FINDING A CURE

Patent expirations, pipeline gaps, the R&D productivity crisis and intensifying regulatory pressures are some of the challenges confronting the pharmaceutical industry. At the same time, a number of opportunities have also emerged.

The steady maturation of biotechnologies and a growing emphasis on personalized, “patientcentric” health care has provided avenues for growth. In addition, digital developments that can make data available anytime, anywhere, and new sourcing opportunities in emerging markets also offer prospects for expansion.

Such growth, however, requires the right global operating model – one that is facilitated by a forwardthinking supply chain and a growthfocused global agenda.

Research shows that information rich, flexible supply chains that are built around customer needs, enable the capabilities that are critical to high performance. Supply chain excellence is directly tied to a company’s financial performance. Today, the pharmaceutical supply chain lags behind other industries in terms of innovation and effectiveness.

This does not dismiss the costcutting and cycle time reduction measures that have contributed to a reduction of almost 30 percent in cost of goods sold (COGS) between 1990 and 2006 (see Figure 1). Nor does it belittle the operational efficiency initiatives that pharmaceutical companies have undertaken. These efforts, however, are rooted in an outdated operating model that is largely insourced, geographically localized and concerned with operational efficiency rather than growth.

LEARNING BY EXAMPLE

The pharmaceutical industry was among the first to internationalize, taking advantage of foreign trade zones, inter-country tolling gains, and other benefits of localized operations.

Yet despite this global presence, many companies still have a long way to go before their global supply chains match that of Halliburton – the integrated oil field services, construction and US government contracting company. The company’s operating model supports a globally distributed production capability. Pharmaceutical supply chains also need to work on setting industry standards, such as those achieved by Inditex, a Spanish apparel group.

Many traditional pharmaceutical companies have also not been able to catch up with the newer, smaller biotechnology firms that have effectively reengineered the latter’s supply chains and related infrastructure.

Companies in other industries have taken different approaches in optimizing the potential of their supply chains. Some have developed entirely new operating models; others have transformed their existing models to enable “virtual supply chains” that have a greater focus on managing knowledge, data and relationships, rather than the actual physical product.

Today’s pharmaceutical industry confronts an inevitable and seismic shift in the transactional processes and capabilities that comprise about 75 percent of its supply chain activities – from a largely insourced and localized operating model to a primarily outsourced and globalized operating model (see Figure 2).

The existing operating model limits pharmaceutical companies’ abilities to make major improvements in their capabilities. To truly achieve these changes and refocus their internal resources toward more analytic and efficient strategic tasks, the underlying operating model must be fundamentally changed (see Figure 3).

Supply chain excellence in pharmaceuticals rests on three pillars:

• Global operating model

• Core competencies

• Collaboration

The global operating model is a prerequisite for good performance across the various industries. More than half of the pharmaceutical industry respondents in the Accenture Global Operations Survey cited a “global supply chain network that achieves simultaneous objectives on quality, cost and time to market” as the capability that is the most likely to help them achieve their profi tability targets.

It is important, though, not to confuse the terms “global” and “centralized”. Depending on individual circumstances, some companies may require a centralized model while others will not. There is, however, a systematic approach to making this key decision.

There are three distinctive operating models: localized, coordinated/ shared and centralized. These convert the global presence of a company into a competitive advantage and a platform for profi table growth, by enabling four diff erent levers. These levers are: local adaptation, global economies of scale, global economies of scope and optimized value chain confi guration (see Figure 4).

If the goal is to improve reach and customer relevance in local markets (local adaptation), a localized model will be optimal. If, however, the principal aim is to spread fixed costs over larger volumes, thereby reducing capital/operating costs per unit and consolidating purchasing power, the centralized model may be more suitable.

A coordinated/shared model, by contrast, will improve the ability to serve global customers and help build critical mass in selected activities by leveraging a broader knowledge base – global economies of scope. It will also help reduce costs, improve performance and mitigate risks, with the optimized value chain confi guration.

As Figure 4 shows, the coordinated/ shared approach touches on more levers. However, as it may not be applicable to every company, finding a strategic and cultural fit should be the guide for making the right choice. Moreover, operational capabilities must be aligned to enable the chosen mix, while being flexible enough to support its evolution.

Consideration of the product portfolio is also necessary as a diverse portfolio with high volume may even require more than one supply chain.

CORE COMPETENCIES

Excelling at the right core competencies can differentiate a company from its competitors. Almost 67 percent of respondents in the Global Operations Survey identifi ed “tight links with customers and suppliers to obtain supply/ demand visibility” as the single biggest challenge they confront in effectively managing their global operations.

