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4G Outsourcing Partnerships

Thu, 03/10/2011 - 11:26am
Rich Nazarian

Outsourcing is a thriving aspect of the medical device manufacturing landscape. However, these partnerships have developed from different “generations.” This article highlights the three generations of current outsourcing partnerships and gives insight into what the fourth generation will likely bring for both OEMs and their partners.

The increasing use of contract firms to accelerate the efficient introduction and manufacture of medical electronics is well established and documented. Data from a variety of sources1,2 indicates that while the overall acceptance of medical product outsourcing has trailed the trends in commercial electronics, adoption is steadily growing.

As in other industries, outsourcing in medical devices has evolved from the contract manufacture (CM) of components and sub-assemblies to turnkey design, development, and assembly of finished devices, and ultimately, into the support of semi-virtual original equipment manufacturing (OEM) medical device companies.

As firms look to the future, the field is shifting further to include engagements that take advantage of unique and differentiating technologies that can be provided by partner firms. These partnerships go beyond looking to outsourcing companies for skills or capabilities that OEMs might not have internally, to actually deploying technology that has been independently created by the partner firm to differentiate the OEM’s products.

First Generation
The most traditional and accepted use of outside firms by medical product manufacturers, as in other industries, is in contract manufacturing (1G Outsourcing). Most of the major CMs now have large divisions focused on medical products. These organizations generally provide outstanding performance in terms of cost reduction, global footprint, supply chain management, and optimized operations.

Although now widely accepted, even this first generation of medical product outsourcing has followed a less aggressive trajectory than in other industries. The reasons for this slower uptake are important and industry-specific. Concerns over regulatory compliance, risk (both business and product liability), quality, and a tendency toward total ownership and vertical integration have contributed to a general reticence to outsource medical product manufacturing. As thoughtful and effective solutions have developed to address these concerns, the advantages provided by outsourcing in terms of speed, efficient use of capital, and flexibility have driven the increasing use of medical manufacturing partners. This acceptance of contract manufacturing has grown not only in scale, but in breadth of services as well.

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Figure 1: CM partner roles in operational cycle

Many of the large CMs are firms that initially specialized in printed circuit assembly and have now developed into broader based box build or turnkey manufacturers with deep and wide capabilities for their medical product customers. Ultimately, the CM’s value is realized by bringing to the relationship manufacturing technology and capabilities that their customers do not possess, thereby allowing the OEMs to do more with their fixed resources and focus on the core elements that increase their enterprise value.

Second Generation
The next generation (2G) of outsourcing engagement for medical products involves the elevated use of contract engineering companies to help supplement and accelerate product development. As medical electronics technology has progressed, the need for specialization in a wide range of areas, from ASICs to DSP to embedded systems to safety critical software development and many others, has increasingly driven the integration of outside turnkey engineering into OEMs thought processes.

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Figure 2: Turnkey partner roles in operational cycle

While medical device firms have long made effective use of consultants and contract engineers in key areas, many of the same concerns that inhibited the use of turnkey contract manufacturing kept medical product companies from turning over the reins of product development to outside firms. The fundamental concerns in contract manufacturing described previously are compounded in engineering because of the non-linear and unpredictable nature of product development, particularly as it relates to new technology or innovative products.3 It takes a considerable amount of trust and communication for a company to put its future in the hands of another and this approach is constantly evolving in order to be an effective and efficient mechanism for product introduction.4 In order for this approach to succeed, both the OEM and the outside firm need substantial depth of awarenessnot only of the applicable technology and the product development methods, but the international product standards and product development processes prescribed by the FDA and the European Union as well. In these development relationships, the partner firm’s greatest value is realized by providing capabilities, expertise, or technology that the OEM does not possess internally in ways that provide the OEM increased flexibility and reduced time to market.

Third Generation
The third generation (3G) of operational relationships is the virtual medical device enterprise. Driven in recent years by extreme pressures on use of capital, the desire to reduce corporate infrastructure has created a demand for partner firms to provide more and more of the operational enterprise for OEMs. The ability for the contract firm to act more like a medical device OEM in terms of design controls, quality systems, product management, and regulatory compliance frees the OEM to focus on its true value driversintellectual property development and sales and marketing footprint. This is a critical value proposition in a world of increasingly cautious, if not shrinking, investment capital. In order for these relationships to succeed, however, the partner firm must construct an infrastructure that is secure, compliant, and readily leveraged by outside firms. This places a burden on the partner firm’s IT and regulatory organizations far beyond what would be routinely contemplated by a contract engineering or manufacturing company; they need to provide quality systems operations as a service. The firm’s value in this relationship is derived from its ability to eliminate significant amounts of infrastructure from the OEM’s operation.

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Figure 3: Virtual company support in operational cycle

Fourth Generation
As traditional corporate structures evolve and 3rd party engineering and manufacturing firms mature, these relationships are moving in new directions, including the merging of their intellectual property (4G). Whereas the conventional approach to product outsourcing has been based on a unidirectional flow of differentiating intellectual property from the OEM through the partner firm into the product, the true power of future relationships may rely on the proprietary intellectual property that the partner firm can bring to the enterprise to enhance and differentiate the OEM’s products.

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Figure 4: IP and technology partnerships in the operational cycle

In all outsourcing relationships, OEMs seek out capabilities and know-how from outside partner firms, but future proprietary IP may go beyond the general purpose manufacturing and electronics expertise or platforms that traditional outsourcing has brought to the table. True leverage and acceleration will be realized when both partner firms bring domain, application, or target market-specific intellectual property to the relationship.

OEMs will soon be seeking partner firms that have their own IP that can differentiate them from their competition or add value to their products. This means that both firms will bring technology or IP that impacts patients or end customers in meaningful ways. It will not be enough to simply have platform designs that can accelerate product development, or manufacturing and infrastructure capabilities that can reduce capital needs and improve quality. Partner firms will truly realize their value when they bring their own product features and identities to the relationship in ways that are meaningful for treating patients and improving outcomes.

References
1http://bit.ly/cjDQaC
2http://bit.ly/9ReZ4d
3http://bit.ly/a2qkDL
4http://bit.ly/cKDsvP

Rich Nazarian is president & CEO of Minnetronix, a medical device outsourcing company, specializing in the design and manufacture of electronics-based medical devices. He can be reached at 651-917-4060 or ranazarian@minnetronix.com.  
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