Sean Fenske, Editor05.23.16
Making a poor selection on a component for a project or a material for an implant can create delays or increase costs. Getting a capital equipment investment wrong, however, can have a more significant negative impact on an entire company, especially when it’s a smaller firm. Therefore, ensuring that all factors are considered prior to making a machine purchase is paramount. With this in mind, Orthopedic Design & Technology reached out to a number of industry leaders to ask them about the process. They shared their insights on an array of questions on the topics of investment strategy, leasing, training, new capabilities, and more to aid device makers who may be looking to explore the options available to them.
Participants in this roundtable discussion included:
John A. Abraham: Over the long term, the investment payback curve crossover point produces profits and/or reduced costs of production. The accelerated depreciation, now in the IRS code, brings this payback point closer on the lifecycle timeline.
John Bannayan: In general, the utilization of older technology does not allow for an arthroscopic shaver manufacturer to realize the benefits that come with the latest technological enhancements in both centerless grinding and gauging.
Productivity increase: Typically, older machine technologies require two to three operations on different machines to grind an arthroscopic shaver. Margin enhancement through process improvement is critical. For example, Glebar’s GT-610 CNC can eliminate multiple operations, which can be primarily attributed to Glebar’s patent pending lateral work rest system (moves the work rest while grinding) that allows users to grind the tip, with virtually no tolerance, to extreme precision.
Real estate is expensive: Eliminating second and third operations and replacing them with one machine will allow a manufacturer to better leverage its floor space.
Accessibility and cost of replacement parts: Obsolete technology can become very costly. The cost of an obsolete spare part is usually very expensive, if you can find one. In addition, lead times are most likely very long, leading to significant downtime and costing a manufacturer valuable production time that can lead to delivery delays and increased cost.
Margin enhancement: Newer technology often leads to less scrap, less labor, less inspection, and productivity increases. This all falls to the bottom line. It will also allow a manufacturer to be more competitive with its pricing while potentially gaining market share in the process.
Labor reduction: Hand-offs between operations can only add error, excessive WIP, and quality degradation. Automation can provide an environment that is very close to a “lights out” manufacturing scenario.
Production risk: If one of the machines in a multiple machine type operation goes down, production stops. When doing the entire operation on one machine type, the impact of one machine in a line going down is mitigated by the redundancy of a common machine type.
Setup reduction and daily productivity increase: Excessive setup time is very expensive and labor intensive. A reduction in setup allows for more production time to make parts. Trading setup time for production time is key for manufacturers. Glebar’s P4K offline gauging system feeds back diameter, taper, and radii to correct the wheel dress profile automatically, significantly reducing operator error and trimming setup times by approximately 70 percent.
Quality improvement: Manufacturers are always looking to improve quality. Utilizing Glebar’s patent pending lateral work rest system eliminates the concern of part marking when backing out the wheel at the end of the grinding process.
Adjusting for length variability: Length measurement gauging adjusts for variability before parts are ground. On Glebar’s machine, in-line gauging works in tandem with the lateral work rest assembly to offset for length variation and to match the form in the grinding wheel.
Less frequent redressing of the grinding wheel: With the utilization of the lateral work rest system while grinding, there is much less corner wheel degradation leading to less frequent redressing. It is not uncommon to run over 2,500 shavers—before dressing—when utilizing the system.
Ron Lindstrom: Process control. While abrasive processing of orthopedic devices was a bit of an art in the ‘80s, higher standards in manufacturing quality have dictated that manufacturers institute more process controls.
Tom Scherpenberg: There are a wide variety of reasons an orthopedic device manufacturer should consider investing in new capital equipment. Most of the reasons relate to meeting rising customer demands and improving profitability. By investing in high-performance machinery, orthopedic device manufacturers can increase throughput, improve quality, maximize ROI, and reduce costs. High-precision machinery can also provide greater flexibility in product design, arming device manufacturers with the capabilities to produce highly complex part applications.
Andrew Snow: Many medical devices in the marketplace are currently being produced additively. Good candidates for additive manufacturing (AM)—such as hearing aids, dental copings and crowns, removable partial dentures, surgical implants (such as hip cups, bone stems, cranial, maxillofacial), prostheses, instrumentation, and cutting guides—all play a major part in the additive manufacturing space for medical devices. These particular geometries are suitable for the direct metal laser-sintering (DMLS) build-envelope size of the available technology, such as the EOS M 290, which has a 10 x 10 x 12-inch build envelope.
Orthopedic device manufacturers use AM because of the high level of customization available, which allows for the design of patient-specific applications. Such designs contribute to a reduction in time in the operating room, faster recovery rates, and increased patient comfort. This is the primary reason an orthopedic device manufacturer should consider capital equipment investment in AM.
Fenske: How does an investment in capital equipment for an orthopedic manufacturer compare to using an outsourcing services provider?
Abraham: This is not a black or white issue. Small start-up or niche orthopedic manufacturers may have limited access to capital or knowledgeable personnel, so outsourcing makes sense in lieu of purchasing new equipment. On the other hand, flexibility and agile production scheduling can be key capabilities for the orthopedic manufacturer to respond to market when capital equipment and personnel are at hand.
Adam Cook: An investment in capital for an orthopedic manufacturer is strategic in nature; they are making the decision to buy versus build. This is usually a long-term strategy with return on investment carefully considered along with other strategic assessments, including assessing how this may impact research and development activities internally. If the manufacturer has visibility into its forecast, the machine payoff can be pretty predictable.
