How precision technology is resetting the parameters for U.S. contract manufacturers

By Mark Shortt

Medical device manufacturers today—OEMs and startups—are at the center of converging trends that are fundamentally reshaping their supply chains. The Covid-19 pandemic brought home the need to build resilience and redundancy, driving many companies to reset their supply chains by nearshoring or reshoring their production.

At the same time, an inflationary environment and the increasing adoption of precision technologies in medical systems are causing OEMs and contract manufacturers to be more selective in their partnerships, and even changing how they interact with each other.

Rapid and unpredictable changes have forced companies to rethink their old ways of doing business and seek out ways to bring new capabilities to their manufacturing partnerships. What are some of the new expectations for OEMs and contract manufacturers, and how can they increase their chances for success?

Design-2-Part spoke with Neal Walters, a partner in global management consulting firm Kearney’s Strategic Operations practice, to find out. Walters is a co-author of the recent paper, The great global supply chain reset is here. Are you ready to regenerate?

Following are excerpts of our conversation, edited for brevity and clarity.

D2P: In the paper that you co-authored, “The Great Global Supply Chain Reset is Here. Are You Ready to Regenerate?” you discuss some of the ways that medical device manufacturers’ supply chains have been changing in recent years, particularly after the Covid-19 pandemic. What did you and your co-authors see that prompted you to write the paper?

NW: I think the genesis was some of the fundamental supply chain shifts and supply chain challenges coming out of Covid,  and some of the insights that both OEMs and contract manufacturers gleaned out of those. And how that shifted their structuring of supply chains, and how they’re interacting with their partners, contract manufacturers, and others throughout the supply chain.

D2P: As they’re seeking to outsource to contract manufacturers, as well as reshore and nearshore, how would you say the manufacturing models for medical device companies are changing?

NW: Those models are becoming much more strategic. Historically, they were more transactional in nature, with piece price being one of, or the dominant metric. Now, with the emphasis on supply chain and maintaining supply to patients, to physicians, and to hospitals, they (OEMs and their contract manufacturing partners) are being more strategic and more integrated in how they work together—how they design and bring new products to market, how they plan their operations.

Traditionally, the OEMs and the contract manufacturers were more siloed. It was more, ‘Here, we want you to make X amount of this in this timeframe.’ Now, it’s a lot more integrated as they’re working together on new product design, to ensure that there’s input from the manufacturer, so that you can actually make a product at a cost point that you can make a profit when you sell it.

It’s not a matter of doing the research and then the supply chain development in siloes. It’s much, much more integrated, with expectations that the contract manufacturer brings those capabilities to be a design partner, be a planning partner in terms of how they plan and execute their operations for reliable customer service. So, there’s a much greater degree of integration, where the model is much more strategic versus a more transactional, cost focus.

Of course, if you’re transactional and cost-focused, you’re more likely to go to an offshore manufacturer because those variables dominate, especially in medical devices that have a high labor content and require a lot of manual assembly. Now, with a view on end-to-end performance and service, and service reliability being paramount, that leads to the reshoring. It’s not necessarily working with a different contract manufacturer but working with them to design your supply chain so that it’s much more reliable.

Another change that comes out of this is what I’ll call end-to-end visibility. In the past, companies might have thought they were getting supply reliability insurance by splitting their volume amongst two contract manufacturers. But if they didn’t have visibility of their full supply chain, sometimes the ultimate source of the raw material was at the same place.

A lot of companies learned in the supply chain disruptions during Covid that if all you saw was that first node (in the supply chain), your direct contract manufacturer, that might not be providing you any risk assurance at all. Because the next node, or the next node after that might combine, and at some point, you might have a single source of supply—most often, potentially, out of China or some other option or location.

So, the other change was the need to understand, right back to the ultimate raw material source, exactly where the supply chain is. Do we really have redundant supply, or supply assurance, or is that just a false flag? Because yes, we may have two Tier 1 suppliers, but if at the end of the day, everything goes back to a common node, then you haven’t mitigated any of the risk if something happens at that one node.

So, I think it’s those two things: the need to be much more strategic, and to have visibility from end-to-end.

