Thursday, June 28, 2012

Impact of “Reduction of Hazardous Substance (RoHS)” Directive on Medical Device Companies

Early compliance could result in market share gain, improved supply chain processes and product line optimization
On June 8, 2011, RoHS recast was adopted by the EU and it repealed the original RoHS directive which was in effect since June, 2006. This new directive now includes category 8 equipment (medical device) and category 9 equipment (monitoring and control instruments).  Medical device companies have until July 22, 2014 for compliance and July 22, 2016 for “in vitro” medical devices. The overall impact to medical device companies is still being identified. This compliance directive goes in effect right after the Affordable Care Act implementation in the US which imposes 2.3% excise tax on medical device companies.
 In 2006, the Hi-tech industry implemented necessary process changes & tools to comply with the RoHS directive. The Consumer Electronics Association (CEA) commissioned a study in 2008 to analyze the economic impact of this directive on the electronics industry. In this report, CEA estimated the cost of RoHS compliance at 1.5% to 2.5% of electronics companies’ cost of goods sold (COGS); this is roughly equivalent to the 1.1% of revenue costs. The medical device industry can use these findings as a baseline for cost estimates. However, medical device is a highly regulated industry and can potentially incur higher cost of RoHS compliance due to requirements/regulations imposed by various regulatory bodies globally. The CEA reports few very interesting findings related to compliance costs:

*Total weighted average cost (weighted by company revenue) was $5.94M for the initial compliance, and $1.44M for annual maintenance.
*Total median cost was $721,000 for initial compliance, $118,000 for annual maintenance

*Contract Manufacturers(CM)/ EMS spent the most effort on business process and system updates

*Component manufacturers and OEMs spent  the most effort on BOM reviews and product redesign

RoHS Compliance: The Challenge
RoHS 2.0, the new directive restricts the use of six hazardous materials in the manufacture of various types of electronic and electrical equipment. It is closely linked with the Waste Electrical and Electronic Equipment Directive (WEEE) which sets collection, recycling and recovery targets for electrical goods. The new directive added a new Module “A” which outlines the requirements for medical device companies to be RoHS compliant:
“Manufacturers must demonstrate compliance by maintaining technical documentation, citing relevant harmonized standards, implementing internal production controls, and keeping a register of nonconforming products”
So, to be compliant, companies will have to 1) Identify products that require design modifications, 2) Invest R&D dollars to change design, test, and get approvals from regulatory authorities, 3) make production and sourcing process changes for product commercialization, 3) post-market surveillance and support process changes. In addition, companies must create, and maintain all necessary documentations, DHF, DMR, etc. for traceability and audits for RoHS compliance. Non-compliance by July 2014 can potentially result in product revenue loss.  CEA reported an average loss of $1.84M for non compliance by the Hi-tech industry.

RoHS Compliance: The Opportunity
The new directive for compliance can be leveraged strategically by medical device companies to analyze their current product portfolio and weed out any low /negative margin, or commodity type products. Since, RoHS compliance will require substantial capital investments, the European Impact Assessment for medical device companies has indicated that for some complex products, the RoHS compliance costs could be as high as 7-10% of revenue (new products) or 1-10% of revenue (for existing products). So, it is very critical that companies should leverage IT tools, such as Product Lifecycle Management (PLM) / Product Information Management (PIM), to deliver an effective, automated and repeatable RoHS compliance process at a lower cost. A PLM/PIM platform will allow companies to demonstrate compliance by linking product records to technical documentations and hazardous substances data, enforcing automated stage-gate process for visibility, approval, and enforcement.  The following PLM/PIM capabilities are required for a best-in-class RoHS compliance process:
Single Product Repository: The ability to manage and control a single product data repository across the enterprise with linkage to hazardous substance data.
Supplier Collaboration: The ability to securely collaborate and exchange restricted substance and maximum concentration values with suppliers electronically
Global RoHS compliance process: The ability to enforce and monitor a global but flexible RoHS compliance process to support “design anywhere build anywhere” model
Real-time synchronization of Compliance Data: The ability to quickly and cost-effectively synchronize “as designed” and “as built” Bill-of-Materials to make sure that finished good products are RoHS compliant.
Medical device companies will have to invest and comply  with this new EU directive, however, companies  can leverage this opportunity to potentially capture larger market share from competitors by compiling early and also improving product profitability, & supply-chain processes.