An outsourcing service provider has many things to consider when purchasing new capital equipment: Do I have a long term contract where I know the capital is going to be fully utilized through a reasonable investment period? Will investing in this new capital equipment give me an edge over other outsource suppliers in terms of quality and can I better compete on pricing through production gains? Will I be able to realize any of the margin enhancements?
In general, there is constant pricing pressure on medical device components. An orthopedic manufacturer and an outsource supplier have to keep cost and quality at the top of their minds at all times.
Lindstrom: Total control. First, you eliminate additional handling that outsourcing requires, and you have total custody of the part from cradle to grave. Then comes the obvious quality control that is in your hands; not somebody else’s that may not be held to the standards that you would hold yourself to.
Scherpenberg: Orthopedic manufacturers that purchase and operate their own capital equipment have greater control over their manufacturing processes. Manufacturers are able to reduce lead-times, maintain higher quality standards, and more rapidly respond to any design or engineering changes that may occur. With the right people, equipment, and processes in place, choosing to invest in capital equipment over outsourcing can lead to saving substantial costs and experiencing new opportunities to grow the business.
Snow: It’s all about customization and volumes. A high volume production, depending on the part size, will have an impact on the decision to either outsource AM printing or insource it.
Fenske: How do the financial aspects for each option compare?
Abraham: You can go “cheap” on equipment and personnel; you can go “cheap” on outsourcing. Both will lead to eventual business decline. When comparing capital equipment investment versus outsourcing, quality should always be a baseline consideration. Is the required capital equipment (and personnel) to be a core expertise of the business or an ancillary capability? Are we looking short term or long term? How steep and expensive is the learning curve for either approach?
Cook: Benefits of outsourcing: Focus on what you do well—if it’s not manufacturing, then it’s not value add. Get inventory off your balance sheet until you need it; variable cost structure.
Risks of outsourcing: Supply chain risk; giving up on internal productivity gains that you may be handing to your supplier if they invest in the latest technology and save margin dollars; you still need to cover your internal fixed costs; potential loss of internal R&D gains.
Scherpenberg: When investing in capital equipment, orthopedic manufacturers should consider the full life-cycle cost of the investment, including the upfront investment cost of the machinery, recurring perishable tooling orders, fixture investments, and employing operators with the right skills for the job. These investments can seem intimidating at first; but with steady demand for production, manufacturers could likely see a full return on investment within several years. Be sure to also factor in the previously mentioned advantages of increased throughput, flexibility, and quality control when calculating ROI. While outsourcing may save an orthopedic manufacturer from these sizable investment costs, the majority of the costs mentioned earlier is still factored into outsourcing service fees and oftentimes, results in higher part costs.
Snow: The decision to outsource or insource depends on the inflection point of the particular part. For this, the unit volumes of the particular geometry need to be considered. In the end, it may make sense to lay out the highest capital-proven cost. For example, the EOS P 110 or the EOS M 100 are relatively inexpensive technologies to insource, and relatively inexpensive to operate. But then you get into some of the larger volume systems like the P 396 or the M 290 that have starting points at roughly $350,000, up to a million dollars. It may make sense to continue to outsource the technology to a contract manufacturer until the volumes get to a point where it’s economical to start bringing that expertise and technology internally. But not all contract manufacturers are created equal. For end-use production, for example, the ISO standard 13485 certification for medical devices is required and not all contract manufacturers have this certification. However, for general prototyping, the ISO standard is not required.
Fenske: What are the primary considerations for an orthopedic company seeking to make a capital equipment purchase?
Abraham: Pre-training is critical if the pending purchase is a “first” or “long since the last one.” There are many new features and technologies where spending a little time trying out equipment or picking the brains of the equipment designers will impart knowledge and a better grasp of the options that may or may not provide better productivity and flexibility. Too often, a purchase will be based on the lowest cost basic unit, or conversely, money wasted on extra options that are really never going to be utilized. Matching the equipment to the task (and future tasks) is important.
Do the quantities to be produced at present and in the future warrant buying equipment?
Is this process extremely sensitive to quality control, or can you trust an outside vendor to meet the quality criteria?
Are you comfortable not retaining full custody of your parts?
Scherpenberg: Orthopedic manufacturers seeking to make a capital equipment purchase should first focus on performance considerations before being bogged down by the initial upfront cost. The manufacturer obviously requires a machine that is capable of producing the necessary applications. Outside of the minimum capability requirements, manufacturers should think about their expectations for productivity, quality, reliability, maintainability, technical support, and customer service.
Snow: Timing is key. Orthopedic organizations should still consider outsourced partners. At the same time, they should develop the internal expertise once the inflection point of production is achieved. This allows for bridging the gap from being dependent on outsourcing to taking charge of AM production.
However, as volumes begin to rise and more devices are developed and designed internally, which therefore requires more capacity, there comes a point where the learning curve needs to be considered. Overall, designing for the process is key for adoption.
Fenske: What important aspect is often overlooked by a company looking to make a purchase?
Abraham: Is the manufacturer going to be around for the long term? D&B rating? Have they been in the industry manufacturing the equipment or is it mostly done by nameless subcontractors offshore? Can they provide engineering files for your unit even if it is now over 10 years old? Is medical device packaging equipment their No. 1 core business or one of several products in unrelated markets? Is there a design policy of backwards compatible upgrades or improvements made available to the existing customer base?