Another thing that’s reinforced the need for more strategic relationships is, what’s happened with the recent inflationary environment. I think it’s shone the light on the need for a strategic relationship that is also thinking about how we treat each other when unforeseen events happen.

We’re having people come to some of our large corporate clients—these are smaller contract manufacturers—and say, ‘I’m sorry, you either take this price increase or I can’t continue to supply you.’ And in cases where that’s a critical part, they really have no option.

In these strategic relationships, that can lead to cost transparency—sharing the full cost structure. ‘This is what it will cost you and this is how that cost changes as we scale up in volume together, and this is a fair profit for you.’ It’s moving away from the role of procurement to extract every price concession they can, to the role of procurement to help develop a strategic relationship that results in each partner getting fair economic and other treatment in a rapidly changing and unpredictable world.

D2P: One of the points that you mentioned in the paper had to do with how companies can become better strategic partners by bringing new capabilities to the partnership. Can you talk a little bit more about that recommendation? What types of capabilities are needed?

NW: Partly because of Covid and partly just because of evolution, the days of innovation in medical device where R&D takes it [the product] to point X and then throws it over the wall to supply chain and says, ‘Figure it out’ are gone. It took 50 years to get the message across, but that doesn’t work in terms of being able to bring something to market quickly, at scale, and do it right the first time.

So, they’re really going towards these integrated, end-to-end teams, where, from the very early stages of product inception, when it’s still an idea on paper, R&D is working with supply chain, working with commercial, and figuring out, ‘How are we going to bring this to market?’

The legacy contract manufacturer was an expert in manufacturing—’Tell us what to make, we’ll make it, we’ll give it to you at our door.’ Now, if they’re going to play in the device market, they have to be much more than that. They have to develop capabilities in how to take a conceptual design at an R&D stage, and how to get it to a point where it can be manufactured cost-effectively and manufactured efficiently.

You need some design capability, some advanced engineering capability in terms of Design for Manufacture—how you can manufacture something effectively. You need planning capabilities, because it typically takes a complex medical device anywhere from two and a half to four years to go from the start of R&D to commercial introduction. This isn’t, ‘Draw it on paper today, and it’s in the operating theater tomorrow.’ It’s a complex process, and you need a lot of capabilities to participate. That’s what the OEMs want and need and clearly, that’s what the scrappy startups need.

The contract manufacturer has to be involved from Day One, so they need design capabilities, they need more advanced engineering capabilities, they need planning capabilities, and, in some cases, at the back end, supply chain and distribution. Because the OEMs are now saying, ‘We don’t want you to be a contract manufacturer, we want you to be a manufacturing partner.’

D2P: Your paper also recommended that companies should target the higher margin, nontraditional products. It seems that you see a lot of innovation poised to occur in the medical device industry. Is that right?

NW: Yes. We continue to see an accelerating pace, and I think the most exciting innovation is this whole field of robotically assisted surgery, which allows a degree of precision.

In the past, if you were doing a biopsy for lung cancer, you would have one instrument that you would put in, with a camera; take it out, and then go in to do the cutting and the biopsy. But you’re kind of doing it by memory. And the lung is a highly complex, with thousands of little, dead-end pathways. It’s not easy to get through. Now, with some of these robotic devices, you have an integrated camera and cutting tool. You know that you are getting the tumor when you take the biopsy. Before, you had no precise assurance. Now, you have precise assurance. You can take it out, do the testing, confirm that it’s malignant, and then, immediately, using the same device, deliver treatment directly to the tumor.

So, consider the value of that versus the chemotherapy where you blast the whole the whole body. Now, you can, with some of these advanced robotic techniques, minutes after doing the biopsy, have treatments delivered specifically to the tumor spot in the lung. And the impacts of that on the prognosis for the patient can be dramatic.

That’s just one example. Catheters that are dealing with aneurysms in the brain are another example. [Robotically assisted surgery has benefits] anywhere you need absolute precision, where being a millimeter off can be the difference between prognoses for the patient. The precision that robotically driven surgeries can bring just opens up a whole new opportunity of innovation.

We talked about the precision and navigation in the brain and the lungs. You can think of any other surgery where absolute precision is a benefit to the patient’s prognosis. The opportunities are almost limitless at this point, and I really expect there will be a fairly significant adoption in the next five to 10 years, of these robotically assisted procedures, and it will be really transforming.

