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Editor’s Note: This article appeared in the first issue of BONEZONE. We’ve decided to republish it because the advice remains true and helpful today.
The Japanese are fond of a quality management analogy in which a body of water is lowered very slowly, so that whatever rocks may lie beneath the surface are gradually exposed. This gives the boats floating on the water sufficient opportunity to avoid the rocks. Transferring a production line to a contract manufacturer (CM) is anything but such a cautiously incremental process. It is more analogous to dropping the water level suddenly and precipitously. The primary manufacturer abruptly finds itself relying entirely on the CM for the outsourced product. Problems that went undetected prior to the transfer abruptly jut from the water, immediately endangering the success of the outsourcing initiative. Extensive planning and meticulous preparations are required if all of the rocks lurking below are to be avoided.
Medical device companies (henceforth “primaries”) have outsourced the manufacturing of certain relatively simple products for a number of years. However, three trends have become increasingly evident over the past few years. First, primaries are outsourcing more products than ever, and are forming more relationships with CMs. The second and more important trend is that medical device CMs are upgrading their technical and supply chain capabilities. Whereas in the past they may have been limited to “simple” operations, they are now developing the capabilities to manage entire supply chains, and to assemble or even help engineer much more complex products. Finally, there is the sheer growth of contract manufacturing capacity. Some CMs are expanding their operations in excess of 20% per annum.
The increase in manufacturing outsourcing by primaries is driven by reduced margins, mounting competition and the search for growth in the new markets around the world. Some primaries are concluding that their strengths reside in design and marketing, making extensive manufacturing outsourcing a local move. Others are realizing that their core competencies lie in their complex manufacturing capabilities. We recently helped a medical device manufacturer arrange the outsourcing of some of its older, more stable products. Our client was then able to focus its operations on newer, harder-to-manufacture products with higher margins. The payback period for the initiative was less than six months, and the client’s total savings now exceed $10 million a year.
A primary that is contemplating the outsourcing of manufacturing must consider such issues as which operations it will outsource to the CM and which it will retain, how the relationship with the CM will be managed, the incentives to put in place in order to obtain the desired behaviors from the CM, and how outsourcing will affect future product changes or improvements. Quality assurance and legal liability issues come prominently into play.
Medical device enterprises are ultimately responsible for any product they sell, regardless of whether it was manufactured internally or by a CM. How tight and reliable are the CM’s quality systems? Have its operations passed an FDA audit? How does the CM manage its supplier inspections, labeling and sterilization?
When a production line is transferred to a CM, there is often little or no time to respond to unforeseen issues, such as tardy production line qualifications, supplier shortages or inflexible regulatory lead times around the world, before they become major problems. It is, therefore, crucial to have identified and worked around the rocks before the water level plunges.
The remainder of this article will examine what it takes to avoid the rocks in transitioning a medical device manufacturing operation from a primary to a contract manufacturer. Our observation and advice are based on our long record of success in expediting successful production line transitions for medical device clients.
Preparation and Partner Selection
First and foremost, the primary must clearly define for itself what it intends to gain from the outsourcing relationship, be it lower cost, access to new markets, technology or scale advantage or the ability to tighten its strategic focus. The second vital preparation is the selection of an appropriate CM partner. The winnowing process should be performed by a small cross-functional team that performs progressively more detailed due diligence as the pool of candidates is progressively narrowed. This due diligence should include site visits, reference checks, and detailed requests for information from all prospective candidates. What are your criteria for a successful relationship with a CM? Is lowest cost of prime importance? How important are the partner’s engineering or technical capabilities? How important is the CM’s location? If the manufacturing outsourcing strategy includes gaining inexpensive access to new markets, and the technical capabilities required of the CM are moderate, then the partner’s location might be the most important consideration. A number of medical device companies with significant markets in the Far East have product manufactured in the region in order to avoid excessive trans-Pacific distribution costs. Organizational compatibility is another important issue. Meet with managers at various levels within the CMs you are considering in order to get a reading on organization fit, compatible styles of communication and so on. Is the fit close enough that the CM under consideration could become a partner in your planning process if you so desired?
Define the Operational Scope
The first step in successfully transitioning operations to a CM is deciding which manufacturing operations will be outsourced, and over what time frame. Will every part of the manufacturing process be outsourced at once, or can the outsourcing be accomplished in logically time-phased pieces? Which support operations—planning, sourcing and distribution—will be outsourced, and which will remain with the primary? How, for example, will post-manufacturing operations such as inspection, final packaging and sterilization be handled? Which company will procure components and take responsibility for component quality (audits, annual inspections, etc.)? How much flexibility will the CM have in setting its own manufacturing schedule?
