Originally Published IVD Technology October 2005
Contract Manufacturing
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| Automatic fill lines at NERL Diagnostics (East Providence, RI) speed bottles and other products through to completion. |
In today’s IVD market, as in other segments of the medical product manufacturing industry, change is a constant. A significant large-scale change is the pace at which both large diagnostic companies and numerous smaller start-ups and biotechnology companies are enthusiastically embracing the benefits of contract manufacturing, outsourcing production and other processes to specialty subcontractors.
Many companies prefer to keep production in-house whenever possible. Manufacturing products by means of completely internal processes allows these organizations to retain absolute control over quality and cost. However, that approach becomes problematic when a company realizes either that it could make more money by outsourcing or that difficulties of in-house manufacturing logistics dictate the far more efficient course of outsourcing to a third party.
The decision to outsource a product is a complex one for any company. Myriad reasons underlie the decision, as well as the choice of a company to partner with.
Reasons for Outsourcing
IVD manufacturers’ reasons for outsourcing, though many, are readily classified into two general categories—financial and strategic.
Financial Justifications. Large companies often calculate the full production cost of each product manufactured by adding in organizational operating expenses, thus spreading these costs proportionally over the range of devices produced. These costs reflect the amount of direct labor, space, and ancillary resources (such as management time) applied toward producing a finished kit or component.
If there is a lean infrastructure in place and the company has the luxury of sharing operational costs across a wide range of products, then the overhead expenses assigned to the manufacturing cost of a particular product can be controlled and kept as low as possible. But when that is not possible, and when adding a new product to the company’s offerings necessitates an additional production line, with the added labor and space and other resources dedicated to it, outsourcing becomes an attractive option. This is true particularly if the company is located in a geographic area where the costs of such resources are higher than they are in other regions.
For many small and medium-sized organizations, the problem can be more acute. Most smaller companies must cope with a restricted cash flow. The amount of capital required for the production of newly developed IVD devices can be extensive. Capital may be needed not only for additional manufacturing personnel and production space, but also to cover such expenses as new manufacturing equipment, good manufacturing practice (GMP) and ISO quality management system consultants (if systems certified to these standards are not already in place), and the advance purchase of raw materials and supplies sufficient to generate a reasonable start-up inventory once marketing and sales have begun. Smaller companies in this situation find outsourcing to be an excellent way to avoid the pitfall of running out of operating capital just as product sales start to increase and additional investment is needed to fuel the momentum.
Strategic Justifications. Many IVD companies manufacture products within a specific discipline of the IVD industry, such as chemistry or hematology. Occasionally, such a company may rush to add a product line that, from a marketing perspective, complements the products it already sells, but that may lie outside the company’s field of expertise. Here, business strategy is the motivation for calling on the services of a contract manufacturer.
Consider a chemical reagent manufacturer that intends to add to its product portfolio a new visual rapid test it has developed or has obtained the rights to. The company’s present manufacturing equipment, technical support, and production space may not be able to accommodate the addition of such a product. In a case like this, the manufacturer often will decide that the much safer course from a strategic standpoint is to outsource the production rather than build new in-house capability. Also, outsourcing would offer the further strategic advantage, on the marketing side, of a faster time to market.
Outsourcing is not always a matter of a U.S. manufacturer moving production offshore. For years now, many companies outside of the United States have looked to gain entry into this market. The logistics of setting up a manufacturing plant in the United States are complicated. Various regulatory, marketing, language, and cultural issues can make it a very difficult task. Outsourcing is a viable option for bypassing many of these issues. Overseas companies that want to sell inside the United States will find that outsourcing production to a U.S.-based manufacturer reduces freight costs and provides a more efficient means of distributing products through a market area as large and diverse as that of the United States.
Choosing a Contract Manufacturer
The decision to outsource is momentous, but at least as important is the choice of a contract manufacturing partner. The criteria that companies use in selecting a manufacturing partner are varied but ultimately fall into a few categories—specifically, culture, experience, location, and stability.
Competitiveness matters, too. Most customers of outsource service providers are concerned that they have chosen a supplier whose quoted price represents good value. The contractor’s purpose, at bottom, is to help the IVD manufacturer meet its financial goals. No supplier who is routinely among the most expensive to do business with will be a manufacturer’s first choice if the customer can achieve the same sought-after results through another company at a lower cost.
