Cost effective operations: A strategic perspective on Pharmaceutical manufacturing operations

The pharmaceutical industry has a number of unusual characteristics, both in its structure and in the nature of its business operations, which are little known outside the industry but that materially affect the process of bringing the safest and quality pharmaceutical drug products to the patient. The development and manufacturing of pharmaceutical drug products is very time consuming, extremely costly and high risk, with very little chance of a successful outcome. The process of pharmaceutical manufacturing operations with respect to cost factors is described, together with all its challenges, including talent procurement.

What did we learn from our past before we look into the strategies to save billions of dollars is the question that every pharmaceutical company should ask.  It’s hard to make predictions in today’s dynamic environments but there is always chance that must be taken. Overall, the Pharmaceutical operations have not changed much. However every company these days is trying their best to place measures to take care of the overly burdened cost of operations anywhere in the world. 

Pharmaceutical companies are making and distributing the drugs the same way as they used to do about 15-20 years ago. As it’s hard to make predictions in the dynamic environment but the old practices must be re-looked at and the policies need some revisions with respect to manufacturing and distribution. Both the fields look simple and easily achievable but in reality they both have challenges.  Both perspectives have a deep line that needs full control so the quality and safety cannot be compromised just for the sake of cost saving efforts. The industry and its stakeholder’s efforts to resolve pressing issues will likely trigger fundamental changes. Companies that are open to be part of the change and are willing to change by adopting required changes will thrive in the years to come.

Some of the most important opportunities that can be looked at while looking at the broader strategic pictures of saving costs are as below and can be considered while looking at the strategic perspectives on cost savings.

1. Overly challenged supply chain and project prioritization

This is one of the most challenging situations in many companies I have worked so far. There is always a constant struggle on finding a vendor who can provide starting materials or API or excipients at a large with the cheapest rates available. Capacity alterations and project priorities are other overwhelming perspectives of the struggle. Capacity needs can change within months or even weeks, while capacity planning often takes a “one-year plus” perspective. On top it, if there THE decision maker that is involved in purchasing and every item needs their approvals to go through, that delays the challenging situation even more. This disconnect has to be resolved through a more flexible supply chain, because as today’s vast overcapacity is brought down, the risk of back orders goes up. The right supply chain requires flexibility along five dimensions: assets, suppliers, people, processes and strategy.

Project prioritization and management along with executions are all linked to the ultimate outcome that is based upon available resources to get the job done on time. The increasingly global and complex pharma supply chains need highly skilled and internationally experienced talent who can drive supply chain innovation projects around the globe and sustain an edge on competitors. Pharmaceutical companies also need to manage demand fluctuations with existing employees by introducing flexible shifts in work systems and shared labor pools within or across their global operations.

2. Overcapacity reductions

The solid dose pharmaceutical industry in the current prospective is about 70-75% overcapacity in the manufacturing sector. The raise in overcapacity has come due to several reasons. Some of the critical attributes resulted in over capacities these days, may be a shift in volume requirements of the finished product by the time it reaches to the generic end of the drug product life cycle, single and multi-component formulations of similar or different strengths to beat the competition, drastic shifts in drug product manufacturing technologies such as Minitab, osmotic pump, thin film or changes in granulation processes etc.,  financial adjustments like deliberate organic growth investments which often results into over-investment situations to create safety buffers and increase in productivity demands.

It has been constantly seen that over capacities in API production is even at the worst case scenarios especially in the areas like specialty products or high potency molecules, control substances, improved synthetic routes and the most important one is a shift in production to low cost countries like China or India.

Pharmaceutical companies must therefore continue and even accelerate network amalgamations. These will have to happen gradually to balance the need for a competitive infrastructure with restructuring costs. But as the high-tech industry has painfully established, those who wait too long will get caught in a trap where the cost of restructuring overburdens their P&L and they start to tumble. In the past, many pharmaceutical companies preferred to sell plants rather than close them. This was not cheaper, but it avoided the social turbulence that goes along with closures. The sellers in such cases assumed it to have more difficult to find buyers, especially for plants without valuable know-how. It is clear that someone will have to carry the cost of downsizing.

3. Controls on third party manufacturing

It has become a trend at the present time that every big or to some extent small houses would like to make their products outside and save on significant related cost structures by default. Today, the dominant model is a balance of in-house and contracted production, with most pharmaceutical production in-house and API outsourced. A recent study on the outsource manufacturing shows that a typical large Pharmaceutical house works with roughly about 150 to 250 CRO/CMO/CDMO’s on annually across the globe.

Managing external partnerships requires shifting the focus from manufacturing towards supply. Making this shift involves new capabilities and governance mechanisms. Companies should conduct systematic screenings of high value partnerships, design contracts to create win-win situations, and create supplier performance management mechanisms. Managing a supplier network also requires the participation of functions beyond Operations, especially Marketing, Quality, and Business Development, to ensure balanced decision-making that considers aspects from “total cost of ownership” and risk exposure to image and competitor approach.

