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Cover Story

Outsourcing : A Trend That Will Continue To Grow...

A report by Frost & Sullivan noted that full service outsourcing is a trend that will continue to grow. In 2004, outsourced component manufacturing comprised 86% of the market; finished goods represented 14% of the space. By 2010, outsourced finished goods manufacturing is expected to nearly double and comprise 27% of the market. It is also expected that the annual revenues of medical technology outsourcing to more than double during the same time frame.

Another survey by Pittiglio Rabin Todd & McGrath (PRTM) Management Consultants, based in Waltham, MA, on high-growth companies in cardiology, in vitro diagnostics, ortho-pedics and endoscopy found that those companies outsourced 10% to 60% of their cost of goods .The companies in these segments are growing at 10% to 15% annually, compared with the 6% to 8% yearly growth experienced by companies across the whole medical device sector.

A survey made by Mark Kesti, vice president of Thomas Medical Products Inc. states that the medical device industry is growing and will continue to do so, and increased outsourcing is one way that manufactures can keep up with changing demands and a dynamic market. Understanding these implications can help device manufacturers determine whether to outsource.

Driving Demand

"Higher-growth companies look at outsourcing for volume flexibility and cost advantages, but they also use outsourcing to support a more strategic focus, to differentiate themselves in the market," explained John Lamb, PRTM director. "They are looking to work faster and with more partners to get more complex products and more integrated solutions that incorporate more technology. They recognize they can't be experts in all technologies, so they partner with companies that are."

There are number of market forces that are influencing the use of outsourcing partners for everything from product development to finished device manufacturing. The factors which forces medical device companies to continue the trend of using contract manufacturers and other outsourcing partners are:

1). Novel devices coming into market:

Novel devices like catheter delivery systems for percutaneous-delivered therapies necessitates device companies to bring innovative and high-quality medical device design and manufacturing techniques that meet or exceed their in-house capabilities.

2). An aging (but active) population and more minimally invasive surgical techniques:

The increased customer demand from an aging population and growing global markets, coupled with fast innovations in technology and competition has created an impetus for outsourcing.

3). Procedures that use medical devices are on the rise

Procedures that use medical devices have been drastically changing. For example such as coronary artery bypass graft (CABG) procedures, has declined over the past 10 years. Interventional cardiologists are getting either better or similar results with much less risk by using percutaneously delivered drug-eluting coronary stents and atrial fibrillation ablation.

4). Changing focus to shift resources to value-added processes

In order to lift non-core activities from their shoulders, the medical device companies are looking to outsourcing partners

In earlier days, companies often turned to outsourcing so that they could concentrate on their core competencies, cut costs and increase product speed to market. Indeed, for many companies, those reasons continue to prevail. Rather than invest in new factory space or equipment, OEMs find it more beneficial to use their people and capital resources on developing new IP.

Even as they offer manufacturing at costs below what many customers can achieve themselves, operational savings are just one benefit medical device manufacturers have come to expect when outsourcing. The others include vendor consolidation and an accompanying shortening of the supply chain, access to technology, quicker turnaround on delivery and other productivity gains.

What Medical Device companies are seeking for outsourcing?

Quality, Compliance, Time to Market, and Cost are the things which are important to device makers while outsourcing. Device manufacturers depend on their contract manufacturers or other outsourcing partners to help them achieve business objectives and deliver quality products to their markets. Contract manufacturers must develop high-quality products that consistently meet or exceed regulatory requirements.

Device companies expect their contract manufacturers to be able to differentiate their core strengths and manufacturing capabilities.

Device companies examine a number of suppliers to determine which has the most flexible, state-of-the-art facilities and techniques.

Increasingly, global medical device companies are requiring their partners to use Six Sigma and lean manufacturing techniques.

Medical device manufacturers are also requiring that their partners incorporate more-exhaustive process validation into the product development phase.

Another expectation is shorter lead times to support companies' push to increase inventory turns and decrease warehouse costs.

Device companies expect partners to attract and retain the best people-from manufacturing engineers to technicians and customer service staff. In addition, device companies should expect their partners to have a proven track record for delivery of quality products on time.

Outsourcing from Product Development to Finished Device Manufacturer

The entire definition of outsourcing has changed. Few years ago it was called contract manufacturing, not outsourcing. Outsourcing has evolved from a process of making components to making a finished device and offering all of the services associated with finished devices. Modern outsourcers provide engineering, design, sterilization and sophisticated supply chain services under a robust quality system that is as comprehensive as their OEM customers', as well as everything through distribution to the ultimate end user-services the market didn't even think of outsourcing half a dozen years ago.

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