Contract manufacturing has been increasing around the world in recent years. What is driving it?

John Lamb: Faster rate of innovation through increased investment across all competitors and rapid globalisation with accelerating growth in China, India, et cetera, is driving the need for faster response to market needs. And all aspects of these more sophisticated needs cannot be met by the OEMs.

OEMs generally have a business model looking for relatively high margins, which leads them to focus on the development of technical leadership and market presence, in preference to operational skills. Contract manufacturers have become more capable of meeting this need – that is, more sophisticated at integrating their services more deeply with OEM. And PLM software now provides better platforms for the more sophisticated depth, speed and alignment of data transfer this requires – globally if necessary.

Why was the medical device industry such a late adapter of outsourcing to reduce costs?

JL: The medical devices sector is highly sensitive to critical quality issues peculiar to the medical world – manufacturing transfer, ongoing supply, and integration with CAPA market feedback. It was slow to realise that appropriately managed, quality demands can be better met by people focused on operational competencies, rather than those in-house who, although more tightly controlled, may struggle more to maintain the required expertise.

Part of the problem was contract manufacturers who were initially slow to take the initiative in offering integrated management services that create a measurable quality advantage. There was also a marked absence of adequate IT systems support for the required tighter integration.

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So has the medical device industry at last caught up with outsourcing?

JL: There’s still a huge way to go. Some major OEMs are still just learning to ‘let go’ and still only outsource a small fraction of the potential. Generally speaking, the industry is just beginning to embrace the concept of ‘strategic relationships’ where OEM and CM march in step throughout the product life cycle, already often mastered in electronics and automotive sectors. CMs have only just begun to consolidate to offer this kind of partnership, and both parties are still in the quite early stages of learning how to do it well. As global supply chain complexity increases, this will stretch to more ‘3PL’ outsourcing of the entire supply chain.

But given the high cost of medical developments, how cost-effective is outsourcing?

JL: It is almost because of the high cost of development that outsourcing is cost-effective. The high cost reflects the long track to integrate new technology in a robust way, to prove it in clinical trials, to gain regulatory clearances, to justify reimbursement with reluctant insurers and governments, to launch globally, to train thousands of large groups of people across multiple shifts (24/7) on safe deployment, and to follow up on quality and corrective action in use.

This gruelling value chain provides major barriers to entry, and enough points of higher value for major OEMs to differentiate themselves that, although they all need to meet high manufacturing standards, they are not the differentiator. The robustness of the design, and other factors, really drive the differentiation for them.

Thus, for OEMs, it is more cost-effective to focus on getting better at the areas that give them real advantage, gain the flexibility to change product architecture more quickly, and not spend money on staying good at operations in a more parochial and less cost-effective way than the CMs can achieve.

Most of PRTM’s medical sector customers prefer to remain confidential, for various reasons. So if you are a medical device development company and approached PRTM for help, what stages would they take you through?

JL: We agree with them on the strategic vision around their opportunity – how they can innovate operationally to achieve entirely new levels of success. Sometimes they already have most of this; sometimes we need to help.

We then measure their core capabilities involved in the appropriate framework (for example, the Supply-Chain Operations Reference-model, or SCOR, or Product And Cycle-time Excellence®, or PACE®) and compare to our in-house database, which links our robust, multi-layer practice framework to business performance. This builds a common understanding of the opportunity, how we will achieve it and how we will measure our success.

The key milestones which validate the success of the culture change are clearly established – but we don’t declare victory just because the planned time for a project is up. That is never an objective measure of the result.

We then mobilise for, and facilitate, change on a grand scale, feeding tailored best practices into cross-functional teams which can fine-tune them, and agree all the critical interfaces. This includes delivering on a major commitment to join in the change process made by top management.

Then we pilot the next level of performance with demonstration projects, products, review and decision meetings, and/or trials.

After that we build all the supporting mechanisms needed to lock into the higher performance, including training on the new accountabilities at all levels, ongoing process management, mapping the new approaches to coaching and career development, and structuring the new levels of real-time data sharing and business process integration with more advanced IT support.

Finally, we report as agreed on the victory milestones already established and adjust the concluding work to secure the value in an appropriate and lasting way.

