Contract manufacturers such as Baril Corp. (Haverhill, MA) use deep process expertise to enhance their clients abilities to innovate. (Photo courtesy Baril Corp.)

Medical device and medical diagnostics companies have long been recognized as among the richest hotbeds of innovation. Many experts give at least some of the credit for the considerable rise in the number of medical technology patents issued in recent years—from 4178 in 1989 to 10,616 in 2006—to the increasing popularity of outsourcing. Their view is that collaborating on projects stimulates thought, which improves product design and accelerates innovation.

This increased innovation is most often manifested in new products and technologies, creative application techniques, and continually evolving form and function. While several of the inventive young companies in question have matured to develop a competence in manufacturing that matches their expertise in development, many heed the management maxim to “focus on what you do well.” Thus, as more and more medical device and IVD companies realize that their core competency is in designing products, developing markets, and servicing those markets, the industry's reliance on the production services offered by contract manufacturers will grow accordingly.

For those companies that prefer to build on and reinvest in the innovation and development side of their businesses, contract manufacturers can play a pivotal role in helping them turn great ideas into high-quality commercial products while at the same time conserving precious capital and management resources. An estimated 30% of the cost of manufacturing medical devices now resides in outsourced services, according to an authoritative industry report. As the medical device and diagnostic product markets continue to expand, OEMs are expected to rely increasingly on contract manufacturers to shoulder some or all of their product engineering and manufacturing workload. Any medical technology company should be sure to address a number of central considerations before committing to a business strategy that depends on the services of a contract manufacturer.

Advantages of Contracting

There are several reasons why companies elect to pursue a contract manufacturing strategy. Prominent among the advantages the senior managers of these companies cite are faster time to market, efficiency in capital management, freedom to concentrate on core competencies, and, when partners are chosen carefully, assurance of product quality acceptable to the market.

Speed to Market. With a ready infrastructure in place, a contract manufacturer can ramp up to commercial-scale production in much less time than it would take a company to build, staff, and commission a new production line. Minor timing advantages can increase the prospect of a successful product launch and create lasting commercial benefits in the competitive medical products market.

Capital Efficiency. Companies faced with a limited supply of financial resources often choose to leverage the installed base of a contract manufacturer to act as a virtual manufacturing department, rather than tie up capital in building their own production capability. This allows them to invest in the strategic activities of innovation, clinical testing, and marketing. It also mitigates the risk of owning an obsolete production line should a new product not meet market expectations. In effect, contract manufacturers allow companies to substitute for inescapable fixed costs an arrangement where the costs are variable and, if the project fails, escapable.

Core Competencies. Early-stage medical device and diagnostics companies commonly are led by managers who have skills in technical disciplines and can drive product development, or whose skills in the financial realm enable them to navigate through the complex channels of the investor community. It is rare for an operations or manufacturing expert to reside at start-up companies. By taking advantage of the resources of a contract manufacturer, early-stage medtech companies can add expertise to their rudimentary management team on what is called a fractional basis. Premier contract manufacturers can offer product engineering, sourcing, material selection, regulatory, and other resources essential for turning a clever product concept into a commercially viable product.

Regulatory and Market Acceptance. Most medical devices and diagnostic products must negotiate regulatory hurdles before entering the commercial market. At a minimum, medical technology industry customers will demand of their contractors that their devices be manufactured to industry-accepted quality standards. Contracting with an established, proven outsource service provider that has worked with the medical device industry can expedite assurance of this capability. Credentials such as certification to the standards specified in ISO 13485 greatly reduce the risk profile for launching a new product manufactured by a contractor.

Risk Sharing. Just-in-time manufacturing, a concept implemented by many companies today, is a development that has forced some contract manufacturers to accept greater logistical and scheduling responsibility for projects than before. They are being asked to take an increasing amount of the burden away from primary manufacturers by providing a variety of services that range beyond manufacturing to purchasing and inventory management.

Today it is not uncommon for a contract manufacturer to receive a blanket order that is accompanied by a shipping schedule specifying multiple product release dates. The contractor must then decide either to run multiple jobs at lower profit or to accept the risk of manufacturing a number of releases worth of product in advance in order to obtain a higher margin and storing the devices until each release date arrives. In many of these cases, the outsourcing company and contract manufacturer will enter into an agreement whereby the outsourcing company will accept some of the risk by accepting responsibility for storing a given amount of material in exchange for a reduced price or some other benefit. The desire and ability of the parties to work together to resolve such issues ultimately determines the success of the relationship.

Another variation on the outsourcing partnership exists. Some contract manufacturers offer more-extensive services in exchange for either an equity stake in the primary company or a long-term production agreement. Such contractors, who may avail themselves of the complementary capabilities of sister companies, can provide the outsourcing company with engineering as well as manufacturing expertise, and with specialty and value-added services. This enables the principal manufacturer to focus even more intently on its core technologies and on distribution.

