Wednesday, March 17, 2004

Outsourcing: Staying Afloat in the Transition Process

What it takes to avoid the rocks when moving some or all of an in-house manufacturing process to a contract manufacturer.

There is a popular quality management analogy that goes like this: A boat is attempting to navigate a body of water full of submerged rocks. The water is lowered very slowly, so the largest rocks beneath the surface are gradually exposed. After the boat passes those rocks, the water is again slowly lowered to expose the next set of rocks, which are then dealt with. This process continues until all rocks have been revealed and the conditions are safe for the boat to travel.

In this analogy, the water represents the manufacturing process and the rocks are quality problems or inefficient production steps. And of course, the boat represents the manufacturer.

If the process of transferring a production line to a contract manufacturer (CM) followed this cautious, incremental process, there would seldom be a problem. Unfortunately, outsourcing is more often analogous to dropping the water level all at once. When a primary manufacturer suddenly begins relying entirely on a CM for its product, rocks that went undetected prior to the transfer abruptly jut from the water, endangering the success of the outsourcing initiative. Extensive planning and preparation is required to avoid hitting those rocks.

Medical device and diagnostics manufacturers (henceforth "primaries") have outsourced the manufacturing of certain relatively simple products for a number of years. But three new trends have become increasingly evident over the past few years. The first is that primaries are outsourcing more products than ever, and as a result are forming more relationships with CMs. The second and more important trend is that CMs are upgrading their technical and supply chain capabilities. Whereas in the past they may have been limited to simple operations—such as assembling tubing sets—they are now developing the capabilities to manage entire supply chains, and to assemble or even help engineer more-complex products. Finally, there is the sheer growth of contract manufacturing capacity. Some medical device CMs are expanding their operations in excess of 20% per year.

The increase in manufacturing outsourcing is driven by reduced margins in the industry, strategic focus, and the search for growth in new markets around the world. Some primaries are concluding that their strengths reside in design and marketing, making selective manufacturing outsourcing a logical move. Others are realizing that their core competencies lie in certain technical manufacturing capabilities, and so they outsource other parts of the production process.

For example, a medical device maker might decide to outsource some of its older, more stable products so it can focus its operations on newer, more technically complex products with higher margins.

A primary contemplating manufacturing outsourcing must consider which operations it will outsource and which it will retain, how the relationship with the CM will be managed, the incentives to put in place to obtain the desired behaviors from the CM, and how the outsourcing will affect future product changes and improvements.

Because medical device and diagnostics enterprises are ultimately responsible for any product they sell, regardless of whether it was manufactured by a CM, quality assurance and legal liability issues also come prominently into play. How tight and reliable are the CM's quality systems? How well did its operations fare in its last FDA audit? How does the CM manage suppliers, inspections, labeling, and sterilization?

Once the production-line transfer to a CM has started, there is often little or no time to respond to unforeseen issues, such as quality problems, supplier shortages, or inflexible regulatory lead times around the world. 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 moving an in-house medical device manufacturing operation to a contract manufacturer. The observations and advice are based on a long record of success in planning and implementing successful production-line transitions for medical device and diagnostics firms.


Define purpose for outsourcing—cost, strategic focus, access to new markets.
Define the scope of what will be outsourced (e.g., which products, quality and supply chain functions, manufacturing operations, etc.).
Enlist senior management support.
Build a cross-functional core team that will manage the selection and transfer process.
Identify potential contract manufacturing partners.
Narrow potential partner field down to a few semifinalists.
Develop a detailed request for proposals (RFP) and submit to semifinalists.
Conduct contract manufacturer reviews, including detailed site visits and reference checks.
Evaluate RFP responses and findings from contract manufacturer reviews (keep in mind the purpose for outsourcing defined above).
Select contract manufacturing partner.


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 advantages, or the ability to tighten its strategic focus.

The second key to success is the selection of an appropriate CM partner. The winnowing process should be handled by a small, cross-functional team that performs progressively more-detailed due diligence as the pool of candidates is narrowed. This due diligence should include site visits, reference checks, and detailed requests for information from all prospective candidates.

What are the company's key 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 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 to avoid trans-Pacific distribution costs.

Organizational compatibility is another important issue. Primaries should meet with managers at various levels within the CM's company to get a reading on organizational fit, compatible styles of communication, and so on. Is the fit close enough that the CM under consideration could become a partner in the planning process?

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 should the outsourcing be accomplished in logically time-phased stages? Which support operations—planning, sourcing, or distribution—will be outsourced, and which will remain with the primary? How, for example, will postmanufacturing operations such as sterilization and distribution be handled? Which company will procure components and take responsibility for component quality (supplier audits, annual inspections, etc.)? How much flexibility will the CM have in setting its own manufacturing schedule? These are all questions that must be asked—and answered.

