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Pharmaceutical Manufacturing and Packing Sourcer

Competitive Advantage


An effectively integrated supply chain is essential to pharmaceutical business performance, and the industry must be wary of retaining legacy arrangements that do not maximise the efficiency and cost saving that can be brought in through strong optimisation initiatives.

The key to identifying the changes required to meet the pharmaceutical manufacturing and supply chain challenges of tomorrow lies in understanding the defining characteristics of today’s supply chains, looking at the latest business trends, and determining how these will influence the manufacturing and supply chains of the future.

The Characteristics of Today’s Pharmaceutical Supply Chains

Today’s supply chains tend to be slow to react, high in inventory and often pursue a one-size-fits-all approach. While functional, many supply chains operate in alignment with historical decisions and pre-designed constraints. Parts of them are often regionally managed, even where this is not necessary, leading to different approaches and different speeds of adoption of innovation. They can therefore be slow to optimise; as a result significant performance improvement is not sustained, as business requirements continue to move too quickly.

Performance
A defining characteristic of pharmaceutical supply chains is the requirement for perfect service, in terms of both product availability and quality, to all – including emerging markets. This is a requirement despite inherently poor forecast accuracy, often-wasteful processes and sub-optimised supply networks. To compensate, most organisations hold high inventory levels, which dictates poor working capital.

Network
Pharmaceutical companies tend to have a complex blended network of in-house and outsourced manufacturing, with various parts of the manufacturing and packaging process taking place in geographically separate locations, an upstream supply network based on design, rather than supply chain requirements, and a mix of direct and wholesale distribution. Certainly, for large and established pharmaceutical organisations, much of this has evolved through acquisition rather than by design for performance, and a result is sub-optimised both in terms of cost and lead time to market.

Planning and Supply Models
Current arrangements often adopt a one-size-fits-all supply chain model for the supply of drugs to market, whereby forecasted orders are used to push inventory into the system, rather than manufacturing being driven by true in-market demand. This situation exists, as it does in many industries, because it works and is relatively risk-free, yet it is inefficient with respect to service, cost of goods and especially cash flow.

Strategy
The complexity of the supply chain and regulation in all regions means that performance improvement is largely tactical, based on incrementally improving yesterday’s systems, rather than based on strategically designing a supply chain system to deliver to future business requirements.

People and Change
Often within the pharmaceutical industry, manufacturing and supply chain change is slow – much slower than in many industries. This is driven by perceptions of regulatory constraints that are (of course) real, but which tend to attract time-honoured solutions that might go unchallenged.

Trends in the Pharmaceutical Business

New product, customer and business requirements will significantly affect the way supply chains are operated. The purpose of the supply chain is to deliver to both current and future business requirements. The ongoing pressure on cost within the industry is driven by many factors, including: the global economic position; increased governmental interest in healthcare spending; regulatory trends (including issues around current Good Manufacturing Practice (cGMP) and its equivalents, such as temperature control during transport and anti-counterfeiting measures); and in some cases poorer-than-expected outlooks for R&D pipelines. This pressure continues a recent trend to bring supply chains to the forefront of pharmaceutical company decision-making; on the one hand the supply chain represents a cost to be controlled; but on the other, it is an opportunity to be exploited for the benefit of company, patient and payer alike.

As a result, it is increasingly essential for supply chain leaders to be integrated into the business, to anticipate future trends and to understand which of those pose a significant challenge to the supply chain. More so than in many industries, there is a significant transformation agenda associated with the healthcare sector that is expected to result in a major change in how business will be conducted in the future. One of the most significant of these trends that will have an impact on the supply chain is the proliferation of products, markets, routes to market and customers.

Products
The trend for increased product numbers doesn’t reflect an increase in overall demand, but a demand for more tailored drugs. So more stock-keeping units (SKU) are needed for the same overall volume of product shipped (or of patients treated). This leads to increasing demand volatility that is harder to forecast, and given poor (often 40-50 per cent) forecast accuracy, it limits the performance improvement that can be delivered with respect to service, cost and inventory, without changing from a forecast model.

In addition, with increasing numbers of products come shorter life cycles. The pharmaceutical supply chain faces unique challenges with respect to managing both ends of the product life cycle – clinical trials and launch cycles on the one hand, and effective end-of-life management on the other. The ability to manage the performance of both ends effectively will become a source of competitive advantage in future.

Competitors
The competitive landscape continues to become more complex. A customer has a bewildering array of sourcing decisions to take – from selecting the right product for the patient from the available molecules and delivery mechanisms, to deciding (for more mature products) whether branded or generic is the right choice and, in some markets, whether to source from another country where the law permits. Generic and parallel trade suppliers have tended to tailor their supply chain arrangements to allow for the lowest possible cost (hence, for example, the trend to reduce inventory through a process of late-stage customisation of product which is held in unlabelled form for as long as possible), but that can be another version of a one-size-fits-all approach, leaving competitive advantage to be derived from more bespoke and patient-centric approaches elsewhere.