Selecting a Partner

Once the medtech company has made the decision to outsource manufacturing, selecting a contract manufacturer that is a good match for the company is critical to the success of the endeavor. Organizations should approach selection of a contract manufacturer and subsequent relationship management strategically. The goal of the selection process should be to find a long-term partner who supports the primary company in its desire to succeed. The relationship must be mutually beneficial to be successful, and so the outsourcing decision cannot be made lightly. The right contract manufacturing company can be a valuable partner who will contribute to the device manufacturer's growth and profitability for years to come. Choosing the wrong one could result in poor-quality product, lost revenue, and a deterioration of customer goodwill.

The outsourcing company should create a multidisciplinary selection team that includes representatives from manufacturing, logistics, engineering, quality, and finance, all of whom must buy into the final choice of contractor. Having a good team with a capable team leader will increase the likelihood of both a good decision and a smooth transition when the decision is implemented.

The first task of the selection team is to initiate contact with likely candidates. At this stage, the team collects relevant information in an effort to winnow the field of candidates to a manageable number. This can be done by submitting a request for information (RFI). The RFI form asks for information regarding the company's capabilities, its capacity, and the quality measures that are in place, including certifications. Things to look for in a contract manufacturer include:

• Financial stability.
• High quality standards, with ISO 13485 certification being weighted heavily.
• The proper equipment and expertise for manufacturing the product in question.
• A full set of existing contingency plans.
• The capacity to handle the additional business, or a detailed expansion plan that the contractor is willing to share with a prospective client.
• Experience in manufacturing IVD products.
• Appropriate packaging capabilities.
• Similar processes for development and documentation.
• Confidentiality.
• Integrity.

Some of these qualities can be determined from the answers on the RFI form, but a number of them can be ascertained only through reference checks or visits to the contractor's facility. Both reference checks and site visits are essential to a thorough candidate investigation in any case. From reference checks, the outsourcing company can gather information about the contract manufacturer's financial stability, integrity, and general business practice. Reference checks should be thorough enough to deliver insight into how the contract manufacturer is perceived by investors and in the marketplace. This provides a good indication of what could be expected from the company if it were selected.

A decision should never precede at least one site visit being made by multiple selection team members. The size of the group has to be managed to minimize costs, of course, but sending two or three people usually is appropriate. The selection team leader should determine which members to involve in this activity, carefully balancing the group's representation of company functions with manageability.

If the prospective manufacturing partner is in a foreign country, the outsourcing company should enlist the assistance of a local consultant who is versed in the language and customs of the country to conduct the initial site investigation. Such an agent can supply a great deal of information acquired through interviews and observation, preventing unnecessary early visits by the selection team, and their costs. The entire team should meet prior to its delegates' embarkation on a visit in order to prepare a list of questions to ask and company attributes to evaluate. Then it should meet again after the return of the delegation, to discuss their findings. In this way, representatives of all functional departments have the opportunity to give and receive input.

During a site visit, initial dialogue should include technical discussions about the principal manufacturer's product and the tolerance requirements that the contract manufacturer is able to meet. It is wise at this point in the inquiry to allow for the possibility that tighter tolerances may be required in next-generation products. Another good idea is to determine which piece of equipment will be used to manufacture the product and to examine it for cleanliness and signs of neglect. When establishing an agreement, the outsourcing company should make sure that all costs are included and specified explicitly. It should also request a copy of the contractor's contingency plans in case of equipment failure. This is particularly important if the product will be run on a unique piece of equipment.

Other questions are to be answered as well. If cleanroom manufacturing is required, then the processing equipment should be in a cleanroom and the cleanroom monitored regularly. The visitors should check to see what quality control and manufacturing practices are standard, and whether production personnel follow the rules of the floor. Any discrepancies should be noted and weighed in the decision-making process. If discrepancies appear even during an audit, then chances are they will occur more frequently when the customer, or prospective customer, is not present.

Another important step in the process is to speak with other customers of the candidate contract manufacturer. This provides a chance to evaluate some of the critical, though less apparent, characteristics of the service provider that will determine ultimate success, such as how well the contractor communicates and how the company deals with problems. A contract manufacturer should be forthright, honest, and focused on finding a solution whenever a problem arises, not seeking to avoid blame. Even if possessing the best technical manufacturing skills, a partner that does not communicate can be problematic.

Conclusion

Managed properly, outsourcing can be an effective way to trim costs and gain expertise that would otherwise not be available. That said, it is important to choose a partner that best fits the needs of the outsourcing organization and that offers the highest probability of success. This often is not the lowest-priced manufacturer; costs related to problems with product transition, delivery, or quality can far outweigh the burden of a higher service price. The important thing for the medical technology company is to establish a relationship with a contract manufacturer that is willing and able to work with it as a genuine partner.