Start thinking early on about the organization within your company that will manage the CM partnership after the transition is complete. If at all possible, the same people at both the primary and the CM who are responsible for managing the transfer should be responsible for the ongoing relationship after the transfer is made.
Define Operating Rules and Responsibilities
It is critical to work through, in advance, how all of the elements of the product’s supply chain (supply planning, materials and components sourcing, manufacturing, product sterilization and distribution) will work, both during and immediately following the transition. Pay special attention to the specific operations that are going to change, which obviously include manufacturing-line and distribution operations. Who will be responsible for sourcing components, providing suppliers with forecasts, and qualifying or auditing suppliers? One way to ensure that all operations have been thoroughly reviewed is to map all of the supply chain processes. Manufacturing operations are relatively easy to map, since they are usually embodied in the primary’s SOPs, but it is equally important to map the processes for managing planning, sourcing and distribution.
In addition to a formal contract, we strongly recommend that you write a joint service agreement (JSA) in order to clarify how the joint operations will work, and to make doubly sure that both parties clearly understand their roles and responsibilities. Historically, a primary’s written contract with a CM tends to be a static document that focuses on launching the relationship—and on dissolving it, should that prove necessary. It does not usually focus on how the relationship will work, how difficulties will be redressed, or how the relationship can be strengthened and expanded over time if all goes well. The JSA is the ideal instrument for addressing those issues.
Plan Customer Supply
Determining how the transition team will handle product supply to customers during the transition is vital to avoiding one of the most dangerous rocks. Customers will not accept service interruptions of any kind. Furthermore, any supply problems, whatever its nature, will be blamed on the primary’s “obviously ill-considered decision” to move to a CM.
Essentially, there are four options for keeping customers properly supplied during an outsourcing transition. One is to build extra manufacturing capacity pre-transfer, so that total manufacturing capacity in operation at any time will unfailingly meet customer demand. The second option is to build up extra inventory in advance of the transfer to cover any supply shortfalls that might occur while the manufacturing lines are being transferred. The third option is to shut down the operation and move it so quickly that there is no effect on available inventory or customer supply.
This third option is seldom worth the gamble. This option will only work if the lost production volume from quickly shutting down and restarting the manufacturing lines is almost unnoticeable in comparison to customer demand. The fourth option is some combination of the previous three: building up an inventory buffer in case the quick shutdown/restart goes awry, for example.
Many companies choose some combination of options 1 and 2, but the choice depends on the cost and the time required to build and qualify new production equipment, as well as the level of excess capacity of current production operations. Creativity in combining the choices can have significant benefits, both in terms of reduced capital outlays and increased transition speed. In one recent manufacturing transfer operation, we worked with the client to plan a set of transfer “waves” in which the CM deployed limited staff among just the critical receiving and validation operations, effectively allowing the primary to transfer two sets of operations in parallel rather than serially, thereby speeding up the transfer by months.
Remember that the supply of components going into production (whether from your own operation or the CM’s) also has to support whatever inventory/capacity strategy you choose. If multiple production lines are going to be transferred, work through how the “waves” of transfer will be scheduled, and how they interrelate. For example, if the transfer of one line is late, will it affect the transfer of the next? If so, how? Whatever plan is deployed for transitioning the product supply needs to be robust enough to absorb delays in the transition, and to cover sudden increases in consumer demand. Moving the first production line is rarely a gradual process. Once the first line moves, the company is suddenly and conspicuously vulnerable to demand spikes. Planning must be thorough before the first line is moved.
Staff the Transition Team
Appropriately staffing the core outsourcing transition team is critical to locating the rocks before the water level plunges. The team should be cross-functionally staffed with people whose schedules allow them to commit for the duration of the transition project. The transition team leader should expect to devote 100% of his or her time to the project, and most of the core team members should plan on devoting at least half of their time. The team should include members from both the primary and the CM, as well as members from all of the internal operations that will be affected by the transition, including IT, Finance and Marketing. Even though they are not directly involved in transferring production lines, IT and Finance will need to change their processes to support the transferred operations. It is obviously important for Marketing to understand the transition’s operational details and timing so that they can confidently answer questions from concerned customers. (During our primary’s recent manufacturing line transfer, PRTM worked with a core team of more than 20 members.) If at all possible, each core team member of the primary’s side should have a peer team member on the CM’s side. These “peer pairs” can be tasked with working out how their respective operations will function during and following the transition, and then reporting their determinations to the core team at large.
