Third-party politics: outsourcing to cost-cut and reduce time to market29 May 2013
Total sales in the medical device contract manufacturing sector are predicted to reach $62.7 billion in 2017, but OEMs are also under increasing pressure to cut costs and reduce time to market. Outsourcing key services to external partners is one way to achieve both. Independent business information provider visiongain reports.
The medical device industry has witnessed explosive growth in recent years. According to visiongain estimates, the global market was worth $266 billion in 2011. Much of this growth is linked to the prevalence of a number of diseases worldwide, most notably cardiac and neurological disorders.
In the past, the medical device industry maintained a low level of outsourcing. This was primarily due to concerns over quality, delays and regulatory compliance. In recent years, however, outsourcing has become more and more common, owing to the rising costs medical device manufacturers face and the competitive, global nature of the industry. Contract manufacturers themselves have started to diversify their capabilities and can offer a range of services, including design, engineering, packaging and distribution.
The main findings of this report are as follows:
- total sales in the medical device contract manufacturing market are predicted to reach $62.7 billion in 2017 and $119.5 billion in 2023
- electronics will be the fastest-growing segment of the medical device contract manufacturing market and is predicted toreach $27.7 billion in 2017 and $55.2 billion in 2023
- the US market in 2011 accounted for 47.3% of total revenues and will continue to be the largest global market during the forecast period
- an increased prevalence in lifestyle and age-related disorders are the primary factors driving the demand for new innovative medical devices, putting pressure on the capacities of the medical device manufacturers
- notable companies in the medical device contract manufacturing market include Accellent, Flextronics, Greatbatch Medical, Nortech systems, Symmetry Medical and the Tech Group.
Cost control and speed to market
Less than two decades ago, medical device companies maintained a low level of outsourcing activity, primarily due to the fact that the companies did not feel the dual pressures of cost control and speed to market that now drive product development and manufacturing. These same companies were also able to provide the level of investment in facility infrastructure and equipment necessary to perform their own in-house manufacturing, owing to strong profit margins and cashflow.
In addition, the demand came from just Europe, Japan and the US, where it is easier to obtain regulatory expertise. Furthermore, OEMs expressed concerns about entrusting design and manufacturing tasks to outsourcing companies and were apprehensive about the loss of direct control, and the supplier's ability and commitment to deliver the high quality that is required. There were also concerns within the OEM regarding brand protection and infringement of their intellectual property. These concerns were exacerbated by fears related to off-shoring such as cultural differences and adhering to in-country regulations.
However, with increasing pricing pressures and reducing reimbursements, particularly in the developed countries, the survival tool for the medical device market is to cut costs. Outsourcing some of the activities is one of the ways to reduce the costs.
The medical device outsourcing industry consists of four main sectors:
- design engineering
- device manufacturing
- final goods assembly
- supply chain management.
Outsourcing industry growth
The total outsourcing market in 2011 was worth $36.9 billion. Device manufacturing remains the largest segment, accounting for more than 91.1% of all outsourcing activities. The outsourcing market for device manufacturing was worth $33.6 billion in 2011. The design engineering outsourcing market generated revenue of $2.5 billion, representing 6.9% of the market share. The final goods assembly sector and supply chain management accounted for sales of $0.4 billion and $0.3 billion respectively.
However, in recent years, design engineering has witnessed strong growth and is poised to exhibit the strongest revenue increase over the next decade. The outsourcing of design engineering allows OEMs to accelerate product development and access specialist expertise in key product design fields. It allows the development of a superior device that can aid the physician with greater device-placement accuracy, leading to better overall comfort for the patient. Also, design engineering focuses on the overall effectiveness of design from a manufacturing standpoint.
Outsourcing has now become a widely accepted practice among medical device companies due to the benefits it offers, including speed to market, reduced cost, quality improvement and availability of highly skilled labour. A number of contract manufacturers now have multiple capabilities to serve all needs of the medical device industry and act as partners to the OEMs. Rather than looking at contract manufacturers as a separate entity, OEMs now view outsourcing as a necessity to improve their overall quality and reduce expenditures.
Both large and small companies benefit from outsourcing. For smaller companies, outsourcing development and manufacturing work is a good alternative to save money. For larger companies, outsourcing some of the activities lets them focus on their core business to drive future growth. It is estimated that outsourcing helped medical device companies to reduce product development costs by 10-30%.
The medical device outsourcing industry is mainly driven by strong growth in the medical device industry. By 2020, the number of people aged 65 and older is expected to reach 700 million. In addition to the aging population, the increase in baby boomers will also fuel the demand for more innovative medical devices.
Consequently, more companies will shift their focus to innovation rather than investing in non-core activities. With this trend growing, increasing numbers of companies are expected to outsource their engineering, manufacturing, assembling and supply chain management activities to contract manufacturers.
visiongain believes that increasing pressure on companies to reduce costs, more focus on innovation and the increasing complexity of medical devices will drive the growth of the outsourcing industry. More outsourcing companies are adopting the one-stop-shop model to provide the entire range of outsourcing activities to OEMs.