By Marissa Fayer, President, Fayer Consulting
Outsourcing and offshoring have become standard business practices in the medical device industry as a means to achieve growth, increase sales, and ramp up profitability. The trend to implement these approaches has only accelerated in recent years, driven by market consolidation, an increase in start-up activity, a heightened focus on cost-effective operations (due to an array of healthcare industry price pressures), and other factors.
In this article series, we will explore the latest trends, challenges, and best practices surrounding outsourcing and offshoring in the medical device industry. This first installment will explain the benefits of outsourcing and offshoring, and share some tips for making the transition process as smooth as possible for you and your organization. But before proceeding any further, let’s take a moment to review some fundamental definitions and concepts.
What’s The Difference Between Outsourcing And Offshoring (And Reshoring)?
The terms outsourcing and offshoring might seem synonymous, but there are some significant differences between the two. Both refer to the movement of some or all operational functions outside the wholly owned parent company. The distinction is in the “how.”
Outsourcing is the process of hiring another company to perform specific functions (e.g., manufacturing) or operate sectors of your business for you. Offshoring, on the other hand, is the development of your own capabilities, but in another country. Both are viable options, and the right approach for you depends on your company’s needs, philosophies, preferences, etc.
While outsourcing has been on the rise for the better part of the last decade, there has been an upswing in offshoring over the past five years, with device makers setting up their own operations in other countries rather than pay margins to foreign contract manufacturers. In other cases, medical device companies have “inherited” offshore locations as the result of acquisitions during the current wave of market consolidation.
At the same time, many have discovered that outsourcing to the traditional offshore destinations of China, India, and elsewhere in Southeast Asia is not as cost-effective as they originally thought or was previously the case. Rising labor rates have rendered the inherent logistics and quality issues associated with these regions far less palatable. As a result, many medical device manufacturers have begun reshoring — that is, moving operations to a location closer to home, either in Latin America, the Caribbean, or lower-cost regions of the U.S. (typically in the South).
Preferred outsourcing, offshoring, and reshoring locations continuously shift depending on technology, market trends, skill level, labor rates, infrastructure improvements, political stability, and saturation. And new regions are endlessly emerging in the U.S. and offshore throughout the world.
The Benefits Of Outsourcing & Offshoring
Some of the main reasons a medical device manufacturer should consider outsourcing and/or offshoring include:
- Reduction in labor costs
- Reduction in material processing and assemblage costs
- Proximity to end-use or next-in-line customers
- More efficient operating structures with decreased bureaucracy
- Ease and proximity of logistics
- Concentration of core capabilities internally and/or in consolidated locations (outsource non-core roles for streamlined operations)
- Flexibility to expand or contract more easily with regards to demand and labor
- Risk management
- Tax breaks and benefits
- Reduction in regulatory costs (associated with some outsourced operations)
- Improved customer service
All of the above-listed reasons, and others that weren’t, boil down to one main driver — increase in profits.
Delegating business process creates flexibility for your organization to innovate, transform, and even revolutionize itself, or to take advantage of a trend or movement around you. That flexibility isn’t limited to the confines of manufacturing either, and could include creating centers of excellence, developing new technologies, employing more educated resources for specific functions, or implementing new practices or programs — none of which you would ever have the bandwidth (people or space) for without removing certain activities or operations. Increase in profits can manifest in the bottom-line, but also in the creation of time, strategic focus, and synergies, which can lead to additional profits.
Overcoming The Main Hurdles To Outsourcing And Offshoring
The biggest complication and concern related to outsourcing and offshoring is ensuring the transition will be smooth and that the business process will eventually become “out of sight, out of mind.” While no outsourcing or offshoring arrangement ever absolves the medical device OEM from regulatory requirements and other complications, minimal interaction is the ideal goal for all parties involved. This is derived from trust, which is built through time, communication, experience of the management team, and especially track-record.
The keys to ensuring a smooth transition and long-term success are comparable for both outsourcing and offshoring, with a few slight modifications:
- Find a partner that aligns to your goals and ideals. This applies not only to an outsourcing partner, but also to an internal company location in another country that needs to be trained on common objectives and principles.
- Cultures that are hard-working, honest, open, and adaptable create the best partners, as they want what is best for both sides.
- Place in positions of leadership skilled and trained project managers who intrinsically align to the transition goal, and who have the adaptability and training to handle multiple cultures, learning styles, communication styles, levels of management, and departments. The technology or specific function becomes almost irrelevant, as the best project managers can learn technology, but have an innate skill in “making things work.”
- Early in the relationship (ideally, before a contract is signed), come to an agreement on communication methods and channels between the two parties. Frequency, style, method, language, roles and responsibility, and information all play into effective communication and have a profound impact on the success and ease of a transition.
- Communicating to everyone in a structured and measured manner will ensure that all sides and the up-and-down lines know what is happening, when, and who to speak with when they have a question, in a generalized manner without too much detail to make it confusing. During the first few transitions, it is natural to be combative, scared, and even aloof, detaching yourself from the outcome, but the true champions will be supportive, informed, and know this helps them individually and their company’s bottom-line.
If you’ve never been involved in moving an operation before, transitions like this may seem daunting, but with the right team, knowledge base, and understanding for both sides, the transition will naturally smooth itself out.
Successful outsourcing or offshoring activities cannot occur in a bubble. They require the cooperation of the entire organization, from the management team on down, and a common understanding of what the decision and transition means for the company.
Outsourcing and offshoring have become the operating practices of the future. If you choose to ignore them, your company runs the risk of being eclipsed by more nimble, forward-thinking competitors that can grow and scale at a faster rate, due to limited bureaucratic practices and structures. They are the new norm and will continue to be for the foreseeable future.
Future articles in this series will discuss the pros and cons of outsourcing vs. offshoring, how to scale-up efficiently, how to manage relationships across alternate locations, emerging areas to offshore, and other topics.
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.