Optimizing a Supply Network

Pharmaceutical-industry executives from Merck & Co., Pfizer, and Covidien share their perspectives on their expectations and evaluation in the preferred-provider relationship. Read this and other preferred organization articles in this special issue.
Feb 01, 2011
Volume 2011 Supplement, Issue 2

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?

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.

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