A New, Prominent Role for Medical Device Contract Manufacturing in 2012

Perhaps this reasoning is why both the 2010 and 2011 Ernst & Young medical technology annual reports reiterate that, in order for original equipment manufacturers (OEMs) to stay competitive and effectively address the business perils facing their industry, they need to:

• Refocus their energies and resources on cultivating non-traditional strategic partnerships (e.g. with pharmaceuticals, information technology, insurance, etc.); and

• Augment their service offerings.

This business model transformation is uncharted territory for most OEMs.

Fortunately, a reflection of 2011 demonstrates that medical device contract manufacturers (CMs) are uniquely positioned to support OEMs on this paradigm-shifting journey, making the trek less arduous.

While OEMs concentrate their attention on expanding into entirely new kinds of products and complementary services, CMs are able to protect their OEM partners’ existing commercially viable technology and, in some cases, enhance them for further competitive advantage.

Success in this effort will depend on CMs that have the ability to:

• Keenly understand the diverse and diverging challenges faced by OEMs;

• Effectively and strategically communicate their ability to meet those needs (i.e. in online and offline marketing resources, business development efforts, etc.); and

• Clearly demonstrate solution-oriented results.

More than at any other time, win-win partnerships with contract manufacturers will play a significant role in bolstering and protecting medical device OEMs in 2012 and beyond.

Full-Service Value Engineering

A common platitude is “the trend is your friend.” But, depending on the direction you’re going, it also can be your foe.

A trend that developed—but certainly didn’t start—in 2011 is that OEMs reduced the number of CMs with which they partner. As the medical device market grew more regulated, the focus turned to suppliers who could offer more full-service capabilities related to design and manufacturing services, regulatory expertise, prototyping, testing, procurement, the 510(k) review process, and more.

2012 is likely to extend the emphasis on fewer suppliers that offer more quality,efficiency, and compliance know-how (ISO 13485, 21 CFR Part 820, qualitysystem regulation, and current good

manufacturing practices). But it’s also likely to bring more complex contracts and supplier agreements.

During the recent AdvaMed meeting in Washington, D.C., a panel titled “Negotiating Medical Product Outsourcing Agreements: Pitfalls and Strategies,” made it clear that there will be more multifarious discussions between OEMs and CMsbefore partnerships are established. These exchanges likely will include proper performance criteria, regulatory responsibilities, and clarification of any intellectual property (IP) issues.

For CMs with limited service offerings, the trend is not in their favor. Staying competitive will require stronger expertise in design for manufacturing, design for assembly, verification and validation, concurrent engineering (or other efficient development processes), global regulatory requirements, quality controls, and supplier agreements, among other things.

For CMs who’ve long been providing holistic, value-added service offerings, the trend is their friend, but only if they can effectively communicate and demonstrate their agility, flexibility and broad expertise.

Travelling with the trend will require that contract manufacturers establish and promote comprehensive, strategic outsourcing services that help OEMs meet growing competition and cost pressures, as well as provide a safe harbor for regulatory compliance.

Contract manufacturers who add any type of risk to an OEM’s regulatory exposure certainly will not make it to first base in these conversations.

Protecting IP &Communicating Value

Getting new or iterative products to market quickly in 2011 called for tighter collaboration between OEMs and their CMs. But in part due to uncertainty in new regulations and growing competition, this also raised OEMs’ concerns about protecting their brands and avoiding infringement of their intellectual property.

From marketing materials to customer audits, CMs needed to be more diligent than ever about protecting the confidentiality of their OEM clients—especially when the CM was prominently involved in product design and development.

Going forward, in order to communicate their impressive, diversified capabilities, it’s imperative for CMs to step up their solution-oriented thought leadership. This will entail providing current and potential OEM partners with qualityinformation—online and offline—thatfocuses on helping them solve their problems, save time, reduce costs, and achieve their goals and objectives.

Examples are insightful industry-related articles that concentrate on a specificchallenge and offer suggestions for resolution; blog posts on your company website that address common questions or subject matter that’s significant to your potential partners; case studies that impart the benefits of a strategic alliance while protecting confidentiality and IP.

