Getting it Right

In the first article from our two-part series, contract manufacturing firms discuss the components to successful outsourcing relationships.

Michael Barbella

In his 2005 bestselling book, “The World is Flat: A Brief History of the Twenty-First Century,” Pulitzer Prize-winning journalist Thomas L. Friedman discusses the torrent of technological advances and social shifts that have led to globalization. He names 10 forces that helped level, or flatten, the economic playing field at the turn of the millennium, claiming those factors made overnight neighbors out of places like Bangalore (India), Bangkok (Thailand), and Bangor, Maine.

Many medical device OEMs turn to outsourcing to increase profit and put an individualized focus on research and development. Photo courtesy of Francis Diaz, Ximedica.

“…technology and geoeconomics is fundamentally reshaping our lives,” Friedman wrote in an article published in The New York Times Magazine shortly before his book was published. “Anyone with smarts, access to Google and a cheap wireless laptop can join the innovation fray.”

Such a link to the world’s interconnected knowledge pools, however, would not have been possible without the flattening factors Friedman identified in his book. The first of these factors was the falling of the Berlin Wall on Nov. 9, 1989. Friedman argued that the event was critically important to globalization because “it allowed us to think of the world as a single space.”

Another flattening factor that greatly influenced globalization was outsourcing. In his book, Friedman claimed that outsourcing’s contribution to the leveling of the world’s economic forces began with the Y2K computer crisis (also known as the millennium bug) in the late 1990s. By the end of the 20th century, America’s reliance on computers was significant—various management systems, from water to air traffic control, were computerized. As the year 2000 approached, business leaders realized that the internal clocks on the nation’s older computers would have to be adjusted so they could recognize the new millennium year and avoid a complete shutdown. It was a huge undertaking; only a society (or country) with enough qualified software engineers could handle such a job.

“And so with Y2K bearing down on us,” Friedman wrote in his book, “America and India started dating, and that relationship became a huge flattener, because it demonstrated to so many different businesses that the combination of the PC, the Internet, and fiber-optic cable had created the possibility of a whole new form of collaboration and horizontal value creation: outsourcing.”

The concept of outsourcing, of course, existed well before the Y2K crisis. Some scholars argue that the practice began several thousand years ago with the production and trade of food, tools and other goods. As small societies and communities began to form, people with specialized skills were assigned certain tasks. The community rewarded these people for their knowledge and skills by assigning them the same tasks (an outsourcing contract in its most primitive form), and these early business folk contributed to society by facilitating trade and helping their communities grow and prosper.

While the Industrial Revolution of the 1800s forced companies to consider using outside (though still local) resources to perform certain functions, outsourcing as a business strategy is a fairly new notion. It took until the 1980s for manufacturing companies in the United States to begin outsourcing parts of the production process, having realized the practice could reduce costs and improve the quality of the finished product.

Medical device companies took even longer to embrace the practice. They started outsourcing only within the last decade, as the industry began to mature and platform technologies essential to the manufacturing process emerged in developing markets.

Outsourcing, not necessarily offshoring, is now considered a basic part of the product development process at most major medical device manufacturers. And for good reason—outsourcing not only helps companies increase their profits, it also can help them improve their focus, increase their return on investment in research and development, and gain access to capabilities outside their core competencies.

The outsourcing process, however, is only as good as the relationship on which it is based. In order for companies to reap the benefits of outsourcing, they must form good relationships with their outsourcing partners.

“Unsuccessful working relationships with outsourcing partners detract from the purpose of establishing the relationship in the first place,” said Brett Freeman, vice president of operations for Providence Enterprise LLC, the U.S. office of Providence Enterprise Limited, a Hong Kong contract design and manufacturing firm that serves the medical device and various other industries.

“An OEM is likely to outsource so it can focus on its core competencies and dedicate its resources towards those competencies,” he continued. “This can only work if partnerships with the outsourced firms are successful. Otherwise, the OEM is likely to spend its time continually looking for better outsourcing partners or bring in-house the product or service that it is seeking.”

Unsuccessful outsourcing relationships not only waste time, they also waste money. Research has shown that well-managed outsourcing relationships based on mutual trust can be worth 20 to 40 percent more in value compared with poorly managed partnerships. Additional data has indicated that about 30 percent of annual contract value is at stake for both parties involved in an outsourcing relationship.

