OUTSOURCING FOR IVD MANUFACTURERS
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How does an IVD company decide that a particular project will require the outsourcing of certain manufacturing operations to other companies?
Myles Marcus: Our company is going through the Lean/Six Sigma, and as a part of that, one of the key concepts is to add nothing but value to a process. As we evaluate the type of value we can add to a given process, especially for manufacturing operations, we’re looking at whether an outside partner might be better able to add more value. As part of this, we’re also looking at our operations to define core competencies. If one of our core operations can’t provide market differentiation, that would be something else we would evaluate in terms of outsourcing opportunities.
Michael Jackson: We look at how the requirements for a project line up with what our capabilities are. If it’s something outside of our capabilities, we realize that we are going to have someone outside help us do that. We also look at where we add value for a project versus another if we’re looking at the limited capabilities that we have. We may choose to go outside for a project if we have other higher priorities that we’d like to keep our internal resources working on.
Tim Patno: We have a different situation since we’re a much smaller company than Beckman Coulter and Bio-Rad. We have all of our component manufacturing outsourced. While we do final assembly at Nanosphere, everything that goes into our instruments, cartridges, and consumable devices is outsourced.
Do smaller IVD companies have to deal with any pressures or restrictions to be more careful about the types of projects that they choose to work on with outsourcing companies?
Patno: We are focused on one core competency, while larger IVD companies like Beckman Coulter, Bio-Rad, and others have many different product lines, which is advantageous in and of itself. But for people trying to get things done, the ability to focus and work in one or two specific areas has been delightful for us because we get so much more done quickly. We have a very narrow front to think about, we know exactly what we want to do, and we can be very specific about what companies we’re going to work with and dedicate a lot of our attention to them. Likewise, we look for outsourcing companies that can dedicate a certain level of attention to us.
What challenges do larger IVD companies encounter when deciding which parts of particular projects should be outsourced to other companies?
Marcus: There are two issues. First, when an IVD company has new products that it’s bringing to market and when it’s an established company with a large base and a history, there is that tendency or desire to do everything in-house. Second, looking also at legacy products and how they’ve grown and evolved, there’s some art in addition to the science in terms of bringing such products to market; those [elements] are sometimes difficult to outsource.
Jackson: I would agree that with larger IVD companies, there’s a big tendency to want to do everything themselves somewhere in the company. It’s sometimes difficult to overcome the notion that we could do this somewhere ourselves.
How do larger IVD companies realize that they can’t do everything themselves and should outsource various requirements for a particular product to other companies?
Jackson: It depends on the projects. Occasionally, we have to convince ourselves that we need outside help by demonstrating to ourselves that we can’t do a particular task in-house. Otherwise, there are some clear areas where we really don’t have the expertise. We can look at a project and the various components, and determine which of those that we don’t have the capability to do. Those are straightforward to farm out. The issue then becomes whether we send it to a different division within Bio-Rad or go to an outside supplier. It comes down to the capabilities of the divisions within Bio-Rad, their ability to work with us, past experience, and what the relative cost and quality might be.
Establishing a Partnership
What do you look for in an outsourcing company? Do you look for companies that have specialized expertise in specific areas?
Patno: What’s been key for Nanosphere is that because we are so small, when we competed with other larger IVD companies for a vendor’s time and attention, they weren’t interested in working with us in our business. We ended up working with some key vendors that are small themselves and new as companies, and that’s been a real blessing for both of us. That has allowed both of us to build up our businesses, so we actually have looked for companies that are smaller or similar in size to us.
Marcus: We look at the key attributes in terms of quality, delivery, service, and innovation from a supplier, and then the total cost of acquisition and ownership. We start to define a matrix with the potential suppliers being looked at and the different capabilities at each one of those. What we’ve tried to do is understand the value proposition of each supplier, and then choose a supplier based on the key characteristics that we’re trying to drive out of that outsourcing activity.
