The call for companies of all types to build additional ICU ventilators to help support coronavirus sufferers exemplifies the importance of relationships between OEMs and CMOs
The call for manufacturers to help tackle the severe shortage of ICU ventilators needed to support critically-ill coronavirus victims has shone a light on the importance of relationships between original equipment manufacturers and contract manufacturers looking to gather components from multiple sources. Medical Device Developments writer Louise Thomas speaks to Jack Sandahl, fellow in a global sourcing role at Boston Scientific, about the important considerations for OEMs of all sizes.
Two decades ago, manufacturers tended to develop products themselves and wouldn’t have given much consideration to outsourcing. In light of the complex regulatory environment, along with the inherent risks in producing devices, this would have seemed to be more trouble than it was worth. If any contracting was completed, it would have been a few specific tasks.
Coronavirus has prompted medical device OEMs to work closer with supply chain
The medical device industry has changed dramatically since that time — exemplified by the urgent demand for ICU ventilators to sustain coronavirus victims — with contract manufacturing organisations (CMOs) now integral in getting new devices to market.
Jack Sandahl knows a lot about sourcing. With over 30 years of manufacturing operations experience in the medical device industry, he has managed complex high-technology-component supply chains in 15 countries in environments with demanding quality, reliability, regulatory and cost objectives.
He holds a BA in business finance from the University of Minnesota and an MBA in manufacturing systems from the University of St Thomas. Currently, Sandahl is a fellow in a global sourcing role at Boston Scientific, and an adjunct professor in the manufacturing operations management degree programme at the University of Minnesota.
A key aspect of creating value in the industry is the ownership of enabling technologies that provide a competitive advantage. This involves making trade-offs.
“Companies needing to protect the intellectual property and technical advantage will tend to insource the manufacture of those enabling technologies,” says Sandahl. “But in cases where resources or capital are limited, the enabling technologies may be outsourced but will require solid legal protection of intellectual property.”
The size of the OEM is another key factor in sourcing. “Large OEMs generally have more extensive capital and manufacturing capabilities, which provide greater flexibility towards insourcing,” says Sandal. “Small OEMs may not have the resources or volumes required to effectively or efficiently insource.”
The skills and knowledge of the CMO is also essential
Decisions are also dependent on the context, which is shared with other industries. “Where the primary driver is cost, and the associated technology or process is not unique, the process or product will likely be outsourced,” says Sandahl. “These trends are not substantially different from standard commercial product manufacturing operations, where core competencies are insourced and non-core outsourced.”
It is not simply a case of distinguishing between core and non-core products, processes and services, however. “While core enabling technologies should generally be insourced, in some cases non-core ones should also be insourced if failure to perform would substantially impact the customer experience,” says Sandahl. “When the level of quality is challenging to control it may be in the best interest to insource.”
The skills and knowledge of the CMO are also essential when making a decision. “A key mistake is to insource a product or process where an outsource partner would be more capable or efficient,” says Sandal. “The result will be lower quality or higher cost.”
This is an increasingly important consideration as CMOs become more comprehensive in their offerings, evolving from suppliers with a specialism to a one-stop shop. For smaller OEMs where manufacturing is not a core competency, outsourcing also offers the benefit of freeing up more time for research and development, and marketing. This trend also means that OEMs will be able to reduce the amount of suppliers used, simplifying the value chain.
As David Kaplan, industry analyst at S&P Global Ratings, said in a previous interview with Medical Device Developments, when it comes to billing, negotiating, sourcing and a whole range of other areas, OEMs would rather “work with four or five companies, than with 40 or 50. Within manufacturing you have plastics, injection moulding, metals, all types of specialities and different materials for different processes. They might be technical, but the broader a manufacturer’s scope of speciality, the more attractive it is as a partner to a very large medical device company.”
Considerable savings for OEMs
However, bigger is not always better for CMOs. “At times, choosing to diversify could be detrimental,” says Elan Nat, another ratings analyst at S&P Global Ratings. “When you think about the function of contract manufacturers, they inherently specialise in these specific processes where they can do and produce things more efficiently than the OEMs. That’s the whole reason they exist.”
In addition to CMOs expanding their capabilities, they are also becoming involved in manufacturing processes at much earlier stages. Previously used almost solely for outsourcing labour and manufacturing, now it is increasingly common for CMOs to be involved at the design and development stage. This can result in considerable savings for OEMs in terms of time and money. Engineers with a high level of knowledge and skill can help generate ways of manufacturing devices in fewer parts, for example, rather than just focusing on utility.
They have the engineering ability and deep familiarity with the manufacturing process, meaning they can help design the product in a way that it is easier to manufacture, rather than just focusing on the utility of it. They know, for example, that if they design something in a particular way they can manufacturer it into fewer pieces
Regardless of who is selected as a CMO or what stage of manufacturing they are involved in, it is important that sourcing is not merely seen as a one-off decision. “Another key mistake is a failure to apply the required organisational engagement and resources to effectively manage the outsourcing relationship,” explains Sandahl. “Outsourcing requires increased oversight and vigilance to ensure synchronisation with quality and service objectives.”
A systematic approach is essential in managing sourcing from start to finish, which can be achieved using the classic management method in business known as the plan-do-check-act methodology.
Firstly, the company must have an operational strategy in place. Secondly, they need to identify and segment core competencies, with a robust financial process for assessing the sustainability and profitability of options. Thirdly, when making a decision, a comprehensive source selection must be executed. This must be accompanied by a system for managing and measuring supplier performance.
For this process to be effective, the method must be embedded into existing structures and become integrated into the company’s culture. Equally important is that OEMs and CMOs are committed to success, which can be ensured through the use of a supply agreement, with key performance metrics specified to facilitate understanding and communication.
With technology continuing to evolve at pace, different factors will become more pertinent when choosing a contract manufacturer. “As we move towards automation and artificial intelligence, and medical solutions from hardware to advanced therapies, the location or entity where the product is manufactured may become less relevant than how the medical process is controlled,” says Sandahl. “An outsourcing decision may involve the entire supply chain from device to the patient, and may focus more on the software and service versus the hardware.”
Regardless of these changes, there are certainties within the contract manufacturing landscape. “In general, the most successful companies in the industry will trend towards a focus on insource of core technologies, and outsource of the peripheral components and processes,” says Sandahl. “A focus on core technologies is essential to maintain the competitive advantage.”
This article originally appeared in the 2019 Vol 2 edition of Medical Device Developments. The full issue can be viewed here.