01 Mar Medical Device Manufacturing Centers of Excellence: Time to Make the Move?
By Steven Afshar
Today’s medical device manufacturers face unrelenting cost, quality and service expectations. Pricing and reimbursement pressures, an ever-shifting regulatory environment and complexities associated with increased acquisition activity only add to the challenges of running a profitable and innovative company. In this highly competitive environment, maintaining or improving quality, service and margins requires transformational thinking and a focus on interconnectivity. To achieve objectives, industry leaders are continuing to develop global manufacturing strategies that optimize plant networks through the creation of Manufacturing Centers of Excellence (COEs). These centers bring core competencies, capabilities, technologies and cost/leverage opportunities efficiently under one roof.
The “Burning Platform” for Medical Device Manufacturing Centers of Excellence
The demands of the medical device manufacturing industry increasingly mandate a new operational model. Consider the following:
- Cost-down pressures are significant, with an industry-wide expectation of 5-6% annualized cost-down. (Only 2-3% can be achieved through greater leverage.)
- Products continue to enter the manufacturing pipeline with a relatively high level of instability. This leads to quality issues and diverts valuable resources toward fulfilling sustaining requirements.
- Product transfers create challenges related to investments, risk exposure, service interruption, poor quality, resource allocation/prioritization, etc.
- New products, line extensions and/or iterations are coming to market with complex new features.
- Pressures on margins and EPS are causing a shift in funding to R&D and marketing, with less investment available for operations.
A Low Cost, High Capability Solution for Manufacturing Innovators
The concept of Manufacturing COEs has evolved over the last two decades. Historically, plants were added to networks in high cost/high capability locations that were in close proximity to R&D, often as a result of acquisition. Once manufacturing stabilized, a second transfer occurred to a more cost- efficient location (with potentially a third move to a contract manufacturer). More recently, the life cycle model has evolved into a Center of Excellence approach, with products being launched directly into the low cost site.
Initial drivers for COEs have typically been tax advantages, market access and high capability. Examples include Ireland (tax, high capability, access to European markets), Switzerland (tax, high capability), Puerto Rico (tax) and Singapore (tax, access to emerging Asian markets – in particular China). The decision to create a new cost-efficient site was often made by one medical device manufacturer (early adopter/risk taker), and others then quickly followed. Clusters developed in targeted locations, particularly in Mexico, Costa Rica and China. The COE model (with direct R&D transfer to the COE) has worked particularly well for premarket approval (PMA) devices where transfer costs and risks are highest.
Manufacturing COEs then and now require stability, maturity and capability. R&D and design for manufacturability must co-exist with the creation of strong technical capabilities at low cost sites. COEs also demand a greater focus on centralization and/or a center-led organization structure with common systems and approaches (e.g., back office).
Fundamentally, COEs offer high capability as well as leverage and cost advantages. Attributes include:
- Unique core competencies (source of competitive advantage)
- Location advantage (cost/tax/access to emerging markets)
- Substantial leverage (management/shared services/administration)
- High workflow maturity and stability
- Common IT platform (ERP/MES) and quality/EHS systems
- Consolidated management of suppliers
- Strong manufacturing leadership
The key take-away? Clarity around strategic plants provides focus for investments in capacity, core competencies, capabilities, best practices and systems.
The Benefits and Risks of Manufacturing Centers of Excellence
The pressures facing medical device manufacturers are undeniable. But are COEs always the answer?
Key benefits of a Manufacturing COE include:
- Higher performance: Substantial cost savings, higher quality/service and more predictable relationships with regulatory bodies (e.g., FDA) that result in better compliance results
- Strategy execution: Successful strategy implementation at a lower risk by moving products directly from R&D to COEs, standardizing the process while managing higher complexity at a lower cost
- Overall business leverage: Significant leverage benefits including government/tax incentives, indirect support and large-scale operational cost reductions
- Operational execution and consistency: Promotes same systems and rigor across business units while creating a regional operational focus and a “find it once, fix it everywhere” philosophy
- Overall maturity acceleration: Improved quality performance, workflow stability and maturity as well as the creation of a continuous improvement culture
- Employee development and retention: Opportunities for growth within a region and development of solid engineering/technical competencies
- Supply chain/transportation: Enhanced inbound-outbound capabilities and compliance
Benefits notwithstanding, there are risks to pursuing a COE strategy, particularly around product roll-out.
When exploring the Manufacturing COE option, remember:
- In the absence of careful planning and execution, increased site complexity and scale could lead to a crisis.
- Poorly planned or executed COEs create regulatory, quality and cost risks, with fixes most likely requiring a change in leadership.
- Operations leaders face the challenge of managing short-term business needs while building for the future. The alignment of current capability and future needs is critical, as is skillfully managing different levels of complexity and different cost structures at the same site.
Site Selection and Development of Manufacturing Centers of Excellence
Site selection and development can dramatically impact the balance of COE benefits and risks. While the ultimate COE goal is the creation of core competencies and favorable costs, trade-offs between capability and cost can be expected at even the most carefully chosen site. Site core competencies include design for manufacturing, clinical/pilot builds, supplier management, supply chain management, subject matter experts and problem solving, product ramp and the ability to manage complexity, stabilization and other improvements.
Strategic locations for COEs center primarily in Central America, Southeast Asia and the BRIC countries, with site selection heavily influenced by interconnected, strategic considerations. Preferred characteristics (source of competitive advantage) for COE sites are cost advantages (direct and indirect labor, tax, freight), access to local markets (particularly emerging markets) and close proximity to R&D, a supply base and/or a distribution/customer base. COEs situated in carefully chosen strategic locations consistently achieve quality and service objectives while offering substantial cost/capability advantages (e.g., managerial talent, technical skills, stable business environment, incentives, IP, security, language, education and training).
Staying Boldly Ahead of the Medical Device Manufacturing Curve
As cost, quality and service expectations continue to press medical device manufacturers, the Center of Excellence model offers relief. Investment in a Manufacturing COE can result in the development of core competencies, technology and leadership while delivering substantial costs savings, creating leverage and improving quality, service and compliance results. For medical device manufacturers who want to up their competitive game, the investment is well worth consideration.
Are you considering a Center of Excellence for your medical device manufacturing company? We’d be happy to answer any questions.
About the Author
Steven E. Afshar has more than 25 years of domestic and international experience throughout the life sciences and high-technology industries. His accomplishments include the successful development and implementation of leading operations strategies and high performance manufacturing techniques. Before co-founding Accel Management Group, Mr. Afshar was a Principal with PRTM. His previous experience includes a variety of operating positions with IVAC Corporation (BD). Mr. Afshar graduated with honors from the University of Michigan with BSE, MSE and MBA Degrees. He is CPIM and CQE certified.