GUIDE TO OUTSOURCING: PRODUCT DEVELOPMENT
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ISO 13485 standards and 21 CFR 820 regulations were developed to ensure the safety of medical devices on the market; however, compliance with these standards and regulations does not address the efficiency of the development process. Companies with small product development staffs may be compliant, but they are often inefficient because the development process is not one of their core competencies—and perhaps it should not be.
The same situation can occur with larger companies, whose technical staff may be competent in a particular technical discipline but not in all the areas in which expertise is required for a project. Financial models discussed later in this article show that an extended time to market can cut a rate of return by as much as 50%. There are other less-quantifiable costs of a prolonged time to market, such as loss of market share and deteriorating brand image, that can be just as real and damaging.
Understanding the company’s development efforts and how inefficiencies affect time to market is critical. It begins with recognizing just what—and who—is involved in the product development process.
It is extremely important to keep in mind that quality and proper design procedures must never be sacrificed to improve time to market. Product recalls and regulatory compliance issues eliminate any perceived benefits related to shortcutting the design process. This article discusses the importance of efficiency in product development within the constraints of ISO 13485 and 21 CFR 820. It also examines whether outsourcing can improve that efficiency.
What Is Product Development?
Product development can be broken down into three phases. These phases are concept, definition, and implementation.
Concept. The concept phase entails generating product ideas, performing market analysis, and establishing technical feasibility for a new product. This is the time to identify the technology to be used and to provide marketing information, such as cost and pricing targets, and estimated production volume.
Definition. The definition phase details the technical and marketing efforts needed to generate a complete product specification.
Implementation. This phase incorporates all design and engineering necessary to get from product specification to completed manufacturing of the product, including:
- Project management.
- Industrial design.
- Mechanical engineering.
- Electrical engineering.
- Software development.
- Packaging.
- Sourcing of raw materials.
- Development of manufacturing processes and procedures.
- Personnel training.
- Pilot runs.
- Release for production.
Managing each of these three product development phases requires a different set of skills and a different body of knowledge. For example, a device company should not assume that a scientist who is a brilliant contributor to the design process is equally as brilliant in design output, verification, and validation.
Is Product Development a Core Competency?
Core competencies are those capabilities at which an organization excels, and the company constantly strives to improve the knowledge, processes, and procedures involved in them. They are the capabilities that make the company competitive in the marketplace and provide the basis of its value proposition.
Companies can use their answers to three questions to determine whether product development is one of their core competencies.
First, how many new products does the company develop each year? Include only brand-new products, not changes to existing products (e.g., a new color scheme or a keypad redesign doesn’t count). Unless staff members are involved in the process of developing new products every day, it is difficult to develop the skill into a true competency as compared with those who do.
Second, does the company maintain a separate product development staff, or is one engineering department responsible for all engineering functions? The engineering staff may understand and follow the necessary design protocols, but if product development is a part-time occupation—constantly interrupted by demands of other departments—then it is unlikely that the staff has the time or the focus to become efficient at product development.
Also, how long does it take for the company to roll out a new product? If a company’s competitors are constantly beating it to market, this is a sign that the product development process is not operating efficiently.
How Can You Spot Inefficiency?
During the implementation phase of product development, small miscalculations or misjudgments can have major consequences. One major cause of inefficiency is a poorly considered and incomplete product specification. This is an extremely costly problem. Incomplete product descriptions can have their origins in at least two situations, such as:
- Marketing personnel provide a superficial description or a concept based on observations of what a competitor is offering. They leave many of the details to the development team and then second-guess them.
- Senior management delegates development of the product description and doesn’t clearly define requirements and specifications. Then they see the first prototype and demand changes based on their opinion of what’s needed.
Examples of the latter problem may include improperly specifying human interaction factors and functional requirements. The incorrect implementation of regulations and standards applicable to a device can require the company to return to the design input phase, which leads to losing time, development dollars, and ultimately reducing return on investment.
For example, consider an injector system being designed for use in implanting a medical device. During design verification, it is determined that the targeted incision size had been compromised. When the team investigates the root cause, it determines that the incision size was not adequately defined in the product specification, and that the correlation between the tip geometry and incision size had not been fully researched and understood.
Such findings would result in the development team returning to the design phase, tying up critical development resources, scrapping capital assets, and most importantly, losing time and delaying the market launch. There are tools and methods, such as quality function deployment, to address these problems, but many small companies have neither the competencies nor the money to access them.
How the Costs Add Up
Many small companies commonly underestimate out-of-pocket costs for new product development simply because their accounting systems aren’t set up to capture all the expenses associated with the effort. For example, personnel costs are usually a major part of overall new product development. But failure to track engineering hours against projects makes it impossible to know the total personnel cost.
And that’s only engineering. Companies might be surprised to find how many employees and steps are actually involved in a development project. The following list provides a few examples:
- Senior management. How much time does senior management spend overseeing the project? How often do senior managers act as senior project managers to make sure things are getting done?
- Additional engineers and technicians. A couple of engineers might be assigned to the project, but how much time do they actually spend on it? How many other engineers and technicians do the assigned engineers bring in to help?
- Marketing. If marketing gets involved in the development process, how much time is required?
