From the outside in11 May 2020
There is ongoing debate about the relative advantages and disadvantages of outsourcing in device manufacturing. Deciding whether to ramp up internal production or engage external suppliers is fundamental in a fast-paced industry. Lyn Erb outlines considerations for outsourcing and how to navigate the various available options.
The medical devices sector continues to thrive. An ageing worldwide population with chronic conditions and co-morbidities continues to drive demand for devices across the full scope of healthcare fields. Combined with a boom in wearable tech and digitised medicine, new and potentially profitable opportunities are constantly emerging for device manufacturers.
However, these opportunities are not without challenges – in particular, how to harness and develop new products and technologies in a costeffective way that maximises competitive edge, efficiencies and quality, while negotiating regulatory hurdles and cutting time to market.
Outsourcing has an increasingly important role to play in addressing some of these challenges. Properly managed, outsourcing all or some key processes of device development and manufacture can help plug internal knowledge gaps, reduce operational costs and ensure ambitious timelines are met. Drawing on external resources can cut labour and factory investment costs, and allow a more efficient concentration of resources on other core elements of the business.
This is why more and more medical device companies are looking to third-party partnerships to leverage these benefits and bring new products – or new production of established products – to market. As a result, outsourcing in the devices market is one of the fastest-growing sectors in the medical manufacturing industry. Depending on which report you read, it will be worth in the region of $190–210 million by 2026.
The predicted value of outsourcing in the devices market by 2026, making it one of the fastest-growing sectors in the medical manufacturing industry.
Advantages of outsourcing
With more contractors than ever vying for a slice of the pie, having fail-safe processes in place to properly manage supply chains from design through to manufacturing and marketing is critical.
Outsourcing can cover a range of services, from initial product design and engineering through to mass production, validation and distribution.
However, outsourcing need not be restricted to the manufacturing cycle. Medical device companies are also outsourcing research and development in an effort to leverage external expertise, to innovate beyond core or traditional markets, and to valueadd for customers.
Having a clear outsourcing strategy in place that is dynamic and can adapt to evolving market conditions, fast-paced tech and internal product requirements is fundamental. It’s important to understand and outline the benefits of outsourcing for all internal stakeholders and to constantly review its advantages in terms of each individual product’s development.
Outsourcing and supply chain requirements should be considered at a product’s conception – it should not be a post-design afterthought. Device design should be considered in parallel with manufacturing capabilities, and therefore also in parallel with the company’s outsourcing strategy.
What benefits might outsourcing offer over ramping up internal production for this particular product?
What machinery or expertise may be needed for each phase of production? Does it exist in-house? What materials may be required externally and from where in the existing supply chain can they be sourced?
Pinpointing these requirements early as part of a design for manufacturing and assembly (DFMA) strategy can help identify whether outsourcing may be an effective solution. External partners who already have the necessary manufacturing capabilities to produce the product may also help streamline development and minimise costly machinery upgrades or postdesign product changes.
The final steps
Crucial to the final decision to outsource is the classic make versus buy analysis – a comprehensive costing of the financial impact of developing a product internally set against the cost of outsourcing some, or all, development or production. This analysis needs to be thorough, drill down to all key elements in the production cycle and involve all company stakeholders from the ground up.
Third-party selection is arguably the most important step in the entire outsourcing process. It is crucial for all internal stakeholders to give feedback on selection criteria so that key benchmarks for success can be identified and weighted to highlight areas of importance. Sourcing partners that align with company values in terms of quality and service cannot be overstated.
Issuing a request for information (RFI) helps to better understand the supply base for the product or function that is being outsourced. Shortlisted companies are then included in the request for proposal (RFP) phase that follows.
It is at this point that detailed project information and expectations need to be provided to potential vendors. Enough information to ascertain project management skills and experience, production capabilities and costings needs to be provided in order to narrow the field for more intensive discussions and site visits.
The RFP documents supplied to potential partners should be consistent for ease of comparison. All bids should then be ranked in line with selection criteria and key benchmarks, with up to two or three vendors selected for meetings and further analysis.
Final discussions with the preferred partner should then seek to identify and agree commercial, creative and manufacturing goals. Frank and open discussions should identify limitations on either side in terms of design, support and factory capabilities, and any shortfalls that may require additional expenditure. It should also be clear at this point what internal support or resourcing will be made available to the contractor. The level and availability of internal support to the supplier – for example, engineering or design support, or responsibility for sourcing additional supply chain materials – should be outlined in contracts.
