During our recent projects with a strong focus on end-to-end process redesign and optimisation, the entire team of consultants and experts realised that a comprehensive update in the procurement processes and strategies of many pharmaceutical companies is long overdue.
The most prominent example and, let's say, the toughest wake-up call was probably the Covid 19 pandemic in the past three years. It has shown that a number of companies and industries are not well prepared. But without the outstanding research and development activities of a large number of unique companies and start-ups, without the rapid, ongoing review by national authorities with a view to rapid market approval of covid 19 vaccines or drugs, and without the enormous combined efforts of all stakeholders to get products to patients, we would be facing far greater difficulties.
Therefore, everyone should look at Covid-19 as an opportunity, or perhaps as a trigger for change, to ensure that procurement functions within each supply chain can optimise their processes, risk management and overall structure in the near future. To facilitate successful and sustainable change, a carefully designed and business-driven transformation authorisation is required. To take full advantage of all opportunities, companies need to focus on the four building blocks of change:Successful transformations require stakeholder engagement and empathetic as well as sustainable change management. Four building blocks of change.
It's time for a comprehensive procurement update.
Procurement functions play a crucial role in getting pharmaceutical companies through crises like the Covid 19 pandemic mentioned above. Interrupted production runs with major shortages of active ingredients and specific glassware or complicated forecasts are just two representative challenges procurement departments face. All these hurdles are in addition to already existing problems such as cost reductions, regulatory difficulties and product launches as fast as possible.What can change look like within the purchasing functions?
Five transformation themes were identified.1
Pharmaceutical companies need to address 1) spend visibility and control, 2) category management, 3) supplier management, 4) optimising indirect spend and 5) looking at product lifecycle costs. To achieve a high level of maturity, a systematic, well-developed approach is key:
QC Gap and Maturity Assessment across four Categories.
Description of the five transformation themes:
1. Spending Visibility and Control:
The Covid 19 pandemic highlights the need for transparency and speed in procurement organisations. Companies need to respond and adapt immediately to the crisis and the associated changes in global supply chains. They can use a real-time view of spend to assess unit cost information by location and supplier. This provides a basis for identifying opportunities, sharing costs or leveraging sourcing synergies across the production network. Companies also need insights into future medium- and long-term demand to optimise contract terms, order quantities, lock-in periods and supplier-managed inventory. To drive scale and efficiency across the network, the procurement organisation needs a clear structure for decision-making and rules for decision rights regarding purchases and spend. This clarity is particularly important to manage the complexity of decentralised purchasing at site level.2. Category Management:
Procurement functions should fundamentally rethink how they implement category management in Technical Operations. By shifting to an approach based on segmentation, maturity and opportunity, the company can manage the complexity associated with achieving performance targets. This helps the company to identify savings early on, such as a rapid reduction in indirect spend that can be used to fund the rest of the journey. Categories differ in terms of the effort or lead time required to make a change. In some cases, for example, changes to secondary packaging are easier than obtaining approval to change an excipient or active ingredient. Procurement functions should group categories into segments based on priorities. Procurement teams can then consider the maturity of each category to focus on the areas where changes can bring the greatest benefit.3. Supplier Management:
Supplier management is not a new concept, but many procurement functions fail to maximise its impact because they do not implement it rigorously. Four areas of focus are recommended.
Company: This group includes the company's three to five most important suppliers. Close and often long-standing partnerships are critical to maintaining sales and profitability. The head of the technical department or procurement department should communicate with the C-level members of the suppliers about key priorities, opportunities for collaboration and knowledge sharing.
Strategic: This group consists of the next ten to twenty suppliers who have a stable and cooperative relationship with the company. Regular dialogue and continuous relationship building are crucial, as some of these suppliers may be among the most important in the near future. Core: Suppliers from whom the company buys regularly but does not consider as long-term key partners. Supplier management staff in the technical departments can manage these relationships using standardised processes, supplier evaluation templates and typical KPIs such as "on-time in-full" or "right-first-time".4. Indirect Spending Optimization:
Dealing with indirect spend in the technical area is difficult. Indirect spend is often not well managed because business teams make decisions without input from procurement groups. However, there are at least three categories for holistic savings.
Capex: For capital expenditure on sites, buildings and equipment, the objective is to optimise expenditure based on total cost of ownership, which includes planning, operations and decommissioning. Investment requirements are then consolidated and ROI values assessed before a decision is made.
Enterprise-level spend: The procurement function should consolidate spend across the enterprise and identify synergies that will enable it to reduce costs comprehensively.
