Onshoring of Production

AMERICAN MADE is making a comeback!
A spotlight on Medical Device
Manufacturing Supply Chains

Through history our world has changed at a gradual pace, punctuated by phenomenal occurrences – The world wars, industrial revolutions, great depression, great recession and the latest Covid-19 pandemic. Each occurrence has carved out a whole new course for the world economy to follow. Here we look at the game changing effects of various factors including the pandemic on the supply chains of medical device manufacturing.

Is there a need to change your business model?

To put it succinctly – Yes! There is a need to change or adapt medical device manufacturers’ business models to our current and future scenarios. The age we now live in has been rightly termed as “the age of disruptions”. Every business model has its risks and liabilities. As long as the business is able to counter these risks and liabilities, they will perform quite well. However, when the risks and liabilities become a threat to the business’ profitability, drastic rescue measure are called for.

In other words, the manufacturing process (which includes the supply chain) needs to be sustainable. Without sustainability, even minor disruptions can result in major defections of a contract.

Medical Device Manufacturers have been outsourcing production overseas ever since it became a successful trend in the 1980s. But the trend is changing and not just because of the pandemic.

Here’s what the Mckinsey study found:

A study conducted by the Mckinsey Global Institute (MGI) revealed that disruptions that can last up to two months can occur every 3.7 years – costing Med-tech companies millions of dollars!

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Mckinsey’s chart shows that supply chain shocks such as theft, counterfeits, cyberattacks, natural disasters, international trade policy changes, regulatory changes, pandemics/epidemics etc. occur quite frequently to affect medical device production. The ability to anticipate the disruptions determines how much the shock will cost the company.  

The Mckinsey study also showed that supply chain shocks cause medical devices companies to lose an average of 38% of their annual earnings.

Key drivers for Reshoring or On-shoring of Medical device Manufacturing:

Recent events as a driver

• The Covid-19 Pandemic
  The pandemic brought about abrupt lockdowns and travel-transport restrictions across borders. Medical device contract manufacturers and those who had partnered with suppliers overseas found themselves stranded in the midst of the crisis. Although cross-border (between countries) transport has now resumed, the medical device manufacturers who had operations within the same region were able to bounce back into action much sooner than those that had to wait on cross-border restrictions to be lifted. Each stage of the supply chain has been tested by the pandemic and a number of vulnerabilities have surfaced. Shortages in medical device requirements because of their use during the pandemic, skyrocketed while the demand for certain other medical devices that could be put on hold, in order to safeguard patients’ health dropped considerably. The case has been the same with suppliers. Scaling up and down amidst massive changes in the unstable market has been tough on medical device contract manufacturers and their partners i.e. Original Equipment Manufacturers – OEMs.

• Suez Canal block
  The unexpected block of the Suez Canal that occurred during March of 2021, left everyone involved exhausted, when a large container ship became lodged in the Suez Canal – bringing the traffic on the major waterway to a complete halt. The question of being overly dependent on offshore supplies or processes which resulted in delays or uncertainties in the delivery times, and the inevitably higher shipping costs have made most offshoring advocates jump sides to accept either full reshoring or at least partial reshoring so that the dependencies are not completely one sided.

• US-China Trade war
  The trade war that began in 2017 brought with it heavy tariffs to the tune of 25% on products imported from China. President Biden’s administration has continued under these tariffs while implementing a number of initiatives that analyzes supply chain resilience in critical industries such as medical technology, pharmaceuticals, semiconductors, minerals in electronics etc. The focus remains on strengthening supply chains through various incentives. The trade restrictions also necessitates that any medical device or product – whole or part, manufactured in China, should be transformed considerably, at a TAA (Trade Agreements Act) and the GSA (General Services Administration) designated country before being imported into the US. This complicates the manufacturing process by extending the supply chain and adding costs at each step.

Government Incentives

Even before the pandemic hit, the United States government had begun to set in motion a number of financial Incentives for on-shoring or reshoring – through the Defense Protection Act (DPA) through financial measures such as loans, guarantees, direct purchases, purchase commitments etc.). Incentives in the form of ‘authority’ to procure and install equipment in industrial facilities owned by the Federal Government or private persons.

The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) empowered the FDA to take all measures necessary to prevent and mitigate all medical device shortages in the event of a forecasted or ongoing public health emergency (PHE). For medical devices alone, the FDA has budgeted $21.6 million for the year 2022 within a program called the Resilient Supply Chain and Shortages Prevention Program (RSCSPP) in the Center for Devices and Radiological Health (CDRH).

These initiatives enable manufacturers to operate more efficiently on-shore in comparison to offshore manufacturing.

Changing Offshoring Conditions

Finally, conditions overseas are not what they used to be. Increasing labor costs, intellectual and patent protection issues, quality concerns, technological imbalances and regulatory concerns have begun to dissuade medical device manufacturers from continuing their operations offshore.

On-shoring-Reshoring Trends

The on-shoring trend has been on the rise steadily over the past decade as you can see from the chart from the Reshoring Initiative. It contributes directly to the US economy by bringing millions of manufacturing jobs (from the 5 million manufacturing jobs that has been outsourced overseas). In fact the ‘Reshoring Initiative’ states that the Total Cost of Ownership (TCO) reduces with onshore manufacturing.

Quality the medical device manufactured onshore is comparatively higher owing to better control over the manufacturing process. Shorter time to market and lower shipping costs with fewer stages in transit makes on-shoring a very smart business model for medical device manufacturers!

Homeward Bound

Offsetting future supply chain shocks are priority! The benefits of onshore manufacturing are on the rise rapidly. It makes sense that medical device Original Equipment Manufacturers (OEMs) look to local Contract Manufacturers (CMs) to partner with. So as an OEM you’ll want a more resilient supply chain, a stronger business model, and one that’s sustainable – with financial incentives and top level support from the government, American-made is definitely making a comeback!

At Instrument Technology Inc. (ITI), you’ll have the benefit of American-made medical devices, crafted to perfection at our state-of-the-art facility located at Westfield, MA. We are a vertically integrated organization which gives us a near 20-20 vision. This helps us deliver on time, every time, at reasonable prices.

If you’d like to know more about our Capabilities and On-shore manufacturing operations, contact us today, our experts are standing by to assist you.

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