Originally Published MDDI October 2002
Originally Published MDDI October 2002
ROUNDTABLEHow Contract Manufacturing is Reshaping the Device Industry
By some estimates, the global market for outsourced medical devices is now $8 billion. Industry executives say that the trends favoring outsourcing are likely not only to continue, but to grow stronger in coming years.
MD&DI asked five industry professionals with experience in contract manufacturing to share their views on current trends in outsourcing, key factors that are shaping its course, and potential pitfalls to be avoided.
Participants in this industry roundtable included: Robert F. Doman, President, Leach Technology Group and Vice President, Leach Holding Corp.; Ron Earle, Group Senior Vice President, Burron OEM division of B. Braun Medical Inc.; J. Randall Keene, President, Avail; Joseph P. Lester, General manager and COO of Criticare Systems Inc.; and Joyce Vytlacil, Operations Manager, Command Medical Products Inc.
Readers should note that the five participants in this forum are not meant to be representative of the outsourcing industry as a whole. For practical reasons of space, many leading outsourcing companies could not be included. Just as participation in this article does not constitute an endorsement, so absence from this article is not a gauge of a company's standing in the industry.
MD&DI: What is the current state of contract manufacturing in the device industry? And where is it headed?
Keene: Contract manufacturing has become medical outsourcing, and a market consolidation is under way. There are a handful of major players emerging from what was once a regional, fragmented industry that was focused on individual specialties. The leaders in medical outsourcing today have multiple capabilities, offer engineering support and manufacturing scale, and in essence can act as an extension of the OEM's own operations group.
Development services are also becoming standard components of medical outsourcing. It has become essential to integrate engineering support into every project we managefrom a simple product transfer to a new product design or process improvement program. The outsource provider of the future must have a strong contract engineering organization to effectively support its customer base.
Earle: There is a strong trend to go to outsourcing. People use the established environment of larger, established firms to market their products. They say, "you've got the distribution." And the distribution folks don't want to get into more manufacturing because products and technology are changing so fast that, by the time they get a product up and approved, the trend has changedand they're stuck with a factory.
We're finding out that there are many pharmaceutical companies that need devices to help deliver their drugs, which increases the market potential of their product. Now the outsourcing need is even more important because we're crossing into a different marketeven though it's within the healthcare industry. Devices and pharmaceuticals have always been kept separate. But we're seeing a tremendous increase in inquiries from companies that want us to help them outsource components that can make their products more useful. How can a product be more useful? It not only can offer improved safety, but nontechnical people can be able to self-administer it.
Vytlacil: Customers now frequently rely on contract manufacturers for value-added services, which include product design, package design, materials selection, and sterilization validation management.
Doman: OEMs view outsourcing as a vital competitive competency necessary to improve product quality, time to market, lower production costs, and reduce capital expenditures.
Industry surveys for the electronic manufacturing services market show growth rates in the 20-25% range. The medical device industry is experiencing the same type of robust growth as more medical device companies show an increased propensity to outsource engineering and manufacturing services. This is driven by the pace of technological advancements in the medical device market and the need to reduce costs or redirect costs on order to invest in their core competencies.
If you look across industries, you can see trends, particularly in outsourcing, that started first in other industries and eventually impacted the medical device market.
Lester: Everyone I'm talking with is outsourcing within the United States, but more and more are going to foreign entitiesmainly to Asia. I think the trend used to be to go to Mexico, but that's changing a bit so that now it's more profitable for the companies to go to Asia. So everyone I talk with is either gone or working on going, or they are contemplating outsourcing. When they talk about that, it's not a sales initiative, but a manufacturing initiative. I believeparticularly in the commodity-type productsthat if you don't move to that type of manufacturing strategy, you're going to be left behind.
MDDI: How would you characterize the companies that are benefiting from contract manufacturing?
Earle: It's across the board. Focusing on the pharmaceutical business for a moment, they do very little of their own packaging anymore. This is because one drugstore may want to carry the product on cards, but another drugstore chain may want it packaged in plastic bottles. You never know. So they say, "we're not going to invest in any more packaging. We'll make the pill, and then we'll send it to an outside packager to put it on cards, foils, or whatever." Even the over-the-counter and consumer markets are into outsourced packaging now.
Keene: For leading medical device manufacturers, outsourcing offers the ability to minimize the disruption in their manufacturing facilities often associated with the scale down of mature products and the scale up of new products. This benefit is achieved while avoiding internal bureaucratic delays. Working with a firm focused on the processes of manufacturing start up also allows the manufacturer to gain the cost benefits associated with manufacturing specialization.