“It’s not enough to recognize that ‘the relationship matters,’ “ declared an article written by Boston, Mass.-based management consulting firm Vantage Partners LLC. “To benefit from the potential gains available from effective relationship management, one has to understand more specifically how the benefits manifest, and what it takes to achieve them.”

Achieving the benefits of outsourcing come easily to medical device firms that know how to build successful relationships with their partners. However, not all companies know the ingredients of a successful partnership, and those that do often fail to give the relationship the attention it deserves.

Basic Relationship Ingredients

The relationship between an OEM and its outsourcing partner is not unlike those that exist between people: The most successful and harmonious ones are built on trust, honesty, and, most importantly, communication. Experts who spoke to Medical Product Outsourcing agreed that communication is key to any successful outsourcing partnership.

“The supplier needs to know how to be a good supplier, and the OEM needs to know how to be a good customer. Understanding the value of communication is essential,” said Daniel Reifsteck, chief

Outsourcing relationships are dependent on defining objectives, respect, and participation by both the medical device OEM and contract manufacturer. Photo courtesy of Francis Diaz, Ximedica.

operating officer for Ximedica LLC, a medical device designer, developer and contract manufacturer based in Providence, R.I. “I’ve seen and heard about relationships that went bad simply because there wasn’t good dialogue between the two organizations. That’s always something that is pretty easy to avoid.”

The management team at Ximedica avoids the pitfalls of poor communication by establishing basic operational protocols with its outsourcing partner at the start of a project and maintaining an “open and honest dialogue” throughout the life of the contract relationship. Reifsteck said it is important for both an OEM and its supplier to spend time understanding how the other operates to avoid costly delays and communication gaps that can quickly sour relationships.

A clear understanding of operational protocols also can help suppliers and OEMs better align their product development process. A company that prefers to have its entire product development team copied on e-mails requires a different type of protocol and communication process than a device firm that dedicates one person to a project.

Ranfac Corporation is one of those firms. Executives with the Avon, Mass.-based developer of precision medical instruments believe the secret to forming good working relationships with outsourcing partners is the personalized attention companies such as Ranfac provide to their customers.

“[Our partners] have a whole bunch of needs that must be tended to, whether it’s manufacturing, engineering, marketing, labeling or regulatory,” said Barry H. Zimble, Ranfac’s executive vice

Communication is important between medical device OEMs and contract manufacturers in order to meet goals efficiently and in a timely manner. Here, medical device kits are loaded into an autoclave machine for decontamination. Photo courtesy of Millstone Medical.

president. “We assign them a project manager that lives and breathes for them so they don’t have to repeatedly explain who they are, what they are doing and what our company is doing for them. We want to make sure they can communicate on a daily basis with that one person who then disseminates their information to our organization. Other companies that conduct business as an outsource partner may be waiting for engineers or quality people to get back to them. These people already have jobs to do—their priority isn’t taking care of the customer so much as it is taking care of internal work. The basicingredient to a successful [outsourcing]relationship is communication and communicating with one key person.”

Indeed, good communication is a cornerstone of any relationship, whether it is professional or personal. But it cannot be the only ingredient—industry experts said successful outsourcing partnerships are based on a variety of factors, including: defining the objectives both sides hope to achieve with the union; proactive participation by both parties; understanding the reasons for the partnership; and respect.

Outsourcing relationships are not to be entered into arbitrarily. Companies that rush into such partnerships without fully understanding the kinds of gains they hope to achieve are setting themselves up for failure, experts said. Without clearly defined objectives, device firms could find themselves mired in contractual battles with suppliers or stuck on the receiving end of services that worsen rather than improve over time.

Defining and understanding the objectives of the outsourcing relationship is particularly important for contract manufacturers. Without an understanding of the driving forces behind the desire to outsource, these contract manufacturers cannot adequately serve their customers. An OEM, for example, may want to outsource a project in order to get its product to market more quickly; a contract manufacturer that fails to understand this objective will not be able to help the OEM achieve its goal.

“We have to understand what our customers’ key drivers are,” Ximedica’s Reifsteck explained. “It’s not just understanding a project; it’s making sure we’re aligned with our partners and know their key objectives—is it time to market, is it margin, is it manufacturability, is it cost? It’s also important to make sure the two teams are really well aligned because that will drive the program. Having clarity on what really matters to our partner is essential.”

