By Redram Alaedini
Pharmaceutical supply chains are typically large and consist of global networks with numerous products and SKUs manufactured in several plants with different capabilities across the globe. These products are manufactured, shipped, and sold in various countries and markets, each with their own unique customer, regulatory, and quality requirements.
The global nature of pharmaceutical companies and the complexity of their supply chains make it challenging to gain visibility into the overall sequence of activities and inventory pictures. In addition, continuous product availability and high customer service levels are mandatory in the industry, as patients and regulatory agencies rightly have little tolerance for product shortages or deviations in quality of products.
Depending on the industry segment (generic, brand, OTC, etc.), some of the issues that make ensuring an effective pharmaceutical supply chain very challenging include:
long product development and approval cycle times
propagation of product line and SKUs: shorter product life cycles due to aggressive generic and nonbrand producers
market pressure for new and more innovative products
increased quality and regulatory requirements
nonnegotiable or more difficult service levels
overextended global supply chains: multiple manufacturing facilities, distribution and sales channels, and markets
business cycle unpredictability: necessity of technical and scientific capabilities for continuous product maintenance.
In most pharmaceutical companies, supply chain management has been the responsibility of a separate and mostly disconnected department or group of employees reporting to the head of technical operations. Historically, these include: l the purchasing and planning departments which have been in charge of procuring the raw material, equipment, and required services and goods
l the shipping and distribution departments that make sure the intermediate or finished product is safely delivered to the intended customer.
Until recently, the purchasing, planning, distribution, and shipping departments have acted mostly as clerical support with no meaningful impact on the operation. The head of technical operations in most instances had a highly technical background and was usually promoted to the position after many years of serving as a plant manager, head of technical services, or engineering director.
As such, this person would have had little interest in how raw material was purchased or how products were shipped; the person’s main focus was on the manufacturing facilities and their network, capital expenditure in the plants, new product introductions, headcount, and production volumes. Indeed, until a few years ago, high inventories, frequent need for expensive air shipments, or the large number of manufacturing and warehouse facilities has been of little concern as long as the market did not face any product shortages and the new products were successfully scaled up into the plants.
However, during the past few years, pressure from generic manufacturers has increased, and at the same time, new product pipelines have dried up. As a result, pharmaceutical companies began to do what other industries had done one or two decades earlier and started to reduce their vertically integrated structures by looking outside for suppliers of goods and services. Eventually, for most companies, purchased raw materials and services became a much larger part of business units’ cost structures, and therefore, reducing that cost has now become one of the cornerstones of pharmaceutical supply chain objectives.
Unfortunately, as quarterly budgets get cut throughout organizations, the purchasing groups are usually forced to develop yet another new purchasing plan for less-expensive raw materials, less-known and cheaper consulting and recruiting firms, or even less-convenient airports for employees to fly out of in hope of reducing costs. Regrettably, these hurried and unsystematic cost-cutting activities have begun to put tremendous pressures on different functional groups within the companies and, in most cases, resulted in an overall increase in organizational expenditures. After all, due to the nature of our industry, any potential change of supplier would trigger audits, and any change in source of raw material would potentially result in additional stability and validation studies or even regulatory filings.
At the same time, to fill the knowledge gap in the supply chain and to accommodate the cost-saving project plans, the pharmaceutical industry has begun recruiting senior managers from other industries, some with limited prior knowledge of the pharmaceutical industry. In doing so, the industry is risking having individuals untrained in the changing requirements of today’s pharmaceutical companies, sustaining a new product technology transfer and commercialization pipeline, or trimming costs and improving efficiencies. Increasingly, it appears that most improvement projects and undertakings by supply chain groups are limited to simplistic and uncoordinated efforts to reduce shipping, raw material, and manufacturing expenditures or merely cut headcount with little comprehension of what actually is required to develop, produce, distribute, and maintain high quality products over the long run.
WHERE AND HOW TO IMPROVE SUPPLY CHAIN AND REDUCE COSTS
There are significant business process inefficiencies in most pharmaceutical companies that exist in every department and group. These inefficiencies have slowed the industry and consequently created an environment filled with opportunities for significant improvement and cost reduction. For example, delays in product development, poor manufacturing processes of new product formulations, regulatory delays due to inefficient submissions, inadequate marketing and sales forecasts, and high recruitment costs all put tremendous cost burdens on the supply chain.
