Q: Merck unveiled its new supply strategy in 2005, which included adoption of lean manufacturing practices, a greater reliance on external capabilities, and a rationalization of its internal manufacturing network. Can you describe the anticipated results of this strategy?
For example, by combining previously distinct research and manufacturing functions into a single Global Pharmaceutical Commercialization group, we have managed to reduce by 12 months or longer the amount of time needed to take a product from proof of concept to market availability. This new process has also significantly reduced capital spending before regulatory filing—and has made it possible to better understand a product's potential marketability before significant resources are committed.In addition, as mentioned in your question, we have implemented lean manufacturing—what we call the Merck Production Systems—at most of our facilities, and we are in the process of installing these processes at all of our facilities.
Another important element of our strategy against which we have made tremendous progress is with respect to our Global Procurement group's implementation of a rigorous Sourcing Management Process and a related system that we call Supplier Value Management. Through these initiatives, we have worked closely with suppliers worldwide to maintain assurance of supply, quality, and service, while significantly reducing costs. In 2004, Merck set an ambitious five-year target of saving more than $1.2 billion over a five-year period through changes in the way we procure goods and services for our worldwide operations. We actually managed to achieve that goal 18 months early and to set a new target to deliver an additional $1 billion in savings over the next three years.
Q: A key part of the company's supply strategy is to widen its use of external partners in its manufacturing strategy. Can you explain the company's outsourcing strategy as it relates to outsourcing primary manufacturing (active pharmaceutical ingredients and intermediates) and secondary manufacturing (formulation)? Are both of these areas candidates for outsourcing by the company?
Spoor: In the past, we have managed an extensive internal and external network of chemical and formulation facilities around the world to assure patients the quality products that they expect from a company like Merck. However, today we, at Merck, are focusing on our core areas—those functions we consider essential for us to maintain in house. It is important to emphasize that we intend to always retain, internally, these core manufacturing operations. At the same time, we are seeking to outsource noncore functions—those where external manufacturers may have greater expertise, and also have the ability to deliver a particular active ingredient, excipient, or even a final product, more efficiently than we could. Importantly, we have systems in place to closely monitor the quality and supply of those products that we source from outside the company. Our goal always is to find the most efficient and effective way to deliver vaccines and medicines to patients with the quality standard that they have come to expect from Merck.
Q: Can you explain the company's goal in the outsourcing of raw materials needs in terms of pharmaceutical chemical development (active pharmaceutical ingredients and intermediates) to third-party providers?
Spoor: As I explained earlier, the changing business environment makes it essential for Merck to be faster and more effective at bringing new products to market. One way to help achieve this is to focus our internal resources on the core activities that provide a competitive advantage for Merck while depending more heavily on external suppliers for noncore activities. We are moving in the direction of externally sourcing approximately 35% of the overall manufacture of active pharmaceutical ingredients, intermediates, formulated pharmaceuticals, sterile products, vaccines, and packaging by 2010. This would represent a two-fold increase over what we currently source from external manufacturers. It is important to again emphasize that the majority of our manufacturing operations will remain internal. As we move additional manufacturing to external suppliers, we are carefully developing a new governance model to assure sufficient oversight of quality and assurance of adequate supply.
Q: In terms of an outsourcing strategy, does the company favor outsourcing throughout the drug life cycle (early-stage development, newly commercialized new chemical entities, as well as products late in the product life cycle) or is there a preference for outsourcing at certain points in the drug development or product life cycle?
Spoor: Our goal is to produce the quality products for which Merck is known and to do so in the most effective and efficient way possible. Given that goal, we must evaluate all aspects of our business for potential areas in which we may be able to improve the way we operate. There is no reason to believe that potential efficiencies are limited to a specific timeframe. As long as a particular activity remains what we deem to be a core activity, it will remain internal. If an activity is not considered a core activity—or reaches a stage where it is no longer considered a core activity—then we would begin to consider whether external suppliers exist with the expertise to manage that particular aspect of manufacturing a particular product or component.
Q: As part of the company's global manufacturing strategy, does Merck have manufacturing operations in countries such as India or China or plans to work with third-party providers in these countries for the supply of pharmaceutical ingredients?
Spoor: Merck has had a manufacturing presence in China since the 1980s, through which we do a limited amount of formulation and we package products for the Chinese market. More recently, we have opened a Global Procurement office in Shanghai. Through our Global Procurement operations, we study companies in countries all over the world to find those best able to competitively supply the active ingredients, intermediates, excipients, packaging, and other services that we require for the manufacture of our products. Regardless of the nation from which the products are sourced, Merck applies the same rigorous standards and the company requires that all materials and products we purchase meet Merck specifications.
Q: Merck has been proactive in adapting lean manufacturing principles to its operations. Can you provide an example(s) of lean manufacturing principles at work at the company, such as the Merck Production System piloted at the Arecibo, Puerto Rico, facility or other project underway at Merck?
Spoor: All our sites have extensive lean manufacturing efforts underway. By the end of 2007, half of our sites will have undergone lean transformations. Most of the sites that have undergone the lean transformation have achieved cost reductions of between 20 and 30%—and inventory reductions ranging from 30 to 50%. We are also using lean principles to support the growth of our two recently launched compounds, "Januvia" (sitagliptin), Merck's once-a-day oral treatment for patients with Type 2 diabetes, and "Gardasil" (auadrivalent human papillomavirus [Types 6, 11, 16, 18] recombinant vaccine). By applying lean-manufacturing principles, including Kaizen methodology, Januvia tablet-manufacturing teams were able to double capacity, through revised cleaning procedures and increased flow rates. With "Gardasil," we are seeing similar benefits as a result of lean-manufacturing methodology. Part of the success of lean technology has been the ability to implement changes in days that may have taken months or years before these new methods were deployed.
Q: Looking forward, what would you identify as the critical success factors in implementing the company's new supply strategy and achieving the goals of the program?
Spoor: We will ensure that we reach the goals of our new supply strategy by establishing strategic alternative sources of supply in advance of critical path activities so that the work stream is never interrupted due to a lack of necessary materials. Our work streams must continuously provide Merck with products meeting our stringent requirements at the lowest cost in the industry, providing a sustainable process for managing future external sourcing needs, and creating a global network both internally and externally.
Performance and collaboration are critical to our success. To succeed with our new strategy, Merck needs external manufacturers who function as partners, and who are prepared to work collaboratively toward mutual success, both in finding technological solutions to problems, and in identifying successful business processes. We strongly believe that another key element in our success will be supplier diversity. If we get it right, we can create a competitive advantage and achieve Merck's Plan to Win.