Originally posted on Medical Design Outsourcing
Written by Eric Sugalski, Founder and President of Smithwise
For a medical device startup, selecting a contract manufacturer for part production can be difficult, especially if a company hasn’t done its research. Developing a detailed bill of materials positions a startup to receive high-quality quotes ahead of production.
Here’s the story…
You’ve spent countless hours refining your design and preparing for the manufacturing phase of your new medical device. Your company built low-volume prototypes, performed bench-level testing, and believes that the next step is to obtain production quotes for the manufactured units. Through your network and some secondary research, you obtain a list of contract manufacturing organizations (CMOs) that appear to be a suitable fit for your production needs. After tracking down the appropriate contacts at these CMOs, you secure non-disclosure documentation and send over your engineering data for quote. The outreach process has already been tedious and time-consuming, and you eagerly await feedback and quotations.
Unfortunately, most of the CMOs that you engage decline the opportunity. They suggest that the project “isn’t the right fit.” The few CMOs that are willing to work with you take an extremely long time to generate their quotes. And when they finally arrive, the numbers are high – much higher than you anticipated. And the proposals are laden with assumptions that limit commitment to the numbers expressed in the quote. Asked how they arrived at their numbers, the CMOs are reluctant to provide much detail. Frustrated, you continue the hunt, searching for new CMOs that may provide a more favorable price.
This story is likely familiar to many medical device entrepreneurs. Transitioning into manufacturing is one of the hardest parts of building a new medical device business. However, it’s also one of the most critical.
Before reaching out to contract manufacturers for a new medical device, it is important to “Know Thy Bill of Materials” (BOM). A BOM is the “ingredients list” that allows a contract manufacturer to efficiently understand the number of unique components and assemblies, types of fabrication processes, materials, packaging and labeling requirements and other critical manufacturing aspects involved in making your device. There are several reasons why a design team should be investing the time needed to build a comprehensive BOM, including:
1. Procuring quotes (good ones)
Many manufacturing firms choose not to do business with startups. Period. CMOs are typically designed to handle volume production, meaning the management costs of transitioning a startup company from design to manufacturing may not be justified by the longer-term business opportunity and associated risks. When dealing with any CMO, it’s important to share details on funding milestones you’ve achieved, prior successes for the management team and any other details that build credibility with the CMO.
It’s also critical to be organized when engaging CMOs. A detailed BOM reveals the level of organization a company maintains and the amount of manufacturing pre-work that will be required. A BOM (or lack thereof) also implies the degree of “handholding” that will be required throughout the design transfer and pilot production processes. In the mind of a CMO, this handholding equates to up-front development time that will be difficult to monetize. These concerns result in no-quotes, inflated unit pricing and substantial non-recurring engineering (NRE) charges. Beginning CMO conversations with a detailed BOM will result in more – and better – quotes.
2. Gaining visibility into cost drivers
Preparing a comprehensive BOM does not stop with listing components and quantities. Design teams benefit from building their supply chain from the bottom up. Seeking production quotations for each custom component and assembly on the BOM provides the visibility that the design team needs to understand the product’s cost drivers. Realizing these cost drivers lets the design team concentrate on the components and assemblies that will have the most significant impact on the cost of goods sold (COGS).
Identifying cost drivers also involves engagement with specialty suppliers such as machine shops, injection molders and printed circuit board (PCB) manufacturers. Often, component suppliers are more than willing to provide feedback on the design, if they believe that they’re well-suited for the volume of production work. These feedback sessions provide insights that not only reduce production costs, but also improve component quality.
3. Reducing switching costs
The intent for most companies when hiring a CMO is typically to engage in a long-term, mutually beneficial relationship. However, these relationships can sour for a number of reasons, and medical device companies sometimes need to switch. If a CMO maintains the full medical device supplier list, component-level pricing and other BOM details as a proprietary material, it makes switching to an alternative CMO extremely expensive and time-intensive. Although the investment of time required to generate a bottom-up supply chain and corresponding BOM may be unattractive, it provides a valuable insurance policy that may need to be leveraged down the road.
4. Mitigating supplier risk
There may be particular components in an assembly that require specialized materials or processing. The list of suppliers that can deliver the parts and assemblies required may be a short one, representing a significant business risk for a device company. Specialized suppliers may drive pricing beyond a reasonable level for the device, or have other inefficiencies that make them undesirable for the BOM. Supplier risk is a reality for many device companies, one it’s not always possible to eliminate. It is possible, however, to gain visibility into the risk and build contingency plans to mitigate any potential issues. Supplier risk is best realized and handled when a design team controls the BOM and has direct relationships with key suppliers.
5. Understanding scale
Often, the CMO that can help launch a startup’s production quickly at low volume is not the same CMO that can help scale it into significantly higher volumes. CMOs are structured differently. Some are vertically integrated, meaning they have expansive in-house capabilities. Vertically integrated CMOs may provide injection molding, PCB fabrication, machining and precision assembly under one roof. Because they are typically larger organizations with larger minimum order quantities (MOQs), they may take much longer to plan and coordinate production. These high-volume requirements and long lead times may not be suitable for a medtech startup.
Other CMOs are horizontally integrated, meaning they’re aligned with a broad network of suppliers to handle component fabrication and critical assembly processes. Some horizontally integrated CMOs focus entirely on assembly, subcontracting other fabrication processes to outside groups. Horizontally integrated CMOs are typically smaller, meaning the medical device startup works directly with CMO executives through the manufacturing planning phase. They often move quickly, but their capital (think tooling), unit and project management costs are likely to be higher, due to mark ups and amortization of setup time over a small number of units. Often a medical device startup will begin manufacturing with a horizontally integrated CMO to get production started quickly, then switch to a larger, vertically integrated partner as sales increase and cost reduction takes priority. The details of the BOM, such as component and assembly pricing levels at different volumes, help a medical device team understand when it may outgrow a CMO and need to plan for expansion.
The points above needn’t mean that medical device startups should take a defensive position when working with CMOs and other vendors. Although a company needs to be focused and protective of its own interests, an environment that breeds mistrust and one-sided financial gain is counterproductive. CMOs are an integral part of bringing medical devices to market and offer much more than simply the assembly of components. CMOs provide valuable input through the design for manufacturing and assembly (DFMA) phase, to ensure that the product meets best practices. They also provide critical elements of a company’s quality management system (QMS). And CMOs serve as valuable conduits for commercial networking, since they are often engaged with large companies and medical product distributors. So, although a medical device company needs to limit their supplier risks and ensure that it has sufficient knowledge to improve its products, engagement with a CMO or any other key vendor should be viewed as a mutually beneficial partnership.
While developing a comprehensive BOM may not be the most exciting part of product development, it’s certainly one of the most critical. A well-assembled BOM will communicate to CMOs that a company has done its homework and has a strong handle on the manufacturing requirements, which in turn will affect the responsiveness and pricing of CMOs. Additionally, a well-documented BOM will provide valuable insight to guide cost engineering, reduce future switching costs, mitigate supplier risks and understand how a medical device scales. “Know Thy BOM” for success in medical device manufacturing.
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