Bannayan: Status quo. Sometimes, companies are hesitant to change existing processes because that is how they normally do things or, due to the validation process associated with using new equipment. Margin enhancement, quality, and daily productivity increases are readily available but folks need to embrace change.
Lindstrom: Orthopedic products are usually segregated into management groups. Abrasive blasting equipment is usually able to provide upgrades to processes across product lines. This is sometimes overlooked as a justification factor when a purchase is being considered.
Scherpenberg: In too many cases, manufacturers focus solely on the acquisition price when calculating return on investment and fail to evaluate the total lifecycle cost or anticipated performance of the equipment. However, the costs for operating, maintaining, and decommissioning these machines may dwarf the original purchase price.
When it comes to operating costs, orthopedic manufacturers must determine the impact this new equipment could have on productivity. The philosophy behind a machine’s design and construction can greatly affect productivity. A high-performance machining center typically has a design and construction that improve key aspects of operation, including cycle time, tool life, part quality, and reliability.
For example, a high-performance machining center has a high-power spindle that facilitates high-speed cutting and low-force machining. It also has the acceleration and deceleration available to reduce non-cut time. The spindle bearing is the main support for the tool, and a larger spindle bearing is better able to handle cutting forces. This bearing’s type and position can also affect machine stiffness and the types of forces it can handle. A stepped column design contributes to machine strength and can be more stable. Machines that have a single-piece casting, three-point leveling, and a tiered column design can reduce machine vibration.
There are also many often uncalculated costs associated with maintenance. It is important to remember that once production starts, unscheduled downtime can quickly erode any saving on purchase price. Because maintenance budgets are typically incorporated into operating costs, they are probably not directly accounted for in a capital equipment ROI calculation. The costs associated with repair, a preventive maintenance schedule, and any unscheduled downtime should be considered. With a high-performance machine, these costs are not the same as they would be if a company kept an inefficient, less reliable machine running.
When purchasing equipment, manufacturers also need to evaluate decommission costs. The residual value of the machine should be accounted for in the actual ROI. Typically, after a contract or payments are up, manufacturers must decide what to do with the machine. They can dispose of the machine or keep it running for another four to 10 years.
Because a low-cost machine is fully depreciated after three years, it looks inexpensive on the accounting books. However, this type of thinking leads many manufacturers to keep the machine running in the shop long after it should have been removed. Typically, with a lower-cost machine, in years four through 12, maintenance costs skyrocket, part quality suffers, and scrap increases, all while perishable tooling costs escalate. At the end of three years, the machine has minimal value. In contrast, a high-performance machine can extend component life and reliability, reduce maintenance costs, and retain 50 percent of its value at the end of three years. These benefits should be factored into actual ROI.
Fenske: Is it common for capital equipment providers to offer training to orthopedic device manufacturers?
Abraham: Atlas Vac offers and encourages factory training before shipment. It is always easier to run equipment and “get under the hood” in a non-cleanroom environment. No distractions nor hurrying. Operating the unit and familiarizing oneself with the hardware “internals” using the equipment documentation in hand is always beneficial and easier when the equipment builder staff is available for a one-on-one Q&A.
Cook: Training on this type of equipment should come standard with this type of machine purchase at no extra cost. Training should include the principles of centerless grinding, overview of the equipment, a detailed process review, what procedures to follow if they have an issue, and how to properly maintain the machine.
Lindstrom: It is extremely important that training is a part of the equation. As an integral part of any manufacturing process, you want to make sure that all operators, maintenance personnel, supervisory personnel, and any process engineers involved are all completely fluent in their responsibilities for the operation of the equipment.
Scherpenberg: Makino offers customers a number of formal training opportunities on selected topics and products. Content is based on specific skill sets and objectives and is designed to transfer a working knowledge and understanding of the machine-tool system and related processes. Our training centers are located in Mason, Ohio; Auburn Hills, Mich.; Elgin, Ill.; Waukesha, Wis.; and Querétaro, Mexico. Training can also be conducted per request at one of our other centers in Los Angeles, Calif.; Union, N.J.; Erie, Pa.: Wichita, Kan.; and Mississauga, Ontario, Canada. Makino training credits may be provided with the machine purchase based on machine type and machine purchase agreement.
Snow: EOS offers a complete portfolio of training and consultancy, ranging from AM fundamentals to additional levels. This type of support allows for the discovery of geometries that are conducive for the process while providing design rules and fundamentals that need to be adhered to.
EOS can also provide more of a 360-degree production assessment of their actual business, where we can assist them in understanding and optimizing their business around the use of additive technology. And again, there’s also supply chain optimization as well. So we have the capability internally to be able to address—cradle-to-grave—the customer from their early interest in AM all the way up to a full commitment to the process.
Fenske: What are the pros and cons of an equipment purchase vs. leasing?
Scherpenberg: Purchasing a machine outright enables a business to own the equipment as soon as the transaction’s completed. The company can then amortize the cost over the lifetime of the equipment. However, buying instead of financing can also reduce the company’s availability of cash for other investments, such as plant expansion or improvement, marketing, or purchasing future equipment.
