Part of what makes my job very exciting is attending conferences. These events provide great opportunities to share, learn, network, and have fun. Earlier this week, I attended the LogiPharma conference, a wonderful event for supply chain professionals working in the pharmaceutical industry. Apart from taking part in numerous interactive presentations and roundtables, I had the opportunity to host a luncheon alongside my colleague, Bill Dubois, for a packed room of pharmaceutical industry executives and SCM practitioners. All-in-all, it was a great validation of my point of view about where the pharma industry is with regards to its supply chain challenges, maturity and where it needs to go. In this blog, I want to share some key challenges faced by the pharma industry and pharmaceutical supply chains. And, in a future blog I will share some recommendations in light of these challenges:
1. Revenue pressures: With several blockbuster drug patents expiring (a.k.a. “patent cliff”) and with patent extensions harder to come by, large pharma companies are looking for opportunities to unlock additional value within their enterprises and across the value network as revenues remain under pressure.
For generic drug makers, this is creating an opportunity to add new products to their portfolio and being first to market when the timing is right. Another reason for the revenue pressures is the increased scrutiny of the pharma pricing practices. Recent EpiPen controversy is just one example. To combat these revenue pressures, big pharma companies are engaging in a growth through acquisition strategy resulting in high M&A activity.
2. High inventory levels: Stephen Meyer of Gartner mentioned that the Pharma industry on average has 63 days of raw material inventory and 51 days of finished goods inventory. Quite a few companies mentioned inventory savings target of 10% or above that their senior leadership is looking for. However, they also acknowledged the challenges in attaining these targets without exposing their supply chains to undue risks.
Some of these companies make life saving drugs or drugs for serious chronic diseases. In some cases, they tend to be the sole supplier or one of the very few suppliers. The cost of a stockout in such situations cannot just be looked at in monetary terms. It is understandable that in such situations, pharma companies tend to err on the cautious side of carrying too much inventory.
Forecast accuracy has been a big challenge, with several participants commenting that their forecasts are less than 50% accurate, resulting in high “just in case” inventories. Part of the reason why the forecast accuracy tends to be low is due to external events such as a competitor shutting down production capacity due to an FDA audit, which could cause a spike in demand for the company in context. Such external events tend to play a bigger role in pharma than other companies. Long manufacturing lead times in pharma compound the problems as forecasts need to be locked well ahead of the sale date to support the lead times. Higher tender activity by governments procuring drugs on behalf of consumers, is also leading to irregular sales spikes that are harder to predict.
3. Rising regulation and penalties for non-compliance: Jurisdictional control was cited as one of the key regulatory needs. In the Pharma industry, the regulators certify not just the finished product, but also the entire genealogy of the drug, going back to active pharmaceutical ingredients (APIs) for sale in a market within the jurisdiction of that authority. Given the long lead times in Pharma industry, this requirement needs to be handled at the planning level itself with lot level attribute planning (approved API variants, expiration, strength, etc).
Several of the supply chain planning solutions in the market, by established vendors, cannot handle this requirement. One of the practitioners complained that because of such systems limitations, they had to export their plans into excel spreadsheets and make offline adjustments to comply. This causes significant loss of productivity due to manual work, and increases the risk of data errors and noncompliance. At the execution level, serialization to fight counterfeit drugs was highlighted as a key need.
4. Increasing supply chain complexity: One generic drug manufacturing executive stated that they are running a virtual supply chain wherein over 95% of their manufacturing is outsourced to Contract Manufacturing Organizations (CMO’s) in India and Europe. However, not all these CMO’s have the same level of relationship or technological sophistication to support collaboration initiatives.
Use of CMO’s is on the rise in the pharma industry as a whole. Managing these CMO relations is a significant challenge. SKU growth was mentioned to be another challenge. Increased interest in rare disease drugs (a.k.a. orphan drugs) is resulting in low volume, high mix in parts of portfolio making production planning and managing changeovers is a challenge, as well. Also, the yields of certain process steps tend to be unpredictable. With multiple steps in the process, such problems compound, introducing more variability in the system and making planning more unpredictable and complex. Increasing channel complexity to reach the consumers was cited as another reason for complexity.
5. Lack of end-to-end visibility: Heterogeneous architecture with disparate solutions that don’t integrate well was cited as a challenge. M&A activity cited in #1 is contributing to the increase in this heterogeneity. One executive said that their quality assurance (QA) process has several steps and it takes several days to weeks to complete.
They have no visibility into whether a lot will be released or rejected until it comes out of QA. This is because the QA status is tracked in a separate system. Manual intervention through e-mailing or calling the QA department to get updates seems to be the only option for this company right now. To hedge against this uncertainty, they tend to carry additional inventory downstream of QA (one of many reasons contributing to the high inventory problem cited in #2 above).
6. Supply chain talent shortage: There was a very interesting panel discussion with industry and academia representatives wherein supply chain skills shortages was discussed. One of the panel participants commented that between now and 2020, there is projected to be a global shortage of 1.2 million supply chain professionals. While the number can be debated, there is general acknowledgement that strong supply chain domain skills are highly sought after. Intern programs and mid-career certification programs were cited as ways to manage and retain the supply chain talent. This confirms the thoughts I shared in a previous blog about why it is a great time to be a supply chain professional. In a separate blog, I also shared several ideas about how supply chain professionals should take advantage of the skills shortage opportunity to take their career to the next level.
Overall, these challenges are not trivial. But on the bright side, the pharma industry is not the first one to tackle several of these challenges, either. Pharma companies have a great opportunity to leverage learnings from other industries and leapfrog into a new generation of SCM; That is a topic for a future blog. Would love to hear your thoughts!