Transforming the Pharma Supply Chain Part 2

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Taking note of best practices across industries

As mentioned in Part 1 of this post, despite the unique aspects of the Pharma industry, the bulk of the supply chain management issues are largely common to many other industries. And without the same degree of supply chain focus that is present in the high tech space for example, the net result generates a degree of waste almost unfathomable by those outside the industry.

The chief question is, “can you achieve an acceptable level of supply availability without the waste?” It’s understood that the definition of “acceptable” ranges from 100% availability for some life sustaining medications to more conservative fill rates for OTC generics. There are enough examples of supply chain mastery in the high tech and automotive industries to suggest the answer is an absolute yes.

The high tech and automotive industries have for years been focused on adopting the precepts of Lean that deal with the elimination of waste and the rapid reaction to change. That is not to say that Pharma industries haven’t leveraged lean principles, but the key difference has been the high tech focus on the entire value chain rather than individual sub-processes.

An operational sub process focus can yield what appears to be cost improvements, but without addressing the broader connection to customer demand patterns and other supply chain steps, they often fail to significantly affect the overall cost. It is the consideration of the cost trade-offs of the entire supply chain's ability to meet demand that seems to be missing. It is in the area of demand planning where the difference is most evident.

In high tech, with the economic pressures to minimize the inventory investment, the ability to rapidly and economically adjust to demand shifts is a major factor in business performance. Saddled to that is a focus on improving forecasts accuracy through investments in collecting and analyzing more meaningful data , while also more broadly collaborating on a consensus plan. As part of this effort, many leading high tech companies have embarked on collaborative forecasting and planning with distributors and sub-contractors.

In Pharma, the inventory buffers make similar investments seem less important. A February 2010 article by Wayne McDonnell of Gartner Research, “Just how long do we have to wait for True S&OP in Life Sciences,” proffered that the two most important areas where life sciences companies need to invest is on improving forecast accuracy and end to end supply chain management.

Pharma companies have also followed many of the outsourcing trends as high tech with essentially the same consequences. Limited visibility and collaboration challenges in synchronizing the supply chain when volatility strikes. As the pressure to control costs and optimize inventory increase, these challenges take on increased importance. Global supply chain visibility and synchronization has been on the strategic initiative list for high tech companies for several years, while it has gained importance in the Pharma space much more recently.

In recent years, Pharma companies have begun to recognize the potential of adopting a high tech approach to both demand planning and supply chain management. Given the pre-existing emphasis on fulfillment, the improvements being sought are more in the areas of end to end cost and working capital turnover. The key to achieving those are through better demand management and an end to end supply chain management focus.

Experiencing escalating costs and working capital strain, companies are rethinking their supply chain model, changing their approach and increasing their capabilities in order to drive better alignment and performance. Evidence of the change is seen in recent hiring trends with executives and middle managers from the high tech and other industries being lured into the Pharma space.

As one example, a January 2010 article in the Wall Street Journal discussed how Mr. Jimenez, the new CEO at Novartis, one of the largest drug companies, had spent most of his career at consumer packaged goods companies, and thus, one would believe that a primary benefit of the appointment would be that Mr. Jimenez could bring a cost and efficiency focus to the role.

As Pharma companies make the transition to better forecasting methods and end to end supply chain management, a new era of cost competitiveness will ensue. With lower inventories, cash will be freed up to address growth and investment opportunities, but it will also introduce the need for competencies in Lean and Response Management to ensure that fulfillment objectives are not compromised.

Analysts have for years heralded what the transformation can deliver —$43 billon in working capital alone according to the A. T. Kearney analysis. With the recent influx of supply chain expertise from outside the industry it could be that the transformation will finally take a leap forward.

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