Because now the medical device can’t just be a manual device that’s used by a doctor. It has to be part of this system, and integrate with a highly electrified, if you will, system to be driven. So, there’s a whole electronification of devices that’s necessary here, where you’re bringing together the physical device with the system’s engineering. It’s infinite opportunity, but far more complex.

And therefore, getting back to the contract manufacturer, the model of, ‘Hey, just tell us what to make and we’ll make it,’ doesn’t fit with the degree of innovation and complexity that’s going to be happening with devices.

D2P: It sounds like there’s a need for contract manufacturers that can not only provide design services, but also provide the precision machining, or fabrication, or whatever else is needed for these precision surgical systems.

RW: Correct. And that’s another driver of reshoring because the lower cost offshoring is really driven by low-cost manual labor in assembling these devices. There’s a point where there’s a degree of precision that a human being can’t provide. And so, you’ll have much higher degrees of automation in the manufacturing process. Therefore, when you have this high degree of automation, the cost penalty of being [manufacturing] in the United States versus Mexico versus Malaysia is far, far less—particularly in the case of Asia, when you add in the cost of transporting it over an ocean.

So, as you have this need for enhanced precision, that will really drive you to digitize and automate in manufacturing, which really shifts the advantage away from low-cost labor countries because the labor component will be much, much less. The engineering component will still be high, but engineers are much closer to cost parity globally. There are still massive differences in what low-skilled assembly workers are getting paid in the U.S. versus Southeast Asia,

But in this shifting, where the majority of the cost is the highly skilled technical worker and the equipment, the cost differential between location A and B is much less a factor than the proximity and the closeness of the supply chain and its being able to interact between the contract manufacturer and the OEM on a much more efficient basis. It just shifts the variables on which you make the decision. For the most part, the race to low-cost labor, other than for the very most commoditized medical devices, will be taken out of the question. It’s ‘Where can I get the best talent, access to the best and most precise equipment, and ability for my people, across multiple organizations, to work together effectively?’

D2P: Robotically assisted surgery is a great example of innovation. Are there any others that come to mind, that are maybe not as prominent as that?

NW: I think it’s the combination of drugs and devices. I didn’t mention the example on the robotically assisted surgery, where you can use the medical device to bring the drug to the precise point. It’s a convergence of medical device and the pharmaceutical world, particularly in oncology, cancer treatment, anywhere that precision is better. Now, we’re treating the exact tumor, whereas before, where there was chemotherapy, or radiation, we were harming the entire patient in the hope that we harm the cancer more than the rest of the body. You can see a world where we’re just much more precise and there’s much less impact on the patient going through that treatment.

You can imagine a round of chemotherapy compared to a bronchoscope. If you have a scope going through, into the lung, and delivering a precise dose to a precise location, you could probably do 90 percent of what you do in a regular day and not even have an impact. So, [it has the potential for] extending the length of life, but also the quality of life, for people who are undergoing treatment.

Cancer treatment is an area that I think is really being transformed. Anything to do with the brain, and brain injuries, is another—catheters going into the brain, delivering balloons and other devices to treat aneurysms, to treat other areas where you would want to be extremely precise, in the brain. Above all is the potential for robotically assisted surgery and then, the combination of medical devices and pharmaceutical treatments converging, and the ability to do those at the same time, versus being separate, historically.

D2P: How do you see the projected trajectory of the medical device industry going forward in the next five to 10 years?

NW: I see continued significant innovation and then, a need to consider, ‘How can we most effectively help the small innovators bring treatments to market quickly? What’s the role of venture capital and private equity versus the role of the OEMs buying these companies?’

I see the speed of innovation increasing. And then, the case is, ‘What’s the ecosystem that’s going to allow this innovation to be brought to market quickly? One of the OEMs has the catch phrase, ‘Our patients are waiting.’ There’s a tremendous amount of innovation, but historically, there’s been a complex path to bring it to the market.

I think there’s a tremendous opportunity for even a step change over what it is today, in the speed and the impact, the patient impact, of new and innovative devices.