Want to Improve Your Supply Chain Relationship? Rainer Beck, Novartis Talks to Pharma IQ about the 3 Phases of Third Party Integration
Dr. Rainer Beck, External Supply Organisation, Supply Relationship Manager, Novartis Pharma AG, joins Helen Winsor Pharma IQ, to discuss the changing domain of global pharmaceutical contract manufacturing as pharma companies increasingly integrate their internal supply chain with the external supplier.
Pharma IQ: Global pharmaceutical contract manufacturing is a changing domain. How has this developed over the past five years?
R Beck: I think when we are going back five years ago, and I am talking now of Novartis, we have had the classical approach, which can be called Demand Focused.
The main target of this business model was to secure the supply and the key decision driver was pricing. This was five years ago. In the meantime, we have had another phase we called Consolidation of the Suppliers. Here, we think, do we have the right suppliers in place? And in this phase we have had also the approach to go to low cost countries, for example like India.
Two or three years ago we changed our strategy again, with the third parties, and we call it now a Preferred Supplier Partnership model. This is in principle we wanted to drive the third party business as we are doing our internal operational departments. So we want to implement performance management KPIs, and we want to do with them key strategic projects like the inventory projects, or what we hear afterwards in more detail, what we now call the Lean Link approach.
Pharma IQ: Pharmaceutical companies are increasingly integrating their internal supply chain with the external supplier. From your perspective, what are the advantages of this, and can you outline the advantages for both parties?
R Beck: We are thinking to drive the third party business as we are doing with our own pharmaceutical production in house, and here you have normally the classical main targets, quality, supply and costs, and with our new model of this Lean Link approach we want to achieve, on the one hand a reliable supply chain, or in simple words, no surprises, and on the other side, and this is exactly what you are doing in a pharmaceutical operation, if you have the right quality in place, the supplier assured, then cost efficiency is the third theme, and here we want, in a partnership model, to create benefit for both parties.
For example the classical one is to reduce the number of orders, or to have the right order size in relation to our internal inventories.
Pharma IQ: What are the key steps involved in this type of venture? And could we take a look at three areas: firstly the planning process, secondly the technology integration and then thirdly the ongoing project management? What are the key steps of these different phases?
R Beck: Before we go more into detail, I would like to mention that it is a joint exercise between Novartis, in this case, and the third parties, and this has to do when you are starting with your question about the planning process. This means we are going in the order pattern, evaluate the number of orders, the sequence, and we want to bring in an optimum size and an optimum sequence, in regard to the operational costs.
This has the benefits of reducing the changeovers, and to use the capacity of the production in an optimum way.
Then technology that you should have in place: we have three elements. The classical one is make to order principles, then supply to demand, and we call the last one, which is the highest collaboration, when to manage inventories, but in principle, to go with this Lean Link exercise, you can do it also with the classical approach, made to order. So this is not really depending on E-supplier features. It helps; it facilitates the whole thing, but it’s not mandatory to have these electronic features in place.
Pharma IQ: Shall we go through the key steps involved in the different phases?
R Beck: The key steps: normally you are looking at the order patterns, you make an evaluation, what you have had last year, and you are looking at the forecast, and one of the prerequisites is that you have sufficient forecast accuracy. This means we have to have it beyond 85%, and then you can, in principle, look that you bring the order sizes and the sequencing in the right balance, related to your internal inventories. This is the first step you do normally.
Then you go in a discussion with the supplier, and this is not driven by us, by the customer; you go to the supplier. You find what's on the operational cost, the optimum, for example, you can have different changeover, you have different steps in production, and there are different cost consequences for this changeover, so in this phase you contact the supplier. This is the classical approach, and after that comes the implementation.
Pharma IQ: In terms of technology integration, when you're implementing these types of ventures, what are the key steps involved there?
R Beck: From the technology, normally this is an industrial standard to have SAP in place, but for the classical approach, it’s also possible with the so-called made to order principle. This means we receive an order from our affiliates, and place or forward this order to the third party. This is also possible without any electronic features in between. It would be facilitated if you have a direct SAP link between both companies. Then everything at the end would flow automatically between both companies, between Novartis and the third party, but it’s not mandatory.
