OUTSOURCING

Ubiquitous consumer electronic devices such as cell phones and MP3 players can be made inexpensively in quantities measured in millions. By contrast, many common medical products, from infusion pumps to defibrillators, are manufactured in quantities far lower than a million parts per year. However, while it is inevitable that low-volume industrial equipment will be more expensive than consumer electronics, end-users, such as hospitals and doctor's offices, are often very price sensitive. Medical original equipment manufacturers (OEMs) find increasingly that their customers' expectations are being shaped by the price and performance of other electronics manufacturers, especially when it comes to portable electronic devices. Medical customers as well as personal consumers have come to expect annual cost reductions and faster delivery times on new products.

The introduction of new medical products has been a slow process—compared with certain other industries, conspicuously so. Complex, process-controlled internal manufacturing processes and FDA trial guidelines together have extended the medical product development cycle to roughly five years. And OEMs want to maximize profit. The challenge is to remain competitive with a low-volume product even though manufacturing in North America is more expensive than manufacturing in low-wage areas such as Asia.

Another trend creating market pressure for medical OEMs is the availability of certain devices on an over-the-counter, nonprescription basis. Automated external defibrillators (AEDs) are an example. Manufacturers of portable AEDs are medical OEMs who have strengthened their supply chains and redesigned their products to address the consumer market.

Manufacturers of low-volume medical electronics devices often struggle to meet end-users' price and performance standards.

North American medical equipment manufacturers see an obvious solution in restricting their product lines to extremely complex items that need to be manufactured close to where the design engineering team operates. Such devices cannot be outsourced overseas. The best answer to the challenge is to reduce the cost of manufacturing the product to the point that production volume is irrelevant. A careful design strategy can exploit both cost-lowering techniques employed on high-volume manufacturing and some of the strategies for controlling costs in producing low to moderate volumes. Another approach discussed here is the judicious outsourcing of key components, which can boost efficiency while also keeping costs in check. In addition, the implementation of lean manufacturing principles can keep U.S. medical electronic device manufacturers competitive in today's global market.

Keeping It Simple

It is far better to use commercially available electronic components than special designs for low-volume manufacturing. When components that are used in consumer applications can be substituted for custom or more-obscure parts in medical device designs, then a low-volume product can benefit from the same volume cost reduction enjoyed by products manufactured in large quantities.

A number of features of notebook computers, for example, can be incorporated into industrial or medical equipment. These include wireless chip sets and lithium-ion batteries. Nearly all notebook computers use a standard-size lithium-ion battery 18 mm in diameter and 65 mm long. Consequently, this size is available from many vendors, and the battery's commodity price affords many more watt-hours per dollar than other cells. In many cases, this standard battery can be designed into a medical device, allowing low-volume products to use an advanced technology that at the same time provides a cost advantage.

Regardless of the manufacturing volume, in order to reduce labor costs, it is necessary to design for simplicity. However, designing for simplicity has other implications that are specific to low-volume manufacturing. The example this time concerns the injection molding of plastic parts. Complicated molds generally are avoided when parts are to be molded in high volumes. Slides for undercuts, for instance, can wear out after millions of cycles. However, if production volumes are low enough, then such mold deterioration is of less concern than the labor costs of extra assembly steps. The slides are not likely to fail before all needed components are produced. Therefore, it is more cost-effective to mold the complex part than to assemble its equivalent from simpler parts.

To spread the costs of tooling and design over multiple items, it is imperative that families of low-volume products be designed on common platforms. Often, the simplest way to do this is to outsource the design and manufacture of product subsystems to companies that specialize in each particular type of part. Established manufacturers of key subsystems will have not only design and manufacturing experience but also a library of reference designs to call upon, further cutting nonrecurring expenses.

Electronics Outsourcing

The outsourcing of manufacturing functions that has been predominant in the electronics industry since the 1980s is only now beginning to gain a foothold in medical electronics. Medical OEMs traditionally have maintained full manufacturing control and complete facilities. Hence, electronics manufacturing service (EMS) providers view the medical sector as a relatively untapped market of new OEM customers. Frost and Sullivan projected that the U.S. medical device market—including both electronic and passive devices—would reach $8.6 billion in 2008.¹ EMS providers are targeting the electronic portion of the medical device market for future growth.

These specialists can help medical OEMs address many market pressures as they offer such benefits as improved efficiency, faster time to market, cost reductions, enhanced quality, advanced production technology, and spare capacity. EMS providers use aggregate purchasing power to get better prices and a more stable supply of parts. Outsourcing of subsystem manufacture allows medical OEMs to focus on their core competencies, which are generally product design, product development, obtaining FDA approvals, and sales and marketing. Frost and Sullivan also forecasts the North American medical EMS market to grow from $4 billion in 2004 to $11 billion in 2010, an increase that would be driven by both supply- and demand-side pressures.²

Most medical OEMs prefer to maintain manufacturing control of subsystems related to their core specialization, intellectual property, and product differentiation. In the case of a portable medical device such as a defibrillator, infusion pump, or multiparameter monitor, the core competency of the OEM is typically the electrical and electromechanical design of the product. Nonstrategic subsystems are the best candidates for outsourcing because they have fewer moving parts and are less likely to undergo change through the product life cycle. Such subsystems include the plastic casing, external sensors, visual displays, and the battery system. By outsourcing these subsystems, an OEM can take advantage of the EMS provider's technical expertise and its supply-chain strength.

