Outsourcing for medical electronics

Building tomorrow's IT-based medical products won't be easy, but manufacturers will have a lot of help

By Mark Zetter


The group of contract manufacturers known as electronics manufacturing services (EMS) providers has long coveted the business of medical device manufacturers, and in many respects that fit is a good one.

The number of medical devices that make use of sophisticated software and integrated circuitry has been on the rise for more than a decade.

Medtech manufacturers can find it difficult to justify full-time staffing for assembly of complex products that are produced in relatively low volumes. And, especially important for EMS providers, this class of subcontracting would seem to hold the promise of good profit margins.

In other respects, however, the connection between medtech manufacturers and EMS providers is a distant one. Medical product manufacturing is a global industry that is expected to reach nearly $190 billion in 2004, with estimated annual growth of 6.5%.(1)

But the amount that medtech companies spend on manufacturing is only a fraction of that sum—and even less is devoted specifically to medical electronics.

EMS providers that have taken the time to review such numbers might be forgiven for losing the gleam of dollar signs in their eyes.

Meanwhile, the global market for electronics manufacturing services in 2003 was roughly $90 billion, a total that is expected to grow to $132 billion by 2008.(2) So even if EMS providers don’t exactly consider medtech companies to be small potatoes, many have adopted a circumspect attitude toward the revenue potential of the device industry.

But all of that could be changing. This article looks at emerging trends affecting the development of medical electronics and how they may also influence the relationships among medtech manufacturers and EMS providers.

Changing Drivers

In the past, the primary force impelling medical device manufacturers to consider outsourcing their electronics manufacturing operations has been cost. Outsourcing such operations to EMS providers yields average cost savings of 10–15% when compared with a manufacturer’s costs for building and maintaining equivalent services in-house.(3)

However, EMS providers have been active in promoting other benefits of outsourcing as well. At a time when many medtech companies of all sizes have been pressed to minimize unnecessary expenses and eliminate wasteful operations, many functions traditionally performed within a company’s own walls have come under intense scrutiny. In some cases, company leaders have discovered that they can better concentrate on their company’s core competencies if they outsource certain noncore operations. Electronics manufacturing is often considered such an outsourceable function, and EMS providers have benefited from this trend.

By supplementing a company’s in-house research and engineering functions, outsourcing also offers advantages in terms of project scheduling. Expedited time to market is a benefit that is frequently highlighted by specialized outsourcing firms, including EMS providers. For medtech companies seeking a first-mover advantage, or those simply trying to meet the needs of a fast-paced and competitive market, speed to market can be a key factor in determining whether to outsource.

EMS providers have also captured the attention of medtech manufacturers by offering a range of services through facilities operating around the world, particularly in regions with low labor and overhead costs. A number of EMS firms can efficiently transfer full production of a manufacturer’s product from a factory in North America to one on another continent. When it comes to meeting the needs of the global medtech marketplace, multinational EMS providers that are able to penetrate new growth areas in China, India, and other emerging markets have a distinct advantage.

Despite such financial and other advantages, however, medtech executives have been slow to heed the call to outsource their electronics manufacturing operations. One obstacle has been the growing use of variable-asset business models, which require medtech executives to assign value to business units—including outsourced functions—according to their contribution to a company’s bottom line. When applied to the outsourcing equation, such models raise issues related to the visibility, responsiveness, and performance of the outsourcing firm, as well as the manufacturer’s ability to manage such elements of the outsourcing relationship. The difficulty of getting to the bottom of such issues—and deciding how they affect the value of a company’s functional assets—can sometimes prevent manufacturers from acknowledging the comparative value of outsourcing.

Ask a Question Post In Forums
Post your article comments below. Please follow our Website and community Terms


Leave a Reply

TIP: Anyone can post article comments whether or not you are registered. But, if you register or log in you can attribute your posts to your user profile in GlobalNet Community.

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

You might also like:

Top 10 providers worldwide