Rethinking the supply chain

pharmafile | September 3, 2004 | Feature | |   

For over 50 years, the pharma industry has delivered wave after wave of innovative scientific advances, with above-average growth and return on investment.  Now the industry is under pressure as never before: players large and small are struggling with innovation, cost containment, and global competition.  It may be time for pharma companies to take a fresh look at new levers of business excellence in this environment.

Tough challenges ahead

After two decades of rapid growth, what is causing the declining sales and weaker innovation that plagues pharma today?  The industry faces major challenges on at least three fronts: R&D, customer expectations, and structural change.  

Major uncertainties surround the science base, which underpins R&D.  A widening gap has appeared between the input costs to R&D and the output in terms of new molecular entities (NMEs) approved for marketing.  Inflation-adjusted industry spend on R&D doubled between 1995 and 2002.  But in the same period the average number of NMEs approved per year by the US Food and Drugs Administration (FDA) fell by more than half.

Customers, meanwhile, have become more discriminating in their assessment of the value of the choices open to them.  Purchasing and negotiating processes are more sophisticated.  Buying decisions are increasingly influenced, not only by considerations of clinical effectiveness, but also by the pressure on healthcare buyers to contain costs.

The structural change taking place within the pharma industry itself, is leading to more intense competition on a global basis.  This change is obvious in generics, where patent expiry is opening the door to new entrants with low costs who can provide an attractive alternative to cash-conscious buyers.  Competition is also becoming tighter in the R&D phase: as new therapeutic classes emerge, they soon become populated with 'close substitute' patented products, all competing for a share of the market.

Meeting these three sets of challenges requires a company to be 'master of all trades': developing genuinely innovative new products which clearly deliver what customers are looking for; marketing and selling those products rapidly across diverse national markets, while manufacturing and distributing their products with maximum efficiency and at lowest cost.

Beyond the product pipeline

Manufacturing and the supply chain have yet to feature prominently in most pharma companies' attempts to reverse their falling profits.  Generally, responses to date have focused on what worked best in the past: pushing harder at the drugs pipeline and introducing broader, more aggressive new sales and marketing initiatives for the output.

Large amounts of executive time are consumed in the search for new blockbuster drugs.  To increase their pipeline, companies are buying new products from biotechnology firms, and/or engaging in mergers and acquisitions, but most are yet to see positive business benefits coming out of these activities.

Equally 'top of mind' for pharma executives is the drive for more effective sales and marketing.  Activities in this area have broadened considerably:  they include working as partners in healthcare to provide information and support for patients and prescribers.  The traditional targeting of doctors has shifted, as 'patient power' and new healthcare buying structures mean that doctors are no longer the primary decision-makers in many instances.

In comparison, manufacturing and supply chain performance, have received little attention.  If this neglect is questioned, it is normally excused on the basis of regulatory constraints, or special features of drug manufacture quality standards agreed with agencies, in-country manufacturing requirements, or the need to assure continuity of supply.

There may be some truth in these arguments.  But accepting them without challenge can have serious affects on manufacturing and hence overall performance.  Quality is one of the biggest casualties: whereas a typical semiconductor manufacturer will discard 0.0001% of product for quality reasons during manufacture, in pharmaceuticals  5-10% of product does not meet specifications and needs to be reworked or disposed of.  

Despite this, a typical pharma company spends about as much on its manufacturing and supply chain operations as it does on marketing and sales activities and considerably more than the average spend on R&D.  Clearly, low quality levels in drug manufacture are adding unnecessary costs and seriously damaging competitive advantage.

Today's forces and business drivers demand a new perspective on these issues, and a new focus on improving manufacturing because real growth in pharma will depend crucially on such improvements in the coming decade.

Compliance and manufacturing

Part of any drive towards manufacturing excellence has to be a clear perception of what is both possible and desirable.  Compliance issues often generate strong views among pharma manufacturing executives, not surprisingly, given the need to apply for regulatory compliance approval every time a process improvement is made.  Some improvements are prohibited altogether by regulations that were laid down as long ago as the 1970s.  

The FDA has made it a priority to review and update standards in the light of technology advances over the last quarter of a century.  Other regulators face the same challenge.  For the good of the industry and those it serves, any changes made will need to provide a more realistic and flexible approach on change, modification and improvement in manufacturing.  

They will also need to recognise three fundamental shifts taking place at the same time in pharmaceutical manufacturing. The first is a move to less chemical and more biological manufacturing, with a rapidly growing market for outsourcing to specialist manufacturers.  Secondly, manufacturing is moving from multi-purpose plant to dedicated product-specific manufacturing plants. The third shift is in the number of secondary manufacturing centres around the globe, with leading players consolidating from 20 to 30 centres down to five to seven.

It's important to recognise that outsourcing may not be the best route to improving pharma's manufacturing cost base.  Making better use of existing assets may be a more beneficial option.  After all, much of pharmaceutical manufacturing capacity lies idle for significant periods, due to the nature of the manufacturing processes employed.  Moreover, pharmaceutical companies tend to outsource the upstream processes where experience and efficiency are greatest.