Pharma IQ: When it comes to the ongoing project management, what tips and stages would you say are really important there?
R Beck: Normally it starts with this order pattern evaluation, and in principle you work with the classical project management mod
Then afterwards comes, we call it Sustainability phase. Here you should create with a third party, KPIs to keep the process under control, for example, how to measure the supply performance, how to measure, or what do you give as a target for the order sizes, number of orders? Forecast accuracy is very important. From our side it must be above 85%. And also order changes would jeopardise the whole system. The number of order changes should be below 5%. And you have to track these numbers.
Pharma IQ: In your view, what are the common challenges and hurdles in integration?
R Beck: The most important thing is openness for collaboration and change on both sides.
Also, and this is also the experience from our pilot: it facilitates if you talk the same language. So if our partner has had a Lean exercise, then internally this will also help, because then he understands what we are talking.
Then a very, very important thing is the willingness of both partners to share the benefits. If there is no agreement, then it makes no sense to go in a Lean exercise, because we have to spend resources from our side, and also the partner has to spend resources in this, so we have to invest somehow, and without benefits afterwards, normally you don’t invest.
From a technical point of view, the forecast accuracy above 85% is very important, for example, below 70% I would never go in a Lean exercise with a third party, and the forecast comes from us in this case.
What you also need on the other side is a reliable supplier, so supply performance, and here I'm thinking in quantity and in time, should be above 80-85%.
Pharma IQ: Can you give some examples of this type of initiative at Novartis? And maybe share some of the lessons learned there?
R Beck: Yes, we have currently running between three and four pilots, and our expectation is that we have a savings potential of about 1-5% of the operational costs. That's in, in this scheme, and I think from this experience the parties on the other side, from the beginning have been very interested to go with us in these pilots.
We have also seen benefits in the overall relationship, because if you are doing a joint project, this has also some intangible wins. This means that you normally improve your general relationship with the third party.
A learning that is also important, the whole exercise is not a quick thing, so I think the evaluation phase and implementation will need, overall, about six to nine months. It’s not something that you can implement in four weeks. It is an exercise that costs resources on both sides, and therefore it's very important to be clear about the model to share the benefits afterwards.
Pharma IQ: How do you see the GPCM landscape developing in the years ahead? What key trends do you see coming on board?
R Beck: Generally, but also for Novartis, I think all big pharmas have a challenge in that the blockbusters are running out of patent. We'll see this inside of Novartis, with Glivec, with Diovan, and also the others have the same issue. This is one thing, which plays a role because the consequence of this is somehow the big pharmas have idle capacity. That's a fact.
Then, and now it’s more focused on Novartis, we have an internal credit sheet that we want to become, as much as possible, patient focused, so we want to develop new pharmaceutical products for niche treatments of patients, and this has also consequences, because this means not the big volumes, when I think of third party business, and also internally.
And then a third element is we have more and more in-licensing deals. This means that a new launched product is not coming internally, from internal development, from internal research department; it’s coming from outside. You buy it. And this has consequences for the third parties. First, the blockbuster thing: if you have idle capacity internally, then normally you don’t outsource big volumes, so I think the order pattern for the third parties will in the future also be more smaller order sizes, smaller volumes.
Then when I think about the patient focus strategy of Novartis, you come in the area of specialists. This can be in packaging, but also in manufacturing. This means you are looking for third parties who have equipment and technologies in place, which you normally do not have in house, because you have too small volumes for this to utilise them in an efficient way.
And the third thing, what I mentioned about in-licensing deals, in the past it was for Novartis internally a no-go to go with a new product with a launch with a third party. Four or five years ago this was absolutely out of discussion.
When you are thinking about in-licensing, then this becomes more and more the case, and this means also for us, for our internal development process, that we have to change or to actualise our internal process that we are also able to go in a launch with a third party from the beginning of the development cycle of a product.