Pharma’s traditionally conservative approach to supply-chain management may be hindering its ability to adapt to changes in demand.
In the past decade, there was a movement within the pharmaceutical industry to benchmark drug manufacturers’ performance against that of manufacturers in other industries, to improve such areas as process robustness, speed and consistency, and to reduce waste (1). Proponents of lean manufacturing urged pharmaceutical companies to adopt best practices from other industries.
Thought leaders began to look more closely at manufacturing, as well as such standard industry benchmarks as changeover times and inventory turns, and asked whether pharmaceutical companies could improve performance and become more agile. To see how closely the industry has been examining its approach to inventory management and supply chain agility, Pharmaceutical Technology asked Lora Cecere, founder of Supply Chain Insights, for her opinion on progress.
“Pharma is stuck in the mud,” notes Cecere, who writes the Supply Chain Shaman blog (2) and has more than 40 years of experience managing major corporate supply chains, consulting, and analyzing industrial performance.
As a 2012 Supply Chain Insights report (3) noted, pharma is immature, compared to other industries, in its supply-chain management practices. It still has higher operating margins, but faces more complexity, commoditization, and globalization than it did in the past. Mergers and acquisitions have also had an impact, Cecere says. Today, most pharmaceutical companies still generally take a conservative, functional approach to their supply chains, and focus more on the demand cycle than on channel data, says Cecere, who suggests that more industry executives follow the advice of supply-chain expert Carol Ptak, a partner at the Demand Driven Institute. In a blog post on SupplyChainInsights.com (4), Ptak suggests that companies focus, first, on return on investment and cash flow, and secondarily on profit and loss, so that they can sense changes in demand and adapt planning and production dynamically.
Cecere and her collaborators have developed a supply chain index to measure how individual companies and industries are improving their supply chain agility. Considering such big issues as overall growth, profitability and complexity, the index tracks industries’ and companies’ improvement by averaging metrics over different time periods.
Each industry is analyzed individually, based on its unique characteristics, but then companies are ranked, with those that have made the greatest gains recognized as “Supply Chains to Admire” (5) within those industries, based on improvements in inventory turns, return on capital investment, and operating margins.
Companies in industries with lower operating margins tend to manage their supply chains better than those with higher margins, so Cecere was surprised to find that generic pharmaceutical manufacturers were not more agile than Big Pharma. In 2015, no generic or over-the-counter drug companies made the cut, while Biogen-Idec was the sole pharmaceutical company to make the list of 26 Supply Chains to Admire.
Biogen-Idec listed on the 2015 “Supply Chains to Admire” List
Biogen-Idec improved its overall supply chain index ranking from 6 (when considering the period from 2006 to 2014), to 2 (when considering 2009 to 2014), the study found. The company increased return on capital from 13% to 21%, respectively, during these same time intervals, and inventory turns, respectively, from 9.99 to 14.55. Table I, shows performance for the seven top-ranking pharmaceutical companies from 2011 through 2014, comparing them with metrics for a manufacturer from a different industry: Apple, Inc.
If traditional supply chain management is not a top priority, how is the industry becoming more agile, and what metrics best reflect its progress? Pharmaceutical Technology asked Greg Anthos, senior managing consultant at Tunnell Consulting, for his thoughts. Anthos says that pharmaceutical manufacturers are focusing more of their attention upstream, to improve the research and development process, and, in particular, the way they handle clinical trials.
More pharmaceutical manufacturers are moving to adaptive trial designs, he says, and a growing number of them are working to be able to bring life-saving products to market under accelerated approval in Phase II. This is a major feat, considering the Phase III failure rate for new drugs (6).
At a time when some commodity generics continue to be in short supply, the emphasis is not on reducing inventories but on ensuring adequate supplies, Anthos says. Companies are also addressing the challenges brought by mergers and acquisitions, which can temporarily distract staff, at all levels, from operational and agility goals. McKinsey analysts argue for the need for greater CEO involvement, standardized processes, and greater communication and feedback, the hallmarks of any good lean or operational excellence program, when a merger or acquisition is underway (7).
The following are some opinions on agile manufacturing that Anthos shared in an interview with Pharmaceutical Technology.
Fear of stockouts and tendency to play it safe with inventoryPharmTech: It was one of Tunnell’s analysts who first drew industry’s attention to pharma’s inventory turns, compared to those in other industries, as a measure of its agility. Why is it that the industry appears to have made so little progress in improving its performance in this area?
Anthos (Tunnell Consulting): Not a lot has changed if you analyze the industry based on the classic supply-chain measures. Some manufacturers are probably carrying well over a year’s worth of inventory. Today, however, supply chain agility has to mean getting medicines to the patient more reliably and efficiently.