Cover all aspects
Every step of this outsourcing process – starting with the initial bid documents – should be protected by confidentiality agreements. This applies to all external parties at all stages of the bid or manufacturing phases – both successful and unsuccessful vendors – and should cover all discussions, as well as documentation relating to product design, manufacture, regulatory submissions and distribution.
An effective risk management strategy should protect all intellectual property and design integrity. Contracts and non-disclosure agreements should include patent release and ownership over all designs and design modifications, as well as knowledge transfer of all end-product data.
Internal stakeholder involvement must be agreed and finalised to ensure effective processes are in place to manage the external supplier – and the project.
Regular meetings should be scheduled with internal stakeholders as well as representatives of the external supplier. Timelines, budgets and key performance indicators (KPIs) should all be outlined and agreed in advance. Clear communication, project status updates and budget oversight are key to maintaining control and visibility, and to managing any problems as they arise.
There should be clear lines of accountability for each stage of the project. This includes outlining all responsibilities in terms of regulatory approvals to ensure there is a clear path to market for products manufactured off-site. This is particularly topical with the May 2020 introduction of the EU’s new European Medical Devices Regulation 2017/745 (MDR). Ensuring outsourcing partners are distributed across these kinds of regulatory changes is critical to achieving end product goals.
By extension, there needs to be a clear process for knowledge transfer at the end of the project. Accurate technical files are not only necessary to safeguard intellectual property rights and future product production and development, but also to meet regulatory requirements.
Smart, strategic outsourcing decisions can result in productivity gains and upticks in competitive advantage and customer satisfaction. It can make new product lines possible with limited capital investment, accelerate production timelines, and boost sales and marketing performance.
However, as with all successful strategic initiatives, it requires careful costing and planning, as well as buy-in from all internal stakeholders – from the top down. While profit margins and costings will always influence – and sometimes make or break – outsourcing decisions, it’s just as important for stakeholders to understand how outsourcing can work to alleviate pressure on internal capacity and other core business objectives. In this way, outsourcing isn’t a means to an end in terms of production, but a tool to help drive future goals across the entire business.
Outsourcing – a strategic opportunity
As modern companies are confronted with higher levels of complexity and uncertainty, it is important for them to adjust their capabilities in order to cope with environmental changes for sustainable competitive advantages. In such unpredictable business environments, to best enhance their competitiveness, many established companies continuously use external resources, as well as internal capabilities.
Outsourcing has been a typical strategy that takes advantage of the more advanced or lower-priced resources with greater efficiency, and thereby brings strategic advantages to the outsourcing companies. Outsourcing strategies lead the companies to have a broad network of the best competencies linked by outsourcing contracts, from which necessary functions such as raw materials, components and systems can be outsourced. Through the networked organisations, the outsourcing companies can transform themselves into more flexible and agile organisational structures. For these reasons, an increasing number of companies have adopted outsourcing strategies, looking to enhance their efficiency and competitiveness, and the topic of strategic outsourcing is increasingly widespread among modern organisations, thereby attracting great interest from organisational scholars as well as company management.
According to transaction cost economics (TCE), the costs associated with economic exchange play a leading role in the outsourcing decision, and the transactions are made through the governance form requesting minimum costs. From the perspective of TCE, corporate management decides outsourcing to minimise transaction costs, in the case that outsourcing can be more cost-effective than in-house development. As it is increasingly difficult for companies to keep the boundaries of their core competences stable for long, the purposes of outsourcing have evolved from cost-efficiency – for example, in offshore manufacturing – to more strategic issues such as flexibility, innovation and sustainability, by reducing risk in a volatile environment.
Resource-based view (RBV), which is another popular approach to outsourcing phenomena, focuses on the idiosyncratic resource owned by each company as an effective factor to motivate outsourcing. The resource-based perspective of outsourcing posits that a company can extend its boundary by building bridges to outsourcing partners, enabling access to immediately available technologies, while TCE considers a company’s boundary to be where they relinquish control over resources. Outsourcing is considered as a strategic opportunity that can complement resources that are difficult to develop internally, and thereby generates synergies beyond combined value.