Medical Device Link.

Originally Published MX November/December 2005

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In today's global market, New Mexico and New Delhi can both be viable candidates for medtech outsourcing.

Steve Halasey

In the medical device industry, outsourcing company operations is frequently an executive's best business strategy. Those who have adopted the strategy agree that it can often improve a company's productivity, reduce product development time, and cut overall costs—all important achievements in today's competitive medtech marketplace.

Candidates for outsourcing include a wide range of company functions, such as fundamental research, technology development, product design, product testing, clinical research, manufacturing and processing, distribution and logistics, and regulatory compliance. Determining which functions are ripe for outsourcing is typically a company-specific exercise that takes into account the company's long-term business and product development strategies.

But even with a list of candidate functions in hand, company leaders must still identify which outsourcing firms can effectively perform each task. And, with a global market in play, companies also have to consider which functions can be reasonably handled overseas and which are best kept close to home.

Keeping some operations close to home has certain advantages. But medtech company leaders are increasingly choosing to outsource activities to locations all around the globe. The decision faced by such executives is not whether to outsource, but where to outsource. This article looks at some of the regional options available to medtech executives who have already determined that their companies should outsource certain functions.

Big Concerns

Whitney

With thousands of well-qualified domestic suppliers and service providers occupying every conceivable niche, outsourcing functions to firms located in the United States is usually not problematic. And while U.S.-based companies have long relied on outsourcing firms to perform product development and manufacturing operations, many are now exploring outsourcing for additional functions previously kept in-house.

"It makes sense to outsource functions such as payroll, human resources, financial and accounting services, regulatory affairs, and information management to domestic companies," says Chang-Hong Whitney, president of Whitney Consulting (Littleton, MA), an international business-consulting firm. "Many medtech companies have implemented this strategy very successfully because of the specialized skills that their outsourcing companies possess. By having focused experience and repeat volume, such outsourcing firms can offer higher quality and lower costs, and can eliminate distraction in a company that needs to focus on its core business."

Colantuoni

The core concerns of medical device manufacturers remain the same regardless of the location of their outsourcing firms. "Medtech companies that we have dealt with are concerned mainly with cost reduction, quality of product, and the protection of their intellectual property (IP)," says Steven A. Colantuoni, director of market research and communications at the Offshore Group (Tucson, AZ), a business development advisory firm.

But when medtech executives begin to consider outsourcing company functions to firms outside the United States—or, sometimes, even outside their home state—more-serious questions arise. In theory, medtech companies can benefit from outsourcing company functions to firms in nearshore or offshore locations rather than keeping them within U.S. borders. Access to low-cost labor and proximity to emerging markets are among the top reasons that many medical device companies are exploring such moves. But experts caution that moving operations to distant locations presents a whole new series of challenges.

"When outsourcing overseas, one needs to consider distance, language, and cultural differences that can result in misunderstanding of contract requirements," says Whitney. "And the effect of these factors can become magnified for products or services that have a high-technology component or require significant training."

And not every company operation is suited for a long-distance relationship, says Colantuoni. "Knowledge-based and technical functions are most often best kept close to home."

Before taking the first step outside the United States to nearshore locations such as Mexico or Puerto Rico, companies should first evaluate whether the functions to be outsourced are appropriate for the newly proposed location. "New product development is a good candidate for nearshore outsourcing, and use of this strategy has grown recently," says Whitney. "Taking a marketing concept and internal ideas and using outsourced engineering firms that specialize in this area can lead a product to market faster and at lower cost. Moreover, this kind of outsourcing all but eliminates internal politics, professional jealousies, and foot-dragging."

But, Whitney adds, "It is important to consider outsourcing this work only to English-speaking firms, because communication through this phase is critical."

The list of functions suitable for outsourcing narrows as a company begins to look farther afield to offshore regions such as China or Eastern Europe. "Any parts of the manufacturing process that are labor intensive—such as fabrication and assembly—are good candidates for offshore sourcing," says Whitney. "In many industries, Asia has become the world's manufacturer for such operations because of its huge manufacturing base and very low wages. Such opportunities exist for the medical device industry as well."

