By Doug Bartholomew, Contributing Editor
Much has been written, good and bad, about enterprise resource planning (ERP) systems. At the end of the day, though, most pharmaceutical manufacturers that use and depend on ERP to run their businesses say they couldn't do without it. "The heart of the business is to move product around, and ERP is the heart of our manufacturing and distribution," says Eric Bloom, vice president of information technology at Endo Pharmaceuticals Inc.
Even so, one of the biggest issues facing pharmaceutical manufacturers is making ERP work with the rest of the company's systems,particularly those that directly support manufacturing--and extending ERP's capability to support other applications. "Getting your manufacturing execution system to integrate up to ERP has been a challenge for quite a while," observes Joe Cardarelli, a consultant with Taratec Development Corp., a Bridgewater, N.J. firm that assists major pharmaceutical firms with regulatory issues. "ERP vendors are looking at better ways to integrate their products with customer relationship management and sales force automation systems, to provide that link so that pharmaceutical companies can get a better handle on drug samples."
In general, the drug industry has been slow on the uptake when it comes to using ERP and integrating it with other systems in the company. "As a whole, pharmaceutical manufacturers are way behind other industries," says Vijay Pillai, North American life sciences industry director for Oracle Corp., a leading ERP vendor. "The reason is that they could afford it, because their margins were so high." However, that picture is starting to change. "Today, a lot of pressures are forcing drug companies to adopt a lot of technology to operate in a more streamlined manner," he says.
Endo Pharmaceuticals, which outsources its manufacturing to several other companies, runs its SAP ERP system at its main office in Chadds Ford, Pa. The six-year-old firm, with sales of $570 million and 500 employees, makes 140 SKUs of both branded products such as Percoset, a painkiller especially for those who have had recent surgery, and Lidoderm, another painkiller in the form of a skin patch, and generic products, such as morphine sulfate.
"ERP gives us the capability to track inventory and make sure that if a wholesaler wants to buy some product, we've got it," Bloom says. "At the same time, it enables is to make sure that we don't manufacture too much of a product."
Cardarelli agrees that this is a significant concern for pharmaceutical firms. "Managing the supply chain so that there is never a stock-out is important," he says. "If you have a product launch and an expensive marketing effort, you'd better have that product there when the customer wants it." As a result, he adds, "Optimization of the supply chain has become an important business driver for both ethical and generic drug manufacturers."
At Endo, product orders come in and are deducted from inventory and electronically sent to the distributor via electronic data interchange (EDI). In turn, once the order has been processed and filled by the distributor, Endo receives back a confirmation that the order was shipped. At the end of each day, Endo makes an electronic double-check of inventory to make sure the figures mesh. That way, the pharmaceutical firm knows it's in total synch with its manufacturing providers, and that the inventory figures in its ERP system are accurate.
ERP also helps with lot traceability. "ERP systems are excellent documentation tools for maintaining lot numbers and traceability in the event a company needs to do a product recall," says Cardarelli.
Endo also finds SAP's ERP package is helpful because it supports certain pharmaceutical-specific business functions. For example, the company must adhere to strict limits on how much active ingredient goes into certain controlled products such as some groups of painkillers. That requirement, in turn, necessitates limits on how much of the active ingredient for those products they are permitted to make and hold in inventory. "When we are up to our quota and need to make more, we need to demonstrate why we need to do that, and SAP helps us demonstrate this need," Bloom explains. The system also helps the company figure this added factor into the materials-planning mix, so that it can adjust supply chain needs in advance. "This requirement adds complexity to our forecasting and supply chain management."
On the downside, Bloom adds, the company has not attempted to connect its proprietary sales force automation system with ERP. "It's totally separate," he says. "It tells our sales people which physicians may be the best prospects for a particular product."
By contrast, most ERP systems offer a fully integrated human resources (HR) application as well as full accounting software. For pharmaceutical companies, the integration of manufacturing with HR means a smooth connection for operator verification and qualification at the plant level. "Companies need to adhere to FDA regulations by tying in the individual's training to ensure that person is qualified and validated to perform the job," Cardarelli says. Many drug manufacturers are using electronic signature capability to perform this function.
