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Contract Manufacturers Aid in Enabling Supply Chain Optimization

Wed, 05/03/2006 - 6:04am
Medical device OEMs can partner with contract manufacturing firms to optimize their supply chains to gain a competitive advantage over other manufacturers in the industry. This article discusses the benefits that may be realized from such a collaboration and provides examples from other industries that will still translate to medical device OEMs and their specific needs.

By Dave Busch

A Solectron line worker inspects a medical PCBA board. Solectron has integrated Six Sigma quality controls into its Lean manufacturing methodology to improve quality and increase product yield.
At a Glance
  • Analyzing the market
  • Partnering with a CM
  • Successes in other industries
  • Real-world examples
For medical OEMs, business as usual will guarantee one outcome—oblivion. The business mantra for medical device OEMs today is faster, better, and cheaper—an old concept with modern-day relevance that will fundamentally change medical device OEM competitive strategy.

What’s driving this mantra? As has been reported by the financial community, the medical device industry is expected to grow from $100 billion to $300 billion during the next few years. Such dramatic expansion is like nectar to a bee; it will attract more and more competitors to the market. This will force medical device OEMs to grow market share by aggressively introducing new products more frequently.

But cost is another factor. New competitors, along with purchasing organizations and government payees, will also add pressure on OEMs to reduce product prices, causing them to look for every possible means to decrease costs. Add to these market dynamics demands from Wall Street to grow revenue at ever-faster rates and the expectations for medical device OEMs are unrelenting.Combined, these factors create daunting challenges. However, leading medical device OEMs can turn these challenges into opportunities, if they know how to respond to them.
Medical OEM Trends
Pressures from competitors, government, and Wall Street paint an incomplete picture for the situation facing medical OEMs. There are industry trends shaping the future business models that have significant implications.

For example, the convergence of pharmacologicals, disposables, and hardware into a single end-to-end device requires a new way of doing business—maintaining control of core intellectual property activities while outsourcing non-core supply chain management that follows the life of a product from product development through production and onto end-of-life.

In addition, the need to stay ahead of the competition by bringing products to market faster and at an increased pace will significantly drive up R&D spending.

Medical OEMs also have to look at the trend toward home-use diagnostics and monitoring devices. This sector will require medical device OEMs to develop products geared for consumers rather than physicians or medical technicians—disposable, inexpensive, convenient to buy, and easy to use.

Medical OEMs are experts at creating new medical product breakthroughs, not managing global manufacturing and supply chain logistics. Great product innovation that misses the market window of opportunity has the same impact as failed designs. True innovation takes place at both the product design and operational level. Unfortunately, effective operations are neglected too often, leading to poor execution and, ultimately, missed sales opportunities.

In today’s accelerating pace of global business, simply moving faster is not enough. Medical OEMs must have partnerships to win, partners who can align operational innovation with product innovation to create market opportunities.
Optimizing the Supply Chain
One of the major factors that has changed the business landscape in the past decade is the shift in buying power. Companies who were formerly in control of what products to sell, when to sell them, and how much to charge for them have seen a reversal in market dynamics. Today, if companies don’t have what the market wants, when they want it, at the price they’re willing to pay, customers will go elsewhere. Bottom line: end customers are in control.


A Solectron manufacturing facility illustrates the implementation of the Solectron Production System, the company’s application of Lean manufacturing principles with the quality rigors of Six Sigma to drive quality, flexibility, and lower costs for medical OEMs.
For years, contract manufacturers (CMs) have helped OEMs in other sectors reduce costs through outsourced manufacturing services. Today, OEMs are collaborating with CMs to not only reduce costs, but improve business performance through supply chain optimization. The shift to end-customer driven demand requires an agile, responsive supply chain that is able to deliver quality, flexibility, and the lowest total landed cost.

That’s a tall order.

To satisfy investor demands, medical OEMs will need to grow business—organically by speeding product time-to-market and increasing the rate of new products, or by looking to grow through strategic acquisitions. Either way, it takes cash—cash for increased R&D or cash for acquisitions.