What about medical device companies who still think they can do the whole thing themselves?

JL: The help is needed because they have been slow to seize the opportunity and learn how to manage it strategically. That next step is huge, requiring a whole different paradigm, changes in the role of high-level governance, open sharing and IT links never envisaged, different kinds of agreements, new roles to define and fill, building a more networked quality organisation, and so on.

Paramount is the need for a shared business process, which usually requires significant changes in the medical devices company’s own internal business process to support it effectively. This is major assessment and change, fast learning – just as the input of external manufacturing expertise is well worth its cost, the input of the management experience, best practices, tools templates and facilitation achieve a much higher level of successful outsourcing more rapidly and less painfully, and is well worth the investment.

We have worked in the medical devices sector for 17 years, often bringing best practices from the other high tech industries where we work.

What are the constraints on medical device companies who wish to move towards contract manufacturing?

JL: There are constraints on three levels. Two of them are surmountable, the third is not. The first is lack of strategic vision. They may have been really good at some of the manufacturing – high volume, high quality, for example – senior managers’ careers were built in operations! It may be hard to see how the game has shifted – those wonderful plants are a strategic disadvantage because they don’t adapt as quickly to a new need as bringing on a new supplier with the desired skills.

The second level is lack of management process capability – not knowing what’s needed to manage the more sophisticated relationship, or not being able to make it work. For instance, how do R&D folks learn to cooperate in the concept phase of their project, how do they work with a CM rep on their core team, how do they share what they need to, without giving away things that may help competitors who use the same CM? If the team members on both sides start pointing fingers, how is it resolved?

The third level is proprietary know-how in production. Sometimes this is process experience and understanding, which really does give competitive advantage – an ability to hit a lower cost point at higher quality, or achieve a valued functionality no one else can for twice the price. It is important to check how real it is – manufacturing folks can sometimes overestimate it. But it can be very real, too, and hard to protect with patents.

If the CM learns it even under an exclusive contract, it can give the CM insight and knowledge that can allow it to do something one better for the competition. These areas should be well understood and rigorously protected, usually by keeping in house, but sometimes by developing a special exclusive contract with a captive supplier, as the pacemaker companies sometimes do.

What are the missed opportunities for medical device companies who have decided that contract manufacturing is not for them?

JL: The missed opportunities are to build market share, and to redefine markets with more complete and integrated solutions, all because they were afraid that sharing their manufacturing know-how increased the risk in some way. They are also usually missing the opportunity to be seen as the market leader in innovation, because it takes longer to change the one or two old plants you had than it does to select and work with the one which is already ‘state of the art’ for what you need in the future.

Those dealing with huge volumes that have been able to remain competitive with a core competence in high volume, high quality manufacturing may also have to rethink soon. They have already gone to places such as Singapore – at similar costs to Europe and the USA – but shortly they will see the same quality coming from China and India at significantly lower costs.

We add more value because we bring in the best and the brightest, who are already steeped in medical development industry technology and business experience.

Is improving communications with decision-makers part of what PRTM offers its clients?

JL: Absolutely. We believe it is one of the greatest sources of value we bring – that it is the ‘stone’ many consulting projects leave unturned. We integrate the changes we make in the rest of the organisation with the changes the decision-makers need to make to support them. We have them approve the changes in design form, then we train them on how to make them work, then we pilot the changes in live facilitated communications and decision-making sessions, and we follow up with them quietly on what has been learned, and what still needs to be done differently.

It means a lot to us, because if the right signals and behaviour changes don’t come from senior management, all our other work is in vain. Beyond that, we define roles and communication between the OEMs and the CMs, so the right mechanisms are in place to manage a smooth and productive relationship. This reaches beyond individual transactions to joint strategic planning and a shared escalation process.

The medical devices sector has a more rigorous approach to quality management, with required validation of benefit before something is sold, and continuing validation of effectiveness all the time it is being sold. Many other industries could benefit from this more honest and complete approach.

The medical devices sector is also a complex customer – often selling to caregivers as primary decision-makers – physicians and/or nurses, for example. But it also has to satisfy patients, administrators, regulators, insurance companies and governments. It is a major challenge to understand consolidated customer trends and meet consolidated customer needs.