What elements factor into the decision to outsource medical device design and production?
Jack Sandahl: Fundamentally, the outsourcing decision to use CDMO/CMO’s depends on goals within the OEMs to reduce costs, focus on core competencies, and to acquire capacity and flexibility. Relationships with CDMO/CMO’s develop when one or more of these goals cannot be met with internal manufacturing capabilities, or if there is limited capital available. Large medical device OEM’s generally have the technical and financial resources to build internal capabilities and the capacity to manufacture products. Smaller OEM’s and start-ups do not have the same resources. Protection of intellectual property is also a key factor in whether to produce inside or outsource. Primarily, OEM’s will look at the core competencies including what is visible and most important to the customers, and maintain control over those factors through insourcing.
How has the relationship between medical device companies and CDMO/CMOs evolved over the past decade?
While the growth in CDMO/CMO revenue eclipses the overall medical device industry growth by several percentage points, indicating a trend toward outsourcing, the level of outsourcing of specific products and technologies is less based on overall relationship between OEM’s and CDMO/ CMO, and more based on strategic objectives and factors that affect outsourcing decisions.
Outsourcing processes and technologies that are non-core is the best way to maintain that focus, and that is generally what is done. For cost reduction, it is most effective to outsource components or products that are segmented as less custom and more toward commodity, and to leverage the CMO ability to consolidate demand and provide better efficiencies. Smaller companies may not have a choice, lacking capabilities as well as resources, and may need to outsource the majority of their manufacturing.
A major change in the past ten–20 years is an explosion of small start-up medical device companies, working to bring innovation to the industry. Many of these companies do not possess manufacturing capabilities, so they leverage the CDMO/CMO to develop and bring products to market. Many of them also lack the capital and infrastructure to fully commercialise the products, so the most promising are likely acquired by larger OEM’s and integrated into their operations.
Over the years there’s been a move from traditional CMO’s handling outsourced production contracts to CDMO’s, which play a greater role in the design and development of products. What drove this change?
The story of outsourcing manufacturing is one of progression. The first stage is to cost through utilisation of low-cost labour zones, tax or other financial incentives, or placing production near markets. As the traditional CMO performs the basic manufacture of products, the progression is to drive continuous process improvement through manufacturing technology advances. This leads to hiring higher level engineering talent, and management that strives to use that talent to add more value for customers. Ultimately, partnering with customers in Design for Manufacturing (DFM) leads to partnering on actual product design. This trend is no different in medical device manufacturing, however, with more extensive quality and regulations the trend is more conservative and adoption is slower than other industries.
How has the shift toward development changed the core competencies outsourcing partners need to be valuable assets to OEMs?
Outsourcing partners for medical technology need to develop not only manufacturing technologies as core competencies, but they need to mirror the capabilities of the OEM with regards to understanding therapeutic needs, ability to align product designs to medical customer needs, and be able to support product life cycles from concept to design and approval. In other words, the CDMO needs to become a full extension of the OEM customer with regards to core competencies.
Has this shift from in-house to outsourced or collaborative product design resulted in cost savings for medical device companies?
I expect there are many instances where outsourcing has resulted in cost savings, especially where high labour content processes and products are transferred to low-cost countries. However, outsourcing is a much more complex formula than just cost reduction and is a strategy that also enables innovation through placing products and processes where capabilities match the products or processes best, while keeping an OEM’s own core competencies close.
What were the main drivers behind the increased use of CDMO/CMOs?
The main drivers behind the evolution in using CDMO/CMO in the medical device industry are the same as most other industries: cost reduction, focus on core competencies, and enablement of growth and flexibility.
The medical device industry is likely lagging behind other industries in adopting this philosophy, primarily due to the critical nature of the products and need to control quality. As pressures to be more efficient and cost effective have emerged in the health care systems in the past two decades, they have also driven the capabilities available at the CDMO/CMOs and increased trust in the quality systems at outsource suppliers.
Has the move to outsourcing brought benefits to patients? If so, how?
Setting up the best supply chains, whether insource or outsource, benefits the patients through quality, reliability, and value. When outsourcing also allows OEMs to focus on core competencies, the innovation is also enabled and benefits the patients with better products to support better health. Outsourcing and CDMO/CMO capabilities also allow innovative ideas from inventors to be realised into products without needing manufacturing infrastructure. All these factors benefit the patients.
Do you expect to see a further evolution in the relationships between the medical device industry and CDMO/CMOs?
Closer relationships between OEM’s and CDMO/CMO can only lead to better placement of development, products, and processes in the optimal places in the supply chain. While the industry will continue to be protective of core competencies and intellectual property, non-core processes and products will trend toward outsourcing.
To what extent will these changes (if any) be prompted by the pandemic experience?
Global industries have experienced the impact of supply chain disruption on performance and delivery to customers. The medical device industry is no exception. In my opinion, with the continued advancement of manufacturing automation I envisage manufacturing leaning toward more localisation, and also being closer to the distribution centres and customers.
Major Players in the Medical Device Outsourcing Market
- Cardinal Health
- Jabil
- Heraeus Holding
- Flex
- TE Connectivity
- Sanmina
- Celestica
- SGS SA
- Eurofins Scientific
- Intertek Group
- PPD
- Tecomet
- Integer
- Wuxi Apptec
Source: Valuates Reports
The Medical Device Outsourcing market size is estimated to be valued at $7.42bn in 2021 and projected to reach $143bn by 2028, recording a compound annual growth rate of 9.7%. Major producers in the sector include Cardinal Health, Jabil, and Heraeus Holding, which accounted for 15.52%, 9.03%, and 8.17% of revenue in 2019. The medical device outsourcing market is expected to grow in response to the need to reduce time to market.
Rapid time-to-market (TTM), time-to-volume (TTV), and time-to-profit (TTP) are critical for manufacturer competitiveness and customer satisfaction in the medical device industry.
Source: Valuates Reports
