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“Gross profit soared 20 years ago,“ says Holger Gruenert, who worked for a well-known supplier for 13 years and then started his own surgical instrument business in 2005. “The gross profit of yesterday is not the gross profit of today.” Undeniably, the medical device industry has changed, but opportunities still exist and small- to mid-cap companies still flourish. The same conundrum of costs, quality and delivery remain, but corporate visions among large OEMs, small- to mid-cap OEMS and physician owned distributorships (PODs) create stark differences in the changing landscape.
We’ve experienced OEMs that navigate more nimbly, faster, leaner and more efficiently to achieve business growth quickly by focusing on their core business and outsourcing heavily. Other OEMs acquire market share through acquisitions and have more processes, people, products and bureaucracy. We’ve also experienced the niche of PODs, whose expertise and business relationships catapulted their growth. In panel discussions, OEMs have opined a litany of supplier issues they’ve faced. Likewise, a supplier faces issues in supplying to OEMs.
This article focuses on navigating amongst OEM players from a supplier’s perspective and shares advice for better collaboration with OEMs with differing visions. In order to do so successfully, here are three questions to consider:
Question #1: Do you view your supplier as a partner, or just another supplier?
Develop a “partnership” mentality. “A partnership is a relationship existing between two or more purposes who join to carry on a trade or business.” (IRS Publication 541) While we are not forming a legal entity, conceptually, being with a partner should produce a better result than acting alone. It forges a win-win relationship rather than a “me” mentality. Successful OEMs learn quickly that a “partnership” mentality reaps more benefits than a “me” mentality, as the latter burns out suppliers, causes resources to deplete and creates short-term solutions instead of long-term security. The benefits include better value to your bottom line because time allotted is more on your core business, more flexibility, and your supplier gains a better understanding of your core business so it can customize services to help you. The result: all partners can focus.
Select the right partner. Due diligence must be conducted carefully. Are your partners ISO 13485 certified? Do they understand the regulatory compliance rules? What skills, knowledge and service are they contributing to you? Selecting the right business partner requires an OEM to review quality processes the contract manufacturer has in place and a tour of the manufacturing facility. Selecting the facility down the road due to proximity is certainly the wrong approach.1 With technology, you should demand the best quality and the best customer service from your partner, and that can be done whether they are down the road or elsewhere.
Upon selection, OEMs compile an approved supplier list (ASL) that operates as the pool of suppliers to select sourcing. In recent panel discussions, OEMs voiced concerns about supplier issues. However, despite issues, some OEMs are reluctant to resolve these by adding more competent suppliers on their ASL. Perhaps this is because additional costs, documentation and time loom too large. Still, precisely why an OEM would continue in a less-than ideal situation when presented with new opportunities from outside sources that can provide flexibility, quality products, shorter delivery times and competitive costs remains a conundrum. Time will instruct. Growth fuels innovation. Status quo doesn’t.
Don’t get hung up on a one-way nondisclosure agreement (NDA). Some OEMs understand that both the OEM and the supplier are participating together. Some OEMs see themselves as the only party. A supplier also invests time, manpower, resources and technical knowledge at the outset, along with the OEM who provides drawings or other information. Just as the OEM has concerns relating to the IP for their devices, the contract manufacturer has concerns relating to IP involved in a specific process used in the manufacturing of the device.2 Thus, consider exchanging a mutual NDA to create a solid business relationship.
Question #2: Do your departments sync and communicate efficiently with the supplier, so that the finished product can be produced cost effectively?
Be cognizant of stopping momentum. Communication can either ramp momentum or stop it. Collaborating and sharing ideas with an OEM stimulates excitement and momentum in a project. Likewise, conflicting instructions among different departments, terminating a project then starting it up again, indecisiveness and last-minute changes that jeopardizes the final delivery time or timely completion of the project can stop momentum. Proper planning and an early entry of the supplier in the design stage can streamline the process and minimize momentum gaps.
Evaluate “cost.” Some OEMs define “cost” by the quoted price without weighing or understanding that hidden factors “cost” money: unproductive time and focus from mismanagement issues, substandard quality of products received, rejections and nonconformances, FDA findings, missed dates and ultimately, a compromised brand. The hidden factors may reappear long after a purchase order has been issued, but the “cost” definition usually modifies with seasoned experience. Be cognizant of the actual “cost” and don’t determine it solely by quoted price.
Question #3: Long lead times have been a common complaint among OEMs. Do you resolve a recurring lead time issue by seeking alternative sourcing, changing procurement procedures, utilizing new opportunities presented to you to find short-term or long-term solutions, or do you find the status quo continues?
Find ways and not excuses to seek alternative sourcing and different procurement procedures, or utilize new opportunities with a proven partner who can focus on delivering to you what you want.
At OMTEC 2013, Tom Solowczuk, Director of Global Sourcing at Alphatec Spine, summarized creative solutions about how an OEM can work with its partners by “creating strategic supply agreements with our suppliers, putting VMI programs in place, allowing the supplier to build ahead. We’ve been able to adapt to some of the changes in lead time and demand. A supplier can respond much faster if we’re able to give them six or nine months of requirements. If they’re able to bank some of that inventory for us, it can cut lead times down from 8-10 to 1-2 weeks, potentially.”3 The example demonstrates not only Alphatec as being adaptable, but that its suppliers were willing to be flexible, invest in them and allow each to focus on what each knows best.
In conclusion, the industry emerged from the recession with an outlook of growth and security. Partnerships are key. Flexibility and adaptability are key, as well as a focus on what each party knows best. The landscape will continue to change, but in this industry, innovation connects us and with its spirit, greater and better products shall continually emerge.
REFERENCES
1. Sean Fenske, “Not All Contract Manufacturers are Created Equal,” MDT, July/August 2013, 28.
2. Sean Fenske, “Not All Contract Manufacturers are Created Equal,” MDT, July/August 2013, 30.
3. “Voices from OMTEC 2013,” BONEZONE August 2013.
Stephanie J. Gruenert, Esq., serves as Legal Counsel for Pacific Instruments, Inc., a surgical instrument contract manufacturer and global procurement source in Honolulu, Hawaii. She previously practiced business and product liability litigation in Los Angeles, California and is licensed to practice law in Hawaii, California, and Rhode Island.
