How to manage the threat of the global supply chain and save money

This month’s expert advises how pharma companies can make their supply chains leaner, and how to guard against the security implications of the global supply chain.

What is your advice to pharmaceutical companies looking to reduce their supply chain management costs?
Many pharma companies have made great improvements by addressing their supply chains and their related costs, however, more can still be done; the sector benchmarks badly against others.

The industry has been consolidating through mergers and acquisitions, which has inevitably left supply chain networks with substantial duplication and redundancy, not just the obvious infrastructure, but in working practices and standards that are applied.

The potential is, therefore, to leverage scale better through structural change and to work towards best practices that are commonplace in other sectors such as food, drink and consumer goods. Before embarking on major structural change, particularly systems, pharma businesses need to examine their operating procedures and standards, re-engineer them then move to the major changes.

Now, more than ever, companies should look for all opportunities to increase product velocity through the supply chain; challenge every touch point (and reduce them); and question every inventory holding point (for one market it may be appropriate and not for another).

It is dangerous to assume that one standard fits all. Companies must differentiate their supply chain activity by product flow and customer type, otherwise a uniform service and costing emerges, and the power to manage cost at the detail level is lost. This is the Cost-to-Serve message and while it introduces some complexity of management, much can be systemically addressed and automated to make transactional processes more predictable.

Supply chains should be examined for waste (particularly time waste). If this can be reduced costs will drop out by default.

A key area for review must be the decision-making process and the 'norms' that are embedded. The following must be considered:

• How often are safety stocks set to ensure markets do not run out of stock? When we review these, we often find the levels are set so high that the inventory is very slow moving and the beneficial effect of safety stock planning is lost.
• While it may seem counter intuitive, the tighter the planning cycle the more reliable (and often flexible) a business becomes. Too many pharma businesses adopt long planning cycles, which effectively extend the market replenishment lead-time, and introduce far too many opportunities for plan revision and change. These cause supply failures in the market, and compromise bulk production planning and vendor performance.
• Process integration and clarity of ownership are essential. It is remarkable that so many businesses still operate dual systems and processes, which inevitably 'slows' decision-making, reduces visibility and inflates costs. Equally striking is the number of areas of business control that have multiple owners and hand-offs, essentially leaving no one in control and accountable.

Poor planning results in very high levels of ‘fire fighting’, generating higher operating costs, which are usually invisible to management as the costs are not reported.

Sixty percent of all process and cost improvement can be achieved through a series of direct and relatively simple actions. Companies should start with the easiest target, as it becomes the funding agent for structural change that will yield the balance of improvement: starting with the basics provides a sustainable business process environment. Get the basics right, keep the processes as simple to follow as possible, and establish operating rules and guidelines that enable your team to address situations intuitively.

Companies that address these points assertively will find their supply chain organization becomes leaner and more efficient, back-office activities will become streamlined, and costs will reduce.

What are the key points to LCP’s Cost-to-Serve methodology?
LCP's Cost-to-Serve methodology provides businesses with rapid and incisive insights into how its customers and products consume resources and erode margin across the supply chain, replacing the normal view of costs by function.

Cost-to-Serve exposes a wide range of cost and margin erosion. It quickly pinpoints which customers, products or markets require attention and operational actions, such as segments that are being over-serviced, over-stocked or double-handled. It takes an end-to-end approach from material source to point of consumption (materials, manufacturing, logistics, distributor, healthcare facility or indeed the patient).

Essentially, regardless of the complexity of process or supply chain structure, we are able to arrive at a very close attribution by function and activity of the true cost to service any given combination customer, product or market. It ties directly to the P&L and balance sheet, which gives confidence in the results.

It is different to activity-based costing (ABC) because it avoids intensive functional diagnosis of cost, which makes it faster to complete. Cost-to-Serve derives its sharp insights from capturing and converting to cost the characteristics of products and customers regarding order size, handling characteristics, cube and weight, stock cover, batch sizes, set up times, truck fill and many others. ABC does not routinely make these differentiations or link them along the specific product to customer chains.

We work with our clients, typically through a series of workshops, to establish a clear segmentation of the customer/product/market/channel mix to identify their specific cost-driving attributes and determine how these may be differentially serviced. This direct analysis through a Cost-to-Serve model that captures the general ledger and transactional data enables us to scale the potential for both cost reduction and enhanced income generation arising from 'tuning' the commercial model and the operations.

The power of this process is evidenced by the impact it has for clients:

• A pharma client saved millions of dollars in capital by rebalancing its supply side economics to more closely match market demand (batch sizes and frequency of replenishment, for bulk production and packaging plant market replenishment). This client also identified lead-time reduction as an essential cost driver and subsequent systematic reduction of lead-time resulted in massive working capital savings.

