WEB EXCLUSIVE!
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Roger Brink
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Many medical device companies are concerned about lowering operational costs and accommodating customer needs (while maintaining high quality standards). Opening additional facilities in Latin America and Asia is a way to combat these problems.
For many, augmenting and often duplicating U.S. production facilities offshore addresses a firm's current needs and lays the groundwork for future growth. However, the decision presents a number of unique challenges. These challenges, as well as specific business needs, must be taken into consideration in the decision-making process. This is particularly true for small- to mid-sized companies for which the risks are more substantial.
Recently, ATEK Medical, went through the process of evaluating offshore options, selecting a location and ultimately opening a facility in Heredia , Costa Rica .
1. Risks and Rewards
Over the course of 18 months, ATEK researched and gathered statistical data on 10 countries covering Asia, Eastern Europe, and Latin America. Each presented unique challenges and opportunities, and all were given equal weight in the final decision.
For us, the biggest risk was ensuring that we had no deviations in the quality of products—they had to be equal with products in our U.S. operations. Additionally, our OEM customers have specific requirements such as cleanroom assembly, sterility controls, packaging controls, labeling controls, quality control throughout all processes, and intellectual property (IP) protection that we needed to address. Requirements reflected in the local government regulations added more layers to the discovery process.
We found that the most critical factor—even before looking into locations—is to create a list of criteria specific to the business niche. We broke down our company's criteria into five key areas of consideration: business environment, financial, infrastructure, customer feedback, and what we call fuzzy considerations (more on that later). By defining each area, we were able to build an offshore strategy.
Business Environment
The political and economic stability, strategic location, legal environment and IP protection, regulatory environment, and wage and salary laws can significantly influence the viability of the location. Before deciding on Costa Rica, ATEK looked at each of these influences in detail.
Political and Economic Stability. This is arguably the most important area researched. Companies need to determine whether the political landscape is conducive to doing business. It is important to consider whether a country has been pro-business in the past, and they must consider its inflation rates and growth history. Political and economic stability is often the sole determinant of a company's success or failure in doing business offshore.
Legal and Regulatory Environment. In the medical field, the legal and regulatory environment of a specific business location is particularly important. Many countries in our research did not have IP protection laws. In a highly competitive industry, IP is critical. Companies want a guarantee that whoever is manufacturing their products is going to respect proprietary information that can give them a competitive advantage. If a location doesn't have IP protection laws, there are no penalties for those who leak information, thereby encouraging an environment of intellectual theft.
Wage and Salary Laws. There are a lot of sources for wage and salary law information. However, much of the data available are outdated and generalized across industries. Therefore, it is important to do individual research.
To understand these concepts better, consider Latin America—Costa Rica in particular. Although foreign investment has fluctuated in Latin America over the years, many experts have noticed a resurgence of medical device companies opening new manufacturing centers in these markets because they offer lower operational costs (compared with the United States) and other benefits. The medical device sector in Costa Rica was initiated in 1987 when Baxter Healthcare decided to open a manufacturing location there. Since then, more than two dozen OEMs (including Boston Scientific, Arthrocare, and Hospira) have set up operations in the country. The influx of operations in Costa Rica can be attributed to access to free zone trading that allows duty-free importing on both raw materials and capital goods such as machinery and other equipment used for production—even materials used for constructing a new facility are covered. In return, the government requires that companies commit to a certain amount of direct investment and provide a specific number of jobs to residents. Additionally, there is an abundance of highly trained and educated workforce available in Costa Rica.
The resources for business environment research are endless, some of the most valuable being large financial institutions. These institutions can provide detailed analyses of each country and offer region-specific information through Webinars or reports. Additionally, visiting the location also is critical. Representatives should talk to other similar businesses, professionals in the banking community, and legal representatives in the specific country. They all provide different and valuable insights.
2. Financial Considerations
An offshore location should be considered a long-term company investment. No company makes a decision to begin operations abroad and plans to leave within a year. Therefore, it is important to have a good understanding not only of tax information and labor compensation, but also whether to rent, build, or buy commercial space.
Renting, building, or buying depends on a variety of factors including cleanroom necessities, existing facility availability, and cost. For small- to mid-sized companies, there is always a concern about the venture not working. Renting allows for an easier exit if an unforeseen event happens.
The deciding factor, however, tends to be the timeline. If a company is looking to move quickly, building may not be an option. However, if there are no adequate vacant facilities and an immediate move isn't necessary, building is the only likely option.
Transportation and shipping also are important considerations. Having a facility close to air freight and shipping ports, for example, can help decrease costs. The same is true if these ports can support multiple daily flights and multiple transportation resources.
Labor and benefit compensation weigh on financials also. All countries have different laws, and it's important to be familiar with them. Be sure to understand days of vacation required, laws on termination, year-end bonuses required, overtime laws, and social security-type systems, if available.
ATEK found a building with existing cleanroom space. In terms of cost savings and timeline, it was a perfect location. We were able to move in without spending time and financial resources on a retrofit to accommodate medical device manufacturing needs. It only took three months from access to the building until we were able to begin operations.
Labor laws also were important to our decision. While the intent is not to overwork employees, there is always going to be the need for an additional time commitment. Labor laws range from being very rigid to being very open and loose. It is important to understand the labor law requirements of each country, as they vary considerably and could potentially have a large financial effect on a small organization.
However, none of this would be possible without a good transportation system in place. In Costa Rica, for example, there is a well-developed transportation system with expediters available to ensure a smooth customs process. In large part, this is due to the number of offshore businesses currently located in the country.
