Pharmaceutical manufacturers walk a tightrope as they balance contradictory forces and changing conditions: they must meet new regulations but also need to increase outsourcing; they face expiring patents but also the expectation of sustained profitability.
The rules imposed on the industry are getting ever more complicated and represent just one of many forces eating away at bottom lines. As brands go off-patent, pharma companies increasingly rely on outsourced APIs and the expansion into emerging markets to maintain or grow revenue. That increased reliance on outside manufacturers represents a loss of control, however – a concept that runs counter to tightening regulation.
Industry leaders are shifting away from R&D and beginning to look more like the consumer packaged goods industry – they are becoming brand companies
In the past decade, the industry has witnessed an evolution, in which industry leaders are shifting away from R&D and beginning to look more like the consumer packaged goods industry – they are becoming brand companies.
At every stage, from meeting regulatory demand to expanding operations and becoming global brands, the supply chain plays a significant role. One of the most common supply chain topics is serialisation, due in no small part to the pending regulation in many regions. However, serialisation is really just the decoration on the cake. In reality, a lot has to take place throughout the supply chain before serialisation can truly add value. If done right, the supply chain can be used to accomplish so much more. At its best, it can be the game changer in the fight against diminishing margins and stiff competition.
An evolving industry
Historically, pharma companies have manufactured nearly all of their own APIs, whereas today major companies outsource as much as 60% of their manufacturing. They are divesting factories, finding lower-cost producers and moving production to less expensive regions.
Meanwhile, fewer new drugs are being introduced in-house. The cost of bringing a new drug to market is around US$2.5–$4bn, reaching as high as $11bn, according to recent reports. It is a staggering cost just to get a new drug in front of payers and prescribers, who ultimately decide whether that drug is a viable treatment for their patients. It has caused some major players to shift their strategy and grow through acquisition, ultimately side-stepping some of the development costs and allowing them to champion drugs they believe are already on their way to becoming winners.
The squeeze on margins means manufacturers cannot sit on large inventories and wait for demand to come
These industry changes add several degrees of complexity to the process of getting products to consumers. The assurance of supply has never been more critical to keeping businesses running. However, the squeeze on margins means manufacturers cannot sit on large inventories and wait for demand to come.
Outsourcing – and to some extent new acquisitions – shifts more production outside the walls of the company, and as a result, adds new risk. It leaves companies surrendering a significant amount of control over the manufacturing process in return for lower costs. And it opens the door for diminished transparency throughout the manufacturing cycle.
As more control is handed over to a more diverse set of suppliers, pharma companies will seek to regain some of the visibility they have lost as a result of all the change. Indeed, end-to-end supply chain visibility is likely to become the main initiative for pharma companies this year.
Supply chain visibility provides the system of checks and balances that often go missing when a company moves critical stages of its manufacturing process to outside vendors. And the desire to improve visibility can be met only if companies begin to see the supply chain’s potential as a competitive differentiator.
The company that can virtually manufacture the best, and see all the pieces of its supply chain at once, is the company that will emerge as a leader in the industry
Most companies aren’t quite there yet. The company that can virtually manufacture the best, and see all the pieces of its supply chain at once, is the company that will emerge as a leader in the industry. It can be seen that the best-in-class pharma companies in the world have the best supply chains.
Visibility comes through technology – the use of Big Data and analytics, powered by the Cloud to connect manufacturers and suppliers all the way through the chain. This opens up the ability to measure processes, to find anomalies or opportunities for improvement and to act upon them.
It is not uncommon to come across a company whose executives have made it an initiative to reduce inventory – yet they do not actively pursue it. If you cannot see it, you cannot reduce it. Visibility brings the ability to see inventory, whether in a warehouse or in transit, to detect delays, shortages or surpluses, and tighten up shipping costs. The net effect is improved performance and reduced costs. It also paves the way to meeting the tough regulations imposed on the industry.
Serialisation – and increased regulation in general – are a response to piracy, counterfeiting and the use of drugs as currency; left unchecked, they represent some of the biggest risks to the integrity of a brand. The consumer wants to know that what they’re buying is the real thing.
While serialisation is a necessary part of ensuring the product is pure, it is part of a much bigger picture in the fight against these risks. Some $15bn of APIs will be exported out of India alone this year. While serialisation may be in place, it does not mean there is no possibility for drugs to get into and out of the supply chain.
The industry is global, regulations are not. The same rules that apply in the EU, do not directly affect countries in South America. Manufacturing and distribution go well beyond political boundaries, however, and manufacturers are responsible for playing by the rules in whatever geography they operate.
At the heart of visibility, track and trace or serialisation is connectivity and collaboration. Pharmaceutical companies today tend to rely on traditional hosted software, or enterprise resource planning (ERP) tools. These do an excellent job of connecting people, sharing data and delivering visibility within the four walls of the business. This approach is ideal for looking inside a business. The challenge companies face as outsourcing increases and supply chains become more complex is that production moves beyond the outstretched arms of ERP.
Tying it all together
Suppliers, factories, logistics providers, customs agents and numerous other parties that touch every transaction are on the outside of business. Pharma companies have spent years trying to add to or extend their ERP systems to connect supply chain partners. EDI and portals are single point connections for trading partners. But this model is unsustainable as the numbers of trading partners grow, with multiple layers of suppliers in different regions, facing different regulations and requirements.
The company loses some of its buying leverage by operating and ordering in a splintered, fragmented environment
Many companies operate five, 10 or 20 different ERP instances – varying by region. This raises complexity and makes it harder to have true end-to-end supply chain visibility. A company, in this instance, may find itself bidding or competing against itself in areas such as goods sourcing or freight procurement. The company also loses some of its buying leverage by operating and ordering in a splintered, fragmented environment.
Supply chain visibility, traceability and connectivity is not a bolt-on project. There is no single solution that addresses this challenge. Rather, it requires a new approach – a rewiring of the underpinnings of connections between a company and its trading partners. A supply chain is not linear, but a three-dimensional network. The pharma company sits at the centre with hundreds of surrounding nodes that are also interconnected. A point-to-point approach here is inadequate. What is needed is a new infrastructure that connects all of the nodes simultaneously, as a single network.
A single global network can integrate all the ERP systems, trading partners and, most importantly, the data that moves between them
A single global network can integrate all the ERP systems, trading partners and, most importantly, the data that moves between them. With this foundation, the idea of supply chain visibility becomes a reality. Companies can see beyond their tier one suppliers into tier two and three. Black holes that once existed between trading partners are eliminated by opening up visibility into all transaction documents and interactions.
Companies can know where their goods are and where they have been. This makes not only track and trace and serialisation achievable, but also opens new doors with regards to smarter, more agile operations. With visibility and data tied into parties and processes throughout the network, companies can know their true cost to serve a particular customer segment. They can assess new market opportunities with a clear view.
The industry faces numerous headwinds: serialisation, patent expiration, product safety, assurance of supply and counterfeiting, to name but a few. The foundation to addressing each of these challenges is tighter collaboration with partners, bringing greater visibility in the supply chain.