- Preparation for manufacturing. How much employee time is needed to prepare documentation, processes, and procedures?
- Prototypes and pilot runs. These critical components also take employee time. How much?
There are also out-of-pocket costs, which can be significant. Here are a few examples:
- Expendable materials (samples of competitors’ products, products with applicable technology, miscellaneous parts for lab work and prototype development, and the prototypes themselves).
- Travel (checking out vendors, investigating the market, etc.).
- Technical consultation (i.e., bringing in outside expertise).
- Tooling.
- Samples and pilot runs—how many samples are built? Are they used for destructive testing, life testing, or sales rep samples? Do they just sit on a shelf?
- Rework (accommodating last-minute engineering changes for the pilot run).
- Product certification—if certification is required, what are the costs of labs and charges from certifying bodies?
Time Is Money
A savvy company accounts for out-of-pocket and personnel costs, but few companies consider the effect of time to market on the value of their investment. Time to market is often discussed in the abstract, but without some sort of metric, it may be hard to understand the effect that it has on investments. Again, time to market is never an excuse to circumvent compliance with ISO 13485 and 21 CFR 820. The assumption here is that the product is developed successfully and that there are no recalls or noncompliance problems.
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Figure 1. (click to enlarge) Internal rate of return (IRR) on a new product as a function of development for
varying time horizons. The model is based on a 360% annual gross profit-to-investment ratio. |
Various scenarios were tested to determine the effect of different variables. The models yielded the following results:
- If a new product’s time to market is reduced by 12 months, the rate of return on investment increases by about 92%.
- If time to market is reduced by nine months, the rate of return increases by around 63%.
- If time to market is cut by six months, the rate of return increases by about 39%.
- Changes in variables other than time to market, such as product life span or product profitability, do not increase the rate of return.
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Figure 2. (click to enlarge) Internal rate of return on a new product as a function of development for varying ratio of annual gross profit to investment. The model is based on a five-year development and sales life.
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Figure 1 provides an example of the relationship between time to market and rate of return on investment using varying product life. Figure 2 shows the relationship using different levels of product profitability instead of varying product life. Figure 3 shows what happens to the relationship between time to market and rate of return on investment if the cost of development varies. The financial model shows that time to market has more effect on return on investment than does the cost of development. For example, if a project takes 24 months and development cost is held to the base value, the rate of return on investment is 27%. If the same project is accomplished more efficiently and is completed in 12 months, the rate of return is 50%.
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Figure 3. (click to enlarge) Internal rate of return on a new product as a function of development for varying investment levels. The model is based on a five-year development and sales life and a 480% annual gross profit-to-investment ratio.
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Assuming that the development cost escalates to 140% of the base (i.e., goes 40% over budget), but the project is completed in 12 months instead of 24 months, the rate of return is still 40%, 13 percentage points higher than if the project were completed on budget but in 24 months.
Management tends to watch the project budget because it acts as a metric, however accurate or inaccurate it might be. But this financial model indicates that the true concern should be to improve the efficiency of development and minimize of time to market.
Should You Outsource Efficiency?
A recent study of time to market revealed that companies meet their product launch dates an average of 45% of the time, and fewer than one-third meet target dates 60% of the time. This indicates that efficient product development is not a core competency for many companies.
If product development is not core competency, the company must be willing to make a considerable investment in people and facilities to make it happen. If such investments are not feasible, or if the company does not have sufficient volume of new product development to achieve critical mass, then outsourcing may be an alternative.
Companies should partner with an outsourcing firm for which product development is a core competency, meaning that it can get safe and effective products to market quickly.
The following are factors to consider when qualifying a firm:
- Is the firm compliant with ISO 13485 and 21 CFR 820?
- Does the firm have the experience necessary to develop an efficient product development process?
- Can the firm demonstrate that it is efficient?
- Does the firm have adequate experience transferring products to manufacturing?
Outsourcing product development, especially when a company is in the implementation phase, has the following benefits:
- Potentially shorter time to market. Efficiency shortens time to market, and a shorter time to market translates directly into higher rates of return on investment, including the investment in the outsourcing company.
- Variable overhead. Keeping specialists is a fixed cost. Hiring a product development company only when the expertise is needed is a variable cost. Using an outsourcing firm in lieu of internal staff reduces fixed overhead and improves the company’s ability to control cost.
- Easy accountability. If the product development process fails to go as smoothly as promised, the responsibility clearly falls on the outsourcing company.
Conclusion
Companies should determine whether product development is one of their core competencies. This includes determining whether there are any inefficiencies that the company can eliminate in order to shorten time to market. If product development is not a core competency, device firms should evaluate the benefits and drawbacks of investing in the processes and personnel necessary to make it one.
Outsourcing has become a feasible alternative for many companies. Due diligence in assessing the outsourcing firm’s product development capabilities up front will pay dividends when the project has been completed. Meeting or beating process deadlines translates directly into a shorter time to market, cost savings, and a higher rate of return on investment.
J. Kirkland Douglass is president of Pivot International (Lenexa, KS). He can be reached at kdouglass@pivotint.com.
Reference
1. Jill Jusko, “Failure to Launch,” IndustryWeek (September 2007): 48.
