Straight from the source: outsourcing and contract manufacturing

30 October 2015



If an OEM chooses to outsource some aspects of its business, it needs to ensure the returned aspect meets the objectives necessary for its success. Jack Sandahl, adjunct professor in the manufacturing operations management programme at the University of Minnesota, and fellow, supplier and materials management at Boston Scientific, explores the current contract manufacturing landscape and shares his five-step process for driving performance excellence.


In an ideal world, a manufacturing company would have direct control over quality, cost and delivery across the entire supply chain. In medical device manufacturing, the importance of these key factors is magnified further due to the nature of the business, including customers' quality requirements, healthcare cost pressures and the need to deliver innovative solutions quickly, while complying with global regulatory requirements. Although medical device manufacturing is under similar pressures to other industries, performance parameters require even higher levels of execution to meet the quality, efficiency, and cost objectives required for success. It is essential, therefore, that OEMs take a disciplined approach to their manufacturing sourcing decisions, and follow through with robust controls in supply chains.

A completely vertically integrated manufactured product is hard to find in today's world of specialisation and high technology. With rapidly changing process capabilities, increased efficiencies and economies of scale, companies are hard-pressed to compete in every aspect of the supply chain while maintaining focus on what they do best. The most successful companies in the world are those able to focus on their core competencies while controlling what is important to the customer and delivering what is truly valued.

In the late 20th century, the US automotive and computer industries learned some tough lessons about the difficulties of keeping a large vertically integrated infrastructure in place. Unable to respond to changing consumer tastes and technology advancements, the industries experienced painful periods of low-quality production, financial loss and workforce turmoil, as management struggled with obsolete production plants and product designs. Plants were closed, divisions sold, and many jobs were lost. Successful companies during this era included Toyota Motor Company and Dell Computer, both of which used the supply chain as a competitive advantage. This strategic position was not all about cost, but included forging better connections with customers and focusing on what the companies did well.

The right approach

Medical device manufacturing, a relatively young, technology-driven industry, is in a position to become the model for the design and execution of robust supply chains. In addition to the large, well-established med-techs, which have the resources and capabilities to vertically integrate where it makes sense, the industry is populated by many small start-ups that need to create supply chains while protecting their limited capital resources. It is in these smaller companies that sourcing decisions are even more critical to competitiveness and financial viability, while for larger companies, it is essential to maintain flexibility, customer focus and financial performance.

For med-tech companies large and small, processes must be in place to make and manage sourcing strategies and decisions. The global business environment and the state of manufacturing technology are constantly changing, so the process must be dynamic, and decisions must be reviewed, revised and redirected when required. An efficient manufacturing organisation has a disciplined process, continuously reviewing the actions that need to be taken in the short term and the strategies that need to be planned for the long term. Outsourcing is not a destination to be reached; it is a process in a constant state of review and change.

A systematic approach is best in managing the sourcing decision process. Five clear steps should be followed to assure that a company is aligned internally and, most importantly, with customer expectations. First, the organisation must have an operational strategy to engage with. Second, to focus and deliver excellence, the company must identify and segment core competencies, and a robust financial process must be in place for assessing the sustainability and profitability of options. Third, at the point of decision, a comprehensive source selection must be executed, while a system for managing and measuring supplier performance is essential for long-term success. The entire process then needs to be managed using the classic plan-do-check-act (PDCA) methodology.

Operational strategy and organisational engagement

A solid operational strategy is the basis for making effective outsourcing decisions. While top-down understanding and support is a necessity, cross-functional engagement and understanding at the lowest level is also essential, and this is one of the key challenges companies face.

For this process to be effective, the method must be embedded into the OEM's structure and become part of the company's culture. The strategy must be clearly defined and supported from the highest levels, and aligned cross-functionally. Capital funding, cash flow, facilities, resources and technical capabilities need to be prepared far in advance, for whatever strategy is to be followed and whatever actions will be required. Finance, product development, marketing, facilities planning, materials management and manufacturing operations are among the functions that need to be engaged with in the development of sourcing strategies.

A lack of understanding and support at the highest levels will result in poor decisions, inefficiencies, and suboptimal performance.

Segmentation of core competencies

Manufacturing alone is not enough reason for a company to exist. Companies exist for their customers, who choose their suppliers and partners based on product differentiation. Such differentiation can come in the form of functionality, quality, performance or cost; and in order to stand out from the competition and command a market, a company must excel in meeting the customer's needs.

The most successful companies in the world are those able to focus on their core competencies, while controlling what is important to the customer and delivering what is truly valued.