"Medical manufacturing executives are best served by the outsourcing of direct labor," agrees Colantuoni. "For operations performed in a low-cost environment, the savings in labor can be significant."

Global Solutions

Meeting the varied requirements of medical device manufacturers is a tough challenge, but one that the global outsourcing community has accepted in earnest. Along the way, such firms have enlisted the assistance of many countries that share the desire to participate in the growing medtech community (see Table I).

When searching for an outsourcing firm, medtech executives want "a company that has the size and geographic reach into lower-cost regions to be able to offer their customers a variety of options," says Tom Podesta, vice president for sales and marketing at the Tech Group (Scottsdale, AZ). In addition to its U.S. headquarters, the Tech Group has operations in Mexico, Puerto Rico, and Europe. "Best-in-class business practices, technical expertise, and a robust supply chain are some of the advantages these facilities can offer our clients," says Podesta.

Outsourcing to companies with nearshore facilities in Mexico has long been a favorite business strategy for medical device manufacturers seeking to take advantage of low-cost labor while keeping operations within arm's reach. But while most such operations have tended to cluster in cities close to the U.S. border, local efforts are underway to attract investment to more-distant sections of the country.

Marcelo Pelaez is executive director of the Ensenada Economic Development Corp. (COPREEN), an organizations that represents business development interests in Ensenada, Baja California, the largest municipality in Mexico. With the support of the state government, the municipality, and the city's business community, COPREEN is seeking to attract new business ventures to Ensenada. "Right now, our interest is mainly in manufacturing," says Pelaez. "But in the future, it is possible that the city could support R&D activities for certain life sciences. After all, Ensenada has more scientists per capita than any other city in Mexico. But at the moment, almost 80% of their research is related to the ocean. "

COPREEN offers site selection assistance; labor market information; connections to federal, state, and local government offices; and links to legal and accounting firms. The organization can also assist manufacturers in searching for local suppliers.

Bingham

The U.S. Commonwealth of Puerto Rico is another choice destination for nearshore medtech operations. Lured initially by federal tax credits for the income earned by their island subsidiaries, many U.S.-based medical device manufacturers have had facilities in Puerto Rico for a decade or more. According to Gary Bingham, director of economic research for new business development at the Puerto Rico Industrial Development Co. (PRIDCO), companies such as Becton Dickinson, Guidant, Medtronic, United States Surgical, and Zimmer invested more than $100 million in facilities on the island during 2004 and 2005, creating more than 1500 jobs.

Puerto Rico offers medtech companies a skilled labor force, a full range of suppliers and professional services providers, a maximum local income tax of 7%, the same legal protections that companies enjoy on the mainland (including those for intellectual property), and the largest FDA office outside Washington, DC. "Those operational and tax advantages are why so many medtech companies have chosen, and continue to choose, Puerto Rico as a location of choice," says Bingham. "It combines the advantages of going offshore with the security of being home."

Although most medtech concerns in Puerto Rico are subsidiaries of finished product manufacturers based on the U.S. mainland, the advantages offered by the island have not been lost on medtech outsourcing firms. The MedTech Group (South Plainfield, NJ) maintains operations in both Puerto Rico and Costa Rica. According to Gil Reich, president of the MedTech Group, operating in Puerto Rico enables his firm to offer "local supply for the Caribbean Basin, with lower costs."

For Costa Rica, the business advantages are somewhat different. "The key advantages of Costa Rica are its low-cost manufacturing capabilities and stable business climate," says Reich.

Camacho

Edna Camacho, general director of the Costa Rican Investment Promotion Agency (CINDE), agrees that the capabilities of the country's workforce are an attraction for medical device manufacturers. Costa Rica, she says, offers a "high-quality, educated workforce—many with engineering and master's degrees—at a very competitive cost. This is an opportunity, because companies are slowly learning about the advantages of this level of labor."