3. Infrastructure
Infrastructure is one of the most time-consuming areas to research. However, all of the components for consideration outlined in this section are extremely important to business success.
It is inevitable that for any location in which a company chooses to do business, it will need access to the local labor pool. Medical device manufacturing is a skilled trade and requires experienced professionals, from engineers to line workers. A visit to local colleges to review their curriculum and technology is a good indicator of employee training.
Local supply and service bases can either be a cost savings or hindrance. Employing local suppliers to provide the products needed to manufacturer finished devices can help ease costs associated with importing from the United States and can speed up the manufacturing process. Such products can include injection molding, packaging, cleanroom supplies. Service providers such as calibrators, microbiologists, and sterilizers can also be hired from local resources.
It is critical to factor in energy costs, availability, and continuity. Understanding whether a country charges more during peak times, what those times are, whether there are blackouts or regular interruptions to power and the availability of adequate power can't be overlooked. The potential financial effect is significant.
Costa Rica, for example, has had a stable economy for more than 20 years and a democratic society for 50 years. Of the 10 countries we researched, we found Costa Rica to be one of the most developed and stable economies. We found that countries such as Mexico and Costa Rica have engineers with a high level of technical capabilities. Additionally, the Dominican Republic, Costa Rica, and Singapore have an established supply base that is continually developing.
Unlike countries such as China, Costa Rica has a fairly adequate energy infrastructure. While China has rolling blackouts, there are no interruptions to power in Costa Rica. However, we learned a difficult lesson about the costs associated with energy. We had been quoted on energy costs during off-peak hours, and costs during peak hours were substantially higher.
While visiting Costa Rica, we also toured several colleges and engineering labs. We looked at the training programs and found that colleges were using state-of-the-art equipment and had exceptional programs. This translates directly into the labor pool talent. There is good availability of college-educated workers. Some are specifically trained in medical devices, and there is very low employee turnover.
4. Customer Feedback
Customers are the heart of all businesses, and their concerns should not be minimized. We spoke with our customers in advance to be sure we were gathering information to answer their questions, and taking their needs into consideration.
A few areas that we found important to our customers included quality and delivery of product, IP protection, product preservation during storage and transportation, easy access to offshore locations, and a general nervousness that something might go wrong. All efforts were made to reassure customers of our decision to open a plant in Costa Rica.
By allowing customers to visit our new location and observe the process, we were able to establish and maintain customer confidence in quality controls, as well as the transportation systems and supplier base availability.
A facility with ISO 13485:2003 certification demonstrates that the firm's focus remains on quality and continuous monitoring of business operations. Such commitment ensures that an outsourcer can deliver on the promises it makes.
We also felt we owed customers a safe and friendly environment to visit. Costa Rica seemed the most logical choice. Not only is it close to the United States, but its people are also accepting of visitors from different countries. Plus, the government structure is pro-business.
5. Fuzzy Considerations
We defined fuzzy considerations as items often not thought about by most organizations, but still important in the decision-making process.
For example, natural disasters (e.g., hurricanes and earthquakes) have the potential to cause a lot of damage and disrupt the production and delivery process.
A desirable location also is important. If the location is convenient and friendly, customers feel more comfortable when visiting, which makes it easier to build a relationship with them. It's also important to consider whether the person's spouse would feel safe while the employee is away at the offshore location.
English-speaking capabilities make a job easier for a U.S.-based OEM. Businesses don't live in a bubble, and outside interaction is necessary. If the country recognizes English as a commonly spoken language, or if the majority of the population speaks the language, business is more easily facilitated.
Lessons Learned
The most valuable information moving forward is lessons learned from our offshore research and implementation. In learning from these lessons, we can be more prepared for future ventures.
- Do your own research on salary and service costs. Statistics can be outdated and often provide only a snapshot of costs associated with all industries in a specific country. Estimates from these sources tend to be much higher or lower than the actual numbers. Doing individual research ensures that costs are accurate and set businesses up for success later.
- Hire an experienced law firm within the country. Although law firms from the United States can provide some insight, it is more important to work with lawyers within the specific country. They will be able to assist with setup of a business entity and provide further insight into rules and regulations.
- Expect delays. Cultural differences can sometimes make processes move slower than planned. The definition of fast in the United States might not be equivalent to its definition in the Dominican Republic. Build in extra planning and implementation time to help ensure a smooth start to business.
- Understand that there will be unforeseen costs. Costs in another country might come from various places. For example, transportation systems may not be reliable, and an employer may have to cover such costs for employees. Additionally, providing on-site healthcare may be more efficient than having employees going to doctors themselves. A 30-minute doctor visit in the United States may translate to a day-long event in another country because of inadequate transportation systems or facilities.
- Get price references. In terms of service costs, recruiters and payroll service providers were found to charge prices similar to those in the United States. Be sure, however, that they have references and meet your needs for expertise. When planning for business travel, we found that hotel and restaurant costs are similar and sometimes higher than in the United States.
Looking At the Horizon
Offshore manufacturing is a business decision that takes a lot of thought. It can be time-consuming and tedious, and it requires investing a lot of resources. However, it can provide significant benefits.
It is critical to ensure that the benefits outweigh the consequences before venturing into opening an offshore facility. This means taking long-term effects into consideration. These could include costs of doing business, such as transportation costs. If profit margins are minimal, such costs can have a significant effect on business.
By being prepared and researching future hindrances, businesses can be more adequately prepared and set themselves up for success.
Roger Brink is vice president and chief regulatory and quality officer, for ATEK Medical. He can be reached at rbrink@atekmedical.com.
