Originally Published IVD Technology October 2003
Contract manufacturing
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| GML Inc. (St. Paul, MN) uses printing, die- cutting, and multiple-layer laminating to produce a variety of IVD products. |
Selecting a contract manufacturer to handle production is an undertaking of paramount importance to an IVD company. The decision cannot be made lightly.
If the selection process goes well and the right decision is made, the company gains a valuable manufacturing partner who will contribute to its growth and profitability. But if the wrong contractor is chosen, problems invariably follow. The IVD company will find itself wasting considerable time and money ironing out problems with the contract manufacturer that never should have happened. Even more damaging, product deficiencies resulting from a contractor’s poor performance could lead to a loss of customer goodwill that may never be regained.
In short, the choice of contract manufacturer can have enormous implications for company profitability, not to mention individual careers. But before the selection process can begin, another important decision must be made: whether to outsource in the first place.
The Decision to Outsource
A company first must be inclined to find outsourcing some aspect of its manufacturing process attractive. The recent trend in the life sciences industry has run more and more toward outsourcing. In the IVD industry, companies are finding that certain operations, such as lyophilization and sterilization, that are not core competencies are not economically attractive to run in-house. They are looking to outsource more of this activity if they can.
Companies generally decide to outsource in response to a few key factors. They may want to place greater strategic focus on core competencies. Capital costs for new technologies in which they do not want to invest—or from which they cannot foresee a high enough payback—may be too high. Or gross margins may be shrinking, forcing companies to look at creative alternatives for cutting cost.
In a study of the readiness of IVD manufacturers to comply with new European IVD labeling requirements, conducted by the author’s company, one-third of companies surveyed planned to set up a deferred labeling operation to comply with the directive, while keeping inventories (and obsolescence) to a minimum. This manufacturing strategy naturally leads to a company taking the opportunity to outsource its packaging and labeling or product assembly processes to a contract manufacturer.
In determining whether it should—and is ready to—outsource, a company must make a number of critical initial determinations, including:
• Its goals in outsourcing—for example, to reduce product cost, to obtain access to technology not available within the company, to develop surge capacity, or to gain entry to new markets.
• The scope of the outsourcing initiative—that is, which products in what volumes, which manufacturing operations, and which functions will be handed over to a contractor.
• The obstacles that could prevent the initiative from being successful.
• The timetable for transferring operations to the contract manufacturer.
• The availability of contact manufacturing candidates that could perform the work under consideration.
• The preparedness of the organization for initiating an outsourcing partnership.
• Possible future requirements, in terms of manufacturing capabilities or volumes, the contract manufacturer may need to satisfy.
Once these conditions have been ascertained, the company is ready to begin evaluating possible contract manufacturing partners in the light of essential selection criteria.
Preliminary Evaluation of Candidates
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| A Class 100 manufacturing and packaging cleanroom at Brandon International (Baldwin Park, CA). |
All the relevant functional departments of the organization need to be involved in the decision to outsource production to a contract manufacturer. The same holds true for evaluating candidates for selection. Ideally, the selection team should include representatives from manufacturing, engineering, logistics, quality, information technology (IT), and finance. A good team leader or facilitator is important. This individual can leverage the knowledge and manage the time commitments of the participants so that the process is productive and remains on schedule.
The selection team is responsible for three key tasks. The first is to narrow the list of contract manufacturers up for consideration. The best way to do this is through the request for information (RFI) and request for proposal (RFP). The RFI should seek basic information on the capabilities and capacity of each potential contractor for the purpose of early winnowing. After reviewing responses to the RFI, the team would ask those manufacturers deemed best qualified to submit a detailed RFP.
The second task of the selection team is to conduct reference checks of the candidates’ customers. Checks should be sufficient to develop a fairly complete picture of how customers view each finalist as a contract partner.
Making site visits is the third key task. Selection team leaders need to determine which members should be involved in this activity, carefully balancing the representation of company functions with group manageability. Site visits should be conducted late in the evaluation process in order to minimize the number of trips and to make full use of the information already gathered from completed RFIs, RFPs, and reference checks. The actual selection of a contractor should take place at a meeting of the full selection team.
Selection Criteria
To ensure that the evaluation process leads to the best decision, a company needs to focus on three critical criteria when selecting a contract manufacturer: the contractor’s capacity and capability, the business alignment of the two companies, and the total cost of outsourcing a function. Several important considerations are encompassed by each of these criteria.
Capacity and Capability. The contract manufacturer must be able to take over the manufacturing process from the company and sustain a strong relationship over time. The contractor should have experience making similar products or operating with similar production processes. Its capacity should be sufficient to handle current volumes and possible future increases, and to expand operations if needed down the line. A proven track record in performing the functions to be outsourced is essential.
