This article will attempt to challenge the basic principles of outsourcing and to bring a different outlook on this highly publicized and challenging subject. Two examples of larger medical device OEMs innovating new products and processes are presented, generating thoughts on how they could have been more successful bringing products to market utilizing smaller, specialized suppliers.
Growing up as a child, I learned a lot by watching my parents. For instance, my father would always purchase the same used and unreliable car because the engines were simple and easy to maintenance. Then it would happen! The car would break down. It would sit idle for several days while my father tried to fix it. After he couldn’t fix it, he would send it to a mechanic. The car would sit idle for several more days because the mechanic did not have enough training or experience to fix it. As a result, my father missed several days of work and we missed a number of holidays and celebrations with family and so on. Had he gone to a mechanic who specialized in the type of repair he needed, the time and aggravation could have been greatly reduced. The initial cost might have been more, but in the long run, he probably would have saved time and money. Larger medical device OEMs tend to go down the same path when it comes to innovating new products and processes. Similar to my father, they choose a supplier they are familiar and comfortable with rather than the specialized supplier that can do a far better job of meeting their needs.
Most larger medical device OEMs typically shun smaller, specialized suppliers. There might be good reason for that. Larger suppliers have lower costs, are perceived as being more financially stable, have more capabilities, and offer fewer capacity constraints. The drawback is no specialization. Not working with the right supplier can lead to long delays in product launch and high scrap costs. Working with smaller, specialized suppliers can help larger medical device OEMs be more innovative and competitive.
How is it that smaller medical device OEMs can be more innovative regardless of their limitations – less manpower and limited access to capital. Perhaps it’s more than just size and bureaucracy that makes larger OEMs less innovative. The key might be the way the OEMs choose to innovate. It may have to do with procedures and policies put forth that determine the level of risk tolerance and R&D commitment. Smaller medical device OEMs are less risk adverse and are not constrained by functional strategies such as limiting the number of approved suppliers. By working with smaller specialized suppliers, such as micro molding, smaller medical device OEMs expand their ability to innovate, giving them a competitive advantage over their larger counterparts.
Case in Point #1: Orthopedic
A larger medical device OEM was looking for a micro molder for two components used in a orthopedic application. An expensive, implantable, PEEK polymer was specified for the two components. The OEM performed a small amount of molding in-house but no micro molding. The OEM’s engineers attempted to micro mold these two components in-house but encountered two problems. First, the plastic injection molds were creating an unacceptable amount of flash, and second, the OEM was losing $250,000 in runner waste per component per year. The root cause was a lack of any previous experience designing and fabricating micro molds for PEEK components and molding the components in a conventional molding machine. The machine type limited the ability of the runner to be reduced in relationship to the size of the components.
The OEM formulated a team and visited the Mikrotech facility to perform an on-site audit. Mikrotech was selected as the supplier of choice and the visiting team’s recommendation was to place the company on the OEM’s AVL (approved vendor list). Over time, the level of correspondence between the OEM and Mikrotech diminished. After nine months, correspondence ceased and the program was put on hold. In one and a half years since, the OEM has not conducted any business with Mikrotech on this project. As a result, the opportunity cost for not moving to a specialized micro molder has reached over $750,000.
The OEM has decided to attempt to micro mold the components again. They are going to make the capital investment in equipment specifically designed for micro molding. Being that this is not a core competency or a sustaining competitive advantage for the OEM, it will take approximately two to three years for the OEM to see the results they are seeking. Moving the work to a smaller, specialized supplier in micro molding may have been the better solution. Overall, the OEM may have seen approximately $2,400,000 in savings going to a supplier specializing in micro molding. In addition, the capital investment in micro molding equipment could have been deployed for product development or enhancement of competitive advantages or core competencies.
Case in Point #2: Neurovascular
A larger medical device OEM was looking for a micro molder to supply four components used in a neurovascular device. The OEM did not perform any molding in-house. After a number of weeks working on the design, Mikrotech lost the business to another supplier. The reason was that Mikrotech was not on the OEM’s AVL (approved vendor list) and was too small of a company. Two years later, the OEM reinitiated correspondence with Mikrotech. The current supplier was a larger supplier that could not supply the components to specification. The OEM was once again seeking a supplier for the necessary micro-molded components.
Similar to the first example, the OEM formulated a team to visit the Mikrotech facility and perform an informal audit. Again, the company passed the audit and was selected as a potential alternate supplier. Soon after, there was no communication from the OEM with regard to any updates on the program. The OEM then decided to pull the product off the market and redesign it. At this point, the OEM decided to dual source the components once the product was redesigned; Mikrotech was selected as one of the suppliers.
Following the product redesign, the OEM decided to re-tool with the original supplier. They chose not to dual source due to a limited amount of time and resources available. Since then, the OEM has re-tooled the supplier, but is still having problems with the company. Moving the work to a smaller, specialized supplier in micro molding may have been the better solution. Overall, the OEM may have seen a more successful product launch going to a supplier specializing in micro molding. And again, similar to the first example, the resources required to troubleshoot and re-tool could have been utilized to enhance other areas to further supplement a competitive advantage.
What is your level of R&D commitment? Are you OEM #1, OEM #2, a little of each, or neither? Both of these examples offer a similar story. The reasons larger OEMs may not be as nimble and quick as their smaller counterparts may be due to more than just size and bureaucracy. It may also be that they limit their ability to become successful. By not working with smaller, specialized suppliers, larger medical device OEMs cannot innovate as effectively as smaller medical device OEMs. Larger medical device OEMs try to alleviate this problem by creating skunkwork development teams, but this is simply a method of circumventing the root cause of the problem.
Functional strategies must be aligned throughout the organization, which should be based on marketing and innovation. When an OEM limits suppliers, it may be limiting the ability to innovate, which can create a negative ripple effect. By limiting the ability to innovate, the ability to optimize product and process engineering teams is impacted. Limiting the product and process engineering teams may lead to frustration and disengagement. Not working with specialists suppliers may be prolonging development cycles, creating cost overruns, and jeopardizing the sales and profit potential of a medical device product launch.