Financing enables a company to better match monthly cash flow being generated from the equipment to the obligation of the monthly payment due under the financing vehicle. Leasing equipment can be an alternative acquisition strategy that can lower the operating cost of the equipment. Of all of the financing options, leasing offers the most flexibility to meet a company’s unique business needs.
When buying an asset, it is critical to consider the long-term costs of ownership, such as maintenance and downtime that can mount when a company holds onto an asset over time. Through leasing, a company can further improve its cash flow while obtaining better equipment with greater ROI. Leasing gives flexibility in capacity and financing. The company is able to add another machine if production increases. It can return equipment at the end of the contract, if desired, or purchase it at the end of the lease.
Snow: We have a current program to ease the transition into AM. For example, from the leasing perspective, you maintain your bank capital reserves and there’s no large down payment. This is a very important aspect; you’re also hedging the technology because the tech is advancing very quickly, year to year. Short-term leases provide an affordable trial, testing the market without agreeing to own the equipment long-term. So it’s a try-before-you-buy arrangement. We also have what we call an off-balance sheet. This allows you to treat the lease payment as a business expense and there are tax advantages. These are the big pros of leasing.
There are also pros when purchasing direct—if you’re a company with deep pockets and cutting a check for $750,000 is not an issue to you. I think that’s even better if you have that kind of capital available. But I’m a big fan of leasing models because I think it’s a great way to manage the risk and manage the assets.
Fenske: What are some of the newer capabilities of the equipment that are attractive to orthopedic device manufacturers?
Abraham: Standard Atlas Vac units have, for years, included dynamic output data (time, temp, psi, time/date, and recipe number) to label printers as a means to capture and document unique package sealing data. The same is now available to drive a Videojet printing system for direct application to the package in the sealer. For 2016, with Class II UDI package labeling requirements in mind, Atlas Vac has taken the next step to include data logging of not only the dynamic cycle data but also logging of operator IDs and passwords, sign-ins, password changes, recipe changes, alarms, odometer reading, etc., all on a new standard color touch screen. What is interesting, this capability can be retrofitted to many existing standard Atlas Vac units in the field as a means to enhance and extend capital equipment life.
Bannayan: The integration of inspection and machine feedback into the machine process dramatically reduces the time to set up the machine and improves quality control. Gauging also adds to traceability and allows for the compensation of length variation.
Lindstrom: Process control capabilities have become more refined in abrasive blasting over the years. Closed-loop air pressure monitors, media flow control, media-sizing devices, and accurate tracking of nozzle presentation/part movement provide repeatable finishes every single time. The orthopedic industry has been slow to integrate robotics, but the benefits will soon become apparent.
Scherpenberg: Each new generation of machinery typically results in advancements in speed, cutting capability, and tooling flexibility. Other benefits of new machine models include more user friendly control functionality, improved operator ergonomics, and enhanced compatibility with automated technologies.
Automation has seen a significant rise in demand for its ability to provide more flexible production quantities. Part mix and part volumes can be changed quickly and reliably in order to address a manufacturer’s evolving needs. Lead times are reduced. Automation also decreases cycle times, eliminates repetitive movements, improves tool life, and reduces labor, all while resulting in more parts per shift. The outcome brings higher quality parts with less scrap and lower part costs. The manufacturer is able to gain a competitive position in the marketplace due to reduced labor and part expenditures.
Snow: I would say what’s attractive is the equipment’s ability to process implantable-grade alloys, such as titanium 64 ELI and Titanium Commercially Pure, which are newer alloys that are now available. This is very important to the orthopedic industry because with these new alloys come new capabilities. And of course you also have the freedom of creation to make patient-specific orthopedic devices and—with front-end software, such as Autodesk Within—to optimize geometries that can enhance bone growth via osteointegration. These are techniques that can’t be easily done through traditional manufacturing without lengthy, very costly processes.
Fenske: Looking ahead, is the investment in capital equipment by orthopedic device manufacturers likely to continue as is, increase, or decrease? Why?
Abraham: This is a very interesting issue to predict given current historically low interest rates, recent corporate mergers, corporate stock buyback initiatives, healthcare insurance turmoil, domestic vs. international demand, and as always, the FDA. Those having the “answer” probably also positioned themselves well for the dot-com bubble, mortgage banking scandal, the last several recessions, and the recent NCAA bracket.
Bannayan: The aging population is more active, which leads to more “clean up” procedures. Also, with the increase in healthcare costs and more folks having insurance, the value of minimally invasive procedures has increased exponentially and should continue to do so. People are reluctant to have major surgery, but are much more open to procedures that can have them functioning in a few weeks in some cases.
Scherpenberg: We see investments by orthopedic device manufacturers continuing to increase as the quality demands and complexity of orthopedic device applications grow. The higher demand requires greater control over manufacturing processes and the overall supply chain. By owning and operating capital equipment in-house, these manufacturers are better able to guarantee results and gain a more intimate, accurate understanding of their supply-and-demand requirements.
Snow: Well I think it’s going to obviously increase. All forecasts out there right now indicate that this is going to grow at a very quick rate. Some of our major OEM customers in the orthopedic space are indicating that through their commitment to EOS, and we are continuing to see more and more medical devices being developed around the use of AM technology. So I really don’t see it decreasing whatsoever. It’s actually going to increase dramatically. And I think the reason is that there are many more people within the design community of orthopedics that are being trained on the design rules associated with AM. So they’re incorporating AM into their thoughts when it comes to the creation of a new medical device.
