Suppliers Speak to Economic and Regulatory Challenges in Global Expansion

Orthopaedic industry suppliers continue to expand globally as they seek to keep pace with customer demand and add customers in new geographic markets. Three suppliers convened at OMTEC® 2014 to discuss the challenges and opportunities they’ve faced from economic, regulatory and quality standpoints during overseas expansion, as well as the continual requirements that their medical device manufacturing partners ask them to meet.

The conversation focused largely on emerging and Asian markets, as all three suppliers have or are building facilities in Asian countries—Orchid Orthopedic Solutions broke ground in India in May; Paragon Medical opened its China facility in 2008 and Symmetry Medical chose Malaysia for its Asia-Pacific headquarters in 2007.

Andrew Miclot, Executive Vice President of MicroTechnologies, moderated the conversation that included Christopher Norbye, Executive Vice President Global Operations, Orchid Orthopedic Solutions; Greg Hall, Director of International Business Development, Paragon Medical and Thomas Barrett, Senior Vice President and Chief Commercial Officer OEM Solutions, Symmetry Medical.

andy-miclot-for-webAndrew Miclot: What challenges and opportunities—economic, regulatory and government-related—have you encountered in supplying to a global market?


Christopher-Norbye WEBChristopher Norbye: In terms of manufacturing set-up, the biggest challenge is finding the right people in the local regions. If you’ve got the right people, then things work out. For regulatory approvals, as purely a contract manufacturer, we must simply work with our customers and their approvals to supply products. Finally, you must set up your infrastructure so you have the same quality systems wherever you are, because you have to have one way of working with quality. That’s one of our biggest strengths.

Greg-Hall WEBGreg Hall:
On the regulatory side, and I agree with Chris here, for us there’s always a change control that we all have to live and work with every day and that presents its own challenges. For us, China was really new. We didn’t have anybody over there. We hired a consultant to help us navigate the waters. Just working with the local offices and local bureau of the province in which we were operating was definitely a challenge because we had to work with them to understand their requirements.

Three aspects that I’d categorize as challenges and opportunities would be logistics, finding good people and finding our own suppliers. First, logistics. We’re doing work with multinational companies in Europe and the U.S. and also in China, but now that you have this facility 7,000 miles away, whether you’re dealing with customers in Europe or the U.S., you have logistics. You have inputs coming in and outputs going out—whether that’s transportation, whether that’s file transfers.

Next, trying to find good people. When we started the company, if you asked how many employees had medical device experience, I would have said that it was a very small number, if any at all. The folks whom we’ve hired are willing to learn, but we had to teach them about medical devices, how to process medical devices, which ties into your quality systems. People are definitely one of the challenges.

Finally, and we still face this challenge today: suppliers. We’re very fortunate where we operate in the U.S., Europe and other countries that we have good tier II suppliers. When you go to China and start talking validations for heat treatment or whatever the case may be, they’re used to running automotive, in high volume. Now you’re talking about smaller lot sizes and different validation requirements. They look at you like, “Really? You want us to do those things for you?” We’re definitely better positioned and smarter now, but those are some of the early challenges that we faced.

Tom-Barrett WEBThomas Barrett: It’s interesting that we’ve all gone to different international locations in terms of a lower-cost alternative. From a manufacturing perspective, it seems like we’ve all had very similar challenges, and it goes back to the infrastructure that you have in place there. We take for granted our facilities here in the U.S. Some of our main facilities in Warsaw have been there for 35 years. Now all of a sudden you’re in a completely new time zone, new part of the world, and you’re doing things for the first time. It goes back to people. It goes back to training. It goes back to that technical learning curve. How do you bring them up to that learning curve? How do they understand the different requirements on validation and quality? All of these things are different when you have a new workforce that you’re basically pulling off the street and training. People are definitely a challenge in new sites. The other aspects talked about both from a quality and a regulatory perspective—a lot of these people have not done medical. We were fortunate in some cases where we are able to hire folks with medical backgrounds, which helped on both fronts. The last thing is the time zone challenge. We’re sleeping; they’re working, it affects logistics. If you want to support those facilities from the U.S., you have people on the phone from nine at night until one in the morning reporting those projects. You need to think about these things when you enter these new markets. How are you going to support those facilities? What are some alternatives; how can you do it differently to get them answers? If you want responses, you can wait days between an email and a phone call. It’s a challenge for us to remain responsive to our customers and at the same time execute and get the answers we need to do the quality job right the first time. We’ve all seen challenges in starting new facilities.

