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Not All Contract Manufacturers Are Created Equal

Mon, 08/12/2013 - 12:56pm
Sean Fenske, Editor-in-Chief, MDT

Partnering with a contract manufacturer can save medical device OEMs expenses in the hiring of additional labor and training to support the manufacturing of a new product. (Photo: SMC Ltd.)In just the last 15 years, the role contract manufacturers (CM) have played in the medical device sector has changed dramatically. With such a highly regulated industry, OEMs were hesitant to use an outside manufacturing partner. They had concerns for a number of reasons, including IP protection, loss of control, loss of quality, the CM’s inexperience with FDA regulations, and more.

Fast-forward to today’s medical device sector and it’s a completely different attitude among OEMs. In an environment that requires ever increasing cost cutting measures, supply chain stability, and manufacturing flexibility, the CM can be a critical partner in the financial success of a legacy device that is still enjoying profitability or in the launch of a brand new innovation that has beat the competition to market.

Why Outsource?
Medical device OEMs site a number of reasons for seeking out a contract manufacturing partner. While it can be extremely difficult for an OEM to have a core competency in every step of the development/manufacturing process of a product (and simply impossible for a start-up), a smartly selected CM can complement an OEM’s capabilities, resulting in a partnership that enjoys the best of both organizations.

With that said, the primary reason a medical device OEM is seeking an outsourcing partner is to control costs. Joseph Lee, president of Xeridiem explains, “CMs have proven their ability to reduce total device costs and are now expanding their expertise to address total supply chain cost reduction.”

Of course, cost is only one reason. “There are several reasons an OEM would seek out a contract manufacturer—when the OEM doesn’t have the technology available to build [a product] internally; when they are out of capacity with their own equipment or personnel; or to get to market faster,” explains Mike Nowaczyk, VP of operations at SMC Ltd.

CMs offer medical device OEMs a competitive advantage when the proper due diligence is observed during the selection process. And therein lies a significant element in the success of the relationship.

A strategic outsourcing partner may have experience a medical device OEM doesn’t have in certain manufacturing areas. (Photo: SMC Ltd.)In addition to these more “business-based” reasons for outsourcing, there is also the advantage of design experience. A medical device OEM may have extensive experience developing medical products, however, with today’s environment of healthcare, designing for a hospital is not enough. Companies need to develop medical devices that are used not only by doctors and nurses, but also for the patients to use directly. And many devices need to “live” in a home rather than a hospital room. Therefore, partnering with a company that has the experience of developing products across several industries can be extremely beneficial.

Kevin Walsh, VP and GM of Celestica HealthTech and Automated Manufacturing Services includes yet another layer to the design experience advantages that can be realized with a CM. While RoHS is not something many device manufacturers have yet had to deal with, it is an obstacle that is being addressed by a number of CMs. “Next summer, medical device companies looking to sell their products in Europe will have to comply with the Restriction of Hazardous Substances (RoHS) directive, which mandates OEMs to remove a number of hazardous materials from the products they produce. The consumer electronics industry has already been regulated to comply with this legislation, so medical device OEMs have much to gain by working with a strategic partner that has proven global experience in RoHS implementation.”

Selecting a Partner
Even though outsourcing manufacturing or an entire product line to a CM is a much more common practice than it had been not that long ago, it is still critical to ensure the right partner is selected. An OEM that rushes the process, thinking that all CMs are essentially equal is doomed to fail (unless extremely fortunate with their rushed decision). Selecting the right business partner requires an OEM to review quality processes the CM has in place and a tour of the manufacturing facility. Selecting the facility down the road due to proximity is certainly the wrong approach.

“Medical device contract manufacturers must have a full component traceability system in place and must be certified to the ISO 9001 and ISO 13485 standards. These certifications and traceability systems, as well as a high degree of automation for assembly process repeatability, full electrical testing and screening, set medical contract manufacturers apart from other contract manufacturers,” states Faina Zaslavsky, director of microelectronics solutions at Crane Electronics.

The right contract manufacturer will have quality processes and inspection systems in place to ensure products meet necessary standards. (Photo: SMC Ltd.)Walsh adds to the “grocery list” OEMs should be seeking in a CM. “While supply chain logistics are becoming more complex, regulatory scrutiny is increasing as well. In the U.S., the FDA is already demanding more transparency in its product review processes. For medical device OEMs, a strategic partner that has been able to demonstrate competency in regulatory affairs is an absolute necessity.”

Securing IP
One of the concerns some OEMs still have when it comes to outsourcing is the security of their IP. While moreso an issue when outsourcing overseas, domestically based CMs still do hear about this from potential customers. However, it’s no longer a one-way street from OEM to CM with this concern.