Participants in this roundtable discussion included:
- John A. Abraham, President, Atlas Vac Machine, LLC.
- John Bannayan, President, Glebar
- Adam Cook, CEO, Glebar
- Ron Lindstrom, Territory Sales Manager, Clemco
- Tom Scherpenberg, Vice President of Finance, Makino
- Andrew Snow, Senior Vice President, EOS of North America Inc.
John A. Abraham: Over the long term, the investment payback curve crossover point produces profits and/or reduced costs of production. The accelerated depreciation, now in the IRS code, brings this payback point closer on the lifecycle timeline.
John Bannayan: In general, the utilization of older technology does not allow for an arthroscopic shaver manufacturer to realize the benefits that come with the latest technological enhancements in both centerless grinding and gauging.
Productivity increase: Typically, older machine technologies require two to three operations on different machines to grind an arthroscopic shaver. Margin enhancement through process improvement is critical. For example, Glebar’s GT-610 CNC can eliminate multiple operations, which can be primarily attributed to Glebar’s patent pending lateral work rest system (moves the work rest while grinding) that allows users to grind the tip, with virtually no tolerance, to extreme precision.
Real estate is expensive: Eliminating second and third operations and replacing them with one machine will allow a manufacturer to better leverage its floor space.
Accessibility and cost of replacement parts: Obsolete technology can become very costly. The cost of an obsolete spare part is usually very expensive, if you can find one. In addition, lead times are most likely very long, leading to significant downtime and costing a manufacturer valuable production time that can lead to delivery delays and increased cost.
Margin enhancement: Newer technology often leads to less scrap, less labor, less inspection, and productivity increases. This all falls to the bottom line. It will also allow a manufacturer to be more competitive with its pricing while potentially gaining market share in the process.
Labor reduction: Hand-offs between operations can only add error, excessive WIP, and quality degradation. Automation can provide an environment that is very close to a “lights out” manufacturing scenario.
Production risk: If one of the machines in a multiple machine type operation goes down, production stops. When doing the entire operation on one machine type, the impact of one machine in a line going down is mitigated by the redundancy of a common machine type.
Setup reduction and daily productivity increase: Excessive setup time is very expensive and labor intensive. A reduction in setup allows for more production time to make parts. Trading setup time for production time is key for manufacturers. Glebar’s P4K offline gauging system feeds back diameter, taper, and radii to correct the wheel dress profile automatically, significantly reducing operator error and trimming setup times by approximately 70 percent.
Quality improvement: Manufacturers are always looking to improve quality. Utilizing Glebar’s patent pending lateral work rest system eliminates the concern of part marking when backing out the wheel at the end of the grinding process.
Adjusting for length variability: Length measurement gauging adjusts for variability before parts are ground. On Glebar’s machine, in-line gauging works in tandem with the lateral work rest assembly to offset for length variation and to match the form in the grinding wheel.
Less frequent redressing of the grinding wheel: With the utilization of the lateral work rest system while grinding, there is much less corner wheel degradation leading to less frequent redressing. It is not uncommon to run over 2,500 shavers—before dressing—when utilizing the system.
Ron Lindstrom: Process control. While abrasive processing of orthopedic devices was a bit of an art in the ‘80s, higher standards in manufacturing quality have dictated that manufacturers institute more process controls.
Tom Scherpenberg: There are a wide variety of reasons an orthopedic device manufacturer should consider investing in new capital equipment. Most of the reasons relate to meeting rising customer demands and improving profitability. By investing in high-performance machinery, orthopedic device manufacturers can increase throughput, improve quality, maximize ROI, and reduce costs. High-precision machinery can also provide greater flexibility in product design, arming device manufacturers with the capabilities to produce highly complex part applications.
Andrew Snow: Many medical devices in the marketplace are currently being produced additively. Good candidates for additive manufacturing (AM)—such as hearing aids, dental copings and crowns, removable partial dentures, surgical implants (such as hip cups, bone stems, cranial, maxillofacial), prostheses, instrumentation, and cutting guides—all play a major part in the additive manufacturing space for medical devices. These particular geometries are suitable for the direct metal laser-sintering (DMLS) build-envelope size of the available technology, such as the EOS M 290, which has a 10 x 10 x 12-inch build envelope.
Orthopedic device manufacturers use AM because of the high level of customization available, which allows for the design of patient-specific applications. Such designs contribute to a reduction in time in the operating room, faster recovery rates, and increased patient comfort. This is the primary reason an orthopedic device manufacturer should consider capital equipment investment in AM.
Fenske: How does an investment in capital equipment for an orthopedic manufacturer compare to using an outsourcing services provider?
Abraham: This is not a black or white issue. Small start-up or niche orthopedic manufacturers may have limited access to capital or knowledgeable personnel, so outsourcing makes sense in lieu of purchasing new equipment. On the other hand, flexibility and agile production scheduling can be key capabilities for the orthopedic manufacturer to respond to market when capital equipment and personnel are at hand.
Adam Cook: An investment in capital for an orthopedic manufacturer is strategic in nature; they are making the decision to buy versus build. This is usually a long-term strategy with return on investment carefully considered along with other strategic assessments, including assessing how this may impact research and development activities internally. If the manufacturer has visibility into its forecast, the machine payoff can be pretty predictable.
