Don't Make This Pharmaceutical Outsourcing Mistake
By Rob Wright, Chief Editor, Life Science Leader
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By Rob Wright
I recently traveled to the corporate HQ of Albany Molecular Research, Inc. (AMRI) to meet with CEO, Tom D’Ambra. He founded this contract research and manufacturing organization back in 1991, before outsourcing was all the rage.
It is amazing what you can learn when you ask a good question, shut up, and listen. My best description of the experience is wisdom transfer, which I perceive differently than knowledge transfer. In my opinion, knowledge can be gained from a variety of sources, such as reading a book. Wisdom, on the other hand, is a much deeper understanding, which consists of knowledge, insight, and judgment. Wisdom is often accumulated over time from attending the school of hard knocks and persevering. Here is a piece of wisdom from D’Ambra, a 30+ year life science industry veteran, you would be wise to heed. When you decide to entrust a key component of your revenue engine to an outsourcing partner, don’t delegate this responsibility to someone in your procurement department. This is not delegating the outsourcing decision, but relegating it to a place of insignificance, a trend D’Ambra would like to see changed.
The Role of Procurement
The role of a procurement director is important to the survival of any business, and on the surface, seems simple — buy products and services at the right price, from the right source, at the right specifications, in the right quantity, for delivery at the right time, and for the right internal customer. If only it were that easy in the cost-sensitive and profit-shrinking environment in which pharmaceutical and biotech companies are currently operating.
After scanning a number of director of procurement job descriptions, I determined that even in the pharmaceutical industry there is not a scientific background requirement. D’Ambra and others have confided in me that the decisions which used to be made by scientists are now being made by purchasing/procurement, and the first question asked is not about quality, but cost. Can a nonscientist business person truly make the best decision when given the following shopping list — fluoxetine hydrochloride, starch, gelatin, silicone, titanium dioxide, iron oxide, FD&C Blue No. 1, and FD&C Yellow No. 6. Throw in some “other inactive ingredients,” all in the appropriate amounts of course, and bon appétit, you have Prozac. If you’ve seen one iron oxide, you’ve probably seen them all, so why not just do a reverse auction, whereby the role of the buyer and seller is reversed. The buyer advertises a need and sellers compete to provide the product or service, often bidding in a public forum similar to e-Bay. Generally the seller with the lowest bid wins the auction. This win-lose approach is not the best way to build a strategic partnership.
Research has shown that labor rights violations, safety hazards, and environmental degradation are the consequences of suppliers being squeezed to compete on price, quality, and production speed to secure a contract while maintaining profitability. Even the most valuable brand in the world, Apple, is not immune to these issues. According to this report, suppliers’ profits of manufacturing an iPhone in 2010 were 14.3%, compared to Apple’s 58.5%. The smallest input cost of manufacturing the iPhone is Chinese labor, which makes up less than 2%, and probably why the company, Foxconn, has been experiencing riots, suicides, and other issues at its iPhone factories. Do you really want to select your strategic partner, which you have entrusted your current or potential pharmaceutical revenue engine, the same way you purchase office supplies?
Outsourcing versus SMARTSOURCING™
In the November 2012 Life Science Leader issue, contributing editor, Wayne Koberstein, wrote an article entitled, Smart Sourcing At The Outset. Out of curiosity, I asked Wayne where he came up with the idea for the article title. He told me, “I just made it up.” When you think about it, the term seems obvious, catchy, and perhaps why AMRI decided to trademark the term as part of their marketing strategy, even developing a blog. But, AMRI is not the only company that has been trying to coin the term. A simple Google search returned 211,000 results. What I learned in my discussion with D’Ambra though, SMARTSOURCING™ has always been the AMRI approach to partnering strategically, they had just never, until recently, defined it as such. Perhaps this is why he and AMRI continue to persevere. If you too want to persevere when selecting a strategic outsourcing partner, don’t relegate the decision to procurement. Instead, take a smarter and more involved approach to the selection process.