A similar proportion cited “effective coordination of external and internal activities in support of a new product launch” as the key to achieving profitability targets. Almost 69 percent named “integration of local market needs with global designs, research and development functions,” as the characteristic of a global operating model most likely to ensure innovation and speed to market.

These and several other desired competencies are aligned with those of the Accenture Global Operations Solution – a holistic, six-component approach to global operational management. This solution applies across strategy, supply chain and other business functions that are necessary for staying competitive in the current rapidly evolving global economy (see Figure 5).

A global operations strategy is essential. It starts with market, product and capability planning to recognize, track and respond to market opportunities as they shift and change. The strategy must also encompass capabilities to monitor, manage and mitigate risks, as well as handle a multitude of tax and fiscal regimes. It should also be about making environmental sustainability a sound business proposition.

Without a global operations strategy, a global operating model would not work. Similarly, the optimal market and product readiness and adaptive supply network components would not apply.

Inditex’s mastery of these components or competencies demonstrates its understanding of supply chain efficiency. The Spanish apparel maker, which owns the Zara fashion chain, can turn something seen on a catwalk into a store item, in a fraction of the time it takes its competitors to do the same. Its designers receive real-time information about customer buying trends directly, via handheld computers from its individual managers located at more than 3,000 stores worldwide. The designers then send specifications from a centralized design and production center to all points in the production process, including outsourced manufacturers. Individual pieces are tracked by bar code through the garment assembly production and shipping process, right through to the store.

In comparison, the pharmaceutical industry falls short, and more work is required to develop such capabilities. Indeed, when respondents were queried on how effectively they were implementing the components required for supply chain efficiency, the answers were not encouraging (see Figure 6).

EFFECTIVE COLLABORATION

In an era of constant and complex change, pharmaceutical companies need to develop collaborative relationships with their partners and customers, as well as entities within their organizations. No fewer than 75 percent of survey respondents recognized this need. As the examples from other industries have shown, the right kind of collaborative partnership can deliver significant supply chain benefi ts.

These benefits are especially noticeable in consumer goods, where collaboration between manufacturers and customers (dealers, distributors and retailers) has decreased inventory by as much as 40 percent and boosted sales by up to 45 percent. It has also led to an 11 to 12 percent rise in in-stock availability, as well as a substantial decline in lead time and rushed orders.

Consumer electronics company Sony tackled the process inefficiencies in its inventory control by implementing an enterprise resource planning system that allowed the company to collaborate with key retailers in forecasting and replenishment planning. The collaboration has helped shrink selling, general and administrative expenses to less than 10 percent of sales and has reduced committed assets by halving inventory.

The pharmaceutical industry similarly needs to refocus its efforts and manage its relationships for key, growth-driving capabilities like product launches. It has much to learn from companies in other industries that have expanded the concept of outsourcing to include the handing over of the external responsibility for an entire process, or even the whole supply chain, instead of struggling to manage a myriad of tactical supply chain relationships in-house. However, a focus on collaboration across the extended enterprise will be required (see Figure 7).

Leading companies in other industries demonstrate greater integration, communication and collaboration both externally and internally. While a strategic relationship with every pharmaceutical client is clearly unnecessary, collaborative arrangements with key customers, like major retailers, could enhance supply chain efficiency. Currently, however, the pharmaceutical industry is still not collaborating well enough with its external partners, whether globally or regionally.

THE NEXT STEP

The pharmaceutical industry is foregoing the potential for revenue increases of one to two percent a year and annual cost savings of between US$12 and US$32 billion, by failing to make the adoption of the three pillars of supply chain excellence a priority (see Figure 8).

In adopting this concept, pharmaceutical companies will be able to trigger several value levers, in particular those that will boost profit and shareholder value. Value levers include product innovation, new market penetration, customer segmentation, customer service, value-added supply chain services, lifecycle optimization and a reduction of time to market.

Pharmaceutical companies should assess their own supply chains and ask the following questions:

• What is the operating model that best positions the organization for success?

• Can the organization redefine its core competencies to differentiate itself from the competition, while focusing on developing the skills to sustain these competencies?

• Can the organization take steps to develop more collaborative relationships with its partners and information sharing systems? (Opportunities and risks need to be taken into account so that these partners have an equal stake in the success of outsourcing initiatives.)

As every company is different in terms of size, challenges, capabilities and geographies, each will take a different path to unlocking the potential for high performance in its supply chain. All, however, should recognize that a supply chain focused on innovation and growth is the key to future value creation.