March 4, 2020

The Math of Cost Reduction with a Contract Manufacturer

Medical device manufacturers have a lot of things to juggle. Not only do they design products, but they also source materials, manufacture parts, perform quality assurance inspections, test products, and more. Taking all of this on by themselves can sometimes seem like a Herculean task.

That’s why you see supply chain and purchasing managers advocating for contracting out the manufacturing of their medical devices. Not only does this free up time to focus on other aspects of your operation, but, they argue, it can also be a part of a cost reduction strategy in manufacturing.

Often, production managers cry foul at this, insisting that all the work of producing a medical device isn’t so expensive that using a contract manufacturer would result in any savings.

Who’s right? Well, the answer is that it depends. There’s quite a few variables to look out for when figuring the calculus of whether to switch to a medical device contract manufacturer.

The front-and-center costs of in-house manufacturing

If you’re going to manufacture your medical devices in-house, you’re probably aware of several major costs. There are the easily identified ones, like the cost of:

  • Buying your own machinery and tools
  • Operation and maintenance of that machinery
  • Hiring manufacturing workers
  • Managing those workers
  • Training them on each product’s manufacturing process

These costs are no joke, and they’re usually among the first things a medical device manufacturer looks at when considering the switch to a contract manufacturer. In particular, these can be a serious burden if you operate out of a high-cost country, like Japan, Australia, the United States, or others.

But there’s also a lot of less obvious costs that need to be considered as well.

The easy-to-miss costs of going in-house

Lower purchasing power

The biggest advantage that a contract manufacturer has over in-house medical device manufacturing is scale; contract manufacturers have multiple clients, meaning they’ll be sourcing material in larger quantities. They can leverage this purchasing power to seriously reduce their own costs and pass that onto you.

A greater supplier management burden

Having a contract manufacturer also means you only have to deal with one individual: without one, you’ll have to go through time and cost of creating purchase orders and invoicing for each supplier. You’ll have to store and manage all of the inventory from your multiple suppliers as well.

More quality assurance concerns

There’s also the need to perform quality assurance checks for each of your orders, as well as having to periodically conduct supplier audits. Not only do medical device manufacturers need to do this periodically to comply with federal regulations, it’s also a smart practice to ensure that you’re receiving a quality product, for liability purposes, and to evaluate whether you’re getting your money’s worth.

But if you have numerous suppliers, the costs quickly add up, not to mention that more suppliers raises the odds that you’ll bring on a supplier with quality control issues who’ll need to be audited more frequently.

The more suppliers you have to deal with, the higher these costs rise. Obviously, these costs apply to a contract manufacturer as well; so as a part of a cost reduction strategy in manufacturing, it would be foolish not to periodically audit your contract manufacturer or perform quality assurance checks. But the difference is you only have to do these once instead of 50 or 60 times.

The challenge of separating your costs out

Even if you’re keeping all of these factors in mind, it can be hard to get an accurate estimate of how much a given product is really costing you, especially if you manufacture multiple products at once. When evaluating whether they should build or buy, medical device manufacturers can be biased towards building their products.

How much does supplier management, quality assurance, training, inventory management, overhead, and all the other costs associated with building a given product really cost? It’s not always easy to determine this, which is why taking a sober and objective accounting of your medical device manufacturing process is critical if you’re interested in cutting down costs.

Of course, cost isn’t everything; maintaining high levels of quality is important as well. That’s why if you do decide to switch to a medical device contract manufacturer, you select one that meets the right criteria. After all, you’ll be trusting your contract manufacturer with delivering equipment that people will rely on to improve their health and quality of life.

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