• Product life-cycle model: Production of items originally made in a single launch plant is shifted to other, perhaps lower-cost, factories (or outsourced) as demand requires or as drugs lose patent protection.
• Technological model: Manufacturing centers of excellence are formed around new production or process technologies and innovative practices.
• Geographic model: Plants are set up in numerous regions around the world on the basis of local demand for products.
• Complexity model: Some plants are dedicated to high-volume/low-complexity products and others to low-volume/high-complexity products, with resources allocated according to demand, competition, and whether high-margin pricing opportunities exist.
• Product and therapeutic area model: Plants are designed for certain product groups or therapeutic areas to better share R&D, manufacturing improvements, and strategic marketing efforts for similar products and brands.
By restructuring their factory footprint into its most efficient and economical configuration, pharmaceutical companies can turn their supply chain into a source of ongoing competitive advantage, delivering mature products efficiently to compete head-to-head with makers of generics and producing innovative drugs in manufacturing networks that can respond quickly to volatile market demands.
4. Create a network of third-party suppliers. To be prepared for market dips, a thoughtful make-versus-buy strategy is essential. If they outsource production of specific products, companies can better deal with slowdowns in demand by simply reducing procurement from a supplier rather than curtailing factory capacity utilization and taking on the expense of idle fixed assets.
But drawing up a make-versus-buy strategy requires a set of clear product and market criteria to determine when third-party suppliers are more beneficial than, for example, a streamlined and flexible factory footprint. Typically, if volume is low — and, importantly, if the drug is not a high-priority innovation that requires diligent intellectual capital safeguards — having someone else produce it is a desirable choice. However, when manufacturing scale and efficiency are achievable (usually the case for top-selling products) or the drug is a distinctive item in the company’s portfolio, in-house production should be favored.
5. Significantly improve planning capabilities. Large-scale shifts in the competitive landscape have escalated the importance of successful product launches and have increased demand volatility and SKU proliferation. All of these conditions require strong planning capabilities to properly navigate these shifts. For example, a new product launch depends upon an accurate assessment of expected demand so that sufficient manufacturing capacity is available to provide for the anticipated customer base and for potential demand spikes. Moreover, as generics enter the marketplace, company planners must correctly gauge their impact on individual branded drugs. This will guide the business side in managing inventory size, returns liabilities, and write-offs if sales drop. And as patents approach expiration, multinationals often try to extend their control of the drug’s revenue stream by developing new forms and delivery approaches for the product, while generics attempt to keep pace with their own version of the drug. In turn, planners are the front line in analyzing the rash of new SKUs that will surely follow.
To meet these challenges, pharmaceutical companies must deploy a disciplined business planning process that supports the company’s portfolio management strategy and product transition plans. Input from marketing, sales, and finance departments is combined with the latest marketplace intelligence and historical demand data to create a consensus forecast for individual drugs and families of drugs. This process allows senior management to evaluate various financial scenarios and business trade-offs. Companies with well-run planning processes experience substantial reductions in inventory levels, supply chain volatility, and manufacturing costs, and also see improved supply chain resilience.
This is not a unique challenge for the pharmaceuticals sector; virtually every industry these days has to reconsider the makeup of its supply chain in the wake of competitive transformation, and turn what were once routine operations into strategic capabilities. But because multinational pharmaceutical companies are coming to this challenge facing deep disruptions in their industry, the tactics they choose to use in remaking their supply chains could serve as a particularly valuable model for companies in other industries facing their own moment of truth.