OUTSOURCING FOR IVD MANUFACTURERS
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Packaging, labeling, and kit instructions are only a few of the critical pieces of design when developing kits and working with a contract supplier. |
The success or failure of the relationship between the OEM and the contract supplier can hinge on the communication and effective transfer of information between the two contracting parties. For example, what information does the OEM need to communicate to the supplier for it to successfully manufacture the component product? At the same time, what information does the supplier require from the OEM? This article will explore the importance of communication in the relationship between the OEM and the supplier. This article will also suggest ways to create relationships that are mutually successful and beneficial for both parties.
Open Communication Is the Key
After the initial contact is made between the OEM and the contract supplier, the need for product secrecy often impedes the flow of information that is required between the two parties. At the first meeting, the OEM may speak in generalizations about its product. The supplier ends up prodding and probing the OEM’s statements, and tries to elucidate the requisite information on which to base its cost-of-manufacturing estimate. Conversely, in order to retain its competitive edge within the marketplace, the supplier is reluctant to disclose to the OEM its intellectual property issues and manufacturing methodologies, especially as they relate to product stability or pricing.
A more productive approach that ensures effective transfer of information entails the agreement of the OEM and the contract supplier to sign nondisclosure agreements. By doing so from the beginning, they can share information in a more open manner. Having such agreements in place is important since the OEM will eventually have to transfer detailed product and raw-material specifications, formulations, and manufacturing forecasts to the supplier.
In addition, if the OEM does not outright own the intellectual property for its product, then another IVD company likely does. The contract supplier will not indemnify the OEM from intellectual property or patent infringement. The OEM needs to ensure that it has the necessary licenses, and pays royalties where appropriate.
Sharing Information
The OEM should ask the contract supplier a lot of questions. In particular, the OEM should inquire whether the supplier has any experience in formulating products that are similar to theirs. For example, many reagent suppliers can manufacture wet or frozen reagent assays. However, due to technical barriers, relatively few can manufacture freeze-dried reagent assays. Consequently, the OEM should find out what are the supplier’s capabilities. Has the supplier previously worked with the OEM’s specific raw materials, especially critical materials such as enzymes, antibodies, and RNA/DNA? Does the supplier have in-house quality and development departments that can assist the OEM in addressing needs specific to those areas? Such information could become critical if problems are encountered during the manufacturing of the component product. Finally, in order to facilitate the transfer of information, will the supplier assign a project manager or team who will be dedicated to the OEM’s product and will essentially become a single-source liaison between the OEM and the supplier?
The OEM can begin discussions with the contract supplier even before it has the answers to all of the questions above. However, the OEM should be aware that the supplier can only provide answers that are as good and accurate as the information the OEM discloses. So what information does the OEM need to provide to the supplier?
From the very beginning, in order to avoid any potential confusion, the OEM and contract supplier should submit all of their specifications and information requests in writing. To facilitate the exchange of information, the inquiring OEM should assign an experienced project manager to oversee the information transfer process. The supplier should also have an experienced project manager who is dedicated to the OEM’s project. All of the information should flow through these two persons, and they should ideally head up the teams that are designated to the information transfer process.
The OEM should be prepared to disclose its product formulations and raw-materials requirements. Whenever possible, the OEM should not express its product formulations as absolutes, but should include manufacturing tolerances. For example, 5 mM of magnesium chloride should be expressed as 5 mM plus-or-minus a value, thereby indicating a manufacturing range. For the raw-materials requirements, the OEM should specify the purity or grade, and disclose whether specific vendors should be used. If the vendors are sole-source vendors, the OEM should disclose them as such.
The OEM should also be prepared to discuss or disclose detailed information on the quality control (QC) for its product. The responsibilities for QC should be clearly identified and delineated. QC options vary from supplier to supplier. Such options can span from being very limited (e.g., shipping a lot sample to the OEM, who will check QC itself), to the contract supplier testing QC of the final product in-house for the OEM. Nonetheless, important issues concerning the responsibility for product QC need to be addressed prior to any information transfer and manufacturing occurring. For example, who will check the QC of raw materials and release them into inventory? Who is responsible if a lot fails QC tests? What steps will be taken to correct failed lots, and who will handle the QC investigations?
