Electronics JOLT medical landscape
Quality and performance requirements drive medical OEMs into high-tech arena.
By -- Purchasing, 11/16/2000
Partner with suppliers. Get them into the design phase of new products. Take advantage of all outsourcing opportunities, and take a few tentative steps toward the Internet.
These are all strategies medical OEMs are taking today as they strive to take advantage of the electronic tidal wave that is still revolutionizing the industry. It's a wave that is being made all the more complicated as manufacturers try to keep up with the changing global economy and the shortages of equipment that fuel the new technology.
"No [medical] product today doesn't have a very high technology or electronics content," says Laura King, general manager of global sourcing for the Wisconsin-based G.E. Medical Systems. "Product performance continues to drive it."
The industry's increased dependency on electronics has some players saying medical technology manufacturing has undergone a manufacturing evolution. It's an evolution that can be compared to the advent of computers. If yesterday's medical technology can be compared to typewriters, the technology can be compared to computers today. It's an evolution that absolutely mandates that medical technology have higher performance capabilities, higher electronics content, and increased value in the operating room.
Add to this the incredible pressure to keep costs down, and you have enough competitive juice to make the medical technology industry stand on its head. Both the manufacturers that produce the equipment and the purchasing managers that help buy the supplies know what this means.
"Companies can come out with great products all day long," says Rob Chioini, president and CEO of the Michigan-based Rockwell Medical Technologies Inc. "But if they are not cost-efficient, it doesn't matter. They won't be purchased."
Complex procedures
That this technology is becoming increasingly high-tech should come as little surprise. Damian Bianchi, mechanical engineer for Creative Product Development Inc., says medical procedures themselves are becoming more complex. Physicians and surgeons are constantly searching for methods that are less costly and less invasive. They need the technology that can bring this to fruition. "They are looking for better performance, lower cost and better technology in the medical industry," says Bianchi. "The procedures are becoming more complex, and the demand is there for more complex equipment."
Bianchi observes that these needs are having an almost exponential effect on manufacturers. Research and development teams are naturally trying to build a better, more electronic mousetrap. In this industry, that means taking existing technology and recreating it, making it capable of higher performance. This work has been enhanced by advances in the production of plastics, chemicals, metals and other commodities.
"You build on what's known and apply new state-of-the-art technology," says Bianchi." And the resulting medical technology is desperately needed as the industry continues to pump out devices that can detect or fight cancer or aid in cardiovascular research and treatment. The fastest-growing population in America today is people over the age of 65. This age group typically falls prey to cancer and cardiovascular diseases. Thus, the war has been declared. High technology is the weapon.
"In more and more ways, we are trying to find tools that are not invasive to a person," says Dennis Deutsch, director of purchasing for the Germany-based B. Braun Medical Inc. "We are trying to improve quality of life and attack the number-one killers first. And it takes high-tech to fight cancer and cardiovascular ailments."
The drive for electronic parts is causing intense competition among medical OEMs. Suppliers and manufacturers alike find themselves scrambling for high-tech parts like the computer chips that power components. Some companies say this drive is leading to nagging shortages, throwing wrenches into their plans.
"There's a lot of trouble with these electronics," says Dana Hatch, purchasing manager for the Massachusetts-based Vista Medical Technologies Inc. "There really is a big problem with these shortages."
Hatch says it considers Cisco Systems a big competitor. That company's ability to buy up vast amounts of technology, like computer chips, puts it ahead of the game in many ways. The ramifications of this competition are being felt throughout the industry.
"We are a small company, and it's hard running against Cisco," says Hatch. "They can buy up 30,000 pieces at a time, and it's driving the shortage. As a result, we have to make quick buying decisions based on these trends."
Keeping costs down
But can purchasing departments do even more in this increasingly high-tech, highly competitive environment? How can they keep costs down and quality high and still come up with intense technology that eclipses the technology that has been on the market for the past year?
In some ways, the buyers in this industry stand at a crossroad. Some buyers say the old methods of getting suppliers into the design meetings are even more imperative today.
But others are experimenting with e-commerce and the possibilities brought on by Internet-based buying. They are getting results. But today, many still describe these efforts as mixed at best.
Many say the trend toward electronics is guiding their efforts in three different areas. The trends, they say, are in:
Custom-made products,
Miniaturization, and
Higher electronic content.
Deutsch says these trends are enforcing the "reengineering" of the health care industry. And for him, the trend is pointing toward custom-oriented technology. Doctors and hospitals are making their demands known. They want devices that can handle specific tasks and get the job done better than before.
"Things are starting to get more custom-oriented," Deutsch says.
"With the advances in technology, we are spending more on research and development," Deutsch says. "People have money, the economy is good, and managed care doesn't need to grab a foothold anymore like it did."