Outsourcing allows development-stage companies to avoid capital investment in bricks, mortar and fixed overhead before there is certainty of market acceptance. They can focus on the critical aspects of their success in R&D and marketing.
Vytlacil: Everyone benefits as the trend to outsource continues to grow. Those contract manufacturers who are offering a full range of services are benefiting.
We've seen success not in a specific product market but more in a customer segment that is oriented toward innovation and rapid "time to market."
Doman: We see both large and small companies benefiting from outsourcing engineering services and manufacturing. However, the reasons that drive them to outsource may be different.
Small companies and/or start-ups are generally trying to avoid cost in order to preserve cash. In many cases, they do not want to create a large infrastructureboth in terms of human resources or manufacturing. The viable alternative is to outsource the development work and manufacturing so these costs become variable versus fixed.
Large companies are being forced to choose what they consider their core competencies, invest in them, and then outsource other areas they do not consider core to their business. Key questions they ask themselves are: What value-add do we bring to assembling electronic medical devices? Why invest in a manufacturing facility when there are other options? By outsourcing, they can reduce cost and overhead, or redirect expenses to R&D and marketing to drive future growth.
In addition, as devices become more complex and utilize a broad spectrum of technologies, OEMs are forced to become more discerning on what and where they need to invest in internally. The opportunity here is to outsource engineering services in areas not core to them.
Lester: I think it's probably smaller firms at this point. A lot of times with newer products, the companies may not even have manufacturing available to them. And their decision is whether to manufacture or to outsource right off the bat. In other words, as soon as they begin the process of releasing their product, what do they do. Do they put the overhead in place to manufacture, or do they outsource. And I think most of the time, it's better to outsource unless you have a product that is extremely technical, with maybe a little black magic involved in the product and you think that maybe no one on the outside can actually produce it.
As the companies get a little larger, they have manufacturing concerns in other countries, particularly India or China. And then the small companies will go through a representative of a company in China rather than going directlike some of the larger companies go.
The middle-size companies also have a lot of opportunity. They may be having a hard time making a decision about what to do. Then they may not have the wherewithal or perhaps a supplier base they can trust to go international.
MD&DI: For the company considering the decision to outsource, how can potential pitfalls be avoided?
Vytlacil: Both product design and manufacturing must be married early in the relationship. Failure to do so, along with unplanned "time saving" shortcuts, will add short-term disruption and potentially long-term cost disadvantages over the product life cycle.
Doman: Certainly, you should find an organization that has compatible values, cultures and business processes. When you start a project, make sure you have well-defined objectives and ways to measure those objectives. And, ongoing communication has to be frequent and two-way.
For example, our firm issues weekly project updates to our customer base. Basically, these cover what happened in the preceding weekfor instance, what milestones were hit, and what's going to happen next week. Then they have the capability, even if they have not been speaking live with us, which is rare, to make comments electronically to be sure everybody is on track. This is circulated to all of our senior staff. So, open communication lines are really important.
The idea of having written and published plans that everyone has agreed upon is also important, along with the willingness to share strategies, concepts, and confidential information. You have to look at the contract manufacturer as an extension of your own organization.
The other key thing is that the client customer has the outsourcing resources and infrastructure to support it. You just can't assume that you are going to outsource a product development project; hand it off to somebody; and expect it to get done. It is critical for the success of the project that there are resources on the client side to interface with on an ongoing basis. We find that our most successful projects are those where our customers are closely involved with our teams on an ongoing, if not daily, basis.
Finally, when you are assessing a contract manufacturer, you need to make sure that they have the capabilities needed to meet the project requirements in terms of the quality systems, as well as the program and project management skill sets and engineering expertise.
Keene: Medical outsourcing is a capital-intensive, quality-driven enterprise. It takes years and years to build a reputation and, because we are dealing with sterile finished goods ready for onward distribution, that long-term orientation and market acceptance standard seems appropriate.
Lester: First, you have to pick a company that has a good reputation. Now that can be hard to do when you don't know companies in China, for example. But obviously these people will give you references when you go in to look at them. I think you need to check the references very heavily. Make sure that what these companies say they can do is indeed what they actually do.
I also think that the companies you might be dealing with have to have a very good financial backing. Because they're going to investing up front in materials and such, you have to make sure they can handle it.
