As numerous original equipment manufacturers (OEMs) continue to pursue aggressive weight loss programs, outsourcing is the closest thing to an industrial-strength dietary supplement. By shedding plants and equipment, manufacturers hope to make themselves more appealing to investors and Wall Street analysts.
As OEMs slim down, contract manufacturers have been bulking up. Indeed, these growing companies have become the new heavyweights of production in many industries.
Contract manufacturing means a firm manufactures the products for another hiring company or firm as it is a form of outsourcing. In this type of business the hiring firm approaches the contract manufacturer with a new design or formula to develop and create a new project with the help of contract manufacturer. The contract manufacturer will decide the quotation based on land, labour, capital, and organisation, generally they investigate in market and make a research on the quotation of material and tools.
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Production of goods by one firm, under the label or brand of another firm. Contract manufacturers provide such service to several (even competing) firms based on their own or the customers' designs, formulas, and/or specifications. Also called "Private Label Manufacturing."
Many industries utilize this process, especially the aerospace, defense, computer, semiconductor, energy, medical, food manufacturing, personal care, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears, and forging.
The pharmaceutical contract manufacturing is carried all over the world, some large companies use the contract manufacturing but medium and small sector companies also use contract manufacturing to increase their portfolio of the product.
Let us now consider a case of pharmaceutical contract manufacturing in Puerto Rico:
Puerto Rico's tax incentives, and status as a territory of the United States, have successfully distinguished it as an advantageous location for industry, particularly for sectors like pharmaceutical manufacturing where labour and capital requirements are high. Importantly, the Island's benefits are not restricted only to those pharmaceutical companies desiring to establish operations on the Island, but are also applicable to companies wishing to manufacture drug product by enlisting the services of a Contract Manufacturing Organization (CMO).
A niche for contract manufacturing within the pharmaceutical sector was borne out of an industry need for the flexibility of a variable cost-structure, and for the purposes of cost containment, capacity, and speed to market. Traditionally, the services of CMOs were sought after to supplement product volumes in response to unexpected sales, to accumulate
sufficient stock for product launch, to access expertise in non-core areas, and to limit risk when pioneering new technologies.
A number of powerful influences within the pharmaceutical sector today have elevated contract manufacturing to a place of heightened importance within the industry and have prompted the evolution of sponsor-contractor relationships from basic project-specific arrangements to value-added partnerships:
â€¢ Merger and Acquisition (M&A) activity, globalization and stock market pressures have highlighted the need for lean operations and practices, and improved earnings per share. Pressure to reduce pricing has further compounded the drive to capitalize upon the efficiencies of scale afforded by the contract manufacturing industry.
â€¢ M&As have created larger and more complex pipelines. Additionally, they have resulted in plant redundancies and excess capacity which have contributed to a decrease in overall supply chain efficiency. Where internally operated facilities traditionally function in a structured manner, CMOs are able to offer flexible manufacturing as they are well versed in operating versatile and adaptable facilities that are able to reconfigure swiftly for different products and processes.
â€¢ More than ever, contract manufacturing is being looked to for improved speed to market as regulatory forces continue to increase the complexity and expense associated with the drug product approval process. Moreover, pressures to enter the market as soon as possible in an effort to fully exploit the patent life of a drug product, are compounded by looming pressures from generic competitors and alternative therapies. CMO partnerships can positively impact timelines by condensing development cycles, eliminating bottlenecks and by providing access to innovative technologies.
â€¢ The number of pharmaceutical technologies entering the marketplace is ever growing and the CMO industry must evolve accordingly in order to remain competitive. As such, pharmaceutical companies are able to access new technologies and trained operators, without incurring risk and committing capital. Having access to a greater pool of candidate technologies gives pharmaceutical companies the opportunity to conduct a more comprehensive evaluation en route to finalizing their strategy, and provides more options to companies looking to offer a range of solutions across different segments of their customer base.