More demand
As a result, Deutsch says, B. Braun is now seeing a demand for higher-performing hearth catheters and other equipment associated with electronics.
"Yes, it's more high-tech," says Deutsch. "A lot more products are used today with electronics."
Deutsch notes, for example, that B. Braun now makes an Inflow set that is used during knee surgery. The device utilizes a tiny camera, allowing doctors to observe the patient's bones and muscles on a television set.
"We can do surgery and watch it on television," Deutsch says. "More and more advances are going that way, with non-invasive surgery.
"This is all driven by the technological revolution," Deutsch says. "It is advancing so fast that everyone wants something better."
Dialysis equipment too is caught up in the push for medical technology that depends on high-performance electronics. Suppliers to this industry, like the Michigan-based Rockwell Medical Technologies Inc., find themselves trying to produce higher quality products at lower prices.
And this is no easy feat, given the nature of the global economy. FDA regulations are strict, making things challenging as companies reach out to different companies.
"You have to make sure that you are meeting the requirements, and that the products won't have an adverse effect on the human body," says Deutsch. "You know that if you don't have the quality, someone else will."
Rockwell Medical Technologies manufactures solutions and packaged powders that are stored in 55-gallon drums and used in dialysis. The company now manufactures electronic mixing devices that mix the solution on-site, making it unnecessary to have the enormous drums nearby. This eliminates the need for having an employee transfer pump-off fluid into a holding tank during dialysis.
"This reduces the cost to the clinic because it costs less to freight the product to the clinic," says Chioini. "Every drop gets used, and there are fewer deliveries."
A fast pace
Chioini says these types of advancements are coming at a faster and faster pace in the medical/OEM industry.
"I think we are constantly becoming more high-tech," Chioini says. "There are constant advancements in technology. This is basically determined from the advancement of the processes, the procedures out there. It will continue across the board for all medical OEMs."
Chioini says there is a payoff for all of this. He notes, for example, that about 20 years ago, people who needed to undergo dialysis did not live very long. "Nowadays, people are 80 years old and still on dialysis," he says.
"With research and development, a lot of money is being spent," Chioini continues. "Companies will try to recoup that cost, but all that matters is keeping the patient alive longer."
Deutsch says the trend toward miniaturization is one of the side effects of this electronics revolution. As the devices become smaller and smaller, they actually are becoming less and less expensive.
"Everything is miniaturized," says Deutsch. "It's smaller, more efficient and costs less."
"It's less expensive to make these products," Deutsch continues. "Everything is smaller, so it requires less raw material."
And if miniaturization is one trend, simplification can be another. Ironically, even while the parts themselves are capable of higher performance, Bianchi says there is growing pressure to keep their parts simple and less costly.
"If you try to stay simple, you get as much function out of single components as possible," says Bianchi. "Don't put in 100 parts if two parts will do."
But if all of these trends are putting on the pressure, how can manufacturers in this industry combat it with solid purchasing strategies?
Strategies
Frost & Sullivan is keeping its finger on these strategy trends. The firm is an international marketing, consulting and training company monitoring information technology, telecommunication and the medical technology industry. Today, analysts at Frost & Sullivan say large medical original equipment manufacturers are increasingly accepting and adopting outsourcing as a competitive strategy. Frost & Sullivan notes that as electronics manufacturing services (EMS) providers add to their service offerings and gain medical manufacturing expertise, medical OEMs are in particular outsourcing their manufacturing functions. Many EMS providers are aggressively targeting these organizations for their firms' business.
Deutsch of B. Braun Medical says outsourcing is not only becoming a mechanism for streamlining by some medical OEMs-it is also becoming a means of remaining competitive.
"We are able to outsource more products," agrees Deutsch. "It's less expensive to have them outsourced than made internally.
"Costs like this have a lot of people spending money on technology," Deutsch adds.
But outsourcing alone isn't enough. In its 2000 total market segment analysis, Frost & Sullivan notes that escalating health care costs are forcing the medical OEMs to better manage their resources. Meanwhile, Medicare reimbursements have experienced cutbacks and forced hospitals to be even more cost-conscious.
The medical OEMs have this much going for them. The good news for the manufacturers is that the medical device market is expected to continue to show robust growth, according to the report. Providers for the EMS industry have enormous potential. EMS firms are becoming more experienced at meeting the Food and Drug Administration's strict guidelines. The EMS industry is therefore picking up speed as EMS companies gain higher scale economies. EMS providers are projected to be rewarded with more business from the medical OEMs because of these efficiencies.