So is a comprehension of the technical services offered by the supplier or contract manufacturer. The OEM must understand and be aware of the array of services offered by its outsourcing partner in order to fully benefit from the relationship, industry experts told MPO. And in turn, the contract manufacturer or supplier must realize how their service offerings can help the OEM (or other outsourcing partner) achieve its business goals.

Officials at Millstone Medical Outsourcing foster such an understanding among their customers by drafting a contract that clearly outlines the terms and conditions of the outsourcing agreement. The contract also includes a detailed “statement of work” that can help customers better comprehend the kinds of services that will be provided.

“Understanding the technical service that is being provided from both sides is very important. After that, communication and trust come into play, but you have to start with a basic understanding of the service that is being outsourced,” noted Chris Ramsden, Millstone Medical’s CEO. The Fall River, Mass.-based firm provides customized outsourcing solutions to the medical device industry.

“If someone comes to us and asks us to do sterile packaging and thinks that is really a cost and materials plus service, we have to back up and talk about validations, cleaning, inspection—all of the things that go on internally during the packaging process that the buyer may or may not be aware of,” he continued. “You have to understand the entire service offering and the pieces that the buyer is looking for.”

Millstone Medical officials usually can decipher the specific needs of their customers by talking to several different people or groups within the organization who are most knowledgeable about the “technical pieces” of the service being requested. Those groups can include the purchasing and quality teams as well as process engineers. “There might have to be five or six people present at the first few meetings to convey to us all the nuances of the process [the OEM] is trying to outsource,” Ramsden said.

Common Relationship Mistakes

In “The World is Flat,” Friedman describes how the Y2K frenzy of the late 1990s spawned an outsourcing relationship between the United States and India, two unlikely partners at the time. He quotes Vivek Paul, former vice chairman of software conglomerate Wipro Technologies, who said of the partnership: “[Y2K upgrading] was tedious work that was not going to give [American firms] an enormous competitive advantage. So all these Western companies were incredibly challenged to find someone else who would do it and do it for as little money as possible. They said, ‘We just want to get past the damn year 2000!’ So they started to work with Indian [technology] companies who they might not have worked with otherwise.”

Fortunately, the Y2K crisis was resolved with little or no disruptions to world’s computer systems, and the outsourcing relationship the United States had forged with India began to blossom. And while the relationship certainly can be considered a successful one, it serves as a prime example of one of the most common mistakes that companies can make when pursuing outsourcing relationships.

Studies have repeatedly shown that companies—particularly large medical device OEMs—list cost control as the main reason they outsource. But outsourcing strictly to save money is risky because it increases the chance that companies will choose the wrong partners. Less expensive contracts, for instance, can make small firms seem like a logical choice for an outsourcing partnership, but smaller contract manufacturers may not have the venture capital backing of their larger counterparts, medical device professionals warned. This lack of funding most certainly can jeopardize the project development process as well as the relationship itself.

Startups present a different challenge. While these firms may have great ideas, they often are unaware of the steps that need to be taken to bring a new product to market. That kind of knowledge gap can strain the relationship between the startup and its contract manufacturer.

“There’s a lot of smaller companies out there that don’t have it all figured out yet, and that can be a much harder relationship to forge and be successful,” Ximedica’s Reifsteck explained. “If a company is coming to us and saying they have got everything figured out but really, all they have is a good idea, then they may not know whether they really have the right product for the right market or whether they have considered appropriate human factors with the prototype they have put together. The company also may not have done the right level of market research or vetted the concepts out with medical facilities or medical staff to ensure success for the product they want to produce.”

Trust and reliability issues can affect an outsourcing relationship as much as the size of the companies involved. So can the number of outsourcing cohorts. Industry experts said companies that use too many outsourcing partners run the risk of experiencing communication problems and delays in the product development process, which in turn, can increase time to market. “Not having a multi-disciplined approach certainly puts the project and the relationship at risk,” one contract manufacturer told MPO. “When there are handoffs involved in the product development process, there is always a budget problem or a timeline glitch. When there are no handoffs, the project can go on roller skates.”

Reducing the number of suppliers and outsourcing partners can help OEMs reduce the risk of experiencing problems with its product development process. It also can help them better manage their supply chain, which ultimately leads to better outsourcing relationships.

“Filtering the supplier database down to a handful of strategic suppliers can often benefit the OEM as they can focus more on strategic relationships rather than those that may be considered more tactical or short term,” Providence Enterprise’s Freeman noted.