Miclot: Switching gears. There are so many acronyms: ISO, IEC, REACH, conflict minerals. What quality requirements are your customers increasingly asking you to meet?

Hall: Interesting question. I don’t know if there are any different requirements as far as multinational companies, but we’re seeing a lot of those requirements. We’re seeing more supply agreements and agreements in which they’re incorporating the conflict minerals and REACH. Whether we’re doing work in the U.S. or offshore in China, those requirements don’t necessarily change. One point I will make is that we’re working with the local companies in China that may not be multinational companies. We’re not seeing those requirements now; there are fewer requirements. However, give them time. Ten years from now, five years from now, as they start to increase their approval process to get products registered, you will see those requirements.

Norbye: I agree with everything Greg said. I don’t think it’s necessarily a bad thing, either. I’ve spent all my life in medical. I come from a big company background. These things were implemented in those businesses years ago. In the end, it’s getting the infrastructure up to manage and handle these requirements. For us to be competitive in the changing world, the Western-managed companies, we’re just dipping our toes in the emerging markets; we need to keep driving this forward because that’s one way we can excel. Keep on driving together with our customers.

VideoCallout WEBBarrett: From a quality perspective, we’ve seen a lot of requirements ratcheted up in terms of process validations and controls. Clearly, that’s an area of expertise, particularly around special processes and the types of validations, which our customers are now expecting of us. When we consider using a supplier, we need to hold them to those same standards because OUR customers expect us to fulfill those quality requirements.

Miclot: Perhaps it’s perceived as a barrier to entry for some small companies—bigger companies have a staffing advantage to take care of these issues. What advice can you give regarding global expansion? What are your plans for expanding globally?

Barrett: Our locations are chosen based on customer support. You need to understand customers’ strategies. What are they thinking about five years from now? Ten years from now? These aren’t five-year investments; these are 20-, 30-, 40-year investments in new locations. It’s important that when you think about locations, you look at where your key customers are going, as well as country infrastructure.

Hall: Tom hit a key point. It’s a big, long-term investment. When we first looked overseas, we looked at opportunities other than China, Europe being one of them. We realized that there’s only so much you can take on, and if you’re going to do it right, you want to make sure you can invest the resources and the manpower in making it a success. We’ll continue to look at other markets. We all know the emerging markets, and they present different challenges and opportunities.

Norbye: My advice based on experience: one, it takes a lot longer than you think. Two, find the right people before you plan. Three, learn. Because you don’t have your own product, sometimes as a contract manufacturer you can only take strategy so far. Then you have to say, ‘Let’s do it.’ I know it’s not what everybody wants to hear from a strategic point of view.

Personally, from an Orchid point of view, we’re interested in China. We don’t have the resources to be in many places at the same time. These emerging markets aren’t going to be low-cost manufacturing markets; we can already see how they’re evolving. It’s important from a strategic point of view to know how you can supply the local market and region. It’s not easy to send products around emerging markets; you have to learn a lot of local knowledge.

Miclot: Would you recommend tying in with a strategic partner to expand beyond where you are now?

Barrett: It’s a benefit if you have a strategic partner who is willing to work with you. You need to assess their strategy vs. yours and make sure you’re aligned in terms of objectives. Symmetry came up through a lot of acquisitions; we never expanded by working with a strategic partner. But I would expect that it would be a good alternative.