Without a strong, lean, and highly motivated supply chain group, any pharmaceutical company would constantly struggle with slow new product introductions, manufacturing difficulties, and product backorders; high inventory, raw material, and labor costs; and significant regulatory issues. Therefore, supply chain improvement initiatives, in most cases, tie in directly with other internal and external departments and groups, and therefore must be undertaken in cooperation with them.
In addition, in all cases, improving efficiencies and reducing costs must be based on the concept of an organized and planned program. Cost reduction is not simply attempting to slash any and all expenses unmethodically and without understanding the consequences. The pharmaceutical company must first analyze and understand the nature of costs and how they interrelate with regulatory compliance, sales, inventories, and cost of goods sold, gross profits, new product introductions, and technology transfer.
It is of utmost importance that the cost-reduction initiatives also involve improving quality, compliance, technical capability, and employee motivation and retention. Without including those objectives, any cost-reduction initiative will eventually lead to higher costs and manufacturing or regulatory difficulties in the future.
In addition, considering the current industry challenges, to maintain and improve profitability, drug companies must reconsider the way they structure internal business practices. Improving quality by reducing process cycle times, eliminating nonvalue-added process activities, and maximizing throughput while minimizing resources greatly improves performance and increases profitability. And the only way to achieve this is to take a serious look at some of the main drivers in the supply chain.
These drivers exist in both the supply chain itself and also where it interacts with other functional groups. Specifically, the supply chain can benefit from:
Rapid and high quality product development and technology transfer: Since the ICH (International Conference on Harmonization ) outlined the notion of design space in its Q8 guideline, pharmaceutical companies have been hesitant to adopt quality by design (QbD) in formulation and process development or technology transfer to commercial sites. However, adopting the QbD principals in product development would not only ensure high quality of product formulation, but also would speed up the process and ensure successful scale up and commercialization.
In addition, as new molecular entities are discovered and product formulations and processes are developed by R&D, these products must be efficiently scaled up and transferred to manufacturing. The new products and processes must be validated at the receiving sites, and often stability batches need to be manufactured, and documents must be prepared for a submission to regulatory agencies. Streamlining each of these tasks, ensuring they are managed properly with the right teams and individuals, and ensuring success within budget and agreed upon timelines are critical endeavors in the pharmaceutical industry. Thus, each delay, error, validation failure, or batch rejection would cost the business unit dearly.
A high degree of outsourcing: Given today’s market demands, an inefficient supply chain is no longer an acceptable way of doing business. Unfortunately, pharmaceutical supply chain groups in most companies have been inefficient for many decades.
In order to lean out inventories, enhance regulatory compliance, and respond to demands for lower cost, most pharmaceutical manufacturers are now turning to outsourcing. Third-party manufacturing, testing, and logistics providers offer the pharmaceutical industry a scalable lower-cost solution. Since these providers must meet the requirements of multiple clients, they bring a set of best practices to operations while maintaining regulatory compliance at the highest levels required by their clients and as dictated in supply and quality agreements. However, it is important that before a company embarks upon outsourcing, its manufacturing, R&D, or other functions oversee a complete analysis of the true costs is carried out. After all, in some instances and for some products or technologies, manufacturing a product in New Jersey or Kansas might make more sense than in Europe or Asia.
An elevated level of trust and collaboration with suppliers: As many of us have seen, for most U.S.-based companies, the interface with suppliers has been, to some degree, adversarial and purely based on reducing the unit cost when it’s time for contract renewal. However, the most effective way to reduce supply chain costs is to collaborate with suppliers and service providers. This will help not only to reduce supply chain expenditures, but also would improve communication and hence quality of product and compliance with the regulatory requirements. Collaborating with suppliers should always include access to information regarding supply chain planning, product changes, and regulatory issues.
A simplification of the product portfolio and distribution network: Most large pharmaceutical companies have too many products and manufacturing sites. Although some seem to have started closing plants to reduce costs, they are still reluctant to let go of older and smaller products, not quite comprehending the actual cost of maintaining these older drugs.
