Optimizing a Supply Network

This article is part of a special issue on Preferred Providers.

Outsourcing is an important part of pharmaceutical companies' development and manufacturing activities. Reflecting the greater value of outsourcing, pharmaceutical companies may develop deeper and more strategic collaborations with select suppliers. Pharmaceutical Technology spoke to pharmaceutical industry executives to gain their perspectives on the preferred-provider relationship and its role in pharmaceutical outsourcing. Participating in the roundtable are Mark Scheftel, executive director of global procurement at Merck & Co.; MacDara Lynch, vice-president of global external supply at Pfizer; and Eric Evans, vice-president and general manager of the global active pharmaceutical ingredient (API) division at Covidien.

Outsourcing strategies

PharmTech: As an overall trend in the industry, we see pharmaceutical companies interested in working with fewer and more strategic suppliers, particularly as it relates to contract services, such as contract manufacturing or contract research. Do you think that is a fair characterization, and if so, why are pharmaceutical companies interested in pursuing such an approach?

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Scheftel (Merck & Co.): It's certainly true of how we are approaching supplier relationships at Merck. We think it's absolutely critical to develop strong, mutually beneficial relationships with a small cadre of highly capable and reliable suppliers. In an environment where cost, quality, and service are vital competitive levers, the pharmaceutical companies that can optimize their business relationships with a core group of strategic suppliers will have an advantage in the marketplace.

Lynch (Pfizer): The industry trend toward consolidation means that companies are in a position of dealing with a greater number and potentially hundreds of suppliers. Managing supplier relationships becomes more complex and with greater complexity comes greater potential for risk specific to quality, compliance, and supply—all of which impact cost. Reducing the number of suppliers reduces complexity and risk. There's more to it than simply reducing the number of suppliers, however. Having an integrated internal and external supplier network and developing more strategic relationships with some suppliers is essential.

Evans (Covidien): My experience is on the supplier side of the purchasing relationship, being a seller of APIs to the pharmaceutical industry, so I'll give that caveat to all of my answers. From my vantage point, I would say that a desire to consolidate suppliers is a trend we are increasingly seeing with our customers. While there is, and always will be, a need to have multiple suppliers to mitigate risk in the supply chain, having too many can be a very costly proposition to manage for a company. These costs are broad but include costs of maintaining qualification, quality audits, and time expended in managing the relationship (i.e., contracts and visits). So while mitigation of risk through multiple suppliers is valuable, it has quickly diminishing returns; companies are beginning to realize this and are taking action to focus their portfolio of suppliers.

Criteria for preferred providers

PharmTech: How would you define a preferred provider as it relates to contract services such as contract manufacturing or contract research? What does it take to be a preferred provider from your perspective? What additional expectations may you have of the contract service provider that you regard as a preferred provider? What additional expectations does the contract service provider have of the sponsor company?

Scheftel (Merck & Co.): We look for suppliers of contract services to provide real, sustained value to Merck in a relationship characterized by trust and alignment of objectives. The alignment is critical. We want to see senior management of the preferred supplier take a broad view of the Merck business relationship and not just seek to maximize short-term revenues.

Typically, this broad view would include a commitment to reduce costs over time, participate in joint task forces aimed at improving business processes, and collaborate on win–win initiatives that could result in higher revenues for the supplier along with greater benefits to Merck in terms of cost, quality, supply assurance, and technical innovation. In return, the contract service provider can expect greater opportunities to win new business and enhanced access to Merck decision makers.

Lynch (Pfizer ): Pfizer's expects its external "strategic suppliers" to have the same stringent internal standards in place across its global manufacturing network and throughout the Pfizer organization. To be a strategic supplier to Pfizer, companies must demonstrate the following:

• Compliance—with excellent quality environmental systems in place

• Committed interest in being a strategic supplier and a willingness to engage and to develop a more transparent relationship (i.e., openness on the part of sponsor and supplier regarding cost structure, capacity, strategic direction, and technological capabilities)

• A competitive cost structure with a culture of continuous cost improvement.

Evans (Covidien): Again, from an API supplier's perspective, there are multiple key elements that are critical to being seen as a preferred provider for our customers. We have captured these elements in what we call our "Core Four" supplier values: quality, performance, supply continuity, and customer service. Most of these are self explanatory, but are very important for defining who we are both externally and internally. Clearly having a competitive price also is a critical component of being a preferred partner, which we feel is captured in performance. At the end of the day, "value" is something more than just "cost." What you get for your money is as important as the price you pay.

Sponsor company–supplier relationships

PharmTech: Some relationships may be kept at the transactional or tactical level while others may be developed into a more strategic and deeper collaboration as in a preferred-provider relationship. What factors or considerations does a sponsor company take into account in determining the level of an outsourced relationship?

Scheftel (Merck & Co.): At Merck, our commodity managers use a robust sourcing management process to help them decide whether supplier relationships should be managed tactically or more strategically. Some of the factors which are considered are supply-market competitiveness, criticality of the good or service being purchased, and spend value.

