Can you achieve an acceptable level of supply availability without the current waste?
There is no question that the Pharma industry must deal with a unique combination of supply chain and regulatory issues to meet its obligations to consumers, supply chain partners and shareholders. For some biotech companies, availability of their products are literally a life saving necessity and disruptions in the supply chain can result in a form of supply triage that is uncomfortable to even consider.
Unlike other industries, the Pharma industry has traditionally treated supply availability as a prime factor, even to the extent that several months of safety stock was not considered excessive. While in the other industries, best in class performance inventory turnover performance is double digit, the Pharma companies seem satisfied with low single digits despite the impact on cash and working capital.
In an April 2010 article in Pharma Pro, entitled, “How to Unlock $43 Billion in Value by Improving Working Capital Management,” A.T. Kearney reported that an analysis of Pharmaceutical companies revealed an average inventory level of 170 days.
Supply availability though is just one key difference to other industries. In a number of the Bio-tech companies, they’ve had to invent equipment and manufacturing processes to produce the new wonder drugs. Early manufacturing is just targeted on producing enough to satisfy trials and is less focused on cost and efficiency. Unlike engineering changes in the high tech industry that change the content of a product, changes in the Pharma space usually target the cost and yield of the manufacturing process. To add to the complexity, these changes must satisfy the quality control requirements of regulatory agencies. The approval process can take months and uncertainty in the timing creates a variety of risk management issues. In addition to the regulatory control over manufacturing, there are different regulatory issues to face in each of the market regions that govern a wide variety of factors including packaging, labelling and shelf life requirements. Combine these factors with the extremely high margins on non generic drugs, and it’s no wonder that the Pharma industry has historically put little emphasis on minimizing the non-production aspects of the supply chain costs.
BUT despite the unique aspects of the Pharma industry, the bulk of the supply chain management issues are largely common to many other industries. Planning for raw materials, dealing with manufacturing constraints, establishing and monitoring distribution inventory levels, and dealing with significant market demand volatility, are just a few. It is important to note that the dynamics that have introduced unparalleled volatility in the high tech industry (short life cycles, internet purchasing behaviors, and intense price competition), have had less of an impact on Pharma, but other factors have achieved much the same result.
Increased global competition, economic conditions, and changes in both regulatory factors and insurance coverage have collectively produced higher levels of demand volatility. Without the same degree of supply chain focus that is present in the high tech space, the net result generates a degree of waste almost unfathomable by those outside the industry. The chief question is, “can you achieve an acceptable level of supply availability without the waste?” It’s understood that the definition of “acceptable” ranges from 100% availability for some life sustaining medications to more conservative fill rates for OTC generics. There are enough examples of supply chain mastery in the high tech and automotive industries to suggest the answer is an absolute yes. The next question is “How?”
Stay tuned for Part 2 of this discussion tomorrow.