You’ll see some progress in inventory management, but it has not been the primary focus. Today, the industry’s first goal is ensuring supply to market so that there will not be any stockouts. A growing number of processes, especially in biotech, can be complex and fickle, so there is a tendency to play it safe with inventory. In the end, pharma companies will be measured based on ensuring supply, but also on revenue and profitability and cash flow, so inventory turns are largely issues for manufacturing departments, the CFO, and the guys in the warehouse.
PharmTech: So how is agility being defined in pharma today?
Anthos (Tunnell Consulting): Agility is much more about, in the short term, getting new products to market quickly. It’s about launching adaptive trials for breakthrough medications and having a sufficiently strong foundation to be able to launch a new product based on Phase II data.
In addition, agility means adapting immediately to changes in the market. These can be changes in demand, for example, when a competitor fails to get approval for a new drug and drops out of the market. But agility also means reacting to changes in internal processes or challenges within the company that must be overcome.
In the end, agility is getting to market faster and better managing the supply chain, and overcoming, more dynamically, any issues, whether external or internal, that have disrupted the supply chain. It’s all about being more responsive to change.
The downsized challenge: doing more with lessPharmTech: How can companies be agile when they are dealing with more, and more complex processes, as well as with reductions in staff and resources?
Anthos (Tunnell Consulting): As I see it, the most progressive companies are focusing on three areas:
As a result, less of their time is being spent on their primary mission: ensuring that safe and efficacious medicines get to the public. For drug developers and manufacturers today, the key question is: How do we develop new products so that, in the future, no or only minimal regulatory changes will be required, except maybe filing for new drug approval in a new geographical market. It’s a great stretch concept, but it takes a fair amount of work to get to a point where you can think about, and address, all the issues involved.
Certainly some of FDA’s and the industry’s early work with quality by design (QbD) had that goal in mind. The idea was to better understand your product performance ranges and the design space, file for approval in a wider range that would allow you to make adjustments in that range.
Today, complexity, both of the products and of the regulatory landscape, has boxed us in. Significant numbers of supplements must now be filed for individual products. That’s a challenge that the industry still has to surmount if it is to develop more robust supply chains and more robust processes.
PharmTech: How are manufacturers doing this?
Anthos (Tunnell Consulting): It requires figuring out design choices. For example, a company might choose to launch a new process using a stable platform that is already fairly well understood and characterized, and that has already been scaled up. It also means doing more of the classic QbD work, such as design of experiments (DoE) to really understand how the product behaves, where it works well, and what the process’ fault lines are. Simplification is key, so you lean out the process to reduce unnecessary complexity.
PharmTech: But how can companies do that effectively with biologics, and how can they do it when they are also rushing to get product to market faster?
Anthos (Tunnell Consulting): With biologics, there is inherent complexity, so the key is designing in better controls or at least monitoring each process so that you better understand its behavior. It’s not easy. The industry is trying to move forward with greater process understanding while trying to get new products to market faster. These are competing forces.
PharmTech: How can all of this be done when international mergers are going on and day-to-day conditions are in such constant shift?
Anthos (Tunnell Consulting): Mergers distract staff. It’s not only a question of pondering who will get to keep his or her job, but such questions as which processes to follow, whether in manufacturing or development. You want to create the best lean practices that are most effective, but you’re often in a rush to meet some cost reduction synergy or regulatory target that a large consulting firm has told you to meet.
As a result, many companies reduce staff before they’ve figured out how to simplify and improve their processes.
Knowledge management is another major issue, because mergers and acquisitions drive a significant amount of employee turnover, both planned and unplanned. Knowledge often resides in individuals, rather than within the organization, and that jeopardizes business continuity. The way to avoid that is by understanding that you want to harmonize processes first, and engaging the folks who are already in the process of doing that to come up with the best work practices.
1. J. Macher and J. Nickerson, Pharmaceutical Research Manufacturing Project, Final Benchmarking Report, 2006, site accessed February 20, 2016.
2. L. Cecere, The Supply Shaman blog.
3. A. Mayer, Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry,” Dec. 3, 2012, Supply Chain Insights, (site registration required).
4. C. Ptak, What is Supply Chain Excellence? Feb. 23, 2016, Supply Chain Insights.
5. L. Cecere and R. Denman, Supply Chains to Admire, 2015, Supply Chain Insights, excerpted with permission, Sept. 8, 2015, Accessible via www.beetfusion.com (site registration and free membership required).
6. A. Shanley, Pharm Technol, 40 (13)(February, 2016), pp 24-27.
7. A. Agrawal et al, Pharma M&A: Agile Shouldn’t Mean Ad Hoc, McKinsey and Co., site accessed February 19, 2016.