Promise vs. Peril: Is Product Transfer Right for You?

There are a number of reasons why product transfer is top of mind with many medical device companies. First, by moving to a low-cost country, companies annually can realize more than $30,000 in savings per full-time employee. Second, offshore manufacturing can yield a significant reduction of one’s corporate tax liability. And third, as the domestic medical device market continues to mature outside of the United States—most notably within the BRIC (Brazil, Russia, India, China) countries—it seems rational to move one’s operations to better support these areas logistically.

It’s certainly easy to see why these benefits make product transfer appear so attractive for medical device manufacturers. But as we all know, effective strategic decisions can’t be made in a vacuum. In addition to these benefits, there are a variety of challenges associated with product transfer—and they’re significant enough to make any medical device company pause and reflect on whether or not product transfer should be the next step in their long-term strategic plan.

Caveats

While it’s true that low-cost countries afford a dramatically reduced labor rate, it’s not uncommon for organizations to overestimate that benefit due to lack of awareness of the domestic headcount that will remain in place to manage the outsourced supplier. Moreover, the people and transportation costs associated with physically moving production lines to a new site can equal or exceed the anticipated first-year savings brought about by lower labor costs. Before any final decisions are made, it’s important to get a handle on the actual costs associated with the product transfer.

The same goes for tax. Yes, there are immediately identifiable benefits, but there also often are hidden costs related to setting up a principle substructure allowing for the offshoring of intellectual property through transfer pricing. These costs significantly can reduce your profitability.

Other caveats include supply chain considerations. If the move requires shipping overseas, that has the potential to extend the supply chain anywhere from six weeks to three months; this will require companies to capitalize their investment in raw material work-in-process as well as sterile and non-sterile finished goods returning from the site. There’s also added responsibility and costs associated with customers, the U.S. Food and Drug Administration, and, in some cases, there are duties associated with receiving product back into the United States. These costs typically aren’t significant but should be factored into the overall strategy. Finally, there is a requirement to establish substance in another country, which typically entails investing in real estate as well as substantial staff to support the entity.

Risk Mitigation

If, after considering all factors, a decision is made to go forward, the first step toward a successful product transfer is to determine whether to go it alone or select a partner that already has established operations within your desired location. The latter has a number of advantages, including existing infrastructure and (hopefully) a history of manufacturing medical devices and, therefore, the requisite knowledge regarding sourcing and import/export.

The next and arguably most important step is to develop a product transfer business plan that defines the objectives of the transfer, criteria for success, the personnel or resources that will be necessary for the transfer, and major assumptions and critical milestones. This document should act as a contract for the performance of the transfer among the sending site, receiving site, and the leadership of the organizations.

Third, it’s critical to ensure the quality of the associates managing the receiving site. A truly successful transfer is incumbent upon pulling product into an operation versus pushing it out of an operation. Assure that you have a well-resourced and experienced receiving-site-transfer team and that some of that team stays on beyond the transfer to participate in the day-to-day manufacturing and fulfillment process. Similarly, be sure to identify members of the sending site transfer team to move into an ongoing supplier management function.

This continuity of staff and product knowledge is key. Without it, once a transfer is deemed complete, there’s sure to be a number of ongoing issues, including quality issues and failure to embrace the processes that were transferred. This, in turn, can lead to a slow ramp up, an inability to fulfill customer service requirements, poor quality and rework, and failure to achieve anticipated financial goals.

Finally, post-transfer, it’s important to put in place a process to ensure the objectives of the transfer are maintained on an ongoing basis.

Under the right circumstances, product transfer can be a very successful strategy for medical device companies. However, it’s critical to look beyond the low-cost labor and tax benefits to consider all of the factors inherent in a transfer. Only when companies have the full picture of what’s involved can they make an informed decision about product transfer and its place in their future.

Phillip Brown is a manager in Plante & Moran’s Supply Chain and Operations consulting group, with more than 20 years of manufacturing, operations and engineering experience in the medical device industry. Brown has performed product and process transfers through a variety of business relationships including OEM consolidation, OEM outsource domestically and internationally through contract and toll manufacturing, OEM in-sourcing, shelter, and the establishment of offshore principal/subsidiary manufacturing.