Manufacturers must start thinking early about the organization within their company that will manage the CM partnership after the transition is complete. If at all possible, the same people who are responsible for managing the transfer at both the primary and the CM 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—production planning, materials and components sourcing, manufacturing, product sterilization, and distribution—will work, both during and after the transition. Pay special attention to the specific operations that are going to change, which will 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 the supply chain processes. Manufacturing operations are relatively easy to map, since they are usually embodied in the primary's standard operating procedures (SOPs), but it is equally important to map the processes for managing planning, sourcing, and distribution.

In addition to a formal contract, primaries should write a joint service agreement (JSA) that clarifies how the joint operations will work. This is to make doubly sure that both parties clearly understand their roles and responsibilities before the transition begins. 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 in avoiding one of the most dangerous rocks. Customers will not accept service interruptions of any kind. Furthermore, any supply problem, whatever its nature, will be blamed on the primary's "obviously ill-considered" decision to move to a CM.

Essentially, there are two options for keeping customers properly supplied during a production-line transition. One is to build extra manufacturing capacity pretransfer, so that sufficient manufacturing capacity will be available at any time to unfailingly meet customer demand. The second option is to stock extra inventory in advance of the transfer in order to cover any supply shortfall that might occur while the manufacturing lines are down during transfer.

The choice depends on the cost and time required to build and qualify new production equipment, the level of excess capacity of current production operations, and the product shelf life (versus the planned transition time). Creativ- ity in combining the choices can have significant benefits, both in terms of reduced capital outlays and increased transition speed.

For example, during a manufacturing transfer operation, a set of transfer "waves" could be established, in which the CM deploys limited staff among just the critical receiving and validation operations. This would effectively allow the primary to transfer multiple sets of operations in parallel, rather than serially, potentially speeding the transfer by months.

It is important to remember that the supply of components going into production (whether from the primary or the CM) also has to support the selected transfer strategy.

Also, if multiple production lines are going to be transferred, primaries should 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 developed 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 each production 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 personnel to understand the transition's operational details and timing so that they can confidently answer questions from concerned customers.

If at all possible, each team member on the primary side should have a peer at the CM company. These "peer pairs" can work out how their respective operations will function during and following the transition, and then report their solutions 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 validations, 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 operational decisions as they arise. For example, if improvements were planned for the products to be outsourced, the transition team may need to decide whether to complete those improvements before transitioning the production line or after the transition, or to postpone the improvements until a more operationally stable time.

Manage the Transition. Regular and frequent core team meetings are important in tracking the progress of the manufacturing transfer and quickly resolving problems as they emerge.

The detailed master plan created at the start of the project should include all the major steps performed by all the functions in the transition process. Most any project-management software will do for creating such a master plan. Enough detail should be incorporated so that the plan reflects all of the operations that need to be performed, especially the interdependencies among the operations involved.

The entire core team should review this plan 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 the interdependent operations, will be affected. Reviewing the master plan at each core team meeting is a good idea as the transition proceeds.

Make "Go/No-Go" Decisions. The object of go/no-go decision meetings is to determine if the team is truly ready to move the first production line, or if additional work needs to be done before the line is transferred. Appropriate senior representatives from the key functions should attend, as well as the entire transfer team. 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 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 the CM. This way, there is assurance not only that the primary is ready to transfer the production line, but also that the CM is ready to receive it. If multiple lines are being transferred in waves or phases, a go/no-go meeting should be held before each line is transferred.


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, as they will win or lose equally. There must be no holding back of relevant manufacturing or supply chain information. The CM must fully understand the operation it is taking over, and know where the potential problems lurk. Early on, the primary and the CM should structure a gain-sharing agreement that addresses such issues as how the two parties will split the gains from reengineered production operations, and how they will deal with—and who will absorb—any component cost increases, should they occur. A good gain-sharing agreement is extremely important to forging a successful relationship.

Both the transition to contract manufacturing and the posttransition period 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 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, actual versus planned ramp-up schedules, transition dates for production lines, and capital, operating, and transition costs.

One idea is to build a scorecard that depicts the critical transfer metrics in graphical form. Each graphic depicts 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 is proceeding in critical terms.


Moving a production line to a CM without negative impacts on product supply or quality requires diligent planning and careful management. 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 processes, the right staffing, and the right planning, the rocks that are bound to emerge during transition can be spotted and avoided, with time to spare.

by:Larry Strauss