As medical OEMs direct their attention to serving their customers through product innovation, branding, and customer loyalty, outsourcing partners can design and manage an optimized supply chain to help improve the medical OEM’s performance.

In industries that have long embraced contract manufacturing—computing, storage and telecommunication—OEMs have benefited from partnering with CMs to lower costs. While the CM can apply best practices to improve business performance in product development, production, and end-of-life support, the OEM can focus on product innovation, branding, customer relationships, and their distribution channels.

Achieving the lowest total landed costs (e.g., the right mix of global proximity to end customers, technical manufacturing skills, low labor costs, access to a quality supply base) requires designing a supply chain that is flexible to unpredictable customer demand, is cost effective, and maintains quality requirements.
Best Practices
Ericsson is one of the leading global telecommunication firms. In 2004, the company was hearing from its customers that it needed Ericsson to significantly reduce product lead time. Failing to do so would have meant lost customers, lost sales, and lost market share.

These products are custom-configured, complex systems with more than 5,000 parts from hundreds of suppliers worldwide, creating a significant supply chain challenge.

Solectron Corp. partnered with Ericsson to design a more effective supply chain. Manufacturing lead times reduced from six weeks to one week and delivery performance to commit reached an average of 99%.


Medical device firms are facing mounting pressure to create new products more quickly at higher quality and lower cost. Freeing up resources to invest in R&D or make acquisitions are driving medical OEMs to consider extending supply chain partnerships to improve competitive performance.
By focusing on the end-customer’s needs, the supply chain was optimized to meet target requirements. As a result of meeting this very aggressive customer demand window, operational innovation enabled the OEM not only to meet current customer needs, but also to begin to take market share.

Too often, though, companies focus on low-cost labor rather than the lowest total landed cost—two very different approaches to supply chain management.

For example, a large data storage company wanted to know what could be done to reduce cost and better manage demand. Solectron conducted supply chain what-if scenario modeling. On labor costs alone, China provided some significant savings. But when other considerations were factored in, the benefits from lower labor costs were not enough to overcome higher fulfillment costs. Ultimately, the recommended supply chain solution included Mexico and the United States, since most of the company’s customer base was in North America.

Likewise, leading medical device companies are beginning to realize similar benefits. One such medical device company developed the first U.S. Food and Drug Administration-approved tether-less, or unconnected, insulin dispensing system. This system helps people with diabetes achieve a freedom of motion never before obtained. The product concept was to provide a low-cost disposable three-day supply of insulin.

Solectron helped the company design the product. It then utilized operational innovation to reduce time-to-production by six months, as well as achieve required quality metrics and reduce the cost of the product to broaden market appeal.
Conclusion
A confluence of market dynamics is creating an environment that will determine the fate of many medical device OEMs.
The good news is that the medical device industry is growing dramatically, and based on some estimates, it looks like the sector will triple in size in the next few years.

But that’s also the challenge.

Growth opportunity begets competition, and competition increases cost pressures. This creates a need for OEMs to outpace competition with new products more frequently at lower costs.

Due to the nature of the IP sensitivity of medical devices, OEMs have historically developed vertically focused supply chains with tight OEM-owned command-and-control processes. But the competitive landscape is causing leading medical OEMs to rethink this approach.

While competition has always been aggressive and intense, today the need to innovate products, reduce costs, and speed time-to-market while maintaining quality is greater than ever.

Certainly no single solution fits all. But what is clear is that medical OEMs will need to look for partners who can collaborate to link product innovation with operational innovation to create market opportunities.

Collaborative supply chains are focused on helping medical OEMs become more competitive in highly complex global markets. The key to success is for OEMs to focus on core capabilities while outsourcing non-core functions.

In the end, innovating the product and operational levels means bringing new concepts from design to market faster, better, and cheaper. It means beating the competition.
Online
For additional information on the technologies and products discussed in this article, see the following websites:
Dave Busch is a vice president at Solectron Corp, 847 Gibraltar Dr., Milpitas, CA 95035. He is responsible for the strategy, development, and execution of the company’s medical market segment business. Solectron is a leading provider of electronics manufacturing and integrated supply chain services. Busch can be reached at 408-957-8500 or davebusch@solectron.com.

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