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dation to result in the formation of 15 to 20 large CMOs around the world. Each of those CMOs will develop its own supply chain and Tier 2 supplier networks.
Once the supply chain consolidates, OEMs and CMOs will become highly focused on cost cutting. And, beginning in 2013, the Patient Protection & Afford- able Care Act will place a 2.3-percent excise tax on medical-device manu- facturing. This will have a profound effect on the supply base—one OEM estimates that its organization would pay $70 million in taxes in 2013. Indus- try insiders predict that the tax will reduce profits an average of 4 to 5 per- cent. Because shareholders likely will not absorb these losses, suppliers will be forced to reduce their costs, per- haps by laying off personnel and cut- ting R&D budgets, impacting innova- tion and revenue growth.
We also expect the regulatory envi- ronment to continue to become more stringent. The medical-device indus- try is highly inspection-based, detec- tion-oriented and, therefore, costly and imperfect. There have been some well-publicized spills within the indus- try during the last decade or so, lead- ing, in some cases, to class-action law- suits. Due to an increase in the amount of money allocated by the Obama administration to the FDA, 500 new FDA inspectors now are scru- tinizing the medical-device supply chain. In some cases, FDA warning letters have literally caused organiza- tions to shut down.
Finally, historically, the medical- device industry has been largely decen- tralized. Five major OEMs have recent- ly announced initiatives to centralize manufacturing management, supply- chain management and purchasing activities to move toward centers of excellence. This will have a profound effect on supplier relationships.
Questions OEMs and CMOs May Ask Potential Suppliers
How successful an organization will be within the medical-device industry
depends on how well it can answer the following questions.
1) How does adding a supplier into my supply deck impact my quality risk? Do you improve quality within the sup- ply chain? This is the door opener for any organization. Are you registered with the FDA? (Unless you’re supplying straight-to-market products, this typi- cally isn’t necessary.) Are you ISO 13485
certified? ( This is critical, as some OEMs and CMOs won’t even entertain discussions with suppliers without this certification.) Do you have a robust approach to problem-solving/root- cause analysis? Do you understand the industry vernacular (CAPAs, MDRs, CFR 21, complaints, etc.)? What’s your track record from a quality-perform- ance standpoint?
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