“We do still hear customer concerns from time to time regarding sharing intellectual property; this is a valid concern for both parties in the relationship. Just as the OEM has concerns relating to the IP for their devices, the contract manufacturer has concerns relating to IP involved in a specific process used in the manufacturing of the device. From a legal standpoint, the appropriate nondisclosure agreements are put in place,” explains Treasa Springett, president of Donatelle.

Steve Heckman, senior R&D engineer at Plastics One, shares this two-way street concern regarding IP. In fact, he has the pendulum swinging the other way. “The roles have reversed. CMs have more of a fear that IPs will be taken overseas by their customers seeking lower prices.”

Walsh offers insight into how outsourcing partners may ensure IP protection between two competitive products, a scenario that could be more likely within a U.S. CM firm than the more sinister ideas that come to mind. “When a strategic partner is manufacturing products that may be in direct competition with each other, segregation into different buildings will be necessary. This segregation may also extend to manufacturing the products in different locations globally and utilizing different engineering teams. Particular care also needs to be taken with customer visits and site tours to ensure that this is no risk to IP for the OEM.”

Some contract manufacturers can take on the entire manufacturing process for a medical device OEM through to final packaging and distribution. (Photo: SMC Ltd.)While a potential manufacturing partner may not be at liberty to reveal whether or not they are currently working with a possible competitor, an OEM can certainly ease concerns by posing the hypothetical to ensure that the company has already thought of this scenario and has put a solution into place, should it be required.

Communication
Clear communication is key to the success of every single relationship, whether between businesses, friends, spouses, or any other pairing. When it comes to the relationship between OEM and CM, the communication between the two can truly be a factor that stands between success and failure. Without clearly understood expectations on both sides, a project will fail. How to accomplish that connection and ensure it is maintained should be a well-established system that the CM already has in place from refining the process with previous customers.

“When Donatelle engages a partner OEM on a project, one of the things we do is assign a project leader to be the dedicated point of contact throughout the entire project. This person acts as a single interface between the customers’ development team and our team of engineering managers and supporting engineers. A key aspect of the initial engagement on a project is ensuring scope and project intent are clearly defined and understood by both parties. Furthermore, the project leader will hold regular update meetings and define necessary follow-up actions to ensure project success. Customers appreciate and value having a single point of contact to coordinate every aspect of their project,” explains Springett.

Walsh presents that better communication can be established through a deeper connection between the two companies. “You need to get to know your strategic partner. This might include auditing their infrastructure and resources, conducting interviews with their support staff, or ensuring they have quality and manufacturing engineers. Once this work is complete, the ability to build a mutually beneficial relationship will become more natural. Medical device companies and their strategic partners should measure their performance together, set clear partnership goal objectives, and share best practices throughout both organizations.”

Misconceptions
While several misconceptions that OEMs have regarding outsourcing (or at least traditionally have had) have already been covered, there are a few more that the Roundtable participants have helped to dispel.

Heckman offers that, “Startup OEMs may not understand the initial cost of exclusivity when it comes to tooling expenses.”

“At times, OEMs don’t fully examine the effect to their CMs when they change SOPs or elements of their quality systems. These changes may have major impacts on the way business is conducted between the two parties if not considered and planned up front. It would not be uncommon to cause a supply interruption or unintended regulatory consequences,” contributes Lee.

Springett adds, “Some OEMs have the misconception that all CMs are equal. This is not the case. The OEM needs to take into consideration the manufacturing expertise of the CM, such as, ‘Can they achieve the difficult but strict dimensional requirements? If the CM is using different facilities to manufacture various parts of a device, are all facilities following the same quality manual, and will it have an impact on time to market?’ OEMs should also ensure they are looking at a true apples-to-apples comparison when evaluating quotes from multiple contract manufacturers. The OEM needs to confirm upfront what is included in a quote and any additional expenses they may incur prior to program launch.”

Conclusion
Developing a medical device from beginning through manufacturing to sales and distribution can be a daunting task for any medical device manufacturer to do on its own in today’s business environment. While it is difficult to select the right partner to aid in this task, doing so can alleviate the aspects where an OEM is not an expert, enabling the company to focus solely on those core competencies in which it is an expert. Additionally, partnering with a CM can eliminate the need to hire additional personnel, invest in capital equipment, or relocate to larger facilities. Being able to have a company help get to market faster can be the difference in being first to the market with a device. Finally, having a company that is intimately familiar with the strict regulations that are put out by the FDA may prove invaluable should they find something in the design that could have potentially caused a recall years down the road. Contract manufacturers are a valuable tool available to medical device OEMs, capable of making the difference between the success and failure of a medical device.

Full Responses
To see the full responses of the participants, view these links:

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