Camacho says that Costa Rica's workforce is especially suited to a variety of functions essential to device manufacturers, including product design and engineering, repair and maintenance, and manufacturing and assembly. In addition, she notes, workers in Costa Rica's medtech industry are familiar with FDA policies and understand the good manufacturing practices requirements of the agency's quality system regulation.

In addition, the government of Costa Rica offers an attractive package of incentives to export-oriented companies, says Camacho. "Among the fiscal benefits granted under the provisions of Costa Rica's Free Zone legislation are 100% exemption from import duties on raw materials, components, and capital goods; 100% exemption from taxes on profits; 100% exemption from export, excise, and local sales taxes, and taxes on profit repatriation; and other benefits that directly contribute to reducing companies' operational costs."

While the medical device industry has tended toward conservatism in its outsourcing arrangements, companies in the global electronics and consumer high-tech markets have taken full advantage of outsourcing opportunities throughout the world. Such experience gives a leg-up to outsourcing companies such as Jabil Circuit Inc. (St. Petersburg, FL), an electronic manufacturing services (EMS) provider with more than 45 design, manufacturing, and repair facilities worldwide. In addition to its operations in the United States, the company also has facilities in China, Hungary, India, Mexico, and the UK.

According to Tony Allan, Jabil's vice president for medical and instrumentation, facilities in different locations serve very different strategic purposes. "Sites in Western countries offer close proximity to customer design centers for rapid prototypes, value engineering, and product support. They can also perform high-mix, low-volume manufacturing of systems close to Western markets." By contrast, he says "offshore locations offer low-cost capabilities, close proximity to established non-Western markets, and access to emerging markets."

Beh

Electronics manufacturing has played a key role in the emergence of Singapore as a center for medical technology. "Over the years, suppliers in Singapore's large electronics sector have been diversifying to become key suppliers to medtech companies," says Beh Swan Gin, MD, director of the biomedical sciences group in the Singapore Economic Development Board. "Medtech companies are able to leverage a very wide base of suppliers that produce electronics as well as plastic, rubber, silicon, and metal components. In addition, there are many providers that offer mold design and tooling services, prototyping, and industrial automation solutions.

"These suppliers have also been able to provide complete manufacturing solutions," says Beh. "Turnkey products manufactured in Singapore include defibrillators, patient monitors, analytical equipment, and other diagnostic devices." According to Beh, Singapore's contract manufacturers are also moving into the field of medical device design. Recent examples include EMS provider Venture Manufacturing (Singapore) Ltd., which has established a 50-person equipment design team, and Forefront Medical Technology (Pte) Ltd., which has created a custom-design team to serve its existing medtech customers.

Singapore supports the growth of start-up medtech companies by offering attractive tax incentives, manpower training support, and research grants. In addition, says Beh, "medtech companies can look to raise equity financing in Singapore through venture capital firms or listing in the public market."

Evans

When a company's network of collaborating companies can include facilities almost anywhere in the world, keeping the lines of communication open can be an important consideration—especially for companies that have decided to outsource early-stage research and engineering services. From its headquarters in the Melbourne suburb of Mount Waverley, Victoria, Australia, Invetech offers outsource engineering consultant services in North America, Europe, and Asia-Pacific regions, with support from a subsidiary in San Francisco and from sister-company offices in Boston and Hemelhempstead, UK. "This arrangement of support offices allows us to have substantial business-hours overlap with our clients, wherever they are on the globe," says Andrew Evans, business development manager at Invetech. "It also allows our sales force and supporting staff to be widely distributed, which helps to cut travel costs and delays in responses to inquiries."

Whether a company's first venture in outsourcing is located just down the block or halfway around the world, company leaders would do well to remember that business conditions and competitive forces never stand still. Being prepared to handle the future needs of the marketplace can often mean taking a dynamic approach to outsourcing decisions.