An outsourcing service provider has many things to consider when purchasing new capital equipment: Do I have a long term contract where I know the capital is going to be fully utilized through a reasonable investment period? Will investing in this new capital equipment give me an edge over other outsource suppliers in terms of quality and can I better compete on pricing through production gains? Will I be able to realize any of the margin enhancements?
In general, there is constant pricing pressure on medical device components. An orthopedic manufacturer and an outsource supplier have to keep cost and quality at the top of their minds at all times.
Lindstrom: Total control. First, you eliminate additional handling that outsourcing requires, and you have total custody of the part from cradle to grave. Then comes the obvious quality control that is in your hands; not somebody else’s that may not be held to the standards that you would hold yourself to.
Scherpenberg: Orthopedic manufacturers that purchase and operate their own capital equipment have greater control over their manufacturing processes. Manufacturers are able to reduce lead-times, maintain higher quality standards, and more rapidly respond to any design or engineering changes that may occur. With the right people, equipment, and processes in place, choosing to invest in capital equipment over outsourcing can lead to saving substantial costs and experiencing new opportunities to grow the business.
Snow: It’s all about customization and volumes. A high volume production, depending on the part size, will have an impact on the decision to either outsource AM printing or insource it.
Fenske: How do the financial aspects for each option compare?
Abraham: You can go “cheap” on equipment and personnel; you can go “cheap” on outsourcing. Both will lead to eventual business decline. When comparing capital equipment investment versus outsourcing, quality should always be a baseline consideration. Is the required capital equipment (and personnel) to be a core expertise of the business or an ancillary capability? Are we looking short term or long term? How steep and expensive is the learning curve for either approach?
Cook: Benefits of outsourcing: Focus on what you do well—if it’s not manufacturing, then it’s not value add. Get inventory off your balance sheet until you need it; variable cost structure.
Risks of outsourcing: Supply chain risk; giving up on internal productivity gains that you may be handing to your supplier if they invest in the latest technology and save margin dollars; you still need to cover your internal fixed costs; potential loss of internal R&D gains.
Scherpenberg: When investing in capital equipment, orthopedic manufacturers should consider the full life-cycle cost of the investment, including the upfront investment cost of the machinery, recurring perishable tooling orders, fixture investments, and employing operators with the right skills for the job. These investments can seem intimidating at first; but with steady demand for production, manufacturers could likely see a full return on investment within several years. Be sure to also factor in the previously mentioned advantages of increased throughput, flexibility, and quality control when calculating ROI. While outsourcing may save an orthopedic manufacturer from these sizable investment costs, the majority of the costs mentioned earlier is still factored into outsourcing service fees and oftentimes, results in higher part costs.
Snow: The decision to outsource or insource depends on the inflection point of the particular part. For this, the unit volumes of the particular geometry need to be considered. In the end, it may make sense to lay out the highest capital-proven cost. For example, the EOS P 110 or the EOS M 100 are relatively inexpensive technologies to insource, and relatively inexpensive to operate. But then you get into some of the larger volume systems like the P 396 or the M 290 that have starting points at roughly $350,000, up to a million dollars. It may make sense to continue to outsource the technology to a contract manufacturer until the volumes get to a point where it’s economical to start bringing that expertise and technology internally. But not all contract manufacturers are created equal. For end-use production, for example, the ISO standard 13485 certification for medical devices is required and not all contract manufacturers have this certification. However, for general prototyping, the ISO standard is not required.
Fenske: What are the primary considerations for an orthopedic company seeking to make a capital equipment purchase?
Abraham: Pre-training is critical if the pending purchase is a “first” or “long since the last one.” There are many new features and technologies where spending a little time trying out equipment or picking the brains of the equipment designers will impart knowledge and a better grasp of the options that may or may not provide better productivity and flexibility. Too often, a purchase will be based on the lowest cost basic unit, or conversely, money wasted on extra options that are really never going to be utilized. Matching the equipment to the task (and future tasks) is important.
Do the quantities to be produced at present and in the future warrant buying equipment?
Is this process extremely sensitive to quality control, or can you trust an outside vendor to meet the quality criteria?
Are you comfortable not retaining full custody of your parts?
Scherpenberg: Orthopedic manufacturers seeking to make a capital equipment purchase should first focus on performance considerations before being bogged down by the initial upfront cost. The manufacturer obviously requires a machine that is capable of producing the necessary applications. Outside of the minimum capability requirements, manufacturers should think about their expectations for productivity, quality, reliability, maintainability, technical support, and customer service.
Snow: Timing is key. Orthopedic organizations should still consider outsourced partners. At the same time, they should develop the internal expertise once the inflection point of production is achieved. This allows for bridging the gap from being dependent on outsourcing to taking charge of AM production.
However, as volumes begin to rise and more devices are developed and designed internally, which therefore requires more capacity, there comes a point where the learning curve needs to be considered. Overall, designing for the process is key for adoption.
Fenske: What important aspect is often overlooked by a company looking to make a purchase?
Abraham: Is the manufacturer going to be around for the long term? D&B rating? Have they been in the industry manufacturing the equipment or is it mostly done by nameless subcontractors offshore? Can they provide engineering files for your unit even if it is now over 10 years old? Is medical device packaging equipment their No. 1 core business or one of several products in unrelated markets? Is there a design policy of backwards compatible upgrades or improvements made available to the existing customer base?