In certain cases, we have established strategic relationships with suppliers who can bring innovative solutions to Merck regardless of whether the sourcing tools identify the category as strategic. We think strategic relationships are an important part of the overall value proposition we bring to our internal stakeholder base, and we periodically assess our supply base to ensure we have the right set of strategic relationships in place.

Lynch (Pfizer): In addition to the criteria given in my answer to the preceding question, Pfizer's strategic supplier evaluation criteria includes a clearly defined segmentation process that addresses critical areas that include:

• Scale of the business relationship

• Strategic importance to our business

• Potential risk

• Potential for improved performance—for example, does the strategic supplier candidate bring (or is positioned to bring) additional value-added capabilities or demonstrate a broad range of technologies and willingness to innovate?

• Compatibility of sponsor/supplier cultures—is there a shared business ethos?

Evans (Covidien): Two things come to mind. The first is longevity. The second is integrity. It is a large investment of time and money to develop a preferred relationship in business. It should not be taken lightly and, like any relationship, starting over is very costly. So both parties should make sure they have the mentality of being in it "for the long haul." Beyond the willingness, each must have the actual ability to be involved for that duration. In other words, both companies should have the financial stability and competitive competency to be viable over the longer term.

Equally important is integrity. It doesn't matter what somebody tells you in terms of their commitment to the business relationship if you can't trust that they will follow through on what they say. A real analysis of how a partner has behaved in the past is critical to concluding if they have the integrity needed to create a more meaningful partnership in the future.

Managing the preferred-provider relationship

PharmTech: When a contract service provider becomes a preferred provider, how may issues such as communication, staffing, organizational setup, and performance metrics change? Can you provide some examples from an industry perspective or within your own experience?

Scheftel (Merck & Co.): The nature of the preferred-provider relationship sometimes requires a different operating framework than that used with a non-preferred provider. At Merck, there is often a higher level of communication with preferred providers. Also, the staff involved—from Merck and the preferred provider—are usually more senior, indicating both the strategic nature of the relationship and how much is at stake for both Merck and the supplier.

From an organizational perspective, we employ a dedicated "relationship manager" on the Merck side and expect a global senior account leader on the supplier side. This ensures that the right level of focus is maintained, and issues are addressed quickly and effectively. We also ensure the interaction with suppliers is both broad and deep across the necessary business functions such as quality and technology. Issues get addressed quickly by the appropriate subject matter experts in both companies.

Lynch (Pfizer): A conscious change in the way we do business is required. Sponsor companies must be committed to shifting from short-term transactional activities to longer-term strategic thinking. It's no longer feasible to approach supply as solely external or solely internal—instead the supply network must operate as an integrated internal/external supply network with the same quality and regulatory standards in place externally and internally. Establishing metrics is key as is agreeing upon what is being measured in terms of performance and how these measurements are reviewed and evaluated.

Covidien (Evans): In my experience, once a long-term contractual partnership has been established, communication and interaction improve dramatically. When a business relationship is in a contractual limbo, there is ambiguity on both sides in terms of how to invest resources. Once there is a clearly established contractually bound interaction, both parties can take comfort in the commitment, which can improve the relationship.

Best practices

PharmTech: What would you identify as some of the best-practice approaches that a contract service provider should take into account when seeking to be a preferred provider? Can you offer some examples from the industry or within your company? How important is innovation from the preferred provider to the sponsor company in evaluating the contract service provider's performance?

Scheftel (Merck & Co.) In our experience, the contract-service providers who can differentiate themselves through greater customer focus, higher levels of quality and supply performance, and lowest overall cost, are the best positioned to become preferred providers.

A best practice we have observed at Merck is exhibited by one of our most valued preferred providers. On a regular basis, this supplier brings innovative cost-improvement ideas to Merck across the portfolio of products it produces for us. Many of these ideas have been implemented over the last five years, with savings shared between Merck and the preferred provider. As opposed to suppliers who regularly propose cost increases, this preferred provider has seen a steady stream of new projects and an increase in revenues of greater than five times. Innovation is a key part of the success of this particular relationship.

Lynch (Pfizer): The key word is "trust." The sponsor/strategic supplier relationship is a two-way street, and both parties must benefit in order for it to succeed. Both parties must be willing to trust one another in order to develop and conduct the relationship in such a way that supports and advances business goals on both sides of the equation. Address expectations, define responsibilities, determine mutually agreeable criteria for defining "success" and create a dialogue around potential "pain points" (e.g., cost and expectations around sponsor/supplier communication) at the front end. Reopen the dialogue at regular intervals as the relationship progresses, assess progress, and adjust as needed before minor issues become stumbling blocks.

Covidien (Evans): The simplest response from a supplier's perspective is that we really need to "walk the talk" when it comes to our value proposition with our customers. When we do this, it becomes our best marketing tool for building more strategic relationships with customers. For example, many customers inquire about how we view the future of our business. We routinely highlight to them the longer-term contractual arrangements which we have in place with key customers to illustrate our commitment. This reassures them. As the adage goes: It is not so much what you say that matters but what you do.

Innovation can be a tough thing to measure, and its importance can vary from one case to the next. When it comes to new ideas, it always takes a bit a leap of faith by both parties to work together and be confident that good things will result.