In order for a company to focus on customer needs, it is essential that resources be directed only to activities that drive differentiation. The key to attaining this focus is the identification of products or processes within a company that can provide that differentiation: only then might a company be able to become the supplier of choice in a market. An integrated supply chain solution, from marketing concept to product development production, is the key to success, and the vehicle to organise this effort is the segmentation of a business into its core competencies.

These core competencies are the product features, functionality, services or processes in which the customer identifies excellence and makes their product choice. The segmentation of such aspects should therefore always be viewed from the customer's standpoint.

In the segmentation process of core and non-core competencies, companies must consider key capabilities and intellectual property that enables the differentiation and customer preferences to be made. In some cases, however, a non-core process will need to remain in house in order to maintain control of technology or quality, and in some cases, a cost-efficient alternative cannot be located externally, so the process or manufacture of a product is executed internally. The primary advantage of using core competency in the sourcing decision is that it enables companies to focus effort and resources on areas that benefit customers, and let other companies perform the operations they do best.

An excellent discussion on segmentation of core competencies can be found in James Tompkin's Logistics and Manufacturing Outsourcing, Harnessing Your Core Competencies.

Financial make and buy

Regardless of whether a product or process is a core or non-core competency, the financial implications of make versus buy need to be understood. This allows the manufacturer to measure the impact of a sourcing decision on financial performance. In many cases, the tipping point in making a sourcing decision - especially for non-core products or processes - is the make versus buy analysis.
In assessing make and buy, it is essential that the internal cost structure to manufacture be well-vetted. Whether an infrastructure is in place for activity-based costing or another method of rolling up internal costs by assembly or operation, the key is to ensure the method has consensus and that a non-partisan financial review process is in place to execute the decision.

Source selection

When a decision to outsource is made, source selection is integral to the long-term success of the related product, process or service. When companies delegate the production of a product or process to another organisation, a comprehensive supplier selection process, accounting for all factors and requirements, must be available - including all the internal stakeholders affected by the decision.

The first step is to understand the supply base for the product, process or service that is to be outsourced. The information for this step is collected through a process called the request for information (RFI), the objectives of which are to communicate requirements to the supply base and gain an understanding of which suppliers should be engaged for proposals, or 'the shortlist'.

Once the supplier base is understood through RFI, requests for proposals (RFP) are sent out to the shortlist. This is where a deeper engagement is required in supplying detailed requirements, and collecting quality, capability and cost information. It is important that prior to RFP submissions, clear requirements and inputs are collected from all stakeholders.

One of the most important activities in the source selection process is the definition and evaluation of the selection criteria. Alignment must be achieved on what is important for success, then the criteria must be weighted and compared with what is included in the supplier proposal, and other information collected during the process. Ideally, the criteria and weighted parameters would be defined prior to sending out the RFP, meaning the information received in the proposals can be objectively compared.

Whatever sourcing decision is made, it must drive the purchaser to prefer your product.

The most important aspects of the process are cross-functional alignment on the criteria, weighting and key decision factors. For full ownership of the decision, key stakeholders and functions that have been involved during the organisational engagement and development of the overall strategy need to have input in the final sourcing decision. This will be important for support during the next phase of supplier management.

Managing outsourced manufacturing

The process does not end after the sourcing decision is made and a source is selected. Organisational structure must be in place to manage the outsourced process or product, and control of quality and execution must be in place as it would be if the process or products were vertically integrated. Control of the manufacturing processes is defined in ISO 9001, assigning final accountability to the company that has outsourced the process or product.

Finally, at this stage, it is important to have a written agreement in place, and to manage the outsourced process or product using key performance metrics. Both parties in the relationship have a vested interest in success, and the best method for securing it is the use of a supply agreement, with key performance metrics outlined to facilitate understanding and communication.

An excellent discussion on management of outsourced processes - including contract structure and metrics - can be found in Maurice Greaver's Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives.

Continuous improvement

Outsourcing is not a project or destination: it is a process. Business and technology are in constant states of change, and the most successful companies will be the ones that make the best sourcing decisions. It is vital to have a PDCA system in place, assessing performances and changing directions to create more effective and cost-efficient supply chains.

What must be kept as the top priority is the customer. Whatever sourcing decision is made, it must drive the purchaser to prefer your product.

PDCA: the plan-do-check-act method, vital for guiding the outsourcing management process.
Jack Sandahl currently works in a supplier and materials management role at Boston Scientific in Minnesota.


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