Supporting such an approach is an integral part of the diverse facility geography strategy adopted by Avail Medical Products (Ft. Worth, TX), an outsourcing firm that currently has manufacturing facilities in the United States, Mexico, and China, with distribution and fulfillment facilities in both the United States and Europe.

Keene

"As product lines mature, they often require a manufacturing relocation to support ongoing cost-of-goods improvements," says Avail president J. Randall Keene. "In turn, this may require an offshore manufacturing move." Avail's strategy provides product life cycle planning in an environment that ensures a common quality system is used across all facilities.

"With the Avail global quality system, our customers are assured of the cost benefits of offshore manufacturing, without the risk of enduring a less-tested quality system new to their product line," says Keene. "As device companies continue to expand their marketing efforts—particularly in Asia—access to an American-owned and -operated device manufacturing facility has real value to the device market."

Getting Help

With such a variety of options at their disposal, medtech executives might be forgiven for feeling a bit overwhelmed. Fortunately, getting assistance from economic development agencies (EDAs) with an interest in attracting medical device business isn't difficult (see sidebar).

According to Allan, most EDAs are "very helpful and willing to establish contacts with relevent resources and to assist in set-up and trade in the area."

Podesta at the Tech Group, says that his company's experience has been similar. "We have had experience in dealing with agencies in Puerto Rico and Europe," he says. "They can typically offer financial incentives such as lower tax rates, funds for employee training and development, and a local network of suppliers and potential customers."

"Most agencies help with local tax law, hiring, site locations, and some even with start-up grants," says Reich of the MedTech Group. "Among government agencies, IDA Ireland is the bellwether."

Business development assistance is also widely available for companies doing business in the Asia-Pacific regions. "Singapore's economic development commission has been very useful in helping to introduce Invetech to potential clients," says Evans at Invetech. "We have also received assistance in marketing from Science Industry Australia, an agency that provides market overview information and seminars relevant to our target markets in the in vitro diagnostics, biotechnology, pharmaceutical, and drug-discovery segments. The Victoria government business office in San Francisco has been a source of services and advice in helping us commence our U.S. operations. And Austrade has provided introductions to potential clients in North America and Europe."

China may be a newcomer to medtech manufacturing, but it is quickly learning the value of providing support to companies that can bring jobs and trade to its shores. "We have had reasonable support from Chinese government agencies," says Whitney. "Most provincial and city governments in China encourage foreign investment. We have also found it reasonable to work with the Chinese regulatory agencies that are implementing new laws to cover contract manufacturing, where the foreign manufacturer retains ownership of the brand but does not have a legal presence in China."

Even so, says Whitney, companies must be watchful when setting up operations in China. "Uneven implementation of laws at the national and local levels often presents a dilemma for foreign companies," she says. "It is advisable to retain help from trade promotion agencies or local consultants who can help foreign companies through the red tape."

Not all good advice comes from quasigovernment agencies. Site selection consultants with specializations in specific regions can also often be valuable resources. "Our organization acts in several ways similar to an economic development agency," says Colantuoni. "In the context of Mexico, the Offshore Group introduces manufacturers to the benefits of operating in the country, explains the costs associated with doing so, and provides an overview of the use of outsourced manufacturing support, or ‘shelter,' services."

Important Factors

Wherever medtech companies may be searching for outsourcing alternatives, experts are agreed that the list of issues to be considered is a long one. Manufacturers should begin by considering the quality of their potential partners, says Colantuoni. "The track record of a potential outsourcing partner is the single most important factor that should be considered by medtech executives."

But when considering complex issues such as the selection of an outsourcing location, the decision is rarely based on just a single factor. "It's a package," says Pelaez of the Ensenada Economic Development Corp. "Companies should search for just-in-time proximity to their market; competitive labor costs with high quality standards; and a good business environment offering political and economic stability as well as the potential for integrating with other production processes."