Closing some plants and still hanging on to the old products has forced many companies to begin to transfer these older drugs to other internal or contract manufacturing facilities in an attempt to maintain what are considered to be “cash cows.” However, it is important to keep in mind that these perhaps financially insignificant products still need to be maintained to ensure they comply with today’s high level of regulatory compliance. This is certainly not an easy or inexpensive task as these older drugs usually would not meet the current requirements, and therefore, in most cases, analytical methods, formulations, and even processes need to be updated before they are transferred to alternate facilities. In addition, product transfers to other sites bring about significant additional costs in personnel, raw material, regulatory submission, and compliance activities.
The need to improve or redesign business processes: Most IT tools presently utilized in the pharmaceutical industry are either not specifically developed for the industry, and therefore lack the necessary functions, are outmoded, or are simply not user friendly. This needs to change in order to provide users with the tools, information, and capabilities they need to make the right decisions or perform their jobs in an effective manner.
Most of the key operational business processes being used at many major pharmaceutical firms are inefficient. These inefficient processes result in an increase in transactional costs, increased cycle times, and eventually ineffectiveness of the organization to adequately achieve its goals. Therefore, improving workflows and processes within and between functional groups, organizations, and companies would be of great help in making supply chain activities and relationships more efficient.
Improved quality systems and regulatory compliance: As defined by Philip B. Crosby in his book Quality Is Free, the cost of quality has two main components: the cost of good quality (or the cost of conformance) and the cost of poor quality (or the cost of non-conformance). The cost of poor quality affects internal and external costs resulting from failing to comply with requirements. On the other hand, the cost of good quality affects costs for investing in the prevention of nonconformance to requirements and also costs for appraising a product or service for conformance to requirements. Obviously, in the pharmaceutical industry, the cost of nonconformance to quality standards and regulatory requirements could be potentially devastating in the form of re-inspections, recalls, lawsuits, market loss, fines, and consent decrees, not to mention potential loss of lives.
The creation of a knowledge-based organization: Supply chain leaders must ensure they are developing the skills, knowledge, and abilities of the next generation of managers and leaders in the organization. They must also spread a shared vision and key values throughout the organization. In addition, they need to work hard to retain the employees and create an environment that fosters organizational learning. More organizations are recognizing that training that is disconnected from the business environment is unlikely to result in lasting change. Consequently, a more effective action learning model that includes working on actual business problems, assignment rotations, and task-sharing activities must be adopted. Contrary to the usual expensive training courses offered in the industry, action-learning models can be provided to individuals mostly at negligible costs.
The implementation of lean six sigma: Over the last 20 years in other industries and some functional groups within the pharmaceutical industry, both the lean and the six sigma methodologies have proven that it is possible to achieve dramatic improvements in cost, quality, and time by focusing on process performance. Lean methods reduce waste, cycle time, and non-value added work, therefore improving information and material flow throughout the process. On the other hand, Six Sigma tools are used to identify root causes of variation in processes, shift the process averages to optimal levels, and reduce variation around the average to find the best operating conditions, identify high-performance operating windows, and design robust products and processes.
However, using either one of these methodologies by itself has limitations. Six Sigma will eliminate defects, but it will not address the question of how to optimize process flow. And, lean principles exclude the advanced statistical tools often required to achieve the process capabilities needed to be truly lean. Therefore, it is important to consider these two methods as complementing each other.
The pharmaceutical supply chain has finally begun to try to catch up with other industries. Unfortunately, most of this effort has involved only headcount reductions, product deletions, and plant closures. However, the regulated and highly technical nature of pharmaceutical development, manufacturing, distribution, and sales offers many untapped opportunities. These opportunities can be taken advantage of only by involving people, within and outside the organization, with the right expertise and a full commitment to the company and industry. Supply chain costs are far more than just the cost of raw material, manufacturing, or shipping. The long-term (and thus “real”) cost stems from business processes within groups such as R&D, regulatory, engineering, and quality assurance as well as suppliers and service providers.
About the Author
Pedram Alaedini is president and CEO of Primapax Biopharma Partners. Primapax specializes in the integration of technical, process, and organizational skills to boost the performance of biopharmaceutical development, manufacturing, and service firms. He can be reached at email@example.com