Growing competition
But at the same time, the growing competition in the medical industry remains intense. Medical OEMs are still under serious pressure to reduce costs by their competitors as well as hospitals and other end users. Intensifying pressure in the marketplace is pressuring net margins downward. EMS providers are looking for additional areas to cut costs as part of an effort to obtain more contracts.
Meanwhile, the medical equipment manufacturers continue to go high-tech and make products of higher performance.
"We need more horsepower within the system to get that performance," says King. "We are seeing that everywhere."
To deal with all this, companies like G.E. Medical are dedicating engineering teams to coming up with technology that offers increased value.
"We make sure we are on the technology curve," says King. "Someone can have our product out there for 20 years, and so we also have to make sure that we can always get replacement parts. Some of our parts will become obsolete, so we make sure our customers can keep their equipment running."
G.E. Medical Systems, for example, sells the Positron Emission Tomography [PET], a cancer-detecting scanner. The device searches for tumors or other cancer hot spots in a patient. PET is particularly important for treating patients who may have breast cancer.
"In all of these devices, there is an increasingly electrical component," says King. "The imaging has to have more ability. We've replaced what used to be film with electronics."
As all of this comes to the fore, good supply chain management practices are becoming ever more important. Medical OEMs like G.E., for example, are learning that they must adopt good purchasing strategies if they want to stay on top of the electronics trend. And making good partnerships with key suppliers is paramount.
"If you want the quality up front, the suppliers are key," says King. "They help in design, particularly in sub-systems and imaging equipment."
"Obviously, suppliers are a critical part of delivery," King continues. "They are partners in the global supply chain. They are an integral part to what we do. They are integral to our success."
The design phase
King says more than ever before, it is now imperative that medical-technology manufacturers get purchasing managers and suppliers into the design phase of new products. It places them in a position to make part recommendations early, suggest alternative supplies, and search for cost-effective steps.
"We have a sourcing person who is part of the new-product introduction team, and they set strategy with qualified suppliers," says King.
"We try to get them in as early as possible," agrees Bianchi. "It leads to reduced time-to-market, reduced time to actually have parts on hand."
Bianchi says, for example, that Creative Product Development Inc., which creates tabletop equipment for the medical technology industry, brought suppliers into the design phase when the company was creating new injection molding parts. The benefits were immediate, and the effect was that of a partnership, Bianchi says.
"We involved the molder up front, asked them to sit down and go over the design," Bianchi says. "We then tailored our part to meet their manufacturing methods."
In a meeting like this, Bianchi describes purchasing as an important "liaison" to the design process.
"The purchasing department would get involved, and they would be more or less in the background, a liaison, and then step in when we start ordering production quantities," Bianchi says. "They take it and run from there. The networking works pretty well."
Deutsch agrees. He says B. Braun has learned to abandon practices that forced multiple suppliers to bid on a project. He says the company has come to see this as an ineffective approach that almost snubs its nose at supply chain management. In today's high-tech race, he says, something more sophisticated is needed.
"The days of having everyone in the room and beating them up for the best prices are over," says Deutsch. "We are partnering with our suppliers."
Deutsch recalls how B. Braun partnered with Bayer, one of the largest suppliers of plastic resins. The company formed the partnership to gain a global edge.
"By doing so, we get global pricing," Deutsch says. "It is the same quality for all of our divisions. We work out long-term contracts in multiple locations throughout the world."
Partnering
Deutsch says Bayer representatives joined the B. Braun team as it prepared to design a new product.
"The supplier was in there; they made their recommendations and we showed them what we wanted to do," Deutsch recalls. "They made the decision on which plastic resins to use."
Deutsch says B. Braun was able to benefit from this because the Bayer team members could make recommendations early in the game. This sort of quick input could help keep costs for the project at a minimum.
"They were the ones that had the expertise," says Deutsch. "It wasn't something new to them, and we used their expertise."
Deutsch says this approach allows B. Braun to keep the quality level high. And this is a tightrope walk in today's medical OEM industry.
"It doesn't do anyone any good to get something cheap if it doesn't work" says Deutsch.
Cursory efforts
Many representatives from medical technology companies describe cursory efforts to work the Internet into their purchasing moves. Bianchi says representatives from Creative Product Development use the Internet to conduct searches for information and occasional vendors. But he sees disadvantages to using the Internet, as well as advantages.
"The advantage is speed," he says. "The disadvantage is you don't get to talk to somebody until you call them."
Some suppliers heartily agree. They describe their interest in medical-based exchanges as "scratching the surface." Some say the hesitancy is coming because the Internet is still in its infancy. Buyers, they say, are simply not used to going online and making deals.
"I don't know if people are comfortable with it. They want to talk to people at the other end of the phone," says Hatch. Vista Medical Technologies has signed on to the private exchange PartQuoteMedical.com, and Hatch is still skeptical about the returns she is seeing.