Shuffle the deck a bit, and company executives will hear a similar list from others in the field. According to Camacho of CINDE, medtech executives should focus on finding four key elements: "A skilled labor force that assures the quality that medtech companies need; a nearshore location to facilitate interaction among headquarters, customers, and manufacturing facilities as well speed to market; a recognized location for medical device companies; and competitive costs."

"For medtech manufacturers that are considering outsourcing, key issues include obtaining raw materials; hiring an educated, productive work force; getting finished goods to market in a timely manner; and keeping most of its profits," says PRIDCO's Bingham. "But the most important factor in any business decision is the impact on the bottom line," he adds.

Despite the importance of bottom-line considerations, "price cannot be a medtech company's primary concern when deciding whether to move offshore for contract manufacturing or outsourcing," says Podesta. "There are many hidden costs that are sometimes not part of the original equation.

"Other factors that should be considered include the technical expertise of the region," says Podesta. "The Czech Republic, for example, has become a popular draw because of the higher technical competence of its citizens compared with that of populations in some other Eastern European nations.

"Similarly, companies should consider whether the candidate region has a robust supply chain when it comes to transporting raw materials," adds Podesta. "They should give thought to where their products will be used, and whether the costs of the new site will be justified or offset by transportation costs. And they should also determine whether intellectual property protection should be a concern. We have gained a number of customers who left low-cost manufacturing regions over concerns of IP piracy."

Concern over the protection of intellectual property rights when doing business in Asia makes the list of considerations somewhat different for countries in that region. "Innovation, know-how, and proprietary technology are critical success factors for medtech companies," says Beh at the Singapore Economic Development Board. "Companies must be able to trust that their outsource partners will respect their IP rights and trade secrets."

Singapore is commonly regarded as having Asia's lowest risk with regard to IP protection, says Beh. "We have a robust legislative framework that provides strong recourse should disputes arise."

Whatever the advantages offered by a particular region, however, the selection of an outsourcing partner may come down to issues of trust. "If considering outsourcing to China, it is most important to find a partner that is trustworthy, dependable, and experienced," says Whitney. "Establishing a personal relationship and full understanding of each party's purpose, objective, and ethics is critical. Identifying a local person who you can trust to observe day-to-day operations and provide clear, concise feedback will provide the insight that is necessary to conduct business."

Conclusion

Experts' best advice to company leaders who are seeking to solve the outsourcing equation are as varied as the list of factors that companies need to address. "Company leaders should not underestimate the impact that working with an outsource partner will have on their own internal organization," says Jabil's Allan. "An internal change agent is required to make the process a success."

Making sure that a new outsourcing facility does not become a hindrance to essential performance levels is also important. "Assuming ready access to a well-motivated and appropriately educated workforce, the most important elements in selecting a domestic or international site are those related to quality systems, the supply chain, and logistics," says Avail's Keene. "Companies must ensure that the new site will not inhibit the installation or proper execution of their existing quality systems, negatively affect the robustness and cost-efficiency of their supply chain, or prevent them from satisfying the logistical requirements of their customers."

"The first priority in selecting an outsourcing facility should be the firm's quality-control culture and resources to meet industry standards," says the MedTech Group's Reich. "After that, strong consideration should be given to manufacturing and engineering strengths as well as facility capabilities."

But not all elements of the equation are within the grasp of the manufacturer. "Companies should be sure to account for differences in culture, the efficiency of the labor force, and employees' ability to deliver at required quality levels—especially if the products are to be exported to regulated markets," says Invetech's Evans. "Differences in the productivity of a country's labor can far outweigh contained costs. And since tax concessions usually come with hooks, such as minimum local employee levels and penalties for early withdrawal, it's important that companies understand these elements well before they proceed."

To make its decision pay off, "a company should choose the location that will optimize its competitive position within its markets," says Colantuoni. "Company leaders should be exceedingly pragmatic and focused in this regard. They should spend the time and money necessary to do effective site selection research. In the end, this expenditure will pay for itself."

Copyright ©2005 MX