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 / Spring 2012 / Issue 66(originally published by Booz & Company)


Five Steps toward a Revitalized Pharmaceutical Supply Chain

A Five-Step Path

When a traditional pharmaceutical supply chain evolves into a flexible, cost-efficient, and functional system, an entirely new set of capabilities is needed. Formerly, pharmaceutical companies needed to focus their skills on research and development and on sales and marketing. For the most part, managing costs and operational excellence didn’t matter as much. But as the competitive landscape has shifted, so have the required operational capabilities. Today, operational capabilities are critical, and these five strategic steps provide a path for developing them.

1. Adopt tailored business streams. Big pharmaceutical companies today tend to embrace a one-size-fits-all approach to the supply chain, maintaining high levels of inventory and high service levels for virtually all their drugs, no matter what the demand patterns (or volatility in consumer demand) may be. This can be an acceptable model for high-margin products in a homogeneous market, but it will not suffice in today’s lower-margin segments and disparate environments.

Instead, pharmaceutical companies need to implement a series of individual supply chains, each tailored toward its own product, market, and customer groups. For high-volume products with steady demand under intense pressure from generics, the supply chain should be built around cost competitiveness, which can be achieved by manufacturing in low-wage countries and producing sufficient volume for lean inventories based on historical and forecasted demand. With relative stability in demand planning, companies can weather long production lead times and enjoy significant savings from high utilization levels combined with low wages.

By contrast, sales of high-margin drugs that are under patent protection or formulated for less-common medical conditions may be more difficult to predict, and the potential earnings justify a more high-touch supply chain. These drugs may be manufactured in sufficient volumes in factories close to their market (often in developed countries), allowing short lead times yet avoiding expensive stockouts in any markets. In addition, a second source of production may be warranted to ensure product continuity in case of a disruption, such as an earthquake, fire, or other natural disaster in the primary factory.

2. Add flexibility to product design and packaging. Pharmaceutical companies should manage product demand volatility in low-margin drugs by implementing pack-to-order strategies. This involves manufacturing, for example, one version of a pill that could be shipped efficiently to numerous global markets, instead of multiple versions, each for a separate region (as drug companies operate now with their less-than-efficient, widely dispersed factory and supply chain footprints). Or this approach could take the form of so-called postponement strategies, in which drugs are packed to order in late stages of manufacturing on the basis of regional demand; this would reduce overall inventory levels and SKU complexity and also improve reaction time to market needs and supply chain agility. Greater flexibility minimizes inventory write-offs and working capital required for production.

3. Reconfigure the supply chain footprint. Typically, pharmaceutical production networks are characterized by large-scale factories and low productivity. Indeed, average industry asset utilization levels are below 40 percent. Continuing that level of performance will only put pharmaceutical companies farther and farther behind in global markets. Instead, established drugmakers must consider a complete overhaul of their factory footprint based on carefully constructed forecasts of regional and local customer demand and product requirements, as well as production and logistics cost and lead time trade-offs. In addition, local rules must be taken into account. For example, in some countries only domestically produced pharmaceuticals can appear on insurance reimbursement lists; in those cases, local manufacturing is de rigueur to avoid a significant competitive pricing disadvantage.

There is no single blueprint for plant network design; the precise approach depends on each company’s existing footprint, its product portfolio, and its future growth strategy, for example, which types of products it plans to focus on and in which markets. Possible footprint designs include the following:

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