The Culture of the Contractor
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| Contract manufacturers, such as NERL Diagnostics, design their manufacturing and production facilities to allow for maximum flexibility. |
Culture is a broad term that in the context of contract manufacturing refers to the degree of customer orientation exhibited by the service provider.
This quality is revealed through the systems the company uses—its reports, regulatory files, accounts receivable department, and order completion processes, for example—and the attitude of its employees toward their customer, the IVD manufacturer. The culture to be sought is one that makes the customer feel important and cared for when it conducts business with the supplier.
A customer-oriented contract manufacturer will display several distinctive characteristics. It will follow up quickly on questions and inquiries of any nature. If it for some reason cannot, it will keep the customer regularly informed regarding the status of its inquiry until the matter can be closed. This is treatment that can be expected from all departments—customer service, technical support, QA/QC, shipping, production, and sales.
A customer-oriented company also will make a concerted effort to anticipate problems before they occur. Managers not only focus on the task at hand but also anticipate obstacles that could occur should some element of the process break down. For example, they might order supplies with lead times sufficient to avoid back-order delays. Similarly, they would keep QA/QC materials such as testing panels well stocked and would have alternative shipping arrangements ready to use in advance of emergency need.
Some contract manufacturers, happy with the status quo, do not prepare for possible increases in production volume required by a thriving customer. They may even avoid taking on customers whose prospective sales growth they consider to be beyond their means. But other suppliers want and pursue customers who are growing so that they can experience growth also. A customer-oriented contract manufacturer that embraces a supportive team attitude toward future growth will attract more referrals of that nature.
Many things can and do go wrong in the manufacturing process. What reveals the character of a contract manufacturing organization is how well it responds when problems arise. A truly customer-oriented company will offer explanations with possible solutions, not excuses. The customer simply wants the problem fixed, and wants to know what steps will be taken to prevent its recurrence. If the contract manufacturer spends energy on placing blame—wherever it may lie—it may be forgetting the main objective: to get the product out right and on time.
Experience, Stability, and Location
Experience. Contract manufacturing experience is a valuable asset for a company being considered as an outsource services provider. That track record as a contractor gives a potential customer the opportunity to talk to referrals and to review an already qualified GMP/ISO manufacturing environment. The experienced supplier knows how to deal with the demands of a customer, such as periodic audits, packaging changes, personnel changes, and so on. A company that has done some contract manufacturing will have put in place a support system to handle all customer needs, including QA/QC, technical support, customer service, and sales support. In addition, the experienced supplier will probably have sufficient space and equipment to perform a variety of functions. This may enable a customer to consolidate several projects in one house.
Experience is an attribute whose value cannot be overestimated in considering a company for contract manufacturing.
Stability. In many, if not most, contract manufacturing arrangements, the customer is the larger of the organizations in the relationship. The financial stability and prospective longevity of the contract supplier are key factors in determining the viability of a business partnership. This is so because most contract manufacturing projects have the potential to run 5 to 10 years or longer, and to grow in volume over time.
A supplier should have good financial statements that are updated periodically, present a strong balance sheet, and show acceptable sales records from year to year. Also, the company should provide evidence of a good payment history and should be involved in no significant outstanding legal proceedings. In the area of stability as well as experience, good references are helpful. The IVD manufacturer should confer with other, or former, clients of the prospective contractor.
Also, the physical plant should be presentable and, in fact, should show well enough to merit the customer’s confidence that regulatory agencies will have a positive first impression of it and that products will be manufactured in a proper environment.
Geography. The geographical location of contract manufacturers can be a critical ingredient in the decision to select one supplier over another. A contractor’s location should be advantageous either with respect to proximity to the customer or as a distribution point for international sales. There should be no indication that the supplier might have difficulty obtaining additional space should expansion become necessary.
Conclusion
An IVD manufacturer that has decided to outsource production has a challenge in finding the best service provider to use. Though candidate companies’ experience and referrals can be excellent indicators, making a choice may not be as simple as some would think, particularly for a company new to the outsourcing process. The IVD company in that case ought to outline its own requirements for what would constitute a good contract manufacturing partner.
The factors discussed here are all important considerations for the search, but, like consumers in any marketplace, what manufacturing companies in the IVD industry want ultimately is value for their money.
Steve Galante, NERL Diagnostics Corp. (East Providence, RI)
Copyright ©2005 IVD Technology