Relationship mistakes are not limited to OEMs and startup companies, however. Contract manufacturers often slip up by failing to understand how the product that is being manufactured is going to be used by medical professionals (or consumers). Understanding how a medical device will be used helps the contract manufacturer craft a development and manufacturing process that produces a top-notch product in a timely manner.

Room for Improvement

No relationship is perfect. Whether they are personal or professional, relationships require a commitment by both sides and mutual respect. Perhaps most importantly though, they require human interaction.

Globalization and technological advances have had an oxymoronic effect on human communication

The relationship between a medical device OEM and its partner can determine the success or failure of a product. Photo courtesy of Millstone Medical.

and collaboration. The Internet has made it possible for people on opposite ends of the planet to initiate a dialogue and work together for the greater good. Some would argue, however, that electronic communication has made people lazy.

“When the world is flat,” Friedman wrote in his New York Times piece, “you can innovate without having to emigrate.”

Emigrating does have its benefits, though. In the medical device industry, face-to-face interactions can enhance professional relationships as well as help medical device OEMs better understand the kinds of services their outsourcing partners offer.

“We’re getting to be too much of an IT world. A Web site can only take you so far,” said Robert Adler, Ranfac’s president. “We have a lot of expertise. We’re a company that has been around 120 years; we’ve developed proprietary manufacturing that nobody else has. To fully appreciate that, you’ve got to come here—you’ve got to touch it, you’ve got to feel it. Any time you can get people into your facility to help them fully understand the kind of market you are in, the type of operation you run and the kind of equipment you have, that is always helpful. You can’t have strictly a virtual relationship.”

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Outsourcing has become a widely-accepted practice in the medical device industry. Over the last decade, companies have gradually realized that outsourcing can help them achieve their strategic goals, reduce costs, improve customer satisfaction and enhance the quality of the finished product.

While many factors determine the success of a company’s decision to outsource all or part of its product development and manufacturing process, none is more important than the relationship an OEM forges with its outsourcing partner. In many cases, the relationship helps determine the success or failure of a medical device manufacturer’s product.

OEMs and other large medical device companies that depend on other firms to design or manufacture their product should choose their partners carefully and build a relationship with those partners that is based on honesty, trust, and most of all, communication. Their reputations depend on it. As Ranfac’s Adler put it: “Sometimes we’re private-labeling a product here. We’re packaging a product up and shipping it to them so they can ship it out the door to their customers. You cannot depend on a company much more than that.”

Editor’s note: In the November/December issue of MPO, our series will conclude with a look at the factors that drive companies to form outsourcing relationships.

Ten Ingredients for a Successful Outsourcing Relationship

The success of an outsourcing arrangement depends largely on the success of the OEM/supplier relationship. Many factors can affect the success of a relationship, including size, familiarity with the outsourcing process, and the goals of the firm seeking the partnership. To ensure success though, industry leaders said most relationships should have most, if not all, of the following ingredients:

1. Good communication. Discussing the needs and expectations of the relationship throughout the product development process helps the OEM and its outsourcing partner avoid surprises that in turn, can result in costly delays.

2. Establish goals. “A good project starts at the end,” one contract manufacturer told Medical Product Outsourcing. Understand what the OEM’s objectives are and create a plan to achieve those objectives.

3. Trust. No relationship—personal or professional—can be successful without trust.

4. Proactive participation. Work to remove roadblocks before they happen. This can prevent costly delays in the product development process.

5. Understand the technical services being offered and the product in development. An understanding of the technical services offered by the contract manufacturer can help OEMs choose the best outsourcing partner. Conversely, an understanding of the product crafted by an OEM can help contract manufacturers design a customized development and manufacturing process for the OEM.

6. Dependability. Always follow through on promises. Failing to do so jeopardizes the relationship.

7. Face-to-face visits. Being in a relationship is about breaking bread. Go visit your partner; a physical connection will help the relationship blossom.

8. A multi-disciplined approach. OEMs are better off choosing outsourcing partners that bring to the table project teams composed of representatives from research and development; design; quality; and manufacturing. Such an approach avoids handoffs that can delay product development.

9. Cost should not dictate the kind of outsourcing partner that is chosen. Firms that focus too much on cost risk choosing the wrong partner with which to collaborate on a project.

10. Re-examine the supplier base. Re-examining the supplier base can help OEMs determine the best outsourcing partners and improve the management of their outsourced product.