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Pharmaceutical Manufacturing and Packing Sourcer

Linking Up

With the dramatic decline in manufacturing demand that followed the economic crash of 2008, manufacturers globally learnt just how difficult it is to turn around a global supply chain at short notice. They also witnessed first-hand the financial implications of failure to do so.

For pharmaceutical manufacturers, supply chain management has not always been the most immediate concern. Other industry pressures – such as spiralling R&D costs, lengthening development timelines and heightened, more stringent product quality controls – are all more obvious sources of strain. The recent crash has ushered in a world where those paying for medicine, be they state or private entities, are poorer and less willing to spend, meaning more rigorous scrutiny of medical outcomes.

Add to this the industry’s necessary reliance on highly uncertain investment, hinging on patent applications and clinical trials that can scupper years of effort and investment in a fl ash, and you could argue that supply chain relationships are fairly low down on the list of pharma manufacturers’ concerns.

However, this is precisely why they are vital. With all of these other pressures brought to bear on a business, it is essential to have an optimised supply chain that ensures no wastage or lost opportunities in the manufacturing of drugs and equipment.

Localisation

Despite the continuing signs of economic recovery, the lesson that global supply chains can be unwieldy in times of crisis remains engrained in the memory of many companies, and is one of a number of factors placing increasing pressure on manufacturers to localise their entire ecosystem, in order to minimise their exposure to supply chain risk. The greater the distance between the parties in the supply chain, the harder it is to maintain close collaboration, communication and trust – meaning the exposure to risk increases.

Another factor driving the localisation trend is labour costs. While emerging markets, such as India, traditionally have been attractive to pharma manufacturers because of the lower wages paid to workers, these have risen signifi cantly in recent years, eating into already tight profit margins.

There are also the practical challenges which supply chains face when operating in a global economy. These include fluctuations in foreign exchange rates, protectionist politics and other barriers to free trade – such as local pharmaceutical licensing legislation and regulation – as well as general manufacturing legislation associated with public health or environmental concerns.

A move to source goods locally not only eradicates these issues, but helps businesses reduce transport costs and emissions – which is becoming a significant consideration for companies looking to address the sustainability agenda by lowering their carbon footprint.

Stronger Relationships

For companies that rely on global supply chains, a more localised approach to procurement and an investment in local suppliers can lower logistical costs and ensure reliable access to goods and services. It can also provide greater flexibility, efficiency and control. However, these benefits will not be realised unless companies are prepared to invest time and effort in nurturing stronger relationships with all their suppliers.

A recent study found that the average manufacturer in the UK has around 190 suppliers. Despite the supply (or value) chain being complex and comprising many separate parties, there remains a tendency for manufacturers to talk only to immediate partners. Unsurprisingly, visibility of lower tier suppliers is regularly cited as their greatest management challenge by the, often multinational, firms at the apex.

According to IBM’s most recent Global Chief Supply Chain Officer study, many supply chain executives argue that their organisations are simply too busy to share information, or do not believe collaborative decision-making is that important. Instead, they are focusing their efforts on strategy alignment, continuous process improvement and cost reduction.

Certainly, the objectives of suppliers differ according to their position within the chain. Large firms look for products at the right price, delivered on time and with a high level of quality. They also need stability in their supplier base, because establishing new relationships is not only a significant undertaking, but introduces risk.

Smaller firms require stability too, as they often have to invest relatively large sums to comply with stringent quality, manufacturing and business standards – making length of contract particularly important.

With all this in mind, supply chain relationships inevitably demonstrate a tension between, on the one hand, the need for large firms to have the security of supply that having options in the market gives them and, on the other, the need for smaller firms to have the certainty of a settled stream of work – which they require to make investment decisions. Resolving that tension can only be achieved through a recognition of common interest and trust. Both will be reached as a result of a relationship based on constant communication. Partnerships that consist of more than just dispatching a batch of components and raising an invoice are far more likely to be sustainable in the long term.

Communicating with Clarity

Relationships based on trust and transparency are central to keeping the supply chain flowing and is the reason why informal contacts that are created at networking events can be so useful. Establishing the necessary communication paths, mutual understanding and respect, however, entails more than simply telephoning or meeting with customers and suppliers every so often. It takes time, effort and close collaboration. It also requires effective two-way communication across the supply chain.

