In the past few months, I have interviewed executives from pharmaceutical and life sciences manufacturing and distribution companies, as well as healthcare providers, to get a better understanding of the current supply chain environment. What is immediately clear is that the business goals of these three key stakeholder groups are not aligned: Manufacturers wish to better control their products downstream, distributors are searching for ways to increase their profitability and margins now that fee for service (FFS) agreements have stymied speculation, and providers want to minimize the number of suppliers they must manage.
Not only is there misalignment, but there remains a basic lack of trust between manufacturers and distributors. One senior Big Pharma executive recalled recent dealings with a key distributor, “How could we have a good discussion when an army of lawyers is always monitoring what we say?”
The Demand-Driven Environment
Life sciences manufacturers remain plagued by poor operational performance, a legacy of the times when margins were high and cost of goods relatively low. Manufacturers may not have seen the implications of this weakness in the past, but those implications are now underscored by issues involving compliance, competition and growth. As a result, product supply excellence is becoming a key performance indicator for more companies, which are using sales and operations planning processes to better connect demand-side processes and information to production operations.
Today, drug manufacturers must produce a greater mix of products at ever-increasing rates for an expanding global marketplace. This is forcing them to re-evaluate their core competencies. Some opt to disband manufacturing entirely and only retain ownership of their brand, while others seek to augment existing capabilities by turning to contract manufacturers.
The sun is setting on the era of vertically integrated manufacturing, which is being replaced by supply networks — dynamically reconfigurable islands of capability that work together to rapidly address opportunities in the market as they come up.
While supply chain processes used to rely equally on the buffers of both manufacturing and inventory, demand-driven network processes redefine inventories into semi-finished and raw materials. In various industries we are also seeing the merging of “make, buy and move” operations, so that warehouses are now performing late-stage conversion manufacturing functions. This scenario is not far off for pharmaceutical manufacturing as well.
Likewise, the rising adoption of contract manufacturing is an acknowledgement by brand owners of their need for manufacturing networks to satisfy industry demand. Our research shows that across industries, the average global manufacturer has over 20 of its own manufacturing sites, but is also managing almost 40 contract-manufacturing relationships. Similarly, the business strategies and models of today’s global life sciences manufacturers are shifting dramatically away from the push processes of the past. New and significantly more complex network models are here, and manufacturers across the board are reevaluating the manufacturing function in the new context of highly distributed capabilities and markets.
The demand-driven transformation requires that a company identify the capabilities needed to harness information and understand customer demand. This information is then translated into operations and product supply to deliver the product with the least cost and complexity.
A major hurdle for the manufacturers has been the reluctance of distributors to share downstream demand data. Distributors are concerned that manufacturers will bypass the distribution channel and go directly to the end customer. This makes for limited product visibility and collaboration between partners in the healthcare value chain.
However, manufacturers are not inclined to pay more for the data. This impasse has to end, and it will be critical to have mutually agreeable contracts in place where the value of the additional information is clear.
The majority of distributors also are not very far along in their demand-driven transformation, and very few use demand data to make inventory buying decisions. In a recent AMR Research survey of 207 pharmaceutical and life sciences manufacturers, distributors, retailers and providers, 50% of the distribution companies said they did not have a group focused on supply chain planning and use of demand data. Roughly 20% of all distributors did not have any formal S&OP process or system in place.
From Supply Chains to Demand-Driven Value Networks
Speculation and substitution of products by distributors and wholesalers downstream have forced manufacturers to pay more attention to downstream inventory movements and intelligence. Manufacturers such as AstraZeneca and Novartis are using demand-driven-based, produce-to-demand strategies that marry the day-to-day variable demand stream with production capabilities.
Companies need to unify and translate demand intelligence, then connect the dots across the value chain to deliver perfect orders and improve inventory management. Many companies continue to experience stock-outs despite maintaining a high finished goods inventory (FGI). From our research, we have seen that companies embarking on a demand-driven transformation are able to lower working capital costs, reduce stock-outs, improve perfect orders and have more successful product launches.
Whereas the supply chains across the different sectors (branded pharma, generic, biotech and medical products) have some similar characteristics, the difficulties and complexities they face are unique to each. We will go into greater detail as we cover the supply chains of each respective sector in future reports.