I would also say you have to get a strong project team on both sides. And make sure that with whoever the program leader or project leader, that the project is their life. In other words, that all they worry about is the project. They should make sure that the materials are coming in and that there are no engineering problemseverything that's required in a new product startupand that they're there and supporting you totally. And we've found that communication is extremely important. You need to set up these project teams, and you have to have continuous communication with that group.
The other place we've found potential pitfalls is with documentation. It's really good if you can clean your documentation ahead of time. Have your manufacturing engineers go through whatever product you're designing to go over to Asia with and verify the bill of material, and verify all of the prints. Perhaps they can actually build the product themselves, there on the shop floor to make sure that you can build it the way the prints say to build it. If not, fix it and then release it to Asia.
One of the other things you find is that, because the product has been over here for a long time, particular suppliers have been chosen for materials. When it goes over to China or Taiwan, let's say, they are going to find lower-cost suppliers and vendors. I think it's important to use their suppliers because that obviously helps in the long run. But I believe that part of the agreement needs to be that they can't use a supplier unless the OEM validates the part they're trying to use well in advance.
MD&DI: How would you characterize the regulatory environment in which contract manufacturers function? Is that environment changing?
Earle: Absolutely, it's changing. The customer is depending on the OEM supplier to meet all the regulatory issues and keep them out of harm's way. So their quality assurance people have to feel comfortable with the OEM supplier, and they have to do more than just audit. They have to believe in the quality assurance program that the OEM supplier has in place.
One point I want to make is that you have companies, with us being a global company, and the globe is regionalized in what products they buy. In one country, they buy economical IV sets and whatever they can get as far as fluid. And in another country where the company has a large marketing force, we may not be able to sell some of those products in the bigger market. So we take those products and look for a partner on an OEM basis to sell them for us. Not a distributor, but some one elsean Abbott or Baxter, let's say whose line it would complement.
The market is changing because people don't want to spend money on reinventing the wheel. There may be three or four different applications available for doing back surgery. But which one is going to rise to the top. They don't know. And that's the reason they don't want to spend the money and resources on their own facilities. They'll let the OEM vendor break their pick and see who can get them there the quickest.
Vytlacil: With the quality systems established at most contract manufacturers (that is, ISO, QSR compliance), regulatory challenges should not be a key factor today.
Doman: We recognize that someone from our client is going to make a decision internally to choose a partner that is going to develop a product; and, hopefully, get it to the marketplaceon time and at the cost that was estimatedand then manufacture it on an ongoing basis. Internally, somebody is putting their neck on the line. They have to be really confident that the company they choose is going to be able to perform for them. This is particularly true for the regulatory aspects of the project.
Certainly, the regulatory challenges have toughened significantlyboth for the contract manufacturer and for the client. Of course, FDA regulates access to the market. So on the client side they are being asked to do more in terms of clinical trials and to do larger trials.
In addition, the FDA has become much more stringent in terms of GMP violations than in the past. So, it is very important that a client become very comfortable with the idea that their contract manufacturer is going to be in compliance with FDA's quality system regulations.
It is challenging on both sides, and it is important that before you enter into a relationship, in which both parties agree on a quality and regulatory plan for moving into the marketplace. This includes how you are going to manage the design history file, change controls, and all the documentation that goes along with that.
You must gain agreement on who is going to be responsible since there are significant legal and financial risks in the environment that we operate in. You are really talking about ongoing management of the product life cycle. The regulatory environment is constantly changing. You need to be sure your partner has the systems and capabilities in place to respond to those changes.
Finally, because most companies operate on a global basis, there is the influence of globalization, which ties into the regulatory side. In many instances, they enter the European market before the U.S. market. The documentation required for product registration and the technical files can be different for different countries, and they can change quite often. So the contract manufacturer has to stay abreast of the requirements and work closely with their client to ensure that they are compliant and avoid potential pitfalls.
Lester: We always make sure that the manufacturing facility is approved by ISO. The other thing we always require is that the facility be FDA registered. And everyone we've dealt with to date was not FDA registered initially, but we helped them register their facilities.
We have to make sure that we audit all of the facilities on a periodic basis to make sure they're following their quality manual and their good manufacturing practices, and making sure that the product coming to the United States is good.
The other thing we always have done at first is that anytime we had a new product, wherever it might be, our manufacturing engineers go over theremaybe every two monthsto make sure that the people understand how to build and test the product. Then when that product comes over here to the United States, our quality department and manufacturing engineering department actually tear apart the first run to make sure it was built according to our specifications. Then we retest the product. After we are satisfied that the product is being built correctly, we take so many out of each batch coming in. We don't take them apart at that time, but we do retest them to make sure that all our standards are being met.
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