Markets
There will be increasing focus on markets in emerging regions which have unique regulatory requirements for how and where products are manufactured and distributed – with a trend (sometimes enforced by import tariffs) towards local finishing and/or manufacture and extremely specific variants by region and country. So traditional low-cost bases such as Puerto Rico, Ireland and Singapore, while still critical, will not always be sufficient to supply to tomorrow’s markets – at least, not with fully finished packs of product.

Routes to Market and Customers

Routes to market are significantly different between, and even within, regions. Trends in western countries are to tailoring wholesale and direct-to-consumer routes, while some emerging markets pose very different challenges. It would not be unusual for a given stock-keeping unit (SKU) in a European country to be made available via several wholesalers, to private or government-run hospitals, to pharmacies, and even directly to a patient via a home delivery provider, for example. This arrangement adds cost but also adds competitive advantage if managed closely. In developing markets, the channels vary substantially from state to state, but manufacturers are increasingly reluctant to lose control of distribution to a third party at the border or the factory gate and can be expected to try to increase their influence over supply arrangements where they can.

Business Expectations

There are far higher expectations from the business that supply chains will contribute more with respect to achieving top and bottom line and balance sheet targets, despite the more challenging and evolving environment. Pharmaceutical manufacturing and supply chains now need not just to achieve the same historical performance in this complex environment, but drive better performance and be a source of competitive advantage.

Developing Successful Manufacturing Strategies For The Future

In order to drive raw competitive advantage, manufacturing and supply chain leaders will need to consider the following issues.

Defining a Clear Supply Chain Vision
Supply chain leaders need to set a clear long-term vision that proactively looks to drive performance to the levels required, rather than reacting and being influenced by their environment. Tactical performance improvement of legacy supply chain systems will no longer suffice. Supply chains need to be segmented and re-structured according to future regional, customer and product segments and optimised accordingly. Networks need to be regional and rationalised. Supply chain models will need to be flexible and demand driven. All of this requires supply chain leaders to continue to become more closely aligned with the business as a whole, which in some cases requires a shift in corporate dynamics.

Segmented Approach
Leaders will design and deploy clearly segmented supply chain models based on whatever makes sense for the needs of the business, whether by market, customer, channel or product type. In therapeutic terms, there may not be a need for hospital-use products to share channels with those dispensed routinely in primary care. Equally, products that are identical, apart from local packaging, may benefit substantially from being managed together using a more market-driven supply arrangement. Within the bounds of what is legally and economically possible, territories could be managed in groups based on similarities of distribution regimes rather than geographic proximity. From all of this, the location and operation of manufacturing and packaging sites can become a function of true cost to serve a customer base, rather than of history or expediency.

Optimisation

Leaders will then need to optimise the segments. This will involve several courses of action, including:

  • Rolling out demand-driven supply chains when possible to improve customer service and reduce inventory
  • Creating even more agile manufacturing and supply chains to compress lead times and optimise batch sizes in order to efficiently manage future complexity
  • Constantly reviewing and strategically optimising the network for performance – establishing supply chains in new locations, especially emerging ones, where strategic advantage can be derived

Conclusion

Very few, if any, pharmaceutical supply chains are currently optimised for likely future market dynamics. An organisation that is able to bring the power of its supply chain to bear on its market is likely to find itself in a position of considerable and sustained competitive advantage. There are several key steps to be taken. Organisations must ensure the integration of supply arrangements with the rest of the business, from the top downwards. They must also maintain a deep understanding of, and influence over, the evolution of every market at every level, and aim to anticipate changes. Finally, it is essential to design supply chains that are driven by market need rather than by legacy arrangements, and not be afraid to re-design them as markets evolve.

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Andrew Partis, PA Consulting Group, has more than 20 years’ experience of supply chain management, of which 15 are in healthcare. He has set up and run a global procurement and supply chain functions for a mid-sized pharmaceutical firm operating in over 80 countries, and has devised and implemented a strategy which revolutionised the route to market, while cutting costs, for a major pharmaceutical company’s products.


James Wright, PA Consulting Group, has over ten years’ experience working with organisations in the medical device and diagnostics, consumer products, automotive and industrial manufacturing sectors. James has worked on projects ranging from supporting new companies define and implement their supply chain strategy from scratch to working with some of the largest global manufacturing companies optimise and re-organise existing factories and supply networks.
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Andrew Partis
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James Wright
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