Outsourced Manufacturing Operations

Jul 31, 2011

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.