Estimating the Costs
The contract supplier will investigate the feasibility of manufacturing the OEM’s product. In order to provide the OEM with a realistic estimate of pricing, the supplier needs to create a bill of materials (BOM) that is specific for the OEM’s product. The BOM is essentially a complete cost analysis for manufacturing the product, and is based on specifications that are provided to the supplier by the OEM.
The manufacturing cost analysis and the BOM may take several weeks to several months to complete. Once they are finished, the contract supplier will submit to the OEM for its consideration a proposed statement of work that details the manufacturing cost of its product, along with the supplier’s and the OEM’s responsibilities. Without adequate detailed product information from the OEM, this task is all but impossible. A discussion of the other elements that are taken into account in the basic cost estimate process follows below.
Labor and Overhead Costs. Labor is the price charged for the work that is needed to manufacture the IVD product. Labor costs are derived by multiplying the per-hour wage by the number of man-hours that are necessary to complete a specific job.
However, the hourly wage is only a small portion of the total calculated labor cost. Labor also includes the cost of the workers’ unemployment and social security compensation, health and life insurance, and retirement benefits.
Overhead costs are those charges that are not directly linked to the manufacture of particular products, and are commonly thought of as the cost of doing business. Overhead costs include indirect materials and labor (e.g., building and machine maintenance and repairs), noninventoried supplies, heating, cooling, lighting, depreciation, insurance, taxes, and rent.
Cost of Noninventory Items. Noninventoried items are usually disposable materials that are not priced as part of a specific job. For example, latex gloves worn in the laboratory, pipette tips used for dispensing liquids, fluid reservoirs and disposable plasticware used for formulating could all be considered noninventoried items.
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The OEM contract supplier should have the production capability to keep up with the demands of the market for the kit that is being produced.
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Reagent Raw-Materials Costs. Raw materials are the individual components that are necessary for manufacturing IVD products. They may be combined into formulations or used singularly. In reagent manufacturing, such materials often include molecular-grade water, nucleotide triphosphates, proteins, enzymes, synthetic nucleotides, buffers, and salts.
The prices and quality of these reagents vary, as there are numerous manufacturers and vendors. If the OEM does not specify a brand or vendor, then the contract supplier may seek the lowest-priced vendor.
Primary and Secondary Packaging Costs. In the reagent manufacturing business, the primary packaging usually consists of tubes and bottles made of polypropylene or another polymer type. The secondary packaging, in which the primary packaging is held, varies from expensive plastic and foam to inexpensive cardboard and laminated-paper boxes. In addition, if the OEM is planning to provide specific packaging materials (e.g., secondary packaging, product literature, MSDS sheets, or labeling), then such information should be provided to the contract supplier so that discounts can be discussed up front.
Materials Supplied by the OEM
In the reagent-manufacturing business, it is not unusual for the OEM to identify specific vendors for critical components (e.g., enzymes, nucleotide triphosphates, synthetic oligonucleotides) that its assay was designed with. It is also not unusual for the OEM to supply certain critical raw materials directly to the contract supplier. The supplier is aware of this and is usually more than willing to work with the OEM on such issues. For specific vendor items, the OEM should check with the candidate supplier first to find out if such components are available through the supplier. The supplier may already be purchasing the same components in large quantities from the same sources. If so, the OEM may be able to benefit cost-wise.
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Quality control processes need to be established and maintained throughout the development and manufacturing process. By careful planning up front, an OEM can save time and money by having a quality control process in place. |
For those specific items that must be supplied by the OEM, such arrangements can be somewhat of a double-edged sword. The OEM may believe that it should be receiving a significant price discount because of the raw materials it is providing. However, by accepting the raw materials from the OEM, the contract supplier may be in effect opening itself up to quality issues if the materials supplied by the OEM are less than optimal or inconsistent from lot to lot. This is particularly true of sole-source materials that are provided to the supplier by nonapproved secondary vendors, or are manufactured by the OEM. The issue of any discounts based on raw materials supplied by the OEM should be discussed up front with the supplier.
