Magazine Article | May 11, 2011

Creating A More Flexible Supply Chain

By Mark Wiesman, President, DDN

The globalization of the life science industry — coupled with the shift from blockbuster drug development toward sophisticated, targeted molecular development — is resulting in a highly complex supply chain. To successfully meet the demands of globalization while mitigating associated risks, the life science supply chain must become extremely flexible.

In a recent article entitled, Supply Chain Yoga, Marco Ziegler, partner of the global management consulting firm McKinsey & Co., emphasized the strategic and financial need for life science companies to modify the current supply chain model, stating, “We estimate that averagely performing pharma companies could boost EBIT by 25% by adopting flexible supply chain processes.” Ziegler adds that while manufacturers have traditionally focused on reducing manufacturing costs and inventory levels, the greater differentiator in the future will be the total cost of supply, requiring greater flexibility throughout the supply chain.

As president of a supply chain company working with global life science manufacturers, I’ve observed the following commonalities among companies that have successfully gained a competitive advantage by building more flexible supply chains.

Shared Efficiencies
By sharing manufacturing capabilities, distribution routes, warehouse space, and back end processing, life science companies increase efficiencies and time-to-market while reducing costs. By sharing space in an FDA/DEA-compliant facility and outsourcing complex IT services and systems — such as warehouse management, contract management, order to cash, and accounts receivable — outsourcing partners are able to spread costs across multiple manufacturers. As a result, the overhead required for each manufacturer is lower. In addition, life science companies benefit by shifting fixed costs to variable costs and paying only for what is used. Companies that choose this flexible model reduce the overall capital invested in their businesses, yielding higher returns on invested capital. Additionally, flexibility is enhanced with the ability to rapidly scale up or down operations, move into and out of products, and add or delete capabilities. These advantages are invaluable in the rapidly changing life science industry.

Mitigating Risk
In years past, disruptions to the supply chain were more regional and less interrelated, but today’s global supply chain makes it clear that whether a disaster happens nationally, (such as the Gulf oil spill), or internationally, (such as the Icelandic volcano or Japanese earthquake/Tsunami), the impact is felt by all. Likewise, counterfeiting, inconsistent quality, and environmental or political disruptions in one area of the world may now impact the supply chain on the other side of the globe. To maintain a flexible supply chain it’s important to develop a supply chain risk-management program. This can be best achieved by building a flexible supply chain with a network of partners.

Becoming a virtual manufacturer is a deliberate strategy for increasing supply chain flexibility, as suggested by Price Waterhouse Coopers (PWC) in its recently released report, Pharma2020. The PWC report describes the following benefits of virtualization:

  • It enables a company to shift to a flexible cost base, reduce the risks associated with investing in new assets, and access new technologies and skills.
  • It helps a company align its supply chain network with its demand forecasts.
  • It transfers the risk of primary and backup supply to a third party.
  • It drives costs down by switching products and processes between competing suppliers in its network.

Moving forward, industry leaders that choose to build a more flexible supply chain will clearly gain a competitive advantage and will be able to respond more quickly to market demands, a requirement for success in the global marketplace.