Magazine Article | October 7, 2010

M&A And The Pharma Supply Chain: Avoiding Critical Disruptions

Source: Life Science Leader

By Bill Hook

The pharmaceutical industry is no stranger to major shake-ups, as evidenced by the sheer size of the merger and acquisition deals that occurred in 2009 alone. While the actual number of deals was lower than years past, the ones that did occur were significant and impactful, as companies sought strategic growth opportunities in an increasingly competitive market.

Much planning goes into a merger from a business standpoint. What many companies fail to plan for is the aftershocks of a merger, which can long be felt in a critical area: the pharma supply chain.

Merging supply chains is a complex process, and anyone who questions the impacts should consider what happens when supply chains break down: Drugs are delayed to market, customers experience poor service, security and compliance risks heighten, and a host of missed opportunities occur. Companies that don’t plan for supply chain disruptions in advance of mergers are opening themselves up to these types of risk — and possibly an unsuccessful merger that fails to deliver benefits to the bottom line.

While 2009 saw a decline in the number of pharma M&A deals, driven by the global economic downturn, recent Datamonitor research (“2009 Pharmaceutical M&A Overview,” December 2009) reports that “new deal-making activity is on the rise once again” with two recent high-growth areas for M&A activity cited as biologic therapies and emerging markets. This means more pharma supply chains will be coming together and changing in the near future — an event that requires foresight, planning, and preparation on the part of supply chain decision makers.

Preparing For The Unexpected
Whether or not M&A activity is immediately on the horizon for pharma companies, it’s imperative for companies to prepare for potential supply chain disruptions sooner rather than later. Even if a merger doesn’t go through as expected, all companies will benefit from a more resilient supply chain. There are five key things that companies can do early in the process to ensure that two separate supply chains will successfully merge into one competitive advantage:

Know your supply chain scalability factor: Before merging supply chains, it is crucial to know the level of scalability of a company’s current supply chain. Companies should take inventory of their supply chains and ensure they have an up-to-date map including all lanes, networks, and stocking points around the world. Many companies don’t have a current profile of their supply chains, and this is critical leading into a merger. The biggest questions companies should ask themselves are “What aspects of my supply chain are scalable?” and “What specific supply chain changes will be required to accommodate changes in product portfolio?” To answer these questions, companies must look at factors such as whether they own all their own brick-and-mortar facilities and, if so, whether all facilities are at capacity. If facilities are full, companies will have to plan how to handle increased volume.

Define a formula for success: New supply chain + new goals = new metrics: When companies merge, two different supply chains are coming in with differing sets of metrics, which must be aligned to meet company goals. It’s especially important to measure customer impacts of any supply chain changes, such as volume of complaints, order fill rates, and on-time delivery rates, and be prepared to compare this data from month to month. Externally, companies must find ways to measure service performance in the eyes of the customer. Companies will need to determine how successful the merged supply chain has been in meeting customer needs and how transparent it has been in communicating changes. Internally, key performance indicators (KPIs) should address both the financial and people aspects of a merger. From a people perspective, in order to ensure they will end up with the workforce they need for the future, companies must find ways to measure how their employees’ views and practices are aligned with the company’s new goals and strategies.

Plan for various scenarios: Scenario planning is a critical part of supply chain design, and this is especially true when bringing together disparate systems and processes. Companies should conduct simulation exercises that demonstrate what will happen to the supply chain when a new company and new products are added to the mix. These exercises will reveal valuable information such as where the company will have heavier fixed costs, how to variabalize costs as much as possible, potential bottleneck issues, and coverage gaps. The assessments should also address their supply chain partners’ ability to “flex” with them in terms of having the assets, infrastructure, and scale to adapt to new situations and needs.

Know when to consolidate: Timing is everything when it comes to consolidation of two separate systems, especially when the consolidation will impact how and when companies go to market. Before merging supply chains, companies should closely consider the optimal timing for making changes that will bring the least amount of disruption. For example, companies in a seasonal business (cough and cold, flu, etc.) most likely will not want to attempt to merge supply chains during the busy time of year. Companies also want to ensure that they have a game plan for moving forward and the resources committed for a successful supply chain integration. At the same time, companies shouldn’t wait too long, as there will never be a “perfect” time to combine supply chains. Being prepared is the key to success.

Focus on the long term: When setting supply chain goals after a merger, companies should take a three- to six-year view. Mergers can serve as a new opportunity for companies to gain a “clean slate” of sorts with their supply chains and make network changes they might not have been able to make otherwise. The key is to focus on the future. Put facilities where you will need them in the future and not just where your customers are today. Build resiliency into the new network to enable you to adapt to various market changes and new customer demands. Supply chain changes will require investments, but ones that will give companies far greater gains a couple of years down the road.

The Supply Chain As A Competitive Advantage
Across the board, excellence in supply chain management is becoming increasingly critical for healthcare companies, as evidenced by findings from UPS’s 2010 “Pain in the (Supply) Chain” survey of pharmaceutical, biotech, and medical device companies.

The survey revealed top industry trends and concerns that are increasing pressures and focus on the supply chain. Among the top trends were: continued expansion of supply chains into global markets and increasing use of different distribution channels, including direct channels (to hospitals, pharmacies, retailers, physicians, and patients) as well as expanding work with wholesalers and distributors. Key industry concerns such as uncertainties around the impacts of healthcare reform, growing issues around managing supply chain costs, and regulatory compliance pressures and challenges were also factors impacting company supply chains.

It’s important to remember that the right supply chain strategy can have positive impacts across the company, especially in critical times such as those following a merger. When done right, supply chain mergers not only can help companies avoid critical disruptions in service, they can also turn the supply chain into a competitive advantage.

About The Author
Bill Hook is VP of global strategy at UPS Healthcare Logistics. He has more than 20 years of leadership experience in the healthcare sector. He received his Honors B.A. in Business Administration from the Richard Ivey School of Business in London, Ontario.