At the same time, the contract supplier may refuse to accept reagents that have been in the OEM’s development facilities, especially if its assay is polymerase chain reaction (PCR)–based. PCR assays are extremely sensitive to contamination and should not be manufactured with development reagents. The supplier will not want to assume any potential contamination risk. A better method is for the OEM to provide any customer-supplied reagents directly to the supplier from the vendors. The exception to the above would be DNA or RNA that is provided as template controls for PCR reactions.
Additional Cost Factors
Some projects may require the contract supplier to acquire new equipment. The cost of at least a portion of such equipment may be incorporated into the cost proposals. For this reason, the OEM should select a supplier that has the experience and equipment necessary to manufacture its specific product.
Depending on the size of a project and the capacity of a facility, it may also be necessary for the contract supplier to add additional manufacturing staff. This is particularly true when a company lacks sufficient automation.
In addition, shipping biological reagents is always an issue, and how the OEM expects its product to be stored, shipped, and received should be addressed. Large lots of frozen reagent kits require freezer space; walk-in freezers are often the best solution for their storage. Wet or frozen reagents usually must be shipped on ice, or dry ice, which carries a hazardous shipping charge associated with it. Depending on the shipping and arrival locations, extreme weather conditions can vary.
Before Making a Decision
The OEM needs to think long-term about its end-user customers’ needs. If the ultimate goal is to market IVD kits, then it may be to the OEM’s advantage to look for a contract supplier that can offer quality systems that are compatible with its long-term needs. This will make it easier for the OEM to validate and submit its product to the regulatory agencies for approval. On the other hand, if the product is solely being used on a benchtop in the research market, then the OEM may be able to manufacture with less-stringent quality requirements than those required for the IVD clinical market. Nonetheless, it is better to work with a supplier that has robust quality systems in place.
The OEM should also visit the contract supplier and audit its quality systems at least once before making any decisions on product manufacturing. Outsourcing manufacturing can be expensive, and the OEM should be absolutely certain that the supplier it has selected is up to the task of manufacturing its product. If the OEM does not have a quality system or a quality department, then it should hire a quality consultant to assist in auditing the supplier’s quality records.
In addition, before choosing a contract supplier, the OEM should ask a number of questions about whether the supplier can continue to provide its products if future production needs should change. All OEMs expect that their manufacturing requirements will change in the future. For example, the OEM may require 100 kits this year, 1000 kits next year, and 5000 kits the year after. The OEM may also launch multiple product lines, and it should choose its supplier with this factor in mind. While the supplier may be fully capable of delivering 100 or 1000 kits during the first two years, what about the 5000 kits in the third year? What about multiple product lines? Can the supplier sustain a level of manufacturing at such a rate that the OEM is not compromised? Does the supplier have automated processes that will allow it to manufacture the OEM’s products on a large scale? Is the supplier planning plant expansions that will speed up production? Does the OEM have other, similar products in development that it is also planning on having outsourced, and does the supplier have the capacity for these products as well? If not, the OEM may find that it is back at step one when the time comes to launch its next product.
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David Asman, PhD, is director of operations for IT bioreagents and IT biochemistry at Idaho Technology Inc. (Salt Lake City, UT). He can be reached at david_asman
@idahotech.com. |
Finally, does the contract supplier have a disaster recovery plan in place, and does it have a preventative maintenance program for its manufacturing equipment? Does the supplier have redundancy in its equipment? Such programs protect the OEM from unscheduled downtime, which could adversely affect the delivery of its product if the supplier encounters problems.
Conclusion
There are many reasons why IVD companies may decide to outsource their manufacturing to contract suppliers. The first reason is money: it costs a lot to set up and staff a reagent-manufacturing facility. The second is time: getting to the IVD marketplace fast is critical, and the investment necessary to build even a simple manufacturing facility, and then hire and train manufacturing and quality staff takes a long time. Third is experience: it may be unnecessary to try to reinvent the wheel when there are suppliers with expertise in manufacturing reagent products.
But the contract supplier understands that the OEM will shop around, and that pricing is important. However, a low price does not necessarily mean quality component products will be manufactured. The OEM should look at the proposed price in the statement of work as only one part of a much more complex path leading its product into the IVD marketplace.
