Regional manufacturing can bring big benefits for medical device companies looking to get closer to their markets, but it’s not an easy model to implement. Elly Earls meets Johnson & Johnson’s Andreas Rühe to find out more about the advantages of building a global contract manufacturing organisation network, and how to do it right.
Constant innovation is crucial in order to stay one step ahead of the competition in the increasingly complex medical device sector, and one way companies can accelerate this is through the strategic use of contract manufacturing organisations (CMOs). Picking the right partners when operating in a global industry, though, is not only about quality, strategic fit and financial health; geographical location has an important role to play too.
To stay competitive in the ever more complex healthcare industry requires continuous innovation in products and processes, one reason the use of CMOs is becoming increasingly popular among medical device manufacturers.
“The strategic use of contract manufacturing can support the acceleration of innovation, and the more effective deployment of capital available to a company,” explains Andreas Rühe, supply-chain procurement leader in the global medical device segment of Johnson & Johnson, which operates its own facilities and has established partnerships with CMOs in every region of the world.
“As many CMOs have significantly improved their capabilities in the last decade, we believe we see an increasing degree of integration with external partners, because they can help their customers become more agile, more flexible, and more responsive to meet customers’ needs and improve the end-to-end supply chain.”
Johnson & Johnson certainly recognises that healthcare innovation is something that takes place inside and outside its walls, as evidenced by its focus on supplier-enabled innovation (SEI), a key goal in its supplier relationship management (SRM) activities, and one that has been proved to work time and time again.
Within the company’s diabetes franchise, for example, Johnson & Johnson has leveraged the innovation of its contract manufacturers in two specific areas to great effect. In packaging optimisation, a new, improved carrying case that increased the product’s value proposition and decreased costs by almost 50% was created, while by using the SEI of its lancer and lancet contract manufacturer, Johnson & Johnson was able to deliver a more painless experience to its customers when taking blood from their finger for testing, increasing its user base.
“CMOs often have capabilities and additional resources to bring innovation to customers, patients and consumers,” Rühe stresses, adding that, because of their importance to the company’s operations, choosing a partner is by no means a decision to be taken lightly.
“The decision to work with a certain contract manufacturer is often made in the new product development phase, and once it’s made, the relationship usually lasts for the entire life cycle of the product. That makes it critically important to put a lot of diligence into the selection of preferred CMOs with emphasis on quality and reliability. Then, to build and maintain these relationships, it takes time and effort from both organisations. There needs to be a clear commitment from both parties to invest in the relationship.”
Building a global network
In today’s globalised world, a handful of CMOs simply isn’t enough for multinational operators like Johnson & Johnson; it’s crucial to build up a network of partners to cover their entire geographic reach, and there are a number of considerations to take into account when choosing international partners.
“The medical devices industry is truly global. Regulatory requirements may change from country to country, but they do not typically trigger sourcing decisions,” Rühe notes. “The setup of the supply chain, the availability of raw materials, and logistics of the product are considerations when developing a contract manufacturing network.
For example, for products that have high electronics-component content, sourcing might predominantly come from Asian countries, as this is the main region in the world where electronics are supplied from.”
Natural disasters and political risks are also factors to be considered when engaging in different regions.
Once established, there are a number of benefits that the regional manufacturing model can bring OEMs, particularly when it comes to service. “Being closer to the markets and lower inventory carrying cost can be of great importance for products with short shelf lives or frequent forecast variations,” Rühe explains.
There are also significant opportunities to bridge cultural gaps when working with different partners around the world. “Our diverse culture, which is also reflected in our workforce, extends to our supplier base. Getting to know new cultures through sourcing activities can actually help us by bringing Johnson & Johnson closer to our customers’ needs,” Rühe emphasises.
He points to two key examples to illustrate the model’s advantages. In Europe, Johnson & Johnson outsourced the final assembly and packaging of a device to a CMO that enabled greater access to a key market, and resulted in achieving double-digit growth compared with the previous year. Meanwhile, in the company’s orthopaedics business, the team decided to partner with a contract manufacturer that provided a number of benefits, including capabilities to support several design remediation activities; providing emerging-market access with best-cost country advantages; and supply origination close to end customer demand, which led to faster reaction times.
Overall, it’s a process that can’t be viewed too simplistically. “Best-in-class companies assess the total ‘cost to serve’ as they develop their supply networks rather than looking at the piece price and logistics only,” Rühe remarks, adding that, while having a regional manufacturing model does provide many benefits, including being closer to the market, it’s also crucial to ensure that these products are registered or have the ability to be manufactured at another location to ensure business continuity.
Making partnerships work
There are several key pieces of advice Rühe would offer any OEM looking to get started on a new outsourcing model. The most important one? Taking time to find a partner company whose strategic objectives and culture are closely related to your own.
“As the nature of contract manufacturing partnerships in medical devices is long term, it is essential to look for alignment in company culture and values, as well as for common focus on quality, reliability and innovation,” he stresses. “Trust between the two companies is the key success factor in generating value beyond cost reduction, and trust is driven by accountability and transparency. Management needs to speak a similar language and objectives ought to be shared on a top management level down to the operator level on all levels of both organisations.”
One way Johnson & Johnson has prevented quality issues, identified quality risks and improved the quality performance of its supply base has been through the creation of its proactive J&J Supplier Quality programme. Key focus areas are high-risk suppliers, strategic/preferred partner development, new suppliers, and suppliers with compliance-related issues. The company is currently in its fourth year of deploying 17 practices with its contract manufacturing partners around the world, and, over this time, has delivered three consecutive years of reductions in supplier-caused field actions as well as seeing a decrease in supplier non-conformances.
It’s also essential to have in place a clear list of selection criteria that can be shared fully with potential partners, including quality, technical and innovation capabilities, geographic location, strategic fit and financial health.
Then it’s time to think about costs. “You need to review the total end-to-end costs of in-house versus outsource to avoid any future hidden costs,” Rühe advises, adding that it’s equally imperative that the contract provides you with full transparency of costs, including materials, overhead and profit.
When a suitable partnership is in place, a formalised and robust SRM process is indispensable in order to guarantee the success of the relationship.
“For various functions of the organisations, there should be daily touchpoints, monthly SRM reviews and yearly ‘top-2-top’ management reviews,” Rühe notes. “The process needs to be well established within both companies, and supported through IT tools that help with monitoring the interactions.”
Finally, regular open and transparent conversations are key to all effective relationships, and OEMs should be open to explaining any internal limitations and complexities to their suppliers, as well as any changes in strategy that could affect the way business is conducted. “We have also found that it is very impactful to bring the voice of the ultimate end user of our products – the patients and consumers – into the relationship to remind us all that, in this industry, we are working to help people lead happier, healthier and longer lives,” Rühe concludes.