Budget business31 October 2017
There is growing demand for competitively priced products at the basic end of the medical device spectrum. We speak to Andreas Rühe, global head of procurement at Johnson & Johnson, about this challenging new business opportunity and what it could mean for the industry.
Some call it ‘good enough’ manufacturing. Hardly a flattering account of the hard work and creativity involved in coming up with a new medical device that will hopefully save lives, but sometimes cynicism is an important part of the manufacturing process. The process, which is rapidly gaining traction in all sectors, involves capturing the new ‘value’ segment. As devices become more high tech and the global market grows, companies are finding it easier to offer two products side by side, one of which is a budget option that still retains the prestige of a respected medical manufacturing brand name.
Not every customer can afford – or wants or needs – the version with all the bells and whistles. As a result, some medical device companies are now offering a ‘value’ range. Imagine it like the supermarket; there’s the expensive brand with the snazzy packaging that has rice or pasta in it, on the middle shelf at eye height, designed to draw your attention. And from the very same factory, but in plainer, slightly cheaper packaging, comes the supermarket own-brand. A plain package that doesn’t really get the heart racing but comes at a third of the cost. It gets the job done just as efficiently as the fancy package, but if it’s never going to be seen by the public, or ever be the cause célèbre of a company’s new facility or manufacturing prowess, then why would it need it be anything more than a workmanlike model? Andreas Rühe, the global head of supply chain procurement for the Diabetes Care and Vision businesses at Johnson & Johnson, is based at the company’s offices in Zug, Switzerland. The city is home to one of Johnson & Johnson’s most important global financial and logistics centres – more than 100 markets are supplied from Zug. This means that decisions must be made on what’s going to be worth the money, and what the market is asking for in terms of an alternative ‘value’ version. Rühe speaks to Medical Device Developments about the challenges and opportunities posed by the new segment.
Medical Device Developments: Can you explain Johnson & Johnson’s current contractmanufacturing processes and what the wider medical devices industry – in your opinion – is looking for with these relationships?
Andreas Rühe: To stay competitive in the increasingly complex healthcare industry, companies need to innovate continuously, in products and processes. The strategic use of contract manufacturing can support the acceleration of innovation and the more effective deployment of capital available to a company. As many contract manufacturers have significantly improved their capabilities in the past decade, we believe we see an increasing degree of integration with external partners, because they can help their customers become more agile, more flexible, and more responsive to meet customers’ needs and improve the end-to-end supply chain.
How can a company taking a plain-products approach ensure that it remains competitive while still catering to its ‘premium’ customers? And how do you ensure that these products are kept separate?
As technology evolves, more functionalities can be added while retaining price competitiveness, because automation and/or component cost reductions help bring the overall cost down over time. Premium pricing is often associated with a significant innovation breakthrough or special features for a product.
Not many companies are successfully able to operate in the ‘high end’ and the ‘low end’ of their industries at the same time. Business processes and innovation requirements are very different, and may require different talent and skills. In order to compete in both spaces in a sustainable way, companies may need to consider separate internal structures, processes and HR strategies, while at the same time keeping an openness to partnerships and leveraging know-how between divisions or with external partners.
The growth in this sector is pushing many companies to develop strategies to attract and retain value customers. What are your experiences with this trend – do you think it marks a shift in OEMs?
This is a trend developing across many different industries. Within healthcare, there are a variety of strategies being deployed to address it. One strategy is to focus on optimising cost for products that are advanced in the maturity curve, making cost critical for the viability of a product. Another strategy is to develop flexible structures with the ability to adopt new technologies and launch new products at a fast pace. Yet a third strategy is to balance a portfolio and respective investments.
Some companies may explore opportunities in the more basic segment of the market, as a source of ‘frugal innovation’ that may be transferable to premium offerings. In other cases, companies may be disrupted by others that started out in the basic segment and move up the curve to higher-value products over time, while keeping a very competitive cost structure. Even if companies choose not to compete in the basic segment, it is critical to observe its developments and emerging competitors.
Some companies are responding to the trend by outsourcing more lowvalue work in order to compete. What effect do you think this will have on the wider medical device market – in terms of trends in R&D, for instance – and in terms of the relationships between OEM and contract manufacturers?
The strategic use of contract manufacturing can support the acceleration of innovation and the more effective deployment of capital available to a company. Outsourcing helps use company resources efficiently and can result in increased investments in R&D. Opening up to external partnerships can also drive more diverse thinking and idea generation. Questions like ownership of intellectual property are viewed with more flexibility, as innovation comes more often from outside the companies than from within.
Due to bureaucracy and regulation, some companies are gaining market share by offering very low prices and innovative business models – how do other companies respond to this without sacrificing quality or prestige?
The strategic use of contract manufacturing can support the acceleration of innovation and the more effective deployment of capital available to a company. As many contract manufacturers have significantly improved their capabilities in the past decade, we believe there is an increasing degree of integration with external partners.
What are the benefits of mitigating the need to purchase complex equipment and overall costs of implementation? Do OEMs find this is better in the long run for their economic model, especially in today’s market with capabilities such as 3D printing?
Contract manufacturers often have capabilities, partnerships and additional resources that allows them to bring innovations, such as 3D printing, additive manufacturing and more, to customers, patients and consumers. Johnson & Johnson recognises that healthcare innovation takes place outside the walls of our company and we’ve always included what we call ‘supplier-enabled innovation’ as a key goal in our supplier-relationship management activities.
Where do you see the future of this area of contract manufacturing and medical device production going in the next five years?
The degree of collaboration with select high-performing contract manufacturers will increase significantly, reducing overall cost, and increasing focus and investment on innovation. In addition, we will start to see the effects of industry 4.0 – the era of digitalisation, where data connectivity along the value chain will lead to more cost-effective production and service delivery to drive significant business model innovation.
The science of the value market
The value end of the medical device market is growing, to the point that global management consultancy McKinsey & Company released a report into the sector, titled ‘Capturing the new ‘‘value’’ segment in medical devices’. According to McKinsey, the target customers are “those who gravitate to products that are good enough and competitively priced. Unlike customers who seek premium products, value customers are willing to sacrifice a degree of innovation, quality and service in return for a lower price.”
So far, so simple. But should a company take the time and money to make its value products in-house or should it outsource the job? The pros and cons make for an interesting debate. The value segment is more relevant in mature product categories, say McKinsey authors Chris Llewellyn, Dmitry Podpolny and Christian Zerbi. It is more common in a range of medical products, such as gauzes and syringes, but also in ‘maturing’ areas, such as imaging devices, as well as stents – a rapidly developing and changing market with new products being launched at a high rate, using a host of new materials. This market is a “mix of established premium companies and new low-cost entrants”, according to Llewellyn, Podpolny and Zerbi.
Despite all these changes to the way in which a company manufactures and outsources its more challenging – or less challenging – projects, there is still one perpetual aspect that must remain at the top: quality. As Andreas Rühe says, a variety of different industries are taking up this cause, and not always successfully. Not through their own fault, but because the market and a consumer’s needs and wants are more difficult to interpret than first thought. When engaging in any new ideas with contract manufacturing, it behoves the business to accurately research the project and make sure they know exactly what they’re doing. They must also ensure they know what their customers want.