John,
This is a great topic for discussion. I can only comment here as one on the CM side of the fence, and in regards to what our company, Zentech Mfg. is doing proactively in this regard. A few years ago, realizing that part-time political advocacy was not enough IPC set up a full time Political Action Committee (PAC) office in Washington, DC. Our President, Matt Turpin, has taken an active role on the Government Relations Committee for IPC. In this role, he works with the other industry leaders (CMs and OEMs) to speak directly to IPC and meet in person with Senators and Congressmen who directly impact regulation, taxes and trade legislation. IPC members also invite politicians to see their facilities and discuss present challenges such as excessive regulation. The passing of the RAMI act, was a direct result of these activities. For more information about what IPC Government relations is doing click here: http://www.ipc.org/ContentPage.aspx?pageid=IPC-Global-Policy-Framework
As far as your question regarding whether OEMs will reclaim margins by bringing manufacturing back in-house, I don't see that as a viable solution. By the time manufacturers purchase equipment, hire employees and manage the supply chain, margin would be lost. This is why it went outward in the first place. Through the economy of scale and pristine process controls, a capable and quality CM save OEMs big money (and headaches!) even after they collect their slim profit margin.
Great topic. Hope others chime in to offer their perspectives!

Superb question. Given the general technology innovation going on from materials, to coatings, to sensors and methods; there are no shortage of ways to improve products and lower costs at the same time.

As I noted elsewhere recently, long time GE CEO Jack Welch had it right! "Change before you have to."

The problem I see is that change is not just for the primo product a company makes, but all products and their parts. Meaning a process of continual upgrade as innovations and improvements appear.

Unfortunately, many lower level managers are unsure of attempting improvements and/or don't want to put effort into projects that won't get them a promotion in 18 months. Those people look for the "magic bullet" that will feed their career, or as seen a number of times, not disrupt their retirement in 2 years.

In 40 years, I've seen this reluctance to fix or upgrade what is obviously known to need a change over and over again.

Committment to continual improvement needs to come directly from the CEO!

Don Kloos As a company grows and volumes allow, it would make sense in some cases to bring manufacturing and other processes in. I think it depends on the situation. As a small startup, we could not afford the equipment and manpower now, but if we grow to a certain point, then it makes sense to look at the numbers.

Everyone is forced to innovate to make better products with less expense. Finding the creative people to do those jobs including management takes effort.

When I look at the product line of a lot of big companies that grew by primarily by acquisition, I see a lot of products designed 20-40 years ago that are badly designed in a number of ways. In many cases I see a redesigned disposable product that can be redesigned and lower costs and improve performance and customer usability that recovers its costs in less than a year.

The question for companies is whether you improve your product or your competitor does and then starts stealing your customers?

Jerry Robinson Just as an observation...

Companies hire people with one directed, targeted skill and many times with substantial "experience".

They DO NOT seek out innovative designers - whether engineer or skilled developers. Hiring staff and search criteria never mention interdisciplinary skillsets in development...

So there should not be any supprise that companies do not have the ability to rapidly adapt to a changing landscape...

Jerry, if medical device companies targeted winning strategies from the likes of proven winners like Jack Welch, then they would be pulling out the stops to find innovative solutions from both within and outside their firms to improve products to "fix" the bottom line.

For medical device companies it means being willing to invest in innovation to gain higher margins. Too often "invest" to managers means "hiring more workers" because hiring a design firm or other contractor is seen as incurring up front costs.

Truth is, if you can't manage an outside contractor on a design issue, then how can you manage an in-house employee who is tasked with the same problem/s to solve?

The truth also, is that, if companies do it right, they learn a lot from specialist consulting designers.

Jerry Robinson Bo.... Logically... I think you are absolutely right.. But Logic does not seem to be in the core course listing of business schools or MBA programs... :>

I think you are right.. It is just that a winning strategy means that you undestand all the rules and that everyone plays by the same set..

If you WANT to do a startup.. have a good idea.. some funding - and a great opportunity.. that is just a starting place.. You have to understand - mostly - the whole set of rules and actions going on..

How many companies have a great idea - yet crash? and WHY?.. that list of failure causes will have more than Logic in it's root cause collapse..

I worked at a company - a TECHNOLOGY company.. - where the CFO laid off the CEO - because he made too much money.. The CFO's strategy was to get rid of all the highly paid people (except himself) and when necessary - buy up outside companies to "milk" them.. layoffs were absolutely expected if you were mid to high compensation..

Needless to say... (a) they eventually went out of business after losing $$$$$, (b) lost the opportunity to invest and deploy iPhone (and later Android) apps - before the BEGINNING of Apple's selling the phone... long before ANDROID.. So... YES.. they lost the window in hundreds of billions of $$$ - but they did save money by laying off the CEO..

