Sponsor company–supplier relationships

PharmTech: Some relationships may be kept at the transactional or tactical level while others may be developed into a more strategic and deeper collaboration as in a preferred-provider relationship. What factors or considerations does a sponsor company take into account in determining the level of an outsourced relationship?

Scheftel (Merck & Co.): At Merck, our commodity managers use a robust sourcing management process to help them decide whether supplier relationships should be managed tactically or more strategically. Some of the factors which are considered are supply-market competitiveness, criticality of the good or service being purchased, and spend value.

Lynch (Pfizer): In addition to the criteria given in my answer to the preceding question, Pfizer's strategic supplier evaluation criteria includes a clearly defined segmentation process that addresses critical areas that include:

• Scale of the business relationship
• Strategic importance to our business
• Potential risk
• Potential for improved performance—for example, does the strategic supplier candidate bring (or is positioned to bring) additional value-added capabilities or demonstrate a broad range of technologies and willingness to innovate?
• Compatibility of sponsor/supplier cultures—is there a shared business ethos?

Evans (Covidien): Two things come to mind. The first is longevity. The second is integrity. It is a large investment of time and money to develop a preferred relationship in business. It should not be taken lightly and, like any relationship, starting over is very costly. So both parties should make sure they have the mentality of being in it "for the long haul." Beyond the willingness, each must have the actual ability to be involved for that duration. In other words, both companies should have the financial stability and competitive competency to be viable over the longer term.

Equally important is integrity. It doesn't matter what somebody tells you in terms of their commitment to the business relationship if you can't trust that they will follow through on what they say. A real analysis of how a partner has behaved in the past is critical to concluding if they have the integrity needed to create a more meaningful partnership in the future.

Managing the preferred-provider relationship

PharmTech: When a contract service provider becomes a preferred provider, how may issues such as communication, staffing, organizational setup, and performance metrics change? Can you provide some examples from an industry perspective or within your own experience?

Scheftel (Merck & Co.): The nature of the preferred-provider relationship sometimes requires a different operating framework than that used with a non-preferred provider. At Merck, there is often a higher level of communication with preferred providers. Also, the staff involved—from Merck and the preferred provider—are usually more senior, indicating both the strategic nature of the relationship and how much is at stake for both Merck and the supplier.

From an organizational perspective, we employ a dedicated "relationship manager" on the Merck side and expect a global senior account leader on the supplier side. This ensures that the right level of focus is maintained, and issues are addressed quickly and effectively. We also ensure the interaction with suppliers is both broad and deep across the necessary business functions such as quality and technology. Issues get addressed quickly by the appropriate subject matter experts in both companies.

Lynch (Pfizer): A conscious change in the way we do business is required. Sponsor companies must be committed to shifting from short-term transactional activities to longer-term strategic thinking. It's no longer feasible to approach supply as solely external or solely internal—instead the supply network must operate as an integrated internal/external supply network with the same quality and regulatory standards in place externally and internally. Establishing metrics is key as is agreeing upon what is being measured in terms of performance and how these measurements are reviewed and evaluated.

Covidien (Evans): In my experience, once a long-term contractual partnership has been established, communication and interaction improve dramatically. When a business relationship is in a contractual limbo, there is ambiguity on both sides in terms of how to invest resources. Once there is a clearly established contractually bound interaction, both parties can take comfort in the commitment, which can improve the relationship.