Specialized expertise would provide a supplier a clear competitive advantage, but we have to compare it to what we are paying for that specialized expertise and what our end customers are demanding of the product that’s being outsourced. If it’s technological superiority, then we’re willing to pay more. If we’re looking for a low-cost entrance into the market, then we may want to give up something in terms of innovation for a cost driver. The final thing we need to look at is what is the cultural fit. Can we work well with this outsourcing company? Can we speak the same language and resolve issues without having to refer back to the contract or worry about a dispute every time a business issue arises?
Jackson: We look at outsourcing companies that have specialized expertise in areas that we’re looking for and working in. We also consider past relationships we’ve had with these companies, whether they’ve been reliable, quality providers for us. We look to see if there’s a company we can work with so we do have a cultural fit, and how important a customer are we going to be to them.
How do you choose which companies to outsource your operations to? Do potential outsourcing companies use a competitive bidding process to present themselves as candidates?
Patno: We look for that cultural fit with outsourcing companies,and we actually look for small companies that have some of the same challenges we have. In addition, we need to feel that they can respond to our needs and challenges that we’re facing without requiring a huge contract with them, because as a small company, we don’t have the volumes and dollars that larger IVD manufacturing companies can bring to contract manufacturers. A lot of contract manufacturers aren’t even interested in working with us, so we look for small companies that fit in with us.
Jackson: We’re looking for outsourcing companies that we have some history with so we know that we can rely on them to be quality suppliers. If not, we’re concerned with their ability to meet the quality standards we would depend on or insist upon. We’re also interested in a company being a significant size so that we can be assured that it’s going to be there through the product’s life cycle. And again, we are looking for a cultural fit with a company so that we can resolve any issues that we have. We also tend to engage companies that do outside manufacturing for us in the entire development process. We have to be able to interact with them as we go through development and refine what the product is that we’re making and how we make it.
Marcus: We will examine the different attributes that we’re going for, such as quality, delivery, service, and total cost, and evaluate what we are looking for in a given outsourcing situation. The concept of cultural fit is again critical, especially as we look at quality as being a key driver in this industry. That gets into the culture, that we’re speaking the same language, we understand each other’s quality systems and procedures, and can resolve those issues quickly. That’s the key thing that heralds the success of any outsourcing, that we get that quality product each time, every time. Given that it’s concerning manufacturing processes, there are going to be issues that come up on a day-to-day basis, so we have to have those communication channels to resolve them quickly. That gets into what the corporate culture is and how well we fit together.
Is cultural fit a matter of an IVD company and an outsourcing company being able to work together, or is it more of an agreement on business philosophies and practices?
Marcus: Some of it is gut feel. But with suppliers we’ve worked with in the past, we know them, they know us, we know how they respond, and they know how we respond. That gives a leg up for our existing supplier base. But there are those suppliers we know that, any time any kind of business issue comes up, resolution can be difficult, and there are some disconnects in terms of what they feel might be critical factors versus what our company feels are critical. So we look at dispute resolution and how that works. Is it referring back to the contract every time a business issue arises? Or is it let’s work together and get the problem resolved, and then figure out what the compensation or required approach is. There’s no definitive rule in terms of what makes a cultural fit, but those issues go into it.
Patno: In the past, if we had a technical problem, it was often difficult to get former suppliers’ attention. They quickly assigned the cause of the problem to the design rather than diligently working with Nanosphere to assess the design and the manufacturing process. The causes of the problems often were a combination of design and manufacturing process. So I like working with suppliers for whom it’s not so important what the cause of the problem is. Rather, it’s important to get it resolved quickly, which is very critical for any company. Then later, as Myles said, we figure out how to resolve the costs incurred by both sides and find an equitable resolution to that part of the problem.
Jackson: Another aspect is having some transparency in the process at the supply company. That way, when we do have an issue, we can have some understanding as to what we should look for, how things are going to be resolved, what internally might be done, what the time frames might be, which people might be involved, and what information they might need from us.