But on the other hand, Hatch says the site came in handy during some global supply searches she was forced to conduct. She was able to temporarily bypass the chip shortage and purchase some chips by going through PartQuoteMedical.com's site.
"There's a lot more legwork these days to find components," Hatch says. "And the Internet is a great resource. It gives you places to look and the inventories of multiple vendors."
The players behind these exchanges are banking on this sort of online success to catch on. Bill Malecki is the CEO of the San Francisco-based PrecisionMatters Inc., which launched PartQuoteMedical.com three months ago. PrecisionMatters is a developer, marketer and facilitator of specialized online collaborative marketplaces for engineers, buyers and suppliers of precision components within key vertical industries. The company has created online marketplaces that serve the precision medical device components, semi-conductor, fiber optics and aerospace industries.
Malecki says PrecisionMatters is trying to profitably enhance the collaborative relationship among engineers, OEM buyers and job-shop suppliers within the precision components marketplace. Its aim is to produce quality products and accelerated time-to-market of mission-critical precision components. The site is designed to attract medical technology suppliers from precise specialties, like laser machining companies and precision molding.
Increased efficiencies
Malecki says through the online solution, manufacturers can source, evaluate and manage procurement. He says those who use the site will create better quality, faster time-to-market, and receive increased market efficiencies and profitability.
Since it was created, PartQuoteMedical.com has linked up 30 different buyers and suppliers to participate. PrecisionMatters receives a transaction fee when a sale takes place.
"It's designed for buyers and suppliers to find each other," says Malecki. "This facilitates communication. The buyers put out their requirements, a request for quotes, define what they are looking for, and see a general list of qualified suppliers.
But such sites have come under increased criticism from different industries. And the high-tech medical technology industry is not immune to this.
Some suppliers say they are becoming too specialized to get much in the way of transactions off of the exchanges.
"I've checked into the exchanges, but I'm finding that most do not tailor to what we want to do," admits Kaushik Patel, office manager for the California-based Computerized Plastic Molding. "Traffic on these can be quite large, I imagine. But in my area, it would be fairly limited."
And many suppliers say they are skeptical about such trade exchanges, saying they tend to flaunt price over quality. It's a concern that Patel shares.
"My concern is they would group us in, without really emphasizing the differentiations that the customer might have," Patel says. "They push price more than they push specialization. It would be bad in my market because the guy making plastic spoons and the guy making medical devices would seem the same, and they are totally different."
But Malecki argues that PartQuote Medical.com focuses on building relationships, not flaunting price factors. It is here, he says, that the online exchange offers supply chain management capabilities and the type of arena that today's buyers in medical technology are seeking. Those who use the site observe in-depth supplier profiles that flaunt their manufacturing capabilities and quality qualifications, he says.
"It's all comprehensive, factual information about the supplier," says Malecki. "Through these relationships, we try to foster something better than a one-time event where price is king."
"We are focussed on building relationships between buyers and suppliers, collaborating," Malecki continues.
King says G.E. Medical Systems is beginning to explore possibilities with online exchanges. G.E. uses a supplier extranet, which helps the company set up collaborative relationships with suppliers. But she also says this system is new, and she is not sure how many suppliers have signed on.
G.E. Medical Systems is also partnering with Johnson & Johnson to create the Global Healthcare Exchange.
Deutsch says B. Braun Medical is attempting to communicate with its suppliers online. To some extent, the company has had some success.
"Some suppliers are online, and we will go to their Web site and check the status of a purchase order," Deutsch says. "We will check the routing of a shipment, what the ETA is.
Despite the skepticism, Deutsch believes it is possible that this sort of purchasing will pick up speed in this industry.
"Ten years down the line, most purchasing will be done online," Deutsch theorizes. "We will go to the supplier's warehouse online, see if what we need is in stock, and know what the leadtime is. It will make it convenient when it comes to tracking orders."
Pricing pressures motivating medical OEMs to outsource.
Increasing usage of medical devices is stimulating growth.
EMS provider competence inspires medical OEM confidence.
Research and development/marketing resource allocation fueling medical outsourcing.
Dynamic home health care market drives medical OEM outsourcing.
Medical OEMs expected to increase outsourcing as a result of EMS providers' efficiency.
Strong North American economy is promoting healthy industry growth.
Expanding global presence of EMS industry incites revenue growth.
Strict FDA regulations hamper EMS market.
Liability issues restrain EMS organizations.
Reimbursement for specific devices slows EMS acceptance.
Apprehensive medical OEMs slow outsourcing.
Price declines force EMS firms to cut costs.
Harsh competition between EMS providers drives service prices down, restraining revenues.
Source: Frost & Sullivan
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