Medical device companies have long benefited from global outsourcing of labor and manufacturing, and are now beginning to outsource product design and development as well. Rather than examine the pros and cons of insourcing versus outsourcing, this article challenges the basic principles of outsourcing, and brings a different outlook to this highly publicized and challenging subject.
It is not uncommon today to open any medical device trade magazine and see an article touting the benefits and pitfalls of outsourcing or offshoring the labor and manufacturing of medical devices. Global outsourcing of product design, development, labor, and manufacturing is being practiced by medical device companies to reduce cost; however, many of the benefits of moving labor and manufacturing could be short-term and end up being detrimental to the long-term growth of a company. Proponents and critics of outsourcing or offshoring often neglect to consider that with these practices, companies may be losing a key aspect of their business: a sustainable competitive advantage.
Sustainable Competitive Advantage
Medical devices for minimally invasive surgery are small volume, complex, high precision multi-component assemblies manufactured using highly skilled manual labor. Many of these devices are assembled under a microscope and using qualitative manufacturing operations such as bonding and welding. Medical device companies spend years developing and perfecting products that enable them to ensure compliance, quality, reduced risk, lower costs and profitability. Due to the nature of these products, perfecting a stable manufacturing process requires a significant amount of time and effort. Processes are developed into a series of skill sets and accumulated over time. The company might have had to endure a period of high costs of quality associated with poor production yields. Over time this accumulated knowledge (intellectual property such as patents, trademarks, copyrights, and trade secrets.) develops into a sustainable competitive advantage.
The term sustainable competitive advantage (SCA) can be defined as a core competency that can yield a long term advantage to a company. A SCA allows a company to differentiate themselves from the competition by creating manufacturing capabilities with a prolonged benefit that cannot be duplicated or imitated by competitors. It establishes barriers to entry that create disadvantages for new competitors attempting to enter the market, and maintains pricing power.There are a number of ways to reduce costs and still retain sustainable competitive advantages. One alternative is to find or develop new manufacturing technologies that reduce or eliminate labor intensive manufacturing operations. Advances in micro molding technology and polymer science now allow a range of cost-effective alternatives for components and subassemblies that are miniature, complex and require high-precision tolerances. Utilizing micro molding for medical products used in minimally invasive surgery (MIS) can permit companies to improve their manufacturing processes and not jeopardize sustainable competitive advantages. These changes can reduce the number of components, overall size, assembly complexity and time required to assemble the device under a microscope.
The Outsourcing Problem
By outsourcing labor and manufacturing in order to cut the costs of producing medical devices for minimally invasive surgery, companies are committing a strategic error in relinquishing a sustainable competitive advantage. Companies risk reducing long-term growth and profitability of the product and company. In addition to reducing costs, a large portion of contract manufacturer’s appeal is their ability to utilize common processes to obtain economies of scale in purchasing and manufacturing, access to intellectual property, and wider experience.
The contract manufacturer uses knowledge to manufacture entire medical devices with very little effort and cost. Once the process knowledge is disclosed to the contract manufacturer, it becomes publicly known and makes it easy for competitors to obtain and replicate (similar to a patent). Contract manufacturers will then make a strategic decision to promote this new knowledge to competitors with similar products lines in the hope of capitalizing on it. As a result, outsourcing lowers competitive barriers, allowing start-up companies to easily enter the market and permits the contract manufacturers to realize economies of scale in purchasing, manufacturing, etc. In other words, the company ends up subsidizing start-up companies!
The problem lies with short-term strategic thinking and the propensity to move in the direction of least resistance. It requires less time and capital to outsource or offshore than try and improve or develop a new and unique manufacturing process.
The Solution: Micro Molding
If companies wish to retain their sustainable competitive advantages they must avoid outsourcing the entire medical device assembly. Companies must only outsource components and subassemblies used to manufacture the medical device. By allowing the sourcing of components and subassemblies only the company can realize the benefits of obtaining ‘best practices’ while retaining their SCA’s.
Micro molding can be an excellent lower cost alternative to outsourcing medical devices for minimally invasive surgery. It can reduce or eliminate labor-intensive manufacturing processes and have a significant impact on the development of new MIS devices. In addition to the cost savings, micro molding can also provide MIS designers and manufacturers one or more of the following benefits:
- Manufacture medical devices more efficiently without compromising SCA’s
- Reduce costs by reducing the number of components, assembly complexity, cycle time and production yield
- Spur continuous improvement and innovation
- Use supplier base to ascertain best practices & incorporate in design and manufacturing
- Do not have to shop labor around
These benefits will allow companies to reduce their dependency (time) on microscope to assemble the device, reduce or eliminate expensive machine components, and reduce or eliminate complex secondary operations which results in higher production yields.
A two-step process is required to ensure companies create and retain sustainable competitive advantages. The first step requires a company to establish an effective organizational structure that promotes three key factors:
- Continuous improvement of product, process and service
- Continuous exploitation of existing knowledge to develop new and different products, processes, and services
The second step requires companies to adequately identify and document their existing competitive advantages and sustainablecompetitive advantages. In addition, they must be accessible to personnel responsible for outsourcing. The decision to outsource is normally made at a strategic level. The process begins with the company identifying the activity to be outsourced and generally using a make-buy analysis to justify the decision.
Companies need to evaluate outsourcing not only to see if it will reduce costs and time, but if they are relinquishing a potential or an existing sustainable competitive advantage. In order for an intellectual property strategy to be truly effective, it must be properly maintained, and personnel properly trained to know how to safeguard intellectual property.
Medical device companies need to explore new manufacturing technologies to help reduce the complexity of minimally invasive surgical devices. Micro molding technology can be an excellent lower-cost alternative to designing and manufacturing components and subassemblies for MIS devices. It allows MIS devices to be manufactured efficiently without compromising knowledge and sustainable competitive advantages. Micro molding can be an alternative that provides many of the same short-term benefits while also maintaining longer term strategic advantages. At the end of the day, sustainable competitive advantages are what make companies strong and able to compete in the global marketplace.
John Whynott is the Technical Product Manager for Mikrotech, division of ASYST Technologies LLC.