Expenditure on professional services: Companies need visibility of their spending on services such as quality control, engineering, regulatory support or laboratory and equipment maintenance. They can use these insights as a basis for negotiating framework agreements for services that cover all of the company's sites.5. Product Life Cycle Cost View:
The procurement function should work with the business side to prioritise costs and initiatives along the product lifecycle. Procurement representatives should regularly participate in lifecycle management to discuss procurement and costs at each stage and drive make-or-buy decisions. Cost management is the component that has the greatest impact and is the most complex in managing the product life cycle. The impact comes from the shortening of lead times enabled by the close partnership. However, complexity includes both soft and hard aspects. Soft aspects include cross-functional collaboration, including sales, while hard aspects include examples such as consistent visibility of cost of goods sold or product-level spend.The future role of CDMOs in the chemical and pharmaceutical industry.2
The variability of services includes pre-clinical and clinical development, API synthesis, out-licensing or all-inclusive contracts towards FDFs such as generics for example. During that increasing demand of CDMO services the Covid-19 pandemic can be considered as a kind of climax or even an ignitor needed for the start of a spaceship at Cape Canaveral. Huge stock-outs regarding specific FDFs or APIs as well as glassware shortages have been the consequence since the demand has been way too overwhelming. Today, CDMOs must build and maintain their relationships with pharma companies via a more strategic long-term approach.
Such a strategic relationship also strongly benefits from a kind of value collaboration between both parties. In addition, CDMOs need to have a deep understanding of the supply chain and manufacturing risks that pharma companies face. For supply and sales organizations, it is exactly the other way around. These companies must learn how the E2E pharma process landscape works. From ordering RSMs, synthesis of drug substance via manufacturing of drug product to the preparation of FDFs. Each single milestone has got a variety of sub-processes with single lead times.
How does a Value Collaboration between Pharma Companies and CDMOs look like?
Leading Pharmaceutical Companies manage the Supply Chain with CDMOs via a proven, value-based Collaboration and Relationship across five Levels.
What was the pre-pandemic situation?
Before the pandemic, most relationships between pharmaceutical companies and CDMOs remained largely transactional. Whenever pharmaceutical companies needed more capacity or access to new technologies that they did not want to build or install in-house, they purchased either R&D, manufacturing or even RA services from appropriate CDMOs on a project basis.
For large chemical, pharmaceutical or biotechnology companies, the relationship between the two parties has been asymmetrical. The big players in the industry have far more size, influence and financial resources and usually generate most of the product value, while the CDMOs only generate a small margin. For years, and even today, the CDMO business has been a highly competitive environment. Especially in the area of generics, the pressure is exceptionally high due to tight pricing and the large number of strong competitors.
CDMOs have tried to strengthen their relationship to their clients for decades. They have invested in more R&D resources and technologies, in extended and fully state-of-the-art production facilities or in specialty sectors such as flow chemistry, hazardous and cytotoxic reactions, biodegradable polymers, modified amino acids or late-stage functionalization of peptides. However, all efforts in summary, except some special cases, have had only limited success with only little amount of maintained strategic partnership being value adding and fully sustainable.
Evolution of more value-driven and strategic Partnerships.
Now is the time for CDMOs to lay the foundation for more strategic partnerships. In the short-term, companies should expand their customer targets to pharma companies looking to bolster the resilience of their supply chain as governments enact localization requirements. Government incentives to go local could change the economics of building new sites in locations that were previously considered to be too expensive. National health bodies are another potential source of customers. To fully leverage the opportunity and increase their competitiveness in the long-term, CDMOs need to switch to a more strategic role that will make them even more integral to the pharma supply chain.
An Organizations Procurement Level of an organisation can be analyzed by a simple Maturity Assessment. The transactional versus strategic Collaboration Model:
Best in class CDMOs need to invest time in four focus areas. Attraction of pharmas via a competitive value proposition, digitalization of supply chain capabilities, expansion of capabilities and sustainable relationship building. On the other hand, pharma companies need to walk through a 360° approach which is also based on four topics. Strategy and mission, operations and systems, management, and structure as well as mindset and capabilities. Since both pathways are in strong dependency to each other specific parts need to be closely linked and optimized in a true value-driven, strategic partnership.
Best in Class CDMOs and Pharma Companies use a kind of 360° Approach to challenge themselves across multiple closely-linked Categories.
Literature.
- The Future of Procurement for Pharma Operations, January6th, 2021, Daniel Kaegi, Daniel Weise, Elia Tziambazis, Aaron Snyder, Philipp Pauli.
- What's Next for CDMOs After Covid-19, March4th, 2021, Gian-Carlo Walker, Eduard Viladesau, Hob Brooks, and Elliot Vaughn
