When outsourcing is not the answer

Rita Medical Systems conducts go vs. no-go analysis

By Mark Zetter

Deciding when outsourcing is right—and when it’s not—can be a major undertaking for medical technology executives. But using a process that models a company’s possible scenarios can help to make even a complex decision simpler.

Rita Medical Systems Inc. (Mountain View, CA) is a medical device manufacturer that builds and markets its own radio-frequency (RF) generators and disposable needles for tissue ablation. Although the company had achieved high profit margins by manufacturing in-house, it was leaving money on the table because its high-cost Silicon Valley facility was operating under low-volume conditions.

Volumes were growing, but not fast enough to cover the company’s Silicon Valley overhead.

Eventually, outsourcing became a serious option. Seeking outsourcing partners, the company entertained proposals from several contractors. Proposals received from outsource providers were significantly less expensive than Rita’s loaded unit cost.

As sometimes happens to executives who have not outsourced previously, however, Rita’s management was struck by the amount of infrastructure that would have to be maintained in order to manage an outsourcing strategy effectively.

Still, even when the cost of internal functions necessary to support an outsourcing infrastructure was added in, outsourcing remained a cheaper option than continuing to manufacture in-house.  (See: Outsourcing Calculator for OEMs)

 

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Then came along a strategic opportunity to merge with Horizon Medical Products, a medical business across the country that was already producing high-volume medical devices. That company had a sales force synergistic with Rita’s, and its location in a rural area in economic decline allowed for low-cost manufacturing. Moreover, the acquisition would provide Rita with a 60,000-sq-ft manufacturing facility in Manchester, GA.

The company ran models in which manufacturing of its RF disposables volume was added into existing production at the Georgia facility along with the necessary increments in direct labor. Unit cost was naturally found to have decreased.

Also, because the two product lines shared overhead, Rita came close to realizing all the cost savings it would have enjoyed if it had outsourced. That made the merger more attractive for Rita.

The do-it-yourself control factor was a premium noted by Rita president and CEO Joseph DeVivo.

Rita’s go–versus–no-go analysis led to the best solution to its problem. Decision analyses of this type often yield surprising results, whether the company is a start-up or a major manufacturer with sustained product volumes.


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