Given the high reliance on technology in some areas of IVD manufacturing, such as bioprocessing and prototyping, ensuring that a contract manufacturing partner has the requisite technical capabilities is critical. Processes like machining, product assembly, and filling may demand less of the contractor, but still, the IVD company needs to make sure that the prospective partner either has the technical capability currently or has shown that it can adopt it quickly and effectively.
Another important consideration is how well the contract manufacturer controls its operations. This management assessment is best accomplished through a comprehensive tour of the contractor’s facilities and interviews with key personnel. Another part of this assessment should be a review of the candidate’s monthly reports for the past year to gauge its performance. Continual improvement should be evident, along with any metrics used to track company performance.
Finally, if systems connectivity is to be an important part of the contractual relationship, the outsourcing company must carefully evaluate the IT capabilities of each contract manufacturer under consideration.
Business Alignment. This second central evaluation criterion speaks to how effectively the contract manufacturer will work with the client company over the long term. Cultural fit is a primary consideration here—that is, how well the contractor’s management team will work with that of the IVD company, whether this management group can be trusted with the client’s products and supplier base, and how smoothly the conduct of business between the potential partners is likely to go.
A related consideration is the contract manufacturer’s experience with, and strategic interest in, the segment of the business being outsourced. Has the firm been involved with, say, in vitro packaging and labeling or bioprocessing for a significant time? And more important, will it continue to focus on this area in the future? The outsourcing company also needs to determine whether the product being contracted out is close to a principal area of interest for the contract manufacturer, or whether it is just one of 20 operations being managed for various companies that may or may not be in the IVD industry. If the latter, the IVD company may want to investigate further to make sure that the product would at least receive high priority.
Flexibility in the relationship is also important. The client needs to know that the contract manufacturer will jump through hoops as necessary—and what hoops it is capable of jumping through. Each contract manufacturer’s stability, both operational and financial, should also be assessed.
When evaluating the degree of business alignment, the IVD company needs to review work done by a prospective contract manufacturer for other companies. This is important not only for developing a clear understanding of the contractor’s experience, focus, and reliability, but also for gaining a sense of how the client’s requirements might rank in importance among all the contractor’s business concerns. A company does not necessarily have to be its contract manufacturer’s biggest customer, but it probably does not want to be the smallest, either.
Total Cost. The cost of moving a production operation out of house into a contract manufacturer’s facility is the last key selection criterion to be addressed here—and intentionally so. Although cost certainly is an important factor in the selection process, to make it the only factor, or even the overriding factor, is a mistake. And total cost must not be equated to price. The outsourcing company has to address a range of issues when evaluating total cost, price per unit being just one of them. Key questions to ask in this regard are:
• How will pricing vary if production volumes increase or decrease?
• What are the transition expenses and how will they be paid?
• How much new capital will be required to start up the outside operation, and how will it be funded?
• What are the logistical costs of moving components or subassemblies to the contract manufacturer’s site, and of moving subassemblies or finished product from there to the IVD company’s distribution centers or customers?
• What is the cost of linking the client’s IT systems with the contract manufacturer’s?
Note that the time required to transfer product manufacture to the contractor involves more than just the cost of transition. It also has an impact on the projected return on the outsourcing initiative, which typically is established when the outsourcing decision is first made. Perhaps the transition cannot be completed for one year because the contract manufacturer is busy bringing in another customer’s project or building a new facility to handle the client’s own product. If so, can the client still meet the objective set for project return and savings?
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| Quality Bioresources Inc. (Seguin, TX) provides custom contract lyophilization and manufacturing services to clients nationwide. |
Evaluation of the total cost of each contract manufacturing option must take into account all of these considerations, not just the offered product price.
A Foundation for Long-Term Growth
Careful consideration of the evaluation and selection criteria described here does not necessarily guarantee the success of a contract manufacturing initiative. However, following this practical set of guidelines can lead a company to the right outsourcing decision.
But selection of the right contract manufacturing partner is only an intermediary step in building longer-term success. Without a detailed, comprehensive transition plan and effective ongoing management of the partnership, even the best contract manufacturing relationship will fail to achieve its full potential. Effective management means fully documenting all processes in order to avoid ambiguity about who is responsible for what. It means putting in place a clear set of performance metrics to keep both parties focused on continuous improvement. It involves establishing open communications across all levels of the two organizations. Finally, it calls for both companies to treat the contractual relationship as a partnership, which requires trust and a willingness to share both risks and
rewards.
Lawrence Strauss, PRTM (Waltham, MA)
Copyright ©2003 IVD Technology
