Four Steps to Managing Supplier Quality

While quality problems can be found in any industry, they have become more frequent recently in the pharmaceutical and medical-device space. As a result, more pharmaceutical manufacturers are paying greater attention to supplier quality. The most progressive operating companies are taking a proactive, collaborative, and holistic approach to supplier quality management. Their goal is to manage and support suppliers, just as they would their own production facilities, to reduce risk and build better partnerships with these suppliers.
It’s not easy. Companies often tell us that they are struggling to master supplier quality — this is not due to a lack of effort, but because managing suppliers has become more challenging. There are several reasons for this, notably:

• Product complexity is rapidly increasing, making it more challenging to integrate suppliers into product development, manufacturing, logistics and service operations, and can also make it more difficult to resolve supplier quality issues.
• Globalization of the supply chain continues to increase complexity. Operating companies must now manage supplier quality across physical, cultural and language borders. Operating companies working with these partners often have visibility into just the first-tier of the supply chain, while significant potential risk resides deeper in the chain with sub-suppliers farther upstream.
• Regulatory demands continue to increase, as FDA and other regulatory agencies expect pharmaceutical companies to take full ownership of managing their suppliers. 
• The past few years, supplier quality issues have been at the root of an increasing number of drug recalls (which have increased by 16 percent year-on-year  for the past five years), as well as 483s, consent decrees, and forced plant shut-downs. At the same time, in the age of Internet and social media, coverage of any quality issues is widespread and almost instantaneous, increasing negative publicity and public opinion of the players involved.

Given all these heightened challenges in managing supplier quality, we took a closer look at more than 40 recent pharmaceutical quality incidents (many of which were at pharmaceutical and/or medical device companies) to discern common themes and identify a holistic approach to improving them. We found that more than 40 percent of these incidents were actually due to supplier quality issues. An in-depth evaluation of these supplier quality issues found three main root causes:

1) lack of collaboration in the design phase

2) lack of a robust quality system/KPIs at the pharmaceutical company and/or the supplier

3) lack of capabilities in supplier manufacturing facilities.

Managing supplier quality cannot be a quick fix.  Instead, it is a multi-stage journey and requires a holistic approach based on four key cornerstones:

1) Supplier strategy and KPI system: Companies must ensure that their supplier quality strategy is aligned with their overarching corporate and purchasing strategies. They must focus their attention on strategically important suppliers, define clear targets, and measure their progress against those targets. Often, companies fail to segment their supplier quality programs, spreading their effort too thinly. This can leave them with only the resources for firefighting, and responding to day-to-day operational incidents, rather than taking the proactive and preventative actions that will drive deep improvements upstream.

2) Functional supplier quality processes: Companies need to define and apply a structured set of standards and processes (advanced product quality planning, part approval processes and root cause analysis standards, for example), both internally for themselves and for their suppliers.

3) Supplier quality organization and governance.

4) Supplier quality mindsets and capabilities: Focused communication efforts with suppliers are required to maintain attention on quality issues. But it is equally important to invest in getting the right people with the right skills and expertise.

One large medical device company applied many of the techniques outlined above to uncover and rectify many of its supplier quality issues, summarized below:

• Diagnostic phase: First, the company identified the sources of supplier quality risk by conducting a full quality diagnostic across 20 critical dimensions of supplier quality. This company started with an internal diagnostic (Figure) using these 20 dimensions to identify improvement opportunities and prioritize its areas of focus. This evaluation highlighted areas where improvement was needed.
• Design phase/prepare for supplier assessment: The company developed a supplier assessment approach to evaluate the operating systems, management systems, and culture of its suppliers. The company’s suppliers were also prioritized for evaluation based upon risk with the goal of balancing a reactive approach (i.e., address the recently “problematic suppliers) with a proactive approach (i.e., evaluate suppliers that could be “problematic” in the future). The company used criteria such as suppliers with recent recalls/complaints, suppliers linked to critical products, suppliers with highest spend, and other qualitative factors to rank suppliers and prioritize the evaluations. This helped to identify the first 15 suppliers to be assessed and improved. An in-depth evaluation toolkit (with scorecards across operating, management and culture systems) was built to conduct the evaluation, and a cross-functional evaluation team was selected and trained. Finally, the company communicated to the suppliers so that evaluation could be collaborative to uncover “win-win” opportunities. 
• Implementation phase: An 18- to 24-month roadmap was built to roll out the assessments, build supplier capabilities and define internal requirements. 

This new assessment allowed the company to go from a reactive, audit-based approach to a proactive assessment toolkit that could be applied across multiple franchises and products. The company has improved many of its internal practices, completed more than 15 supplier assessments with clear action plans to improve the suppliers’ approach, and now is continuing to evaluate its other “high-risk” suppliers. Most importantly, there was a substantial improvement in the collaboration with suppliers that will continue to identify actions to reduce quality risks for both the suppliers and company itself in the future. 

ABOUT THE AUTHORS:

Parag Patel (parag_patel@mckinsey.com), Janice Pai (janice_pai@mckinsey.com), JehanZeb Noor (jehanzeb_noor@mckinsey.com), and Ramit Jain (ramit_jain@mckinsey.com) are part of McKinsey & Co.’s Pharmaceutical Operations practice.