To remain relevant, CMs need to start seeing themselves first and foremost as a value-added partner—not just for manufacturing, but also for design, development, prototyping, regulatory and quality assurance expertise, and value engineering.

It’s no longer enough to offer quality, full-service solutions. The benefit of those solutions to OEMs must consistently and increasingly be conveyed—long before face-to-face discussions about contracts, responsibilities, and agreements.

Manufacturing Quality

Rapid advancements in technology in 2011 also re-emphasized the importance of continuing education and consistent cross-training within a CM organization.

The U.S. Food and Drug Administration and global regulatory bodies have made it clear that the medical device OEM ultimately is responsible for the reliability, safety, efficacy, and compliance of its products—regardless of the CMs they work with in the supply chain. Therefore, CMs that want to offer the most value and strategic support to their OEM partners consistently must enhance the knowledge and capabilities of their associates—especially on the manufacturing floor.

In previous years, the standard was to hire manufacturing employees for their present capabilities, and then offer little to no training or education to help them develop and advance their skills. If an error or oversight was made, the employee was let go.

In an efficient, Lean manufacturingenvironment, this is counter-productive. Errors absolutely need to be taken seriously, but if mistakes are seen as opportunities to learn and improve, manufacturing employees are more likely to promptly relay issues or potential problems. This mindset leverages a CM’s ability to recognize and achieve quality for their OEM partners.

In addition to increasing employeeretention and improving motivation and morale, cross-training and continuing education enables superior products to be manufactured at an accelerated pace.

For example, a CNC operator, who also is trained in the post-machining deburring and polishing capabilities, adds flexibility to the manufacturing process by reducing set-up and hand-off times, improves task speeds and increases productivity.

Moving into 2012, CMs that have limited integration of consistent internal and external continuing education and cross-training ultimately will struggle to maintain high quality and safety levels for their customers. Conversely, CMs that emphasize and expand educational opportunities will set themselves, and their OEM partners, apart.

Collaborate Internallyto Maximize Value Externally

Any organization that seriously is committed to playing in the medtech arena must first recognize that it’s strong internal relationships that allow for great outcomes to be accomplished externally.

As noted in “Fifth Wave Leadership,” by author Morris Shechtman:

“It’s not that skills and knowledge have ceased to be important. It’s that they’re now just the ante to play the game. As good as technical people are, they don’t give us much of an edge these days … success comes from building relationships, not products.”

No matter what services a company provides or how talented the people are within the organization, if the internalassociates are unable to work cooperatively, they leave their company andcustomers vulnerable and unable to function at full capacity.

Talent without teamwork is simply not effective—especially in today’s fast-paced, hyper-regulated medical device contract manufacturing world. This is why siloed approaches to contract manufacturing not only have become outdated, but they also tend to delay product launches and hinder a company’s ability to effectively leverage its expertise.

If a primary survival (and competitive) tool is adaptability, then the key to consistently adding value to customers, associates, shareholders, and the marketplace lies in medical device CMs to emphasize and foster a collaborative work culture. This is what ultimately accelerates product development, elevates quality, and helps OEMs maintain a competitive advantage.

The Journey Ahead

There’s no question that 2011 presented challenges to both OEMs and CMs. But in every challenge, there’s an opportunity. With an aging global population, longer life expectancies, rising rates of chronic disease, an expectation of high activity in our later years, and under-served patient populations, demands for cost-effective medical technologies that enhance quality of life only will continue to increase.

Meeting those demands in 2012 and beyond will require OEMs to center their attention on clinical and technological innovations that are cost-effective, less invasive, and improve patient outcomes.
Delegating other critical areas to high-level, strategic contract manufacturing partners with comprehensive expertise, tight controls, economies of scale, and existing facilities and suppliers will become fundamental to the overall success of the industry.

This realignment has the potential to offer invaluable advantages to both OEMs and CMs while paving a smoother path to business model innovation and improved patient outcomes.

Mark Murphy is president and CEO; Joe Rotino is vice president of quality and regulatory affairs; Rick Van Kirk is vice president of operations; and Tricia Rodewald is director of marketing & strategic alliances for Pro-Dex Inc., an Irvine, Calif.-based company thatdesigns, develops and manufactures surgical devices, motors, metal components, and sub-assemblies for medical device OEMs.