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As Medical Device Supply Chains Evolve, So Does Risk Ownership

May 28, 2019 Decorative image of man at insulin bag assembly line

Consolidation of healthcare providers and the rise in group purchasing organizations mean you are fighting harder each day for your share of the more than $400 billion medical device market. Your margins are tighter. You may have become more specialized to compete. Perhaps you are offering new services such as testing, packaging or shipping in conjunction with your products to differentiate your company.

For most medical device and component manufacturers, the supply chain is also evolving to meet new market demands. You may be relying on fewer suppliers. You may be asking them to broaden their scope of work. Those suppliers may be located overseas where production costs are lower.

These changes can have significant risk-ownership consequences for your business. It may be time to carefully review your business agreements to make sure you and your partners understand who owns which risks. Let’s look at a few examples.

Expecting Suppliers to Do More
As your supply chain members become more integral to your success, make sure you understand their ability to accept risk and partner effectively with you. Don’t simply add projects or tasks to existing agreements and assume nothing else changes. Some considerations include the following:

  • Do your supply chain partners have the necessary quality assurance systems in place to do the work?
  • Do they have the necessary regulatory expertise to ensure compliance?
  • Have they received any FDA warning letters?
  • How will they—or you—handle inspections and certifications?
  • How vulnerable are they to natural disasters, and what could that mean for your business?
  • Do they carry business interruption insurance? If they are overseas, do you need to cover trade disruption risk insurance?
  • Do you have a system in place to track the financial stability of your top tier suppliers, especially if they are overseas? If claims arise, will they be in business to address them?

The more you depend on a supply chain partner, the more you should know about how the organization manages risk.

Relying on Purchase Orders Versus Contracts
Sometimes medical device companies rely on purchase order terms and conditions rather than on formal contracts to document the nature of their supply chain business relationships. These relatively one-sided agreements often fail to answer some important questions:

  • Who is responsible for fulfilling FDA regulatory requirements and ensuring product safety?
  • When and how are manufacturing changes to be communicated? Who approves them?
  • Which party is liable in the event of a design or workmanship failure? Who really designs your products?
  • If located overseas, does the supplier carry U.S.-based product liability insurance?
  • How would a recall be handled, and by whom?
  • What happens to pricing and availability if demand far outpaces the forecast?
  • Who owns material if the forecasted demand doesn’t materialize or the product suddenly becomes obsolete?

These are just a few examples. Take the time to discuss and document potentially thorny issues up front. Everyone will benefit.

Making Informed Decisions
The medical device and healthcare industries are undergoing dramatic changes. Hylant’s life science industry experts can help you review your major supply chain risks and identify which are most likely to impact your business. Together, we then can build a strategy for mitigating risk and insuring against losses. Contact us if you would like help reviewing your existing contracts.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.

Author Mike Cremeans