Outsourced Manufacturing Operations

There is a growing trend for pharmaceutical companies to outsource corporate services and manufacturing operations to create more flexible cost bases, improve return on capital employed, leverage external capability, and enable the company to focus on core products and capabilities, commercial operations, and research and development (R&D). However, consumers of outsourced services often fail to realize these benefits because they don't always adopt best practices for ensuring a successful collaboration. In particular, the systems used to manage outsourced operations are often immature, suboptimal, and lead to excess inventory, safety stock, and so forth. With annual reports showing that consumer goods achieve more than 20 inventory turns while pharmaceuticals achieve less than 10, there is clear opportunity for improvement. Other industries, such as automotive, electronics, and consumer goods, have mature systems in place for: sales and operations/integrated planning, collaborative planning, supply-chain visibility, and for adopting more innovative contractor contracts. By taking this knowledge on board, pharmaceutical manufacturers can make their supply chains leaner, more responsive, and flexible, as well as leverage a lower base for cost and working capital. They could also strategically manage safety stock based on patient need rather than mitigating against supply-chain failure. The four elements mentioned can be approached together.

Sales and operations/integrated planning

Integrated planning requires the organization to be open and allow for teams to work together across internal commercial and industrial boundaries to improve trust. This approach also improves the flow of information between sales and operations, reduces uncertainty, and better aligns supply and demand. Overall, the approach enables the organization to use the best information available and to agree on that elusive "one number" on which to plan and optimize operations.

The challenges. In the pharmaceutical industry, factors that complicate integrated planning are the complexity of physical and information networks, regulatory and compliance issues, and lack of communication between sales and operations.

What can make a difference? Senior leadership from both sales and operations need to understand and appreciate the benefits, and therefore consequently commit to the process, both in terms of time and resources. In other industries, integrated planning is often performed by dedicated personnel. These personnel operate at control centers for demand, planning, and supply-chain management, which enables them to focus on the challenges and complexities associated with the task. Information from these personnel is often used to further standardize and manage supply-chain transactions. Without the capability and commitment to manage integrated planning internally, there will inevitably be significant challenges when developing effective collaborative planning externally.

Example. One successful example of sales and operations and integrated planning provided by Husquarva, a global manufacturer of garden equipment, involved implementing demand-and-supply planning hubs. These hubs focused the integration of information demand from the sales organization and supply information from their plants globally to enable the development of "one view of the truth" that the business then worked from.

Collaborative planning

Collaborative planning succeeds when a sponsor works openly with contract manufacturers to optimize performance for the benefit of the customer and the whole network—not just performance in individual silos.

The challenges. The challenge is often the strength of the relationships, as well as deciding how much information to share and the quality of that information (see supply-chain visibility below). With respect to relationships and information-sharing, this varies on a case-by-case basis, but it is clear that success must be achieved together between pharmaceutical and outsourced manufacturers. Strong relationships do not require all of a company's critical information to be shared, but do necessitate a structured, open system for communicating and aligning strategy, resolving capacity challenges and establishing programs for improvement.

What can make a difference? Collaborative planning is easier when there is clarity on strategic sourcing and the goals for the long-term relationships between parties. In addition, the following can make a difference: sharing real-demand, mid- to long-term forecasts, and high-level operations strategic goals; regular communications and a strong working relationship to jointly resolve issues and add value for the benefit of both organizations; and the use of cloud-based technologies, which are changing the ease with which collaboration can now happen.

Example. The Toyota model for developing long-term strategic relationships provides a great basis for collaborative planning. Its approach was emphasized in the recent earthquake in Japan when Toyota focused on helping its suppliers get up and running again as quickly as possible and to provide the needed support. Western companies, on the other hand, seemed to be more focused on finding a second source.

Supply-chain visibility

Improved supply-chain visibility supports both integrated and collaborative planning. While organizations should not get hung up on establishing absolute real-time data, there is a need to have accurate and up-to-date information.

The challenges. Traditionally, a mix of enterprise resource planning (ERP) or material resource planning (MRP) and Excel spreadsheets are used to communicate demand and transactions, but these have deficiencies. ERP systems often don't interface well between organizations. They can be inflexible for supporting scenario and contingency base planning. These systems are compensated for by Excel files, which can themselves be manually adapted with out-of-date, incomplete, or inaccurate information. The challenge is to give key parties visibility on what is happening and what is likely to happen next in the simplest manner possible.

What can make a difference? The marketplace for information-technology (IT) systems is evolving rapidly. Demand sensing and cloud technologies are being increasingly used to share the latest information, to automatically predict trends, and to link parties in the network—relatively painlessly—without the need for large and costly IT infrastructure. The use of these systems can cost effectively make a step-change in the quality of information available.

Specifically, demand sensing can be used to more accurately predict shortterm demand that is less well predicted through integrated planning, but still drives the majority of stock. This approach can improve an organization's chances of shaping demand to match planned supply, reduce stock uncertainty as short-term demand patterns are reduced and, through the use of tailored algorithms, allow for forecasts to remain accurate.

In addition, cloud technologies are increasingly being used to facilitate information sharing between organizations that are not plugged into the same global or regional IT system. These technologies tend to be based on Internet interfaces that multiple parties can access and use to communicate through, with access granted at various levels as required.

Improving supply-chain visibility on its own doesn't resolve visibility issues, but it does facilitate integrated and collaborative planning, and allows organizations and parts of organizations to be working from one data set.

Example. A leading healthcare manufacturer developed an end-to-end order visibility tool. It enabled the full order-to-delivery picture to be viewed both across the organization and by supply-chain partners. The tool highlighted exceptions orders using red flags so that priorities could be addressed, thus improving customer service whilst reducing inventory.

At the 2011 European Supply Chain and Logistics summit, several organizations, including P&G, explained the benefits of using techniques such as demand sensing. This approach was acknowledged to improve the accuracy of short-term forecasts, which, in turn, can help companies make a 20% improvement in stock levels. Innovative contracts

Enhanced contracts can align real benefits for both organizations. To consider when forming contracts are: flexibility, capacity, and delivery and stocking policy, with the goal of improving jointly agreed-upon measures.

The challenges. Given normal business focus and procurement targets, it is common to accept the best product cost based on standard service and management terms. Costplus model contracts are regularly signed without any clear understanding of what the supplier is providing for the increased management fee.

What can make a difference? For strategic relationships, it is beneficial to develop contracts that include targets and rewards for measures other than straight product costs. These should include realistic but challenging targets for the supplier, as well as what is strategically important for the pharmaceutical contractor in terms of overall landed cost, cash flow, and service.

Conclusion

Pharmaceutical manufacturers have a great opportunity to get more value from their contract manufacturing relationships. From the authors' experience, by focusing on key initiatives, companies can anticipate more than 20% improvement in inventory alone, as well as benefits in terms of improving supply-chain responsiveness and agility, and exploiting jointly identified initiatives to the benefit of all parties.

James Wright and Malcolm Horsley are supply chain and pharmaceutical experts, respectively, at PA Consulting Group.