Regulations focus sourcing

Medical imaging companies balance global sourcing and regulatory compliance.

By Wayne Forrest -- Purchasing, 3/2/2006

Procurement professionals at medical imaging equipment makers are faced with some interesting challenges these days. Demand for their products is at an all-time peak, according to those in the industry, but like all manufacturers, material costs are on the rise. Throw in the issue of regulatory clearance for all finished products and you've got a unique challenge: find high-quality suppliers that can produce quality components on time.

Hologic in Bedford, Mass. is a perfect example. Hologic makes bone densitometry and mini C-arm x-ray units in Bedford and has a mammography production facility based in Danbury, Conn. Newark, Del., is the site for the production of digital panels for its mammography and x-ray devices. The company reports that demand for its medical imaging products is way up and its backlog of orders continues to increase. As of Dec. 24, 2005—the end of Hologic's last fiscal quarter—the company's total backlog for all products increased to $140 million. This is the highest quarterly backlog in its history and a 37% increase over the backlog on Sept. 24, 2005.

That kind of demand intensifies Hologic's need to find suppliers that can provide the level of parts, components and manufacturing services it needs—on time—to meet regulatory standards no matter where the company markets its products around the world.

"Building boards, harnesses and machined parts is best done by companies that do it all the time in high volumes because they can invest the capital," says Mike Parilla, Hologic's vice president of manufacturing operations. "We outsource all of the manufacturing except electromechanical assembly and final integration."

While the majority of Hologic's suppliers are U.S.-based, the company is carefully inching toward global sourcing for both components and manufacturing.

"I am a strong advocate of the American workforce," Parilla said. "But if there is a market somewhere we can penetrate, maybe it makes sense to make some of those products in or close to that market."

Hologic is looking toward Asia and currently is evaluating three prospective suppliers in the region. As part of its due diligence, the company plans to perform very detailed audits with potential overseas vendors, reference their customers, inspect their products and spend time observing operations first-hand.

Hologic most likely will start with production of subassemblies of a certain system and evaluate the results before committing to the overseas manufacture of an entire instrument.

While the U.S. Food and Drug Administration (FDA) does not regulate where a medical equipment company sources its components from, the FDA and other regulatory bodies around the world will evaluate the efficacy of the final product, which can be impacted by its suppliers. That review process only heightens the need for high-quality parts and subassemblies.

Siemens Medical Solutions manufactures imaging equipment at four primary manufacturing sites in: Germany (home to its corporate office in Erlangen), the U.S. and the Pacific Rim. No matter where the production facility, Ernest Miller, Siemens' senior director of strategic procurement for the U.S., says the company's global sourcing strategy "takes the total cost into consideration, which includes the logistics costs of dealing with suppliers on a worldwide basis."

While the FDA may not be present at the ports when parts or subassemblies arrive, Siemens has to act as if the FDA is looking over its shoulder. "Our quality organization assures that the buyers have met these stringent guidelines before we can bring the product in," says Stewart Clarke, Siemens' director of commodity management. "Even though some companies have off-the-shelf products that we would consider bringing into the U.S., they still have to meet these stringent quality requirements for the medical industry."

The stipulation that outsourced components meet worldwide regulatory standards "is published very clearly and made part of any contract we have with our supply base," adds Miller. "The products we deliver can have a direct impact on the health of a person."

In Europe, where the CE Mark is required to market a medical imaging product, some regulations—such as environmental guidelines for potentially hazardous emissions—are stricter than the U.S.

"In testing our products, we make sure the power supply meets that stringent requirement of Europe, as opposed to the U.S." Clarke says. "We don't have to have two different versions of part numbers."

In the highly competitive global medical imaging market, outsourcing has helped both Siemens and Hologic lower manufacturing costs, reduce production cycle time and bring devices to market sooner. At its Danbury facility, Hologic in one year reduced the production time for its Selenia mammography system from four months to seven days.

"We'll stock some subassemblies—many of them on consignment—and key parts and build to a forecast," Parilla says. "We know what we need to build each quarter and we break that down daily and weekly and have set up [production] lines accordingly."

With Selenia's backlog of orders growing to 221 systems in late 2005, that strategy has helped Hologic ramp-up production from making four or five units per week to 10 units per week over the last year.

"Ninety percent of our standard product cost is material; 10% is labor," Parilla figures. "If we make a 10% reduction in labor costs, it saves 1%. A 10% reduction in material costs saves 9%. It certainly provides more bang for the buck."

Siemens' Miller says in the mid- to late 1990s, when a medical imaging system's life cycle was seven to 10 years, there was more opportunity for procurement year-over-year to take costs out of a product. "Now, you have to take the costs out in product design, because the life cycle is more along the lines of three to five years."