a short-term, limited approach to improving the business, financial and technical performance of a medical device company. It ignores all of the opportunities for competitive differentiation, quick time to market and lower total cost of ownership that come from working with a strategic co-development partner. Outsourcing alone deprives medical device companies of further opportunities to advance their market position and competitive advantage. Codevelopment is all about providing application-specific solutions and enhancements more quickly and efficiently. These advantages can make the difference between gaining or losing market share as the economy begins to recover and grow again.
Michael Marshall
is President and
Steve Szabo
is Business Development Manager at Kloehn Inc., 10000 Banburry Cross Drive, Las Vegas NV 89144, USA
tel. +1 702 243 7727
e-mail: info@kloehn.com
This article first appeared in the March 2010 MD+DI Guide to Outsourcing.
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