The transition team must be empowered by senior management to manage all aspects of the transition, including its timing, the sequence of moves (if multiple lines are being moved) and the development of protocols for line validation, to name just a few aspects. In addition, the team will almost certainly discover in the course of the transition that some operations are not fully defined in terms of how they will work during or after the transition. In order to avoid slowing the transition process, the team should be empowered to make these operations decisions as they arise. For example, if improvements were planned for the products to be transitioned, the transition team may need to decide whether to complete those improvements before transitioning the product, after the transition, or to postpone the improvements until a more operationally stable time.
Manage the Transition
Regular and frequent core team members are important in closely tracking the progress of manufacturing transfer and expeditiously resolving problems as they emerge. Create a master plan at the start of the project, which includes all the major work performed by all the functions in the transition process. Any project management software, such as Microsoft Project, will do for creating such a master plan. Incorporate enough detail into the plan that it accurately reflects all of the operations that need to be performed and (especially) all of the interdependencies among the operations involved. Review and then re-review this plan with the entire core team until everyone’s “buy-in” is secured, and then review and update the plan regularly throughout the transfer project. If any tasks are slipping, or if management decides to speed up or slow down the transfer for some reason, this plan is the first place to look in determining how the transfer, and all the interdependent operations, will be affected. Reviewing the master plan at each core team meeting is very important as the transition proceeds.
Make “Go/No Go” Decisions
The object of “go/no go” decision meetings is to determine whether the team is truly ready to move the first (or the next) production line, or if additional work needs to be done before the line is transferred. Appropriate representatives from all functions should attend. The topics at these meetings should include not just the status and details of transition planning, but also supply planning and risk-mitigation planning. Setting fixed dates for go/no go decision meetings, and sticking to them, can be a “forcing function” that keeps the team on schedule. If the transition team has done its work effectively and has adhered to the schedule, no-go decisions will be rare.
Ideally, the core transition team should report to a steering committee made up of representatives from both the primary and contract manufacturers. This way, there is assurance not only that the primary is ready to transfer the production line, but the CM is ready to receive it. If multiple lines are being transferred in “waves” of phases, a go/no go meeting should be held before each line is transferred.
Build a Partnership from Day One
Both the primary and the CM need to view their relationship as a partnership from the outset. The sides must treat each other as equals, since they will win or lose equally. No hidden agenda. No holding back on relevant manufacturing or supply chain information. The CM must fully understand the operation it is taking over, and where the potential problems lie. Early on, the primary and the CM should structure a gainsharing agreement that addresses such issues as how the two parties will split the gains from re-engineered production operations, and how they will deal with (and who will absorb the cost of) component cost increases. A good gain-sharing agreement is overwhelmingly important to forging a successful relationship.
Monitor Key Metrics
The transition to contract manufacturing (as well as the post-transition) should be monitored using a set of performance metrics. Metrics help ensure that everyone agrees on what is important to track and measure. When properly employed, metrics maintain the momentum of progress toward well-defined goals, and they expose problems as early as possible so that corrective action can be taken. Metrics typically monitored in the course of a manufacturing outsourcing project include finished goods inventory levels, production rates, product quality and yield, and the actual versus planned measures of ramp-up schedules, transition dates for production lines, capital and operating transition costs.
During one recent engagement with a primary, we built a “scorecard” that depicts the critical transfer metrics, in graphical form, on just three pages. Each graphic depicted a specific goal or target versus the actual performance toward that target to date, giving managers a quick and clear picture of how the transfer was proceeding in critical terms.
Rising Rocks, Falling Water, Safer Harbor
Transitioning a production line (or lines) to a contract manufacturer without serious negative impacts on product supply or quality requires diligent planning and project management throughout the transition process. Every party involved in the transition, whether on the primary manufacturer or contract manufacturer side, must understand that no one is succeeding if anyone else is failing. With the right frame of mind, the right management process, the right staffing, and the right planning, the “rocks” that are bound to emerge during the transition can be spotted and avoided with time to spare.
Larry Strauss was Principal of Pittiglio Rabin Todd & McGrath when he wrote this article.
