More than labour in ‘Lowest Total Cost’

14 June 2010

Susan Mucha

I’ve been spending a fair amount of time travelling within Asia and looking at the total cost equation in outsourcing. I thought this would also be good topic for a column.

In March, I presented a paper titled, “Risk Mitigation and Singapore’s Supply Base” at the Medtech Manufacturing Conference in Singapore.

In preparing the presentation, I’d interviewed several medical device manufacturers to better understand what their concerns were when outsourcing in Singapore.

The top concerns were clustered in the following areas:
• Ability of supplier to meet product quality/regulatory requirement
• Ability of supplier to maintain configuration control/material quality
• Ability of supplier to meet the product’s technical requirements
• Ability of supplier to meet cost reduction targets without impacting quality or reliability
• IP protection
• Ability of supplier to support new product development
• Hidden cost surprises
• Ability of supplier to meet variable demand.

Interestingly enough, several of the companies I interviewed were sourcing with suppliers in emerging labour markets where these concerns were not readily addressed. In terms of executing strategies to mitigate these risks, the interviewees took a fairly hands-on approach. Audits were done at all potential suppliers and often the OEM’s international purchasing office (IPO) would continue to re-audit periodically.

The interviewee’s answers on whether or not industry-specific quality certifications such as ISO 13485 or compliance with FDA Quality System Regulations (QSR) 21 CFR Part 820 ranged from “all suppliers must have ISO 13485 certification” to “it is generally required but exceptions are made for strategic suppliers” to “use of our own quality system is required.”

Other risk mitigation strategies included using product development firms or their IPO personnel in the build site region to manage the product development process with the suppliers. Source inspection was used during the new product introduction process.

When adding suppliers, some firms used a strategy of midstream processing, where the new supplier did only partial product assembly until proven as a reliable supplier. In some cases, 100% incoming inspection of product built by new suppliers was done for a set period of time.

Manufacturing agreements with clear performance requirements were also cited as a way to mitigate risk.

The interesting dynamic in the strategies listed is that it is a mix of efficient and inefficient supply chain management strategies. While audits, 100% inspection, onsite source inspection and driving adoption of a unique quality management system mitigate risk, they also increase cost. While they are far less costly than a product recall would be, it is important to consider this type of cost in evaluating whether or not sourcing in a given low cost labour region really saves money, particularly when the project involves low-to-medium volumes.

My presentation also looked at tradeoffs between emerging labour markets, established labour markets and mature labour markets. The bottom line was that while emerging labour markets offered the lowest labour costs, a mature market typically offered the broadest supply base, most efficient suppliers and the highest levels of quality and responsiveness. Where labour costs are higher, suppliers focus on eliminating inefficiencies and associated hidden cost.

While Singapore represents a mature labour market, it has still managed to become a regional hub for medical manufacturing. According to Singapore’s Economic Development Board (EDB), as part of Singapore’s biomedical sciences sector, the medical technology industry doubled its manufacturing output from US$0.87 billion (S$1.5 billion) in the year 2000 to about US$2.13 billion (S$3 billion) in the year 2008. Over the same period, its manpower base also doubled from about 4,000 to more than 8,200 last year. By the year 2015, the medical technology sector targets to achieve S$5 billion, or about US$3.4 billion, in manufacturing output.

Today, Singapore accounts for 10% of the world’s contact lens production, half of the world’s thermal cyclers and more than 50% of the world’s microarray production. EDB statistics show that Singapore has emerged as a choice location in Asia for more than 25 global medical technology companies manufacturing high value-added products. More than 30 leading biomedical sciences companies, including the top ten global medtech companies, have located their regional and international headquarters there.

The reasons Singapore continues to attract companies include:
• Ability of OEMs to one-stop shop within the region
• Good supply base infrastructure
• Public-private partnerships for improvements in technology and supplier capabilities
• Business friendly environment
• Strong IP protection
• Logistics simplicity.

The public-private partnerships for improvements in technology and supplier capabilities is one area that I continue to find most interesting, in part because I simply haven’t seen government support initiatives in other countries that are as comprehensive and manufacturer-friendly as what is offered in Singapore. I mentioned Singapore’s Medtech Manufacturing Consortium in my column last year, when it was first announced. During my visit to Singapore in March, I attended a presentation on this consortium and was able to meet with some its members at the Medtech Manufacturing Conference.

The strength of the Medtech Manufacturing Consortium is its holistic approach. It is led by the Singapore Institute of Manufacturing Technology (SIMTech), a research institute of the Agency for Science, Technology and Research (A*STAR). This consortium is one of the several it has spearheaded. Its goal is to address the challenges faced by Singapore industry in manufacturing medical devices by establishing a framework to improve or create new medical manufacturing capabilities. It does this by sharing experience, knowledge and best practices in medical manufacturing technology, while facilitating research collabouration among consortium members and research institutes. The consortium isn’t limited to suppliers. It is instead a group of suppliers, medical device manufacturers, support service providers, government agencies, associations and universities. In short, the entire value chain is represented.

As a result, medical device manufacturers and universities can collabourate in driving manufacturing technology development within the supply base. Some of the participating agencies such as Singapore’s EDB and International Enterprise (IE) Singapore assist medical device manufacturers with market entry strategies which either launch new products and technology or modify existing products to better address regional market needs. In short, Singapore’s value proposition isn’t: locate in this region to find lower labour cost. Instead it is: locate in this region for competitive market advantage.

The Medtech Consortium has several electronics manufacturing services (EMS) members, as well as support service providers aligned with the needs of the electronics industry. EMS providers include Beyonics Technology and CEI Contract Manufacturing Limited. Precision engineering suppliers who also do assembly include: First Engineering Limited, Fischer Tech, and Fong’s Engineering and Manufacturing Pte. Ltd.

Last month, I was able to give a second presentation on the minimising hidden costs topic in a webinar supported by IE Singapore. The webinar also includes presentations by IE Singapore, A*Star and CEI Contract Manufacturing Limited and discusses details on market trends, the Medtech Consortium and examples of some of ways CEI has been able to tap public-private partnership programs to enhance internal capabilities. An archive copy is available for viewing here.

Achieving market leadership is a challenge for manufacturers in any industry right now and there is isn’t one perfect solution. Consortia and tightly networked supply chains are one potential source of competitive advantage. Sourcing strategies which evaluate both measurable costs and hidden costs are another. Regardless of whether or not Singapore fits in your company’s sourcing or business location strategy, its success in continuing to attract OEMs with complex support needs makes it worth studying as a best practice example.

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