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â€¢ Taking into account the exposure that CMOs have to a wide range of products and processes, and given that a high proportion of the projects CMOs take on are technically challenging in nature, companies who choose to partner with a CMO stand to benefit greatly from their experience and knowledge base. Contract manufacturing has gained acceptance from the pharmaceutical industry as an invaluable resource for achieving operational efficiency and effectiveness - much in the same way that Puerto Rico has established itself with the pharmaceutical industry as an advantageous location for cost effective manufacturing.
Advantages of Pharmaceutical Manufacturing in Puerto Rico:
â€¢ Strong Infrastructure for the Conduct of Business
As a Commonwealth of the United States, entities operating in Puerto Rico experience the same legal and governmental assurances as businesses operating within the continental U.S.A.
The island is favorably situated proximate to mainland U.S.A., and at the intersection of trade routes from North America and Europe to Latin America and the Caribbean.
A wide choice of sea and air transportation options enable the efficient and reliable delivery of goods worldwide.
Trade barriers are minimized as dealings with the continental U.S. are considered domestic, and free trade agreements throughout North America and Central America facilitate the exchange of goods.
An extensive highway system and communications infrastructure support business processes on the island.
â€¢ Well Established and Growing Pharmaceutical Presence:
With over 40 years of experience in the pharmaceutical industry, Puerto Rico maintains a position of leadership in the areas of Pharmaceutical Manufacturing, Medical Devices & Equipment and Research.
Puerto Rican universities generate a high proportion of science, engineering and technology graduates contributing to the Island's highly educated and dedicated workforce.
A resource rich network of suppliers and services has arisen over time to meet the needs of the pharmaceutical industry Strong relationships exist between industry mem
Strong relationships exist between industry members on the Island and the FDA, and with various European, Asian and Latin American regulatory bodies. Over the life span of the industry an expansive knowledge-base regarding compliance practices has been developed.
Significant industry investment in the biopharmaceutical and biotechnology sectors has highlighted Puerto Rico as a center of excellence and has well positioned the Island for future growth.
â€¢ Attractive Tax Infrastructure & Employer Incentives:
Companies with an established legal entity on the island of Puerto Rico qualify for a local corporate income tax rate of seven (7) percent or less.
U.S. companies have the opportunity to establish a foreign entity within a U.S. territory.
European companies have the opportunity to repatriate earnings without further taxation.
Deductions, exemptions and tax credits are available for research and development expenses, employee training expenses, and for the purchase of equipment, machinery and raw materials.
Capitalizing Upon the Advantages of Pharmaceutical Manufacturing in Puerto Rico
Whether by the in-house management of an operation on the Island, or by enlisting the services of a CMO, there are a number of strategies at the disposal of the pharmaceutical industry to maximize the advantages of manufacturing drug product in Puerto Rico.
New Pharmaceutical Operations in Puerto Rico:
A company without a previous presence in Puerto Rico that is interested in capitalizing upon the Island's tax benefits is able to do so by acquiring or building their own facility, or by contracting the services of a manufacturer on the Island. In order to accomplish the latter, the company would be required to
1) Establish a CFC on the Island, and
2) Establish a contractual relationship with the manufacturer, following which they would be in a position to apply for a tax exemption grant.
Notably, to enjoy Puerto Rico's tax advantages through a contract manufacturing relationship, the client company must establish a Puerto Rico subsidiary and establish a long term contractual relationship for production. Additionally the client must hire one or more employees to oversee production at the host's facility and must retain the risk and ownership of the product throughout the production process.
Existing Pharmaceutical Operations in Puerto Rico:
For companies who have already established a presence on the Island of Puerto Rico, the technology transfer of a new or existing project to a contract manufacturer located on the Island, can be accomplished using the company's existing tax structure.
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Disadvantages of contract manufacturing:
In outsourcing, contract manufacturers give up all decision making to the other company. Once that contract is signed, one company is calling all the shots. If the wrong company is chosen, this could lead to some serious problems.
Before signing anything, both companies should effectively and honestly communicate their mission, goal and the standards they are driven by. Differences in standards could lead to quality problems, since the outsourcing company is only motivated by profits.
