Sunday, September 22, 2013

Considerations for Offshore Manufacturing in Healthcare Industry

The healthcare market in the US is increasingly competitive in recent years. The medical device market reached $100 in annual sales. More medical device manufacturers enter the industry. Also, since a lot of pharmaceutical big players are facing patents expiration, generic drugs companies started to seize market share by selling drugs at low prices. Thus, adopting offshore manufacturing is part of their strategy to reduce cost and increase competitiveness. However, risks and benefits of offshore manufacturing both exist. There are several factors that companies need to consider before taking any action.
First of all, offshore manufacturing is not necessarily cost saving now. a decade ago, China, for example, was considered as cheap labor, cheap construction and low environment cost. According to a survey in 2006, nearly 90% of pharmaceutical executives considered China a better choice than India for low-cost drug manufacturing. However, with the increase of the labor cost, facilities maintenance cost and currency rate of RMB, people start to think about moving manufacturing facilities back to or near the United States.
Secondly, healthcare industry is highly regulated. All countries have regulatory authorities to monitor and control manufacturing quality of drugs and medical devices. Different countries may have different regulations. Manufacturers have to meet the requirements in different countries, which requires efficient communications, excellent project management, comprehensive regulatory knowledge and experience in dealing with emergencies and problems. Some countries may have lax regulations, which may cause issues such as call back, law suits, counterfeit drugs or serious side effects among patients. All these problems generate extra costs for a company and affect a company's reputation.
Last but not least, from the US government perspective, it's risky to rely too much on other countries. China produces 2/3 of the global aspirin supply. And China is becoming the sole supplier of other key active ingredients like prednisone, metformin, and amlodipine. However, the Centers for Disease Control and Prevention only maintains a stockpile of antibiotics to treat up to 40 million people (13% of the US population). If companies in the US highly depend on Chinese manufacturers, their business will be hampered by those suppliers, which will be risky for the development of the US economy. 
All factors mentioned above should be considered and decision makers should leverage risks and benefits of offshore manufacturing before making any commitment. 
Readers could further think about these questions: 
1. What else should decision makers consider before making the final decision of offshore manufacturing? (Customs requirements, global transportation, etc.)
2. How could decision makers leverage the risks and benefits of offshore manufacturing? 


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