MANUFACTURING

Getting down to the core

Image: iStockphoto

The term “outsourcing” is often misunderstood. For some it means opportunity and change, for others it denotes downsizing or layoffs. In truth, all companies outsource at some level. The days of the vertically integrated company are past. Now, supply chain management and product velocity are the driving factors of operations. Unfortunately, too many companies have not thought through their outsourcing strategy, thus they are limiting their potential for success. When choosing to outsource, two decisions are paramount.

The first is deciding what parts of the product or system are core technologies to the company. Core technologies are typically at the centre of a company’s strength. For example, a life science company may view its chemistries as its core capability, and a medical device company may consider disposables to be at the heart of its offering. For many companies it is critical that core technologies remain within the organisation while systems that support the core technologies are outsourced. When this boundary is established, a company can then decide who it should outsource to; typically, there are two different methods of outsourcing.

The first approach is grouping the individual commodities that make up a system or device, for example, circuit boards, sheet metal, cables and plastics, and contracting with qualified vendors to produce these items. The varied commodities are then gathered together to build a finished product.

The second approach is to bundle an entire product and outsource it in its entirety. The advantage of this approach is managing a single part number while leveraging the buying power and quality systems of a competent contract manufacturer. This reduces the demand for managing multiple vendors, but places a high premium on qualifying the contract manufacturing partner. Typically, this approach works well when the device being bundled for outsourcing is medium to low in volume and high in complexity and the chosen contract manufacturer is located in the geographic region in which the product is to be distributed.

For many medical device companies in Europe, the decision to use overseas contract manufacturers to build an entire device is a difficult one. The idea of another organisation being responsible for manufacturing its entire system, even if it is a noncore system, is hard to embrace. Will the contractor build it correctly? Will the company lose control of its process? Will the contractor’s quality systems meet expectations? Will the company be able to communicate well with its contract-manufacturing partner? Even with these valid concerns, there are strong arguments in favour of using contract manufacturing to grow a company’s overseas business.

The benefits

One of the big advantages of using overseas contract manufacturing is avoiding the investment in brick and mortar to establish new operations. If a qualified contract manufacturer has already made the investment in establishing the manufacturing processes that are capable of producing the product and has developed a strong supply chain, leveraging its existing ability can get the final product to market faster and lower the medical device company’s overall investment.

Another significant reason

European companies use overseas contract manufacturing is to avoid a punishing exchange rate. Because of the weak dollar, European companies have seen margins and market share decrease as they struggle to compete with regional competition.

In addition, the ability to manufacture and distribute products locally can be a huge cost saving, as opposed to shipping products abroad.

Check list for qualification

As medical device companies qualify new contract-manufacturing partners to build their entire system overseas, they should consider the following:

• Does the contract manufacturer know how to produce quality product every time?
• What methods and tools does the contract manufacturer use to communicate?
• Can the contract manufacturer deliver cost competitive products in an open-book accounting fashion?

Remember, the best companies outsource to win, to innovate and to grow, not to shrink.

Paul Fink is President and Chief Executive Officer, and James Skeen is Vice President Business Development, at TriVirix, 925 6th Avenue NE, Milaca, Minneapolis 5635, USA, tel. +1 303 589 8075, e-mail: james.skeen@trivirix.com, www.trivirix.com.