Bannayan: Status quo. Sometimes, companies are hesitant to change existing processes because that is how they normally do things or, due to the validation process associated with using new equipment. Margin enhancement, quality, and daily productivity increases are readily available but folks need to embrace change.
Lindstrom: Orthopedic products are usually segregated into management groups. Abrasive blasting equipment is usually able to provide upgrades to processes across product lines. This is sometimes overlooked as a justification factor when a purchase is being considered.
Scherpenberg: In too many cases, manufacturers focus solely on the acquisition price when calculating return on investment and fail to evaluate the total lifecycle cost or anticipated performance of the equipment. However, the costs for operating, maintaining, and decommissioning these machines may dwarf the original purchase price.
When it comes to operating costs, orthopedic manufacturers must determine the impact this new equipment could have on productivity. The philosophy behind a machine’s design and construction can greatly affect productivity. A high-performance machining center typically has a design and construction that improve key aspects of operation, including cycle time, tool life, part quality, and reliability.
For example, a high-performance machining center has a high-power spindle that facilitates high-speed cutting and low-force machining. It also has the acceleration and deceleration available to reduce non-cut time. The spindle bearing is the main support for the tool, and a larger spindle bearing is better able to handle cutting forces. This bearing’s type and position can also affect machine stiffness and the types of forces it can handle. A stepped column design contributes to machine strength and can be more stable. Machines that have a single-piece casting, three-point leveling, and a tiered column design can reduce machine vibration.
There are also many often uncalculated costs associated with maintenance. It is important to remember that once production starts, unscheduled downtime can quickly erode any saving on purchase price. Because maintenance budgets are typically incorporated into operating costs, they are probably not directly accounted for in a capital equipment ROI calculation. The costs associated with repair, a preventive maintenance schedule, and any unscheduled downtime should be considered. With a high-performance machine, these costs are not the same as they would be if a company kept an inefficient, less reliable machine running.
When purchasing equipment, manufacturers also need to evaluate decommission costs. The residual value of the machine should be accounted for in the actual ROI. Typically, after a contract or payments are up, manufacturers must decide what to do with the machine. They can dispose of the machine or keep it running for another four to 10 years.
Because a low-cost machine is fully depreciated after three years, it looks inexpensive on the accounting books. However, this type of thinking leads many manufacturers to keep the machine running in the shop long after it should have been removed. Typically, with a lower-cost machine, in years four through 12, maintenance costs skyrocket, part quality suffers, and scrap increases, all while perishable tooling costs escalate. At the end of three years, the machine has minimal value. In contrast, a high-performance machine can extend component life and reliability, reduce maintenance costs, and retain 50 percent of its value at the end of three years. These benefits should be factored into actual ROI.
Fenske: Is it common for capital equipment providers to offer training to orthopedic device manufacturers?
Abraham: Atlas Vac offers and encourages factory training before shipment. It is always easier to run equipment and “get under the hood” in a non-cleanroom environment. No distractions nor hurrying. Operating the unit and familiarizing oneself with the hardware “internals” using the equipment documentation in hand is always beneficial and easier when the equipment builder staff is available for a one-on-one Q&A.
Cook: Training on this type of equipment should come standard with this type of machine purchase at no extra cost. Training should include the principles of centerless grinding, overview of the equipment, a detailed process review, what procedures to follow if they have an issue, and how to properly maintain the machine.
Lindstrom: It is extremely important that training is a part of the equation. As an integral part of any manufacturing process, you want to make sure that all operators, maintenance personnel, supervisory personnel, and any process engineers involved are all completely fluent in their responsibilities for the operation of the equipment.
Scherpenberg: Makino offers customers a number of formal training opportunities on selected topics and products. Content is based on specific skill sets and objectives and is designed to transfer a working knowledge and understanding of the machine-tool system and related processes. Our training centers are located in Mason, Ohio; Auburn Hills, Mich.; Elgin, Ill.; Waukesha, Wis.; and Querétaro, Mexico. Training can also be conducted per request at one of our other centers in Los Angeles, Calif.; Union, N.J.; Erie, Pa.: Wichita, Kan.; and Mississauga, Ontario, Canada. Makino training credits may be provided with the machine purchase based on machine type and machine purchase agreement.
Snow: EOS offers a complete portfolio of training and consultancy, ranging from AM fundamentals to additional levels. This type of support allows for the discovery of geometries that are conducive for the process while providing design rules and fundamentals that need to be adhered to.
EOS can also provide more of a 360-degree production assessment of their actual business, where we can assist them in understanding and optimizing their business around the use of additive technology. And again, there’s also supply chain optimization as well. So we have the capability internally to be able to address—cradle-to-grave—the customer from their early interest in AM all the way up to a full commitment to the process.
Fenske: What are the pros and cons of an equipment purchase vs. leasing?
Scherpenberg: Purchasing a machine outright enables a business to own the equipment as soon as the transaction’s completed. The company can then amortize the cost over the lifetime of the equipment. However, buying instead of financing can also reduce the company’s availability of cash for other investments, such as plant expansion or improvement, marketing, or purchasing future equipment.
Financing enables a company to better match monthly cash flow being generated from the equipment to the obligation of the monthly payment due under the financing vehicle. Leasing equipment can be an alternative acquisition strategy that can lower the operating cost of the equipment. Of all of the financing options, leasing offers the most flexibility to meet a company’s unique business needs.
