Top Procurement Strategies to Enhance Profitability

August 17, 2015


• Categories: Business Analysis, Supply Chain

To remain competitive in today’s global marketplace, the smartest medical device manufacturers are broadening their perspectives when it comes to contract manufacturing strategies for new product introductions. They are moving beyond reliance on simple, cost-per-piece metrics and are incorporating the value of risk reduction, working capital requirements, increased customer satisfaction and time to market into their business analysis in order to fully optimize revenue and margin potential.

Traditionally, the procurement process works like this: The design team fully engineers and specs out a new product. The finance and operations teams estimate the cost to manufacture the component pieces in-house and then procurement is given the specs and asked to bid out the component pieces. Vendors with expertise in low-cost, high-quality production bid on the specs, and the lowest reputable bidder is awarded the job. While this model may be fine for existing products entering the mature stage of their life cycle, it is a very myopic approach to use for new product development for at least two important business reasons.

1. Most of the opportunity to optimize value in new product manufacturing rests in the upfront stages of concept design and prototyping. By identifying time and cost efficiencies early, they can be baked into the product design and the process design to create an ongoing stream of cost savings. Leaving production specs flexible with respect to materials, configurations, process yields and the like allows contract manufacturers do what they do best: Design for manufacturability. 

   Opportunities to increase top-line revenue should also be part of the procurement model. For example, using a contract manufacturer’s dedicated resources for rapid prototyping may or may not result in a lower cost-per-piece during production, but it can generate one to two months of incremental revenue by moving the launch date to the left, not to mention the other obvious benefits of being first to market.

   The problem is that most converters and contract manufacturers are organized to service the traditional cost-per-piece procurement approach and lack the range of capabilities needed to fully optimize all aspects of the new product development process.

2. Direct manufacturing costs may represent only a fraction of the overall business opportunity. A narrow focus on cost-per-piece makes vendor selection simpler, but can leave significant value on the table. Looking at the broader, landed (or total) cost of a component can get you to the next level of margin improvement. A bigger picture perspective involves accounting for the working capital and overhead contributions associated with the piece. 

   Few OEMs take into account inventory-related costs when making contract manufacturing buying decisions. Negotiating smart stocking agreements that let manufacturing partners buy materials in bulk, have longer production runs, and maintain finished stock can deliver numerous benefits in addition to lower costs-per-piece, such as: Faster customer fulfillment times (as fast as 48 hours), elimination of receiving inspections on the OEM side, and a better ability to manage risk in volatile product and commodity markets.

Next-level Margin Improvement

How do you assess whether or not a potential contract manufacturing partner has what it takes to help you get to the next level of margin improvement?

First, look for contract manufacturing partners that have a New Product Introduction (NPI) Process. An NPI Process streamlines design to manufacturing by incorporating design and process engineering in one shop so the full range of issues related to design, prototyping, tooling, materials ordering lead times, etc. will be considered simultaneously and the benefits of concurrent engineering can be applied to generate the best possible financial outcomes.

Second, to break the “cost-per-piece” mentality of procurement, it is important to work with a partner that has the ability to deliver a total solution, from concept development through packing and inventory management. With more factors under their control, they can recommend more ideas and strategies to add value and take out cost. The new breed of contract manufacturers is organized to service more sophisticated procurement strategies and provide a higher level of business analysis, particularly for new product introductions.

Conclusion

As production materials and processes become increasingly complex, and global competition creates additional margin pressures, forward-thinking medical device OEMs are adopting more sophisticated contract manufacturing strategies for their new product introductions. By shifting from a cost-per-piece model to a landed cost model of procurement, these companies are multiplying the number of factors they can include in the business analysis of outsourcing decisions, creating a sharper competitive edge.