Manufacturers will need to meet on a regular basis to build an understanding of what the financial and technical demands are, as well as the delivery pressures dictated by the progress of the schedule. Manufacturers will often share the same kind of technical and investment risks, regardless of size. Nevertheless, they must meet regularly to understand those risks both up and down the supply chain, and know who bears them, especially given that risks change over time.

Suppliers must provide clarity and transparency on their capacity and constraints. Crucially, they must be honest and avoid making promises they cannot deliver. If a supplier signs a contract that agrees a 300 per cent variation in volumes week-on-week, it should have this capacity available and not be surprised should the customer actually ask for it. Companies that overpromise are soon found out.

Such volatility is no rare thing in the pharma industry. Alongside the expected ebb and flow of demand for given ingredients, sudden changes in legislation or regulation, patent or licensing breakthroughs, or the actions of a competitor, can all mean sudden subsidence or growth in demand for a certain drug and, hence, its ingredients. For example, if a manufacturer produces a new drug after years of it being in the pipeline, they typically only have a short time alone in the market before others chip in with ‘me-too’ drugs vying for market share. This window is a time of high profitability, and manufacturers and their suppliers need to be able to potentially upscale production rapidly to best take advantage, and to then absorb the ensuing reduced demand without being harmed.

Likewise, suppliers must have absolute clarity from their customers on their volume and schedule requirements. For example, if they order a specific number of components for a specific date, they need to check back once they have manufactured their products to ensure that the exact number of components purchased was used. If there is a discrepancy, the customer should be under obligation to inform the supplier immediately so that they can either increase their production, or scale back accordingly.

Problems occur when a delivery date is pushed back, brought forward or cancelled, or when an order volume is changed. If a manufacturer is not communicating effectively, both upstream with its customers and downstream with its suppliers, then that change will not be effected through the supply chain properly. At that point, there will be some members of the chain whose production will be out of sync with what is now required – something that can introduce considerable cost.

Rules of Engagement

Entering into a well-designed contract from the outset helps to cement a solid working relationship and establishes clear rules of engagement. Any issues surrounding penalties, litigation and non-disclosure agreements can be addressed by making sure the details of the contract are right for both parties. For example, smaller players can add clauses that set manageable limits on liabilities, as well as new risks that are creeping into contracts, such as liabilities surrounding inherent defects.

Smaller players need to understand exactly what the customer wants, needs and expects, and manage that expectation in the right way. It is not just about negotiating on price, but recognising the value that is being provided to the customer through a proactive approach within the relationship. Managing your suppliers should be about much more than just keeping them on time and to budget. Larger players have to understand the technical and business risks their suppliers face – after all, they can impact them too.

The key is transparency between supplier and customer. Fluctuations in one part of the chain will be felt up and down the whole. If the potential pitfalls are visible, they can be avoided or side-stepped. Sharing information at an early stage is essential – allowing plans to be put in place by all parties to make the best of situations that will inevitably occur.

This can prove essential when the unexpected happens and conversations become more difficult. If time and money have been invested in a partnership, customers will be much more inclined to ensure that the relationship with the supplier survives intact following a particularly challenging situation. As such, the value of a solid relationship is most apparent during stressful times when schedules change and place additional strain on the supply chain.

Forward View

In essence, the longer your supply chain, the more risk there is – and the closer your suppliers are located to you, the easier it is to maintain better collaboration, communication and trust. Having a forward view of the customer’s requirements by working closely together helps to avoid any issues with capacity and schedules. This type of visibility should also be shared by manufacturers downstream, to improve stability and minimise supply chain vulnerability.

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Graham Dewhurst, Director General of the MTA, has a wealth of industry experience spanning almost 30 years in manufacturing. Beginning his career in 1979, Graham worked for the National Supply Company (a division of ARMCO Inc) before entering the manufacturing technologies sector in 1988 as Finance Director at Holroyd Machine Tools. He progressed to Divisional Finance Director for Renold Engineered Products in 1997, followed by Divisional Managing Director in 2001 for Renold Precision Technologies. During his time in the industry, Graham has offered a great deal of support and expertise to the MTA, latterly as Hon Treasurer of the Association. He became MTA’s Director General in 2007.
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