The Global Spread of Contract Manufacturing

28 February 2005 (Last Updated February 28th, 2005 18:30)

The growth in outsourcing is set to continue as OEMs seek partners with specialist knowledge and efficient business operations.

The global medical devices industry has become increasingly reliant on manufacturing outsourcing in recent years. As medical device manufacturers feel the mounting pressure of healthcare cost containment, the outsourcing of component manufacturing can often present benefits in terms of cost savings, access to new technologies and streamlining of in-house processes.

Recent research has shown that manufacturers are beginning to see the value of choosing to work with strategic outsourcing companies rather than those who can merely beat the competition on price. This is a reflection of the increasing closeness of outsourcing relationships, with more and more parties entering into longer-term partnerships rather than simply closing narrowly defined supply deals. The dynamics of such relationships are changing accordingly, with factors such as the development of trust and close management contact becoming increasingly important.

OUTSOURCING BENEFITS

While relationships between original equipment manufacturers (OEMs) and contract manufacturers are becoming increasingly complex, an outsourcing agreement must first and foremost offer the OEM a manufacturing solution that delivers cost benefits. On a basic level, this would deliver the low labour costs and overheads typical of eastern European and some Asian operations.

On a more complex level, outsourcing can accelerate time-to-market and free management from mundane manufacturing issues to concentrate more on business-critical areas, which in turn offers cost advantages – although quantification of these benefits is difficult.

As OEMs rationalise their operations and core competencies, the ability of contract manufacturers to leverage a technology across a range of devices is now one of the most compelling reasons for OEMs to establish relationships with such companies. Since the incorporation of a new technology into the product range of an OEM will start at the product design stage, the interaction between OEM and contract manufacturer is necessarily closer than it is for pre-designed products.

The service offerings of contract manufacturers must include design, engineering and development as well as manufacturing capabilities. Contract manufacturers are responding accordingly by expanding their capabilities through investment in equipment, facilities and personnel.

FUTURE POTENTIAL

The future for OEM/contact manufacturer relationships is expected to be lucrative in specialist areas. The trend towards the incorporation of outsourced technologies is particularly prevalent in product areas where the fusion of biotechnology, chemistry and medical device technologies is occurring. OEMs whose core competencies lie in only one of these areas require expert input in the other areas.

Future growth in the medical devices/drugs fusion industry is likely to come in orthopaedics and implants as well as in the cardiovascular devices sector, where issues relating to biocompatibility, anti-microbial sterilisation, device coatings and drug release mean that specialist contract manufacturers are likely to be in increasing demand. The combination devices market has high potential, and it is in the best interests of OEMs and contract manufacturers alike to ensure that fully functioning partnerships are established which can provide expertise in every aspect of these markets.

For example, Memry Corporation provides design, engineering, development and manufacturing services to the medical device and other industries using its nitinol shape-memory alloy technologies. Nitinol is a generic name for a family of nickel-titanium alloys. Shape-memory alloys expand in response to body temperature or electromagnetic fields, which makes them a useful material in an implanted device such as a stent.

"The ability of contract manufacturers to leverage a technology across a range of devices is now one of the most compelling reasons for OEMs to establish relationships with such companies."

Current customers of Memry include the cardiovascular giants Boston Scientific, Medtronic and Guidant. Partnerships with Memry have enhanced the market viability of the drug-eluting stent offerings from all of these companies, giving them access to a market which is estimated to have been worth something in the region of $2.7bn in the USA alone in 2004 (Frost & Sullivan).

The medical device electronics industry is another specialist field identified as a potential growth area for contract manufacturer relationships. Until now, this type of relationship has not developed to any great extent. This is because it is a low-volume, highly regulated market and therefore does not lend itself to typical contract manufacture partnerships where advantages have traditionally been gained through economies of scale and lower overheads.

It is predicted that contract manufacturers with specialist electronic capabilities will leverage on the emergence of deeper OEM/contract manufacturer partnerships and display competencies in areas such as adherence to regulatory requirements and input into product design to display their value.

EXPANDING RESPONSIBILITIES

Growing trust between OEMs and contract manufacturers is considered to be a key driver for the continued outsourcing of manufacturing processes. However, with increasing trust comes increasing responsibility. So far, experiences have been favourable, and more OEMs have been keen to reap the cost savings (usually reported to be 2 to 5 per cent) to be gained through using a contract manufacturer. This has meant that OEMs have had few problems when expanding a contract manufacturer’s input into the product design phase, particularly if this means a shorter time to market.

Problems could arise if roles within deepening partnerships are not sufficiently defined. For example, OEMs often take it for granted that suppliers understand and comply with the relevant regulatory requirements in a particular market, and in terms of gaining business it is wise for suppliers to do so. Legally, however, the OEM itself is responsible for ensuring that a product meets the regulations.

The FDA Quality System (QS) regulation requires manufacturers to report their quality system for the design, manufacture, packaging, labelling, storage, installation and servicing of finished medical devices intended for commercial distribution in the USA. This regulation is intended to ensure that medical devices are safe and effective for their intended use.

A company may outsource any process involved in the commercialisation of its product, including design, development, manufacturing, sterilisation, packaging and distribution. However, the ultimate responsibility for the quality and safety of a medical device rests with whoever lists a product with the FDA.

Under the European Medical Device Directive (MDD), a company that places a device on the EU market under its name is considered to be the manufacturer. That company must undergo a conformity assessment even if it contracts the manufacturing, design or development of its product to another party.

As more manufacturing responsibility is being shifted to the contract manufacturer, these companies are often required to make independent decisions based on sales projections, order history and the company’s own anticipation of market requirements. In this way, resource planning is another responsibility that is beginning to be shared within the partnership.

FUTURE DEVELOPMENTS

It is predicted that consolidation will occur among contract manufacturers in the near future. Currently the majority of contract manufacturers are small specialist outfits. However, as volume requirements grow and safety regulations tighten globally, it will probably be the larger operations that will be best placed to cope with increasing demand.

Acquisitions aimed at specific niche technologies or capabilities are likely to be the most effective way of achieving a wider company skill set going forward. Overseas acquisitions may also be the best response to an increasingly globalised customer base, which may require manufacturing partners with a similar international presence.

While it is likely that many smaller contract manufacturers will be unable to compete with larger, all-encompassing companies, it is believed that there will still be a place for niche players who have specialist technologies or skills in certain markets or manufacturing processes. As well as offering unique capabilities and expertise, these companies can often react more quickly to changing OEM needs.

It is evident that OEMs are relying more heavily on contract manufacturers as part of their product development strategy. Contract manufacturers must be able to offer a number of benefits to make them the supplier of choice. The most important of these is the efficient manufacture of quality products.

On top of this, OEMs are likely to look for one of two things in potential partners: knowledge or technology in an area outside their own expertise; or a business model which allows the offloading of a chain of product design, engineering, development and manufacturing responsibilities to a trusted party. The key to either type of relationship is a proven track record of high performance and trustworthiness.