Two further pharma clients used Cost-to-Serve to pinpoint loss making product sectors and services, which led to major strategic re-balancing of priorities, saving capital expenditure and adjusting commercial terms.

By linking the segmentation to clear 'rules of engagement' through Cost-to-Serve, businesses become empowered to engage their customers, markets and internal sales functions with greater clarity. Services, products and channels that add value to both customers and our client are visible and the team can move forward with confidence.

Most companies see this process as so data intensive that it fails at the first hurdle. LCP's methodology, whilst data dependent, introduces remarkable levels of granularity without the usual overhead, by integrating a wide range of readily available data into a proprietary tool that acts as the engine for the Cost-to-Serve modelling.

Having implemented this methodology in numerous businesses, across national and global platforms, including interfacing to common ERP systems such as SAP, the technology is robust and the methodology well proven.

From our experience, the single biggest challenge for businesses is no longer technical. It is to gain the internal championing and wide functional engagement of the concept, such that the cross business issues that emerge (not fundamentally supply chain ones) can be openly addressed and explored to determine benefits.

What are the main issues concerning complexity and security that have arisen from global supply chain?
The global scope of supply chain operations has introduced two dynamics. First, the very nature of the extended global supply chain brings in a whole set of issues:

• Visibility of material flow and availability is perhaps the biggest, which by the fact of the elongated chain becomes more prone to error and delay. Clear systems of control and systems integrity is an essential platform for good supply chain management. As such, these systems and processes must be routinely reviewed and audited for compliance.
• Communication is made more complex through the lack of sharing of a common language. As such, it is vital that all supply chain practitioners at least have a shared understanding of how their supply chain is to be governed and managed; compliance to standards should be part of their personal objectives on which they are measured.
• Intellectual property right risk is a major concern. As (manufacturing) operations become decentralized and region specific, the risk of products being copied increases. While every endeavour may be made to secure all aspects of the supply chain, this is an area fraught with challenge, often resulting in more complex processes to limit the risk exposure.

The second is the practice of parallel trade, which is a major concern as product moves across borders through grey channels, potentially risking safety, as well as eroding margin. While this is difficult (if not impossible) to eliminate, a responsive and relatively low cost supply chain, with product flowing at high velocity into markets, limits the levels of inventory that exist in any given channel at one time and spoils the grey supply chain.

Parallel trade is an area where product and market channel (and consequently unique country packaging) has driven complexity, reducing the full potential for supply chain/production efficiencies. Given that distributors still find it cost effective to repack/remarket 'grey' product, one aspect of prevention is to use the supply chain as a competitive weapon and tighten the supply side economy so that surplus inventories are not readily available.

What are the main challenges in cold chain supply?
There are two main challenges: guaranteeing 100% temperature integrity over the extended chain, and access to specialized chill chain capacity with the critical mass to benchmark with industries such as food.

Systems and controls across the supply chain are designed to guarantee the integrity of the cold chain; the issues generally lie in the transport and handling at warehousing/storage points as material flows along the chain, rather than when it is stored at a given location. Historically, businesses have relied on third parties to conform to standards and have audited the physical processes to ensure a degree of assurance.

Today, warehousing, in-cab and handling equipment technology enables full traceability of cold chain integrity. The fundamental challenge is the whether businesses (both clients and providers) feel compelled or can afford to make the investment now.

Products managed through cold chains tend to be of higher value and more critical in their application, therefore, investing in this technology represents a competitive advantage.

Scale in the pharma chill chain is difficult to achieve and the service is currently fragmented. There is a major opportunity for collaboration in distribution to drive scale and economies, and support investment in the best equipment.

How can these difficulties be overcome?
The answers lie in understanding true Cost-to-Serve, focusing on process segmentation and integrity, time compression and the application of systems technology and telematics.

How feasible is a full EU traceability system within an open, cross-border pharmaceutical sector supply chain?
Technically this is possible. Business systems can be configured to maintain and exchange what is a very large database of transactional history and batch traceability. The internet, wireless and GPS, which enables tracking systems, is already widely used globally to maintain full traceability and security. Adoption, adherence to standards and the benefit gained from such an investment, however, will always be the points of contention.

Returning to the earlier observation, that many companies are insufficiently integrated to allow them to operate such systems internally without great administrative effort, a pan-EU and cross companies system is probably a step too far at present. Internal control is the most immediate hurdle to overcome.

Inter-regional systems and authorities lack the necessary infrastructure to facilitate this further and are reliant on company disclosure and internal systems, which are subjected to audit.

This aspect of goods flow management and accounting at the inter- and intra-regional level is, therefore, some way off. There are more immediate priorities.