Are you more inclined to work with outsourcing companies with which you have had long-standing relationships, or are you open to working with companies that you have never worked with before?
Marcus: The answer to the latter part of the question is definitely yes, especially as we look at potentially using leading-edge technologies. IVD manufacturers should consider looking for new supplier companies outside the ones that they’ve worked with traditionally. One reason to look for them and work with them is that it’s not only looking at their capabilities but also wanting to make sure that the existing suppliers are providing what is best in the industry relative to pricing and quality. In doing that benchmarking, we have to keep that in mind as we go forward to make sure we’re still getting the best value proposition from our outsourced partners so they don’t get too complacent.
Jackson: We are open to working with companies that we’ve not worked with before, particularly when we’re looking for leading-edge technologies.
Deciding to Collaborate
What specific tasks do you outsource to companies?
Jackson: It depends on the project and what it is we have to achieve. But we would outsource tasks that we don’t have the manufacturing capability for, such as manufacturing of instrument components and a variety of other things.
Patno: We outsource molding, so our consumable devices are molded by vendors. We also outsource a good deal of the fabrication of the parts and assemblies that go into our instruments.
Marcus: Going back to the Lean/Six Sigma concepts, where we think that an outside partner can add more value than we can to a given process, that’s something we’d be looking to outsource. For example, our company has recently outsourced some metals operations that we previously had done in-house. It’s looking at the different manufacturing processes to determine where we think we can gain more value. That value is not only our cost structure but also the investment in management time to continue operating those manufacturing processes.
Do you try to limit or predetermine the amount or percentage of a project that should be outsourced?
Marcus: It depends on the product. We don’t go into any given project with a specific target in mind for outsourcing. However, one process that we do have in-house is called early supplier involvement. As we go through our developmental efforts, we like to bring in suppliers for the different commodities that might be involved in that project to find out their capabilities.
We develop the confidentiality agreements with these suppliers, share with them our plans, and try to learn what their thoughts are about what they might be able to provide in partnering with us. By doing that at the early stages, we end up with a good roadmap for the end project in terms of what they will do versus what we’d outsource to partners. It is critical to know the supplier base that we have a comfort level with and doing the technology investigations by bringing them in and seeing what value they can offer versus trying to do this in-house in a vacuum.
Jackson: We don’t go into a project with a set percentage of how much we think would be outsourced to suppliers. It depends on what the project is and how much of the project would be outsourced to a given supplier. That would be lined up against where Bio-Rad has capabilities, where we do not, and where we think a supplier would add more value versus what we would.
Patno: It’s a different situation for us in that, as a small company, we outsource all of the components that we then do final assembly for. But what was interesting for us was the decision on whether to do final assembly outside or inside Nanosphere. After trying to do final assembly and testing at outside vendors, it turned out to make more sense to have Nanosphere have ownership of that final process. By doing so, we could control quality levels to our standards and not have to make compromises in that area.
At what point during the product development cycle should an IVD manufacturer get outsourcing companies involved?
Jackson: We tend to do this earlier in the product development cycle. After we’ve identified the pieces that we think we need to outsource, then we begin to get the outsourcing companies involved.
Marcus: We’ve done it at all stages, in early development. But given our portfolio, we also evaluate some of our older legacy products to look at some opportunities to bring in suppliers. But for the new products that are coming to market, such as instruments or even reagents, we get our suppliers involved early in the process. The best way to get speed to market is to learn as much as possible early in the process because it makes the later steps in the process go more quickly.
Patno: We must get vendors involved early in the prototyping stages. It is fortunate because of the size of the company that we’re forced to do so.
What level of input do you want or expect from the outsourcing companies that you work with?
Jackson: When we outsource, we’re interested in gaining some expertise that we don’t have and that doesn’t line up with our capabilities. We’re much more inclined to describe the output, the particular part, or component we want, and how would the outsourcing company suggest we go about producing that, and how could they help us to produce that. We’re looking for some intellectual input beyond just fabricating the part.
