Supply-chain optimization is critical for sourcing active pharmaceutical ingredients and intermediates. Sourcing and related activities are typically served by a centralized procurement department within a pharmaceutical company or may be outsourced to manufacturing representatives and distributors. But SAFC (St. Louis, MO), part of Sigma-Aldrich (St. Louis, MO), has devised a new business model to assist pharmaceutical companies in their sourcing activities.
That model involves leveraging the expertise and organizational structure of SAFC Supply Solutions. SAFC Supply Solutions provides customized raw materials to the pharmaceutical, diagnostics, and flavors and fragrances industries. It sells roughly 100,000 products, has its own production plants in Europe and North America, and externally sources chemicals for its products in Europe, North America, and Asia. As part of its custom offerings, SAFC Supply Solutions also offers analytical, packaging, and quality-assurance support services. This infrastructure and organizational expertise in sourcing and procurement led SAFC Supply Solutions to offer an outsourced sourcing solution beginning in 2004.
"Certain pharmaceutical companies came to us with their problems in sourcing. As we worked to resolve those problems, we decided to launch an outsourced sourcing solution," explains Ed Roullard, vice-president of SAFC Supply Solutions.One example offered by Roullard is that of a large pharmaceutical company that had limited capacity and headcount in their sourcing department. "The company had identified many strategic opportunities and aggressive savings goals, but lacked the internal resources within their sourcing department to achieve those objectives," he explains. "The company was frustrated by the time-consuming sourcing for compounds for development and the low impact that this sourcing had in realizing its goals for cost-savings. The development department was frustrated with the sourcing service levels from central procurement and sourced its own materials independently, further diluting savings goals."
To address these problems, SAFC Supply Solutions developed a pilot program in which it would provide sourcing services on an outsourced basis. This approach was a departure from its usual course of business as strictly a supplier of chemicals and related support services. The change was to leverage, in a new business offering, the internal resources that SAFC uses in sourcing chemicals in its own business activities. The key factor in achieving a viable sourcing solution is the ability to leverage or extend its own internal sourcing activities externally. Roullard estimates that SAFC Supply Solutions has roughly 250,000 vendors in its internal database and that it regularly purchases from 10,000 of those vendors. Having that working relationship provides a potential customer with some valuable upfront benefits: previous vendor qualification, capability assessments, and performance records, all of which are important in making a determination to work with a given sourcing partner.
"We had to go through that process in making our own determination to work with a given vendor. We can then offer our expertise and knowledge in working with a given vendor and whether it will be able to meet the requirements of a given project," says Roullard. "It also extends the pool of potential candidates for the pharmaceutical company looking for particular chemicals," he says. These potential suppliers include vendors from low-cost economies. "A local presence is critical when working with these sourcing countries," says Roullard. "We have that local presence because of our own internal sourcing activities and can extend that expertise and related service support to external customers as part of our sourcing solution."
Under its external sourcing model, SAFC uses dedicated staff for sourcing materials and works directly with development chemists. "We obtain quotes and lead time from vendors, including from SAFC," says Roullard. "SAFC is only one vendor, and we are competing for the project as any other vendor would and are given no special consideration. We provide the data to the customer to make a decision for vendor selection. Once the customer selects the vendor, we manage the vendor to ensure on-time delivery."
This outsourced sourcing solution worked well for the pharmaceutical company that had approached SAFC. "The sourcing department of the pharmaceutical company was able to devote a majority of its time on high-value initiatives," says Roullard. "The development chemists were satisfied because they received better service, improved response time, and had more choices and access to the specific chemicals they needed."
This sourcing solution provided quantitative improvements. "For the pharmaceutical company, the savings from sourcing the specific chemicals under the project increased from 3.5% to 13%. Also, on-time delivery improved from 70% to 90%.
For SAFC, this approach also yielded results. The company charges a fee for the sourcing service, thereby gaining an additional revenue source. It also receives the opportunity to offer a quote on a given project. "The customer may select us or go to another vendor that we researched and offered as a candidate for the project. Even if we are not selected, we gain a stronger relationship with the customer," says Roullard.
In addition to this project, SAFC signed another customer contract for this sourcing solution and is piloting a similar program with two other large pharmaceutical companies.
"It is really a win-win situation for all parties," says Roullard. "We are able to provide customers with the benefits of a global infrastructure in resolving their sourcing problems."