The CFO - got bonuses and moved on based on his success... the other creative staff - got the shaft and also moved on.. the opportunity lost.. may be $100 billion - but likely more..

This kind of story happens a lot.. It's in the Invention and Disruptive Innovation space... I don't think Jack Welch liked that kind of space and risk.. probably a good choice if you are GE.

Your observations are dead right.. and it translates not to a few $$millions of lost profits - but to something 100's to 1000's of times more...

--jerry

Ee Bin Liew Hi John, perhaps missing something here but how would the regulatory requirements mean costs passed on to the OEM?

Cheers,
Ee Bin

John Sanchez Hi Ee Bin Liew,
Well as new and/or more stringent regulatory is enforced, more overhead is required to sustain business. I'm seeing first hand stricter requirements for quality systems being passed down to contract manufacturers which is most certainly resulting in higher overhead. Furthermore, it seems that OEMs are putting more pressure than ever to lower costs.

I feel it's more important than ever to innovate products and processes in order to bring costs down and margins back to a healthy level.

This is a very interesting topic to me. I appreciate every ones contributions.

-John

Andrea Niccoli Industry reform is just a reminder of what these companies should have been doing all along. In my experience improving efficiencies, quality and processes automatically falls to the bottom line. It is companies who go to the extreme and become greedy that end up failing. Investment in people, continuous improvement and maintenance of equipment does pay off. The only thing that has changed is that the companies who looked at short term goals will have to invest and settle for a lower profit margin. Companies that didn't get greedy for huge profits and invested in their own will do great!

Ee Bin Liew Hi John -

Perhaps it's just the reinforcement of existing regulations on suppliers that's getting attention. Supplier controls has been in many regulators' watchful attention for many years. However, the requirements hardly changed, and in the last 10 or so years, the only significant change is having a few countries other than the US (FDA) to implement inspections outside of their country's jurisdiction. So perhaps these added costs were costs that had needed to be spent in the first place but were not? So from a longer term perspective these costs are justified.

Bear in mind why supplier controls are important - OEMs and CMs are considered an arm, an extension of a manufacturer. Drawing from this analogy - wouldn't you take good care of your arm? :-)

that said, in-sourcing only happens when there are other factors such as IP, 'cleaner' documentation with regards to legal and physical manufacturer, or a very complex device that no CM can do as well as the designers do... but the reason is never ever cost. Globally speaking, with more and more startups sprouting - more good years for OEM and CMs indeed. starting up a factory anywhere is just way to costly even with government funding. Low cost devices stem from a low BoM, and not from lower labour costs - 20% (or even overheads - another 20%). Low cost can be better achieved if startups understand WHERE materials and parts and components typically come from, able to go direct, able to negotiate a reasonable price (low price is never possible due to the small volumes), and then have the physical manufacturing close to these material sources to ensure transportation (and supplier management) costs are kept to a minimum. As any property agent may put it - Location, Location!

hope it helps.

Cheers,
Ee Bin

Mark Schnapf I am in 100% agreement with We Bin's response. In addition the added cost of quality now saves money down the road.

Mark Schnapf I apologize for the the misspelling of Ee Bin in my previous comment.

Andrea Niccoli noted: "Industry reform is just a reminder of what these companies should have been doing all along. In my experience improving efficiencies, quality and processes automatically falls to the bottom line."

What I've seen since the "depression" is managers afraid to seek changes unless directed to do so. These managers are petrified that they will be the next one fired/laid off if just one of their decisions doesn't "work out."

I've shown managers how to cut costs 25%-50% on mfg cost on some volume products and proven the technique is safer than existing products. The managers don't disagree on the benefits, but they are literally afraid to try something new for fear of failure somehow.

It is not only with end products. I spoke to the West Coast manager of Arburg molding machines today (I've used their machines for over 30 years.) He noted running a mold for a potential customer and showing that the Arburg would run existing parts 22% faster than their existing molding machines on a high volume product. The molder didn't want to "rock the boat" and maybe suffer the consequences if something wasn't up to snuff in volume production. No deal.

Getting a manager to make a decision which will save millions of dollars per year with near zero risk is a major chore, if you can get it done. That means companies are not getting the continual upgrades they need to keep more dollars on the bottom line.

My personal belief is that the "marketing manager" or "senior project manager" who typically looks at new & improved concepts, doesn't really have the confidence in design decisions from having worked in engineering and manufacturing. They mostly come from MBA programs. When they talk "risk assessment" that also includes the hidden assessment of the risk to their continued employment.