Patno: We have some vendors that we have multiple discussions with every single day to make sure that our supply chain is going smoothly, that issues are being resolved, and that the people responsible for resolution here and at the suppliers are in close and constant communication.
What do you hope to accomplish by outsourcing manufacturing operations?
Marcus: What we’re trying to drive at is we want suppliers that can add more value to a given process than we can. Suppliers can add that value in terms of making components more efficiently than we can, driving down costs, reducing our time to market, and improving product quality by offering a core competency they have or providing some innovation to a product that we don’t have. It’s trying to improve that product presentation to the end customers in all the different attributes that they are looking for.
Jackson: We’re looking for outsourcing companies that would complement the capabilities we have and enable us to bring a project to market sooner, more efficiently, and in some sense with a better quality than if we did it ourselves.
Patno: At Nanosphere, it’s very important for us to stay focused and flexible in terms of outsourcing. If we were trying to be experts in not only molecular diagnostics but also in manufacturing processes, we would have struggled to succeed with the limited resources we had, especially when our company got started. It’s key and critical for us, and we depend on good relationships with vendors.
Managing the Relationship
How do you oversee and monitor the progress of the outsourcing companies that work on jobs for you, to make sure that they stick to the schedules that have been established?
Jackson: If we’ve identified these outsourcing companies early in the project as we’re developing the product, we tend to manage them as we do the rest of the project team with regular phone calls, reports, and periodic visits to see what progress is being made and what problems are being encountered. We ensure success by staying in constant touch with the people who are working for us.
Marcus: One of the things we’ve learned here as a company is that outsourcing doesn’t mean just throwing our responsibilities over the wall and giving that to a partner. IVD companies have to keep close contact with them and understand their manufacturing processes, especially in this industry. As part of that, we try up front to define clear quality agreements and other metrics that will assess the status of the product and processes being outsourced. There’s also setting up processes such as regular business reviews and contacts, where, if issues arise, there are clear escalation paths to ensure clear-flowing communication on a constant basis.
Patno: In some cases, I try to treat the vendors the same as an internal team member or function, and try to keep them included in all the discussions as we work through the design process and begin the manufacturing transfer.
Do you put a greater sense of urgency on a project if it involves the development of a new device in a product area that your company is entering for the first time?
Marcus: With a large company like ours, we give everything a number-one priority. Typically, we’ll have different project teams working on each project, which will be the focus of each individual team. We try to structure relationships and projects so that we’re fully aware that when one becomes critical, we don’t have resources competing with one another in order to make things happen.
Patno: At Nanosphere, we are developing a key strategy of two or three key products that are similar and related in many ways. Developing vendor relationships and selecting vendors similarly has allowed us to be focused and effective with our vendor relationships.
Jackson: We tend to have several projects with different amounts of outsourcing going at any one time. The project team is managing that relationship so it’s prioritized high within the team. We do have higher-priority projects within the company, and the ones that we’re paying the most attention to are at the top of our list. But each team is paying full attention to its own challenges.
What are the primary challenges in working with outsourcing companies?
Jackson: The biggest challenge has always been the inability to communicate what it is that we’re looking for, whether it’s a molded part that isn’t quite what we want, not quite the shape or size, or a reagent that doesn’t quite perform the way that we wanted it to. The way we work with that is with a lot of communication with the outside company.
Patno: When we first started, we took this naïve approach that we were going to outsource everything. We were going to have other companies build our instruments and manufacture our cartridges and reagent trays, and that we would supply the design. But we quickly learned that didn’t work very well. We’ve changed our strategy to outsource specific tasks like molding, metal forming, buying illumination technologies, and we then assemble and test the final products because we understand our technologies and what we want them to do much better than our vendors can.
Marcus: I agree with Mike that the primary challenge is ongoing communication. People don’t like to highlight problems, so when we’re dealing with outside suppliers, they sometimes want us to feel a comfort level that they’re doing everything. But if they do have problems, they may try to solve them internally, which they can get caught up in, and it starts affecting their ability to supply the product or service that we’re trying to get.