The battery system may be taken as an example. One obvious advantage of outsourcing this subsystem is that a battery system supplier has already developed the engineering expertise and manufacturing competencies necessary to optimize these critical designs and thus can bring the best system design to market faster. Better system pricing is another benefit, as a battery system supplier gets substantial volume discounts on the most expensive part of the battery system, namely, the cells. Cells typically represent 50% of system cost.

There are some less-obvious advantages to outsourcing the battery, as well. Most of the engineering talent within a typical medical electronic device OEM has either electrical or mechanical expertise. The base component of the battery system, the cell, is an electrochemical device, however. OEMs do not generally possess advanced knowledge of cell chemistries or the grounds for selection of the optimal chemistry. Also, if improperly assembled, a battery system can damage the host equipment.

Makers of brand-name lithium-ion cells require their distributors and OEM customers to undergo a certification process, and these manufacturers enforce a requirement that their cells be used only in approved system designs. Reputable battery system suppliers have access to numerous cell manufacturers, whose cells they profile extensively in order to understand exactly how they will perform under varying conditions of temperature, vibration, humidity, and usage.

The process of cell selection is lengthy and expensive. It is economical for an OEM to undertake the process itself only if its cell volumes are in the tens of thousands.

Selecting an EMS Provider

If an OEM wishes to outsource the design or manufacture of a key subsystem of a medical device, it should consider several factors when selecting the contract electronic manufacturing services provider.

Most medical OEMs must be registered with FDA. The subsystem supplier also should be FDA registered and should already have passed at least one—and preferably numerous—FDA audits. This is because the production of medical equipment subsystems can be halted by the federal agency if the subsystem supplier does not pass its audit. FDA registration alone is not sufficient to ensure a steady supply of product to the OEM.

Successful completion of multiple FDA audits is the only true indicator that a supplier complies with all the requirements of the FDA quality system regulation in 21 CFR Part 820. The medical OEM should request copies of the supplier's establishment inspection report (the FDA inspector's log of a particular audit), its FDA-483s (listing an FDA investigator's observations of potential violations), and any FDA warning letters with their affiliated responses. Only in this way can the OEM be justifiably assured of continuing product supply from the subsystem provider.

Compliance with FDA regulations increases the fixed and variable components of a supplier's manufacturing cost structure. Aspects of FDA registration that increase overhead costs include extensive tracking of customer shipments, quality assurance inspections and sign-offs at every step of the manufacturing process, extensive product verification and validation, tight security on labeling procedures, and providing each of the customer's production runs with exclusive use of the product line. A medical OEM should be sure that its supplier has sufficient medical OEM customers so that the supplier's fixed cost of maintaining FDA compliance is distributed among multiple companies.

Lean Manufacturing

To remain competitive with Asian enterprises, manufacturers in North America continually reexamine their production processes, looking for ways to drive material and labor costs out of their products. Lean manufacturing has become widely known and is now implemented in many North American manufacturing facilities. Principles of lean manufacturing include special employee compensation for production-line kaizen events, just-in-time inventory management, application of total quality management techniques, and continuous improvement based on statistical analysis of production data.

The establishment of a so-called visual factory, involving the implementation of visual controls, can increase the efficiency of product assembly. Visual controls are means, devices, or mechanisms designed to manage or control a production operation such that any problems or deviations from standards are immediately visible, allowing corrective action to be taken immediately. An open factory floor and the use of visual indicators increase awareness of potential problems. Color codes and flashing lights that are used to indicate production interruptions can be seen from all areas. Also, an open factory floor with clear inventory bins provides good visibility for quickly determining production supply status.

A manufacturing operation organized according to the principle of build-to-demand combines quick, on-time delivery of inventory with production-line flexibility. This enables devices to be produced when they are actually needed, instead of ahead of anticipated need. The ability to build product to demand rather than to forecast reduces the amount of wasted material and lessens storage requirements.

Similar to kaizen in that it involves everyone in improvement efforts, and also Japanese in origin, 5S is a methodology for developing, organizing, cleaning, and sustaining a productive work environment. The 5S philosophy dictates that every production tool and component have an assigned location and that all tools and components reside close to the point of use. U-shaped production lines result in efficient component flow and facilitate personnel training.

Each one of these manufacturing modifications lowers the cost to produce devices in low to medium volumes. When applied in combination, they can enable a North American manufacturer to operate profitably and market its products competitively.

Conclusion

Current economic conditions, generated by both supply- and demand-side pressures, necessitate that medical OEMs pursue business strategies specific to low-volume manufacturing. The environment is conducive to these OEMs outsourcing nonstrategic portions of their products, but the contracted subsystem supplier must be one that exhibits design and manufacturing expertise, adequate purchasing economies, and a comprehensive understanding of FDA registration requirements, along with the ability to implement them. To remain competitive with Asian manufacturers, North American companies must find ways to improve their manufacturing processes to prevent material and labor costs from driving the product price up.

There are strong motivations for medical OEMs to keep manufacturing in North America, including the imperatives of quality and convenience. However, they must be ever diligent if domestic production is to be practical.