By Marissa Fayer, President, Fayer Consulting
If your partnership isn’t bringing out the best in you, you’re in the wrong relationship. The relationship between an OEM and a contract manufacturer (CM) is similar to a marriage: Pick the right partner and have a long, happy, and profitable future together. Pick the wrong one, and there’s extra work, unhappiness, and a short-lived future.
The previous article in this series discussed the quality focus in outsourcing and offshoring, specifically, what to retain and what to relinquish. Here, we will discuss how to choose the best CM for your business, within the context of what is happening in the industry today.
Today’s Market Landscape
One of the loudest and most prevalent trends in medtech is the pressure for cost reductions. While this is neither a new trend nor a revolutionary idea in the medical device industry, it seems to have increased in fervor this year.
For the past several years, market consolidation has been the prevailing theme. Now that many of the large mergers are completed and the initial year of company integration is completed, or at least well in process, the large OEMs are focused more than ever on cost reductions associated with their supply chains, as well as achieving economies of scale. This translates into cost reductions on individual components; pressures for lower margins on assemblies; consolidated cost reductions due to increasing cash volumes, resultant of the mergers; and year-over-year contractual cost reductions across the board.
Cost-cutting efforts also are becoming apparent through the consolidation of supply chains, which have been merged to reduce the number of suppliers on companies’ now-combined approved supplier list (ASL). Vertically integrated CMs stand best positioned, as they can offer several component and assembly verticals under one company name. Utilizing these vertically integrated CMs can eliminate between three and seven individual suppliers. The value of such consolidation to an OEM with several hundred suppliers is unparalleled.
Characteristics To Consider When Selecting A CM
Medical device OEMs each face a critical decision in choosing the correct CM for their product’s success — and ultimately their company’s success. Price seems like the only natural consideration, but I have found that it is just one of the factors relevant to determining the right partner for your business.
- Size: There is a significant difference between a CM’s size classification (large, mid-size, or mom-and-pop) and what that size means to an OEM. Large CM’s operate similarly to an OEM — often with bureaucratic structures and high overhead, but also with access to financing for the newest technology and equipment. Small mom-and-pop CM’s are useful for small-volume production or when they are geographically accessible during design development. Typically, though, these small CMs don’t have the ability to significantly ramp up volume, the global scale for cost reductions, or the developed quality systems required by most OEMs. Mid-size CMs currently lead the pack as the best fit for most OEMs. They are small enough to be agile and responsive to the OEM’s needs and have developed robust quality systems, since many of the executives come from OEM backgrounds. Many mid-size operations also have created a global presence in at least one low-cost manufacturing region, providing significant cost reductions, and have access to capital for equipment and technology. All of these benefits come without the bureaucracy of a large company, or the financial risk associated with a manufacturer serving only one or two key clients.
- Vertically integrated vs. singular focus: As previously mentioned, vertically integrated CM’s deliver significant value to the OEM in the way of consolidated supply chains and integrated teams to deliver total value to the product. Vertically integrated CM’s often are in the mid-size classification, thus they include scaled engineering and process teams, supply-chain management expertise, and they often are already looking at methods to reduce cost via their sustaining engineering teams — savings which can then be passed on to the OEM. Singularly focused CM’s are most valuable for niche processes, or when they are experts in their field of the singular commodity process (i.e., tubing extrusion).
- Quality focus: The value of a robust quality system with specific accreditations — such as ISO 13485 and FDA compliance — in combination with risk mitigation plans, is incredibly valuable to OEMs. As discussed in this series’ previous article, quality is often the most important factor to consider. CMs with ISO 13485 and FDA assembly approval have invested the time, effort, and money to make their quality systems equivalent to most OEMs and hold themselves to a high standard internally, without external pressure imposed by an OEM. This is a significant differentiator when choosing a CM, as it almost always reduces an OEM’s expenditure of time, money, and effort in the long run — during both the good times and the bad.
- Responsiveness and communication: The ability to speak to a real, live human when you need to — and that person being the correct individual to answer a particular question — is invaluable to an OEM. The responsiveness of a CM, especially in the beginning of the due diligence process, is indicative of how the business operates on a day-to-day basis. After making initial contact with the business development team, take a tour of the facility and ask to discuss some specific questions with the engineering and quality team. Their knowledge, method of communication, ownership of the project/product, and responsiveness to your inquiries is an indication of how the business will operate throughout the partnership.
- Location / Country: Location and country of manufacture will significantly affect the all-so-important price-per-unit. The countries best suited for CM outsourcing and offshoring were discussed in a previous article in this series, but factors such as cost-per-unit, access and timeliness to distribution channels, and overhead rates make this important to mention again. Additionally, the ability of your CM to have multiple manufacturing locations creates multiple points of access for the OEM while ensuring the CM can meet volume requirements, as well as provide cost reductions in the future, especially a CM with access to low-cost manufacturing regions.
- Internal goals: It is critical that a CM has a clear understanding of the OEM’s goals. The choice of a CM varies greatly when the outsourcing motivation is based on cost reductions, reducing wholly-owned space, creating flexible models of expansion, or creating space for a top-level knowledge merger. Those are just a few of the varied reasons to outsource, and a prospective CM’s knowledge of the one(s) most relevant to your business’ success will play a significant role in your choice.
Good CMs Adapt To Better Serve You
A contract manufacturer that is willing to work with your organization to understand and achieve your end-goal target is ultimately the best fit. Each CM has something unique to offer, but that fit is dependent upon what you want to gain from the relationship. Price is, and always will be, a significant factor in choosing the best CM for your project, but other characteristics play an equally important role in creating a lasting and profitable partnership.
Reductions in supplier base and increased emphasis on cost reductions are going to remain significant themes as market consolidation continues over the next several years. CM’s that are able to “roll with the punches” and are nimble in their integration, project management, responsiveness, and price are going to be the frontrunners that grow partner OEMs’ business, regardless of future changes in market strategy.
The next article in this series will discuss how to manage relationships with your partners and best practices to employ. Further articles will discuss how to scale up your offshore facility for more effective and engaged employees, and how to give back to the community in which you and your partners work.
About The Author
Marissa Fayer is president of Fayer Consulting, a global consulting business helping small to midsize medical device companies reduce their costs and increase their profits. The firm specializes in manufacturing relocations, project management, high performing team development, and optimization of operations. Marissa Fayer has been working in the medical device industry for over 15 years with a focus on offshore operations and project management for complex multistage integration and implementation projects. Reach her at firstname.lastname@example.org and on Twitter @MKFayer.