The right level of communication is needed to highlight escalating problems or issues so that they can be resolved mutually. An IVD company can provide a lot of value in terms of understanding, recognizing, and communicating what the issues are and working with suppliers in a collaborative manner.
Effect on Business
Over the years, has outsourcing in fact offered significant cost savings, time savings, and efficiency to your companies’ operations?
Jackson: That’s difficult to quantitate over the product development process, but I believe we have saved time in getting to market and completing projects because we’ve outsourced some of the operations and components. It’s also difficult to say whether we’re saving money by manufacturing some of these components outside or inside since we would have had to develop the capability to make them.
Marcus: With technological advances, we have found more value in OEM partnering, and because of our longer history with some of these companies, we have good cost models. We decided to move to the outside some operations that we’ve been doing in-house. With those, we developed some compelling economic rationale for outsourcing them in terms of having cost structures that are lower than ours. We also looked at the ability to avoid some capital investments and suppliers leveraging their core competencies with us. So we have seen significant cost savings.
Patno: We are forced to have components made outside, so we didn’t have an alternative. It would be clear for us that the capital expenditures Myles mentioned would be too great for a company like ours to burden. But it’s interesting that we probably saved money by bringing final assembly into Nanosphere versus actually doing it externally.
Do you believe IVD manufacturers will be inclined to outsource more or less of their operations in the future?
Jackson: I anticipate that they will outsource more, and probably in the ways that we have, by looking for companies that complement their capabilities and bring technologies that they don’t have. Given the breadth of IVD products in the market, I would imagine the scope of outsourcing would increase over time.
Marcus: IVD companies have to look at outsourcing, especially global outsourcing in Asian markets, and consider what they have to do to compete in those arenas. Manufacturers have got to expand their horizons and look at other opportunities.
Patno: Our model will stay consistent for several years. We will continue to outsource components and maybe some subassemblies, and do the final assembly.
Following up on Myles’s point, as the global IVD market continues to grow, will IVD manufacturers start outsourcing their operations overseas?
Marcus: The healthcare markets in India and China are growing at phenomenal rates. However, we have to evaluate the current status of those markets, how they want to grow, and the fact that they look at low-cost solutions in a much different light than in the United States and Western Europe. We end up with different models in terms of the continuum of care that has to be provided. We also have to look at partners in those areas that we could work with to increase their capabilities yet keep the products competitive in the markets and in line with what they’re willing to bear at that time.
Patno: For Nanosphere, I can envision in a year or two that we might put in some final cartridge assembly locations in Europe or Asia to take bulk reagents and do final filling and distribution in different locations.
Jackson: We already work globally with different contract manufacturers. I expect that we would continue to do that with the advantages they offer both in Western and developing markets.
As diagnostic technologies become more advanced, what new types of operations will IVD companies have to start outsourcing?
Patno: As Nanosphere starts to mature by finding ways to save money and drop the cost of manufacturing, some of the models and some of our thoughts that we now have and other ideas may end up changing. As we mature, it’s important to learn from vendors and their expertise since they may come up with lots of different paradigms or ideas that right now we aren’t thinking of.
Marcus: If we look at where the advances are coming from relative to intellectual property use, perhaps getting outside instrumentation but more into reagents and molecular diagnostics, depending on who holds the intellectual property is going to define whom we have to work with. And then, whether the company that holds the intellectual property wants to manufacture or do only research, that too defines how we set up that working relationship. It also involves looking at the different technology areas.
For example, if we look at the need for integrating the lab, we start talking about information technology and what’s required there. But if the IVD business is not the best place to start looking at innovative approaches to integrating technology, we start looking more to the traditional software houses. So depending on where we want to anticipate future trends, if we look at what the customer base is demanding, it’s more-complex tests but simpler ways for those tests to be administered and the results to be evaluated. That starts to drive what we have to look for in terms of technological skills and capabilities of potential partners.