4.  Inventory management and controls

The available data in the market suggests that, on average Pharmaceutical companies holds finished product or API and/or intermediates for about Six months in inventory. Whereas their peers from the consumer goods market holds it only for about 2-3 months. The 2-3 month comparison may not be a right choice for the pharma sector as their margins are quite high as well as the therapeutic usages of the pharmaceuticals demands for highest levels of services. But in the current cost effective model situations the pharma world might like to rethink about cutting their inventories management by placing proper controls to about 70-80 % of old time days. That itself is about 20-30% efficiency in the cost savings efforts, which will be more realistic goal to achieve without disturbing the routine operations.  

This opportunity can be easily reached if companies that can align their cross functional teams to work rigorously and use the capabilities wisely. The sector also needs took at the increased demands from supply chain with respective to stay under compliance practices to margin the FDA actions. Companies will need an increasingly powerful supply chain function, with broader and profound involvement in planning, production, distribution, and purchasing processes. Data transparency will be necessary to operate an increasingly global supply chain. Simple tools like ERP systems can be placed in the system to achieve the required set of standards.

5. Regulatory burdens on the businesses 

Each and every manufacturer despite of their large or small house status is under scrutiny from the regulatory agencies. As a result they have to deploy all sorts of processes and system improvement initiatives that in fact results in spending hundreds of thousands of dollars to the consultancy services and adding resources in to the existing systems.

The available market data suggests that about 25 to 35% of costs to the companies are related to quality and implementing quality management systems to the organizations, as the top most priority these days is and will always remain is the “QUALITY”. To cope up with the regulatory scenarios many companies have deployed the harmonization practices to support various markets and special demands from the emerging markets. For example, it is believed that it’s more difficult to comply with Brazil or Russia today than with the US FDA, even though the US FDA has increased its scrutiny.

Since harmonizing global oversight is at least partly a political process, it is inherently unpredictable. But the industry’s willingness to join forces on quality and compliance has already translated into the design of an industry wide supplier auditing system. This could be a good starting point to engage more with regulators and accelerate harmonization, avoiding a further propagation of compliance systems. In the short term, companies can radically simplify their quality and compliance systems, making them cheaper, simpler and therefore safer. Most operational excellence efforts in quality and compliance have delivered unexpectedly high savings.

6. Entry into emerging markets and talent acquisitions

Recent studies suggest that the expected pharmaceutical sales from emerging market is about $150-180 Billions till the beginning of 2016 and has significantly increased since then. Emerging markets will be the growth engines of pharmaceutical sector. Seven out of ten people live in emerging markets today, and every year, over 100 million children are born there. 

While the prospects are at large, so are the challenges, especially from an operations point of view. In India, for example, prices are 85 to 90% lower than in the US and they continue to fall. Some Indian companies produce tablets at a cost of $2 per thousand, compared to the roughly $60 that multinational corporations spend on average. This has major implications for business models, especially for pharmaceutical companies selling into markets with cost-plus pricing structures. Achieving low cost is not just a matter of raising margins— it is a prerequisite to entry. Serving emerging markets at large scale to capture growth requires a different model, not just adjustments. The diversity of these markets requires more flexibility, balanced with global synergies.

Nearly every pharmaceutical company that uses emerging market growth strategy uses the same approach to capture growth in emerging markets. The difference will be in the quality of execution, especially in operations.  In the years to come, most of the pharmaceutical company’s output will be destined for emerging markets. Many of these markets will also require that production be local or in a low-cost region. The emerging market supply chain will therefore not be an annex—it will become the core of pharmaceuticals operations.

Having nearly perfect talent to obtain efficient and effective operations is another humongous challenge that is faced day in and out by all the Pharmaceutical organizations irrespective of their large or small sector segments. There are still huge opportunities in pharma operations. This will require major changes in operating models, organization, technology, mindset, and geography. Pharmaceuticals industry will have to consider if they are in a position to manage all these changes themselves or if they will partner with others. This decision depends largely on the talent they can attract, retain, and develop, not only to manage the day-to-day business, but also to lead the change. But talent and skills matter beyond management. Navigating rising challenges requires that all employees, including operators and first-line managers, are developed and deployed to the maximum of their abilities. That entails the huge cost burdens on companies. Quality space, standard work, and the other techniques of smart operations all require skilled and motivated staff. Human Resources and Operations today tend to work side-by-side, not together, and have little understanding of the other’s challenges or capabilities. Defining a joint agenda and leveraging training, coaching, career planning and incentives to develop the best people will be essential. At the end of the day yes there is way to save costs but not by putting quality on stake and not putting burdens on the companies by following the on-the-fly approaches.

By putting together a value added cost savings assessment plan and then executing even just a few of the cost-saving ideas to make it happen realistically, your company can be on its way to a more profitable bottom line. Before the companies begin their cost savings journey, there is one thing they should remember..... Even though cutting costs and saving money feels good, it’s important not to sacrifice the quality of products that will ultimately result in low business or lackluster services…. just isn’t worth it!!