Hall: If you’re looking at setting up a facility in another country, you either call a consultant or call a strategic partner. You have to find someone who understands how to navigate the regulatory issues with setting up a company.

If you’re looking at a strategic partner, like a joint venture, hire a good lawyer. We had a couple of companies and partners that we considered for a joint venture. We didn’t get far into it, but we started looking at what happens if we want to get out. You could lose a lot of your investment depending on what would happen with that joint venture.

My advice is if you’re going into other markets, find someone who knows how to work within the system there.

Norbye: I agree. If you’re a $10 billion to$30 billion company, you can choose any entry strategy you want. Joint ventures have not been that successful.

Miclot: Do you see different pricing pressures in various markets?

Hall: Pricing pressure will continue. Dealing with local domestic companies in Asia, you see price pressures there. We expected that, but it’s pretty significant.

It’s complicated when you’re looking at shipping products to other countries where you have to look at the landed cost. It’s not only making the part; it’s getting the part to a different location, different territory, different region. That adds challenges.

Norbye: The conversation we try to have with the customer is what happens when you squeeze the stone empty of every drop. You can do that, but long-term, it doesn’t help. We ask, ‘Can we get together. There are a lot of ideas. How can we improve the process? How can we take the cost out? Can we share the cost? Would you approve a process change?’ We see more of our customers try to percent the whole cost of the project. As the supplier, we would do that; it usually helps both the customer and us. We know our customers are receiving price pressure, which wasn’t as relevant five or ten years ago in the orthopaedic industry. The U.S. is still a high-paying market vs. Europe. You get paid more in China than you do in Europe for products. It’s interesting; different pockets have completed different models. Of course there’s price pressure. 

Barrett: Healthcare costs are a problem everywhere. Our customers are receiving those cost pressures. In turn, we’re receiving those cost pressures. At the same time, regulatory and quality requirements are going up. All these things challenge our ability to make a cost-competitive product. In the future, we’ll work close together with our customer, defining better ways to manufacture our product. Focusing on the supply chain, there is still a lot of waste in our processes. There are a lot of handoffs; there are a lot of inspections. Over time, for us to get cost-competitive, we’re going to have to look at how the supply chains link better together and how we can eliminate some of the wasted, non-value added cost that’s associated with how we get products from our facility into the operating room.

Miclot: This is a good ending question. With Zimmer’s acquisition of Biomet and consolidation in the market, what will consolidation with customers and suppliers look like? Will the big get bigger? Are there places for niche suppliers?

Barrett: Orthopaedics is a nice market, an attractive, long-term market. With that said, there will continue to be a lot of consolidation. It’s hard to tell if the big will get better. I think we will continue to see consolidation on both sides. There is always a place for a niche supplier, one that is fulfilled and focused on serving a customer. I think customers will look to consolidate both from a quality and risk perspective.

Hall: I agree. We’ll continue to see some consolidation. I think you’re going to see consolidation in other countries, too. All three of us pointed out the investment of time when you start looking at new markets. ‘It’s going to take me X amount of years and X amount of dollars to get things set up, or I can look into an acquisition.’ I expect continued consolidation, especially on the supply side, especially looking at technology or capabilities you don’t have, and the cost of starting that up from scratch.

Norbye: I’m sure. Cash and growth is limited, so it’s normal behavior. I think it’s interesting that when you come here to OMTEC, you see there are a lot of small suppliers in this business. There are hundreds and hundreds of niche small and segment suppliers. I think there was a wave of consolidation. A lot of our companies are built on acquisition. We continue to look after niches; we don’t so much look at capacity anymore. We look at adding capabilities to the customers.

From Orchid’s perspective, we will act as a full value chain and handle the full project. The customer buys something from B, C, D, E and F and has to put everything together. Our customer might not want to handle 12 suppliers. They might come to us and say, ‘Can you be the primary supplier and take over the relationship between these tier suppliers?’ These things are happening as our customers are consolidating in different ways. It goes in cycles.