An alternative approach would be to adopt techniques used in low-margin manufacturing-driven sectors, such as automotive and mainstream chemicals.  This requires courage – a willingness to take risks with regulators and customers.  It also requires a more holistic and creative view of the issues.  

One major US-based pharmaceutical manufacturer did decide to take the plunge.  It was forecasting a significant increase in demand and saw operational excellence as a platform to increase production.  But low organisational effectiveness was impeding large-scale performance improvement.  Working with Celerant in three areas – organisational structure, process improvement and management systems -the company succeeded in reducing cycle time by 50%, increasing output by 40%, reducing unit costs by 18%, and raising overall productivity by 60%.  

Rethinking the supply chain

Performance improvement on such a scale can deliver significant competitive advantage.  But, in a global industry like pharmaceuticals, the quest for excellence cannot stop at a firm's boundaries. In this industry, supply chain management can be literally a matter of life or death, as patients cannot afford to be without their prescriptions.

Pharma companies must also remember that their customers' perception of their products and services is based on the performance of the whole supply chain which is only as competitive as its weakest link.

Forecast accuracy is one of the greatest challenges facing pharma executives.  Not only can customer behaviour be highly unpredictable, but there are also problems getting local marketers in 30 to 40 affiliates around the world to work together effectively.  It's not just about training them in the best techniques.  They also need the capability and willingness to communicate effectively with each other and with manufacturing, about absolute quantities but also about tolerances and risks.

At the same time, forecasts are crucial to managing costs.  On the demand side, accurate forecasts enable dedicated national leverage of a firm's product portfolio.  On the supply side, raw materials, active ingredients, tablets, injections and packs must be forecast and managed to meet the predicted demand.  This requires cascades of systems and processes, maintaining a delicate balance between external sales, stock holdings at various levels, manufacturing schedules and materials purchasing.

A small European pharmaceutical company commissioned Celerant to help improve customer service.  Through a series of adjustments, including the installation of a process management and optimisation system, improved production scheduling, and the introduction of a process for sharing best practices, the company raised its production schedule attainment by nearly 60% and improved yield across several products.

Supply chain systems and processes are under increasing pressure at both ends of the product lifecycle, thanks largely to competitive market conditions.

In the past, for example, a product launch could be spread over three or four years across the top 20 world markets, owing to regulatory delays.  Now that launch may be concentrated into 12 or 18 months.  As a result, manufacturing is forced to make difficult decisions quickly, to ensure the right launch stock and capacity requirements in the early years, and the ability to match growth in subsequent demand.

At the other end of the product lifecycle, after patent expiry, supply chain management has to cope with massive uncertainty in the supplies required and likely demand, in the face of competition from generics.

The 'soft' option at both ends of the cycle would be to hold excessive levels of inventory.  But this option is prohibitively expensive.  A better answer lies in addressing the other challenges presented by the supply chain: by making to customer demand, increasing operational effectiveness, improving cross-functional teamwork, and becoming more effective at overall cost control and compliance.

What's the payback?

Some companies have already grasped the nettle of manufacturing and supply chain improvement.  The rewards they've reaped cover a wide spectrum of business benefits, including: cost reduction; improved efficiency; increased yield; improved 'on time, in full' (OTIF) delivery; increased productivity; and greater control of project duration.

Aventis Active Pharmaceutical Ingredients (API), for example, has worked with Celerant to develop and implement a maintenance excellence programme throughout its five production plants in Germany, France and Italy.  The aims of the programme were to increase overall equipment effectiveness, improve contractor management and increase efficiency in its maintenance processes, including procurement.  Common management control and reporting systems were implemented across all the plants.  A knowledge management concept was developed for maintenance processes across API.  The programme has yielded savings of E6.9 million.

Aventis Scoppito, on the other hand, asked Celerant to help with performance improvements to address growing global competition.  Improving employee skill levels and introducing best practices from other industries were major planks in the improvement strategy.  A variety of management tools such as Total Productive Maintenance and Six Sigma were combined with holistic planning and a realignment of the organisational structure.  Improvements included a 20% increase in overall equipment effectiveness, 30% reduction in plant cycle time, and 12% overall productivity increase.

Focus on the future

Gaining and maintaining a position as a serious player in pharmaceuticals has never been easy.  Those who succeeded in the past excelled at both drug development and marketing.  Those who succeed in the future will also excel at manufacturing and supply chain management.

Ironically, pharma companies are in many ways victims of their own success, their own proven ability to push back the boundaries of what was scientifically and commercially possible.  

In today's industry, breakthrough innovation increasingly means the expensive creation of whole new product categories.  Differentiation is more and more difficult.  Meanwhile, investors are demanding all possible economies to protect earnings in an increasingly unpredictable future. Even the leaders in R&D and marketing will need to put the cost, efficiency and effectiveness of their manufacturing and supply chain under the microscope.  The winners will be those that can deliver performance improvement on a par with the best, not just in their own sector, but with any company in the world.