When buying an asset, it is critical to consider the long-term costs of ownership, such as maintenance and downtime that can mount when a company holds onto an asset over time. Through leasing, a company can further improve its cash flow while obtaining better equipment with greater ROI. Leasing gives flexibility in capacity and financing. The company is able to add another machine if production increases. It can return equipment at the end of the contract, if desired, or purchase it at the end of the lease.
Snow: We have a current program to ease the transition into AM. For example, from the leasing perspective, you maintain your bank capital reserves and there’s no large down payment. This is a very important aspect; you’re also hedging the technology because the tech is advancing very quickly, year to year. Short-term leases provide an affordable trial, testing the market without agreeing to own the equipment long-term. So it’s a try-before-you-buy arrangement. We also have what we call an off-balance sheet. This allows you to treat the lease payment as a business expense and there are tax advantages. These are the big pros of leasing.
There are also pros when purchasing direct—if you’re a company with deep pockets and cutting a check for $750,000 is not an issue to you. I think that’s even better if you have that kind of capital available. But I’m a big fan of leasing models because I think it’s a great way to manage the risk and manage the assets.
Fenske: What are some of the newer capabilities of the equipment that are attractive to orthopedic device manufacturers?
Abraham: Standard Atlas Vac units have, for years, included dynamic output data (time, temp, psi, time/date, and recipe number) to label printers as a means to capture and document unique package sealing data. The same is now available to drive a Videojet printing system for direct application to the package in the sealer. For 2016, with Class II UDI package labeling requirements in mind, Atlas Vac has taken the next step to include data logging of not only the dynamic cycle data but also logging of operator IDs and passwords, sign-ins, password changes, recipe changes, alarms, odometer reading, etc., all on a new standard color touch screen. What is interesting, this capability can be retrofitted to many existing standard Atlas Vac units in the field as a means to enhance and extend capital equipment life.
Bannayan: The integration of inspection and machine feedback into the machine process dramatically reduces the time to set up the machine and improves quality control. Gauging also adds to traceability and allows for the compensation of length variation.
Lindstrom: Process control capabilities have become more refined in abrasive blasting over the years. Closed-loop air pressure monitors, media flow control, media-sizing devices, and accurate tracking of nozzle presentation/part movement provide repeatable finishes every single time. The orthopedic industry has been slow to integrate robotics, but the benefits will soon become apparent.
Scherpenberg: Each new generation of machinery typically results in advancements in speed, cutting capability, and tooling flexibility. Other benefits of new machine models include more user friendly control functionality, improved operator ergonomics, and enhanced compatibility with automated technologies.
Automation has seen a significant rise in demand for its ability to provide more flexible production quantities. Part mix and part volumes can be changed quickly and reliably in order to address a manufacturer’s evolving needs. Lead times are reduced. Automation also decreases cycle times, eliminates repetitive movements, improves tool life, and reduces labor, all while resulting in more parts per shift. The outcome brings higher quality parts with less scrap and lower part costs. The manufacturer is able to gain a competitive position in the marketplace due to reduced labor and part expenditures.
Snow: I would say what’s attractive is the equipment’s ability to process implantable-grade alloys, such as titanium 64 ELI and Titanium Commercially Pure, which are newer alloys that are now available. This is very important to the orthopedic industry because with these new alloys come new capabilities. And of course you also have the freedom of creation to make patient-specific orthopedic devices and—with front-end software, such as Autodesk Within—to optimize geometries that can enhance bone growth via osteointegration. These are techniques that can’t be easily done through traditional manufacturing without lengthy, very costly processes.
Fenske: Looking ahead, is the investment in capital equipment by orthopedic device manufacturers likely to continue as is, increase, or decrease? Why?
Abraham: This is a very interesting issue to predict given current historically low interest rates, recent corporate mergers, corporate stock buyback initiatives, healthcare insurance turmoil, domestic vs. international demand, and as always, the FDA. Those having the “answer” probably also positioned themselves well for the dot-com bubble, mortgage banking scandal, the last several recessions, and the recent NCAA bracket.
Bannayan: The aging population is more active, which leads to more “clean up” procedures. Also, with the increase in healthcare costs and more folks having insurance, the value of minimally invasive procedures has increased exponentially and should continue to do so. People are reluctant to have major surgery, but are much more open to procedures that can have them functioning in a few weeks in some cases.
Scherpenberg: We see investments by orthopedic device manufacturers continuing to increase as the quality demands and complexity of orthopedic device applications grow. The higher demand requires greater control over manufacturing processes and the overall supply chain. By owning and operating capital equipment in-house, these manufacturers are better able to guarantee results and gain a more intimate, accurate understanding of their supply-and-demand requirements.
Snow: Well I think it’s going to obviously increase. All forecasts out there right now indicate that this is going to grow at a very quick rate. Some of our major OEM customers in the orthopedic space are indicating that through their commitment to EOS, and we are continuing to see more and more medical devices being developed around the use of AM technology. So I really don’t see it decreasing whatsoever. It’s actually going to increase dramatically. And I think the reason is that there are many more people within the design community of orthopedics that are being trained on the design rules associated with AM. So they’re incorporating AM into their thoughts when it comes to the creation of a new medical device.