After the contract has been signed, the only way for the hiring firm to increase profit is to decrease expenses and compromise product quality, since they cannot reduce labour wages.
Outsourcing for contract manufacturing services 2008-2023:
The revenue for world contract manufacturing business in 2007 was approximately $30bn, with a growth rate of 6% from 2006. The technical expertise and cost savings offered by contract manufacturing organisations (CMOs) make them increasingly essential for the organisation. Greater emphasis has been put on European CMOs to leverage low-cost contract manufacturing markets, such as those existing in India and China, to enhance cost efficiency. Many CMOs in Europe have turned to biotech services as a means of avoiding competition with lower-cost API companies based in developing countries. In common with European service providers, North American CMOs are adopting a dynamic approach. Also, they are providing other services, such as packaging, logistics and marketing support. Are the companies taking advantage of the opportunities available? Recent years have seen the emergence of moderate level competition from Indian and Chinese CMOs.
CMOs are increasingly undertaking analytical testing and other value-added services alongside traditional contract manufacturing of APIs. In some major CMOs, these value-added services have taken up significant proportion of their revenue generation. This rate will increase further in the coming decade. The establishment of large, global companies offering a full range of contract services has led to a change in the image of CROs and CMOs. There has been a shift in the business model of CMOs to integrate themselves more fully into the supply chain of pharmaceutical and biopharmaceutical companies by offering a wider range of services.
The Top Ten Reasons for Outsourcing
"Outsourcing" is the latest buzzword in global economy today, but it also makes for good business sense for a lot of businesses. A lot is being written on the subject but the benefits of outsourcing far outweigh the reasons why companies should not opt for it. The top 10 reasons for outsourcing are:
1. Savings in Labor Cost - This is perhaps the most important reason why companies should opt for outsourcing some of their activities. The cost of labor in some of the developed countries is extremely high and creates a huge expense for the employers. If the same jobs were to be done at a far lower price by equally skilled personnel then it is definitely advantageous.
2. Growing Global and Local Market Shares - More importantly, even if they do not outsource, their rivals will. This will affect them adversely as their rivals will gain in terms of profitability and lower costs. Able to pass on high quality at lower prices, rivals will walk away with market shares, which a firm cannot afford to lose. Stagnating corporate profits will limit the creation of new capital and its reinvestment within the domestic economy.
3. Communications - With the improvement in telecommunication networks and lowering of telecom costs across the world, outsourcing as an option provides round the clock services to companies and their clients without putting too much of a strain on the existing manpower.
4. Speed - As a result of better communications, outsourcing has helped a number of companies reduce their turn around times by taking advantage of the time difference between countries. In the big picture, firms reduce time to market on new products and improvements beating rivals that do not outsource.
5. Tax Breaks - A number of companies in the US have benefited through tax breaks from outsourcing. According to Federal Law, companies can defer payment of tax on profits earned abroad for an indefinite period. These taxes are to be paid only when they return these profits to the US.
6. Move to Higher Segments of the Value Added Chain - The move to outsource helps the higher income earning countries to move to higher segments of the value added chain as they are now free of some tasks that have been outsourced.
7. Profitable Use of In-house Resources - Firms around the world are attempting to make the most of their in-house talent pool. Expertise and experience are definitely in short supply,much in demand and more importantly, expensive. Outsourcing helps resolve this dilemma and frees a large pool of in house resources for other work.
8. Focus to Accelerate Business Transformation - This is done by passing on various specialized jobs to the outsourced vendor and focusing on the core business. This results in more time spent working on strategic issues for business transformation and implementation of the same.
9. Access to Skill Sets and World-wide Capabilities - The growing shortage of skilled workers in the US has prompted companies to look elsewhere for these skill sets. Outsourcing enables firms to access a worldwide pool of workers equipped with a range of skills.
10. Reductions of Risks - Organizations make large investments in their operations and have to deal with a number of economic and political changes, which may prove risky for their businesses. By outsourcing, companies are able to reduce some of the associated risks because service providers also share in some of the costs. This reduces the cost burden on the outsourcing company.