Unlocking the Value of the Pharmaceutical Supply Chain
Pharmaceutical companies are facing an ever increasing number of challenges as they look to maintain strong revenue growth. The delivery of innovation within the industry has fallen and many large blockbusters are facing patent expiry. Additionally, the industry is facing realignment in strategy, both in terms of therapeutic focus and the rising demand for specialist high value treatments.
In the face of skyrocketing healthcare costs, public and private payers across the globe are pushing aggressive cost-containment policies, impacting access to drugs and the levels of reimbursement.
The supply chain must deliver: The provision of a cost efficient and well-coordinated supply chain, responsive to the needs of the market, is increasingly taking centre stage with senior executives.
The specific challenges faced in developing an optimised supply chain vary depending on the organisation. Big pharma need to manage the complexity associated with implementing structural change; ensuring costs do not spiral, the work force remains motivated and the end state is defined and understood. Small and mid-sized companies are more likely to face challenges such as how to raise the necessary capital, acquire the right internal expertise and manage operational efficiencies, whilst still managing regulatory compliance and output from third parties effectively. So how should companies tackle the task of developing a supply chain for the future that gives them the best return on their investment? We have identified five key questions to consider:
How can I design the optimal operating model for my needs?
The decisions a pharmaceutical company makes when establishing a supply chain contribute significantly to its future cost base, so careful analysis is important. Bringing together customer insight, a detailed knowledge of internal capability and recognition of corporate culture and growth aspirations will help form a sound basis for the future operating model. But focusing on the “here and now” is not enough – it is important also to plan for the future, by considering questions such as: What sort of products or services are we likely to be offering in another five years? Where and how do we expect to be making them? And how are the relevant regulations likely to change? Considering these issues will help define “what you are and what you do”; the basis of an operating model that will steer management decisions across the organisation to align to an endorsed strategy. There is no right answer; there is only a “best fit” that balances the objectives of the business with its desired investment profile as effectively as possible.
Should I make, buy or supply services to others?
Many factors determine whether a company should make its own products or use a contract manufacturer but, if it is to take the right sourcing decisions, it will need to start by assessing its internal capabilities, capacity and tax structure. This will enable it to define the areas where it is well placed either to handle production itself (or even to sell its services to others) and those where it would be better off seeking support from a contract manufacturer. And this may not necessarily mean simply paying a supplier for a service; increasingly more complex arrangements are emerging in thepharma marketplace. These include long term strategic relationships, shared development work, joint ownership of product licenses and royalty payments.
Where assets are not being fully utilised, value may be released by leveraging proven manufacturing capability to produce products for third parties. This can be an attractive strategy, with the potential to change production facilities from cost centres into profit centres. However, the challenges of implementation should not be under estimated. To be successful, this will need new capabilities in relationship management and business development rather than the traditional line management skills generally found in manufacturing organisations.
How can I maximise value by using third parties?
When carefully managed, using external service providers can provide significant advantage. Small and mid-sized companies often face more challenges than their larger counterparts when it comes to managing contracts – not least because they can rarely negotiate such favourable terms. But big pharma has different issues; they must ensure alignment across their business so that the advantages of scale can be leveraged effectively. Understanding the marketplace and choosing partners with similar corporate cultures or growth aspirations can provide profitable opportunities for both buyer and seller.
The best way of selecting suitable partners is to focus on a small set of contractors, rather than using blanket tendering, and work closely with these potential suppliers throughout the tendering process to ensure that they have a clear idea of the purchasing company?s business needs and the complexities of the products or processes it is planning to outsource. However, it is also important to maintain a close relationship with each supplier once the contract is in place. Lifecycle management of contracts is crucial in realising value and minimising contract “leakage” through off-contract buying or poorly aligned service levels.
How can I make the most of my internal operations?
Exiting manufacturing may not be the answer. Research across other industry sectors has indicated that improvements in internal operations (taking into account „business as usual” improvements as well as process and organisation re-design) can yield up to 30% savings on COGS. These savings can be realised by looking at areas including asset utilisation, people capability and culture, strategic sourcing, enterprise wide planning and cross-organisation alignment of business processes. The complexities of a pharmaceutical process can raise challenges that do not exist when implementing lean solutions in simple, high-volume manufacturing plants. In addition, the necessity to ensure compliance with current Good Manufacturing Practice (cGMP) and the cultural difficulties associated with moving from a traditionally conservative manufacturing environment to one of continuous improvement cannot be ignored. In short, most pharmaceutical companies have the opportunity to unlock value in their internal operations, but the right implementation approach is essential to manage the technical and cultural change.
How can I create a regulatory function that’s a source of competitive advantage?
Many big pharmaceutical companies have responded to increasing regulation by building large regulatory affairs functions and hiring external experts to supplement their internal capability. This can result in considerable complexity and duplication, as well as driving up costs. Although small and mid-sized firms have an advantage over their bigger competitors here, because they are not hampered by large portfolios or complex legacy organisations, they may still have regulatory functions which are very specialist and professional but ultimately disconnected from the business.
Any company wanting to create a regulatory function that is a source of competitive advantage rather than spiralling costs should start by ensuring that it understands the real drivers of complexity. Pragmatic balance between central control and local autonomy to enable staff to cultivate good relationships with the authorities in their respective territories is essential, as are appropriate measures to track the efficiency and effectiveness of the regulatory function as a whole.
The pharmaceutical supply organisation of the future will look very different from today. Large multi plant facilities will re-shape into manufacturing campuses and dedicated facilities will be replaced with smaller, more agile multi product lines. A federated model, built on collaboration with external partners will become the norm, with factories and warehouses containing a companies own products alongside those of companies who until recently were their close competitors. The external environment is creating challenging conditions for the pharmaceutical industry. Are you unlocking the value in your supply chain?
Johnathon Marshall is a director of PricewaterhouseCoopers’ Pharmaceutical Supply Chain practice. He can be contacted at + 44 (0)207 804 8234 or email@example.com
Alison Wilson is a consultant in PricewaterhouseCoopers’ Pharmaceutical Supply Chain practice. She can be contacted at + 44 (0)207 804 0435 or firstname.lastname@example.org
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