In the product development area, SAP has functions that help companies manage their supplies used in clinical drug trials. "It's like a mini-supply chain, managing the flow of drugs that are used in the trial phase," says Tilman Binder, vice president of the consumer product pharmaceuticals industry business unit in Waldorf, Germany, which serves more than 30 pharmaceutical manufacturers worldwide that use SAP R/3. For instance, the system takes into account the double-blind feature of the clinical trial process, tracking the use of both the actual drug and the placebo among the test patient population.
Oracle's ERP package even allows users to track inventories of reagents in the lab in the R&D process. "Lab people typically laugh at ERP, but when I tell them they use tons of reagents and they need to run their laboratory as a manufacturing environment, then they realize the need for ERP in managing their supply of reagents, their product planning, and in controlling their costs," says Oracle's Pillai. "If you ask the CFOs, they always understand the importance of these kinds of things."
Other industry-specific functionality in ERP includes certain critical aspects of the sales and invoicing process. SAP R/3 allows for chargebacks, tracking special prices negotiated for certain large customers, and calculating rebates for wholesalers. "SAP provides full price visibility so that the pharmaceutical company can manage these contracts more effectively," SAP's Binder says.
Tracking Product Shelf Life
Finally, ERP systems are useful for tracking product shelf life, a critical function for drug manufacturers. "Every product has an expiration date," Cardarelli notes. "The manufacturer needs to verify that the right date goes onto a product and to track the product in the supply chain."
These industry-specific processes unique to the pharmaceutical business, particularly those related to FDA compliance issues and validation, add a great deal of cost to any ERP system's implementation, Cardarelli points out. "All these systems people are using require regulatory compliance through validation," he says. "If these ERP processes are not properly validated, these companies will end up with major fines." He believes the cost of implementing electronic record-based systems and validating them "adds about 30 percent to the cost of implementing ERP versus implementing the same system in another industry."
In the case of SAP, the pharmaceutical industry vertical package comes with a built-in set of tools to test the system for compliance. "It has tools to test the system, as well as to give the operator a snapshot of the configuration of the system," Binder adds. "These tools make it very easy to set up and use the system from a compliance standpoint."
Other ERP packages have similar capabilities. Oracle Corp., for instance, has a feature called "Internal Controls Manager." This feature enables companies to:
map their business processes;
identify areas where they may be at risk for quality or other concerns;
define actions to reduce that risk; and,
implement compliance requirements where risk needs to be reduced or eliminated.
As is the case with some other ERP packages, SAP's R/3 started out with manufacturing resource planning (MRP II), accounting, distribution, and human resources, and came late to the party when it comes to connecting with data on the plant floor. But that's changed significantly in recent years, and SAP continues to step up its effort to mesh business systems with plant-level data. "SAP has made a major commitment to integrate into manufacturing execution systems," Cardarelli reports.
Having ERP extend to the shop floor is especially beneficial to drug manufacturers. One reason is that the system provides a means of not only automating, but actually standardizing business processes.
"The major driver on the shop floor in this industry is compliance and standardization of business processes," says Binder. "The issue is how to build these legal requirements into the process,it's what I call systems-enforced compliance."
As an example, Binder points to SAP's operator-validation routine in the R/3 package. "All the information on the operator resides in the HR system," Binder says, "So when he logs onto his screen, the system verifies his identity and ensures compliance by checking that he is trained and validated for this process." In addition, the same system validates the equipment the operator uses.
One pharmaceutical manufacturer that uses a more plant-floor focused ERP is Macfarlan Smith, a Scottish firm that makes active pharmaceutical ingredients, alkaloid opiates, and other controlled drugs. By using Invensys' Protean, an enterprise package designed for the process industries, Macfarlan Smith is able to maintain close tabs on not only inventory, but adjust production schedules and pinpoint production problems. "Protean has allowed us to significantly reduce the time spent in tracking down production related problems," says Alasdair Macleod, head of systems at the Edinburgh-based firm.
Some pharmaceutical manufacturers have turned to outsourcers to get the benefits of ERP. And although outsourcing offers cost and other benefits, it brings its own set of integration issues.
Three Rivers Pharmaceuticals, a Pittsburgh-based startup with a staff of 15, has opted to outsource its ERP. The company is expecting FDA approval for its generic Ribavirin, used in conjunction with Interferon to treat Hepatitis C. "We have several other generics we plan to launch in the next three to five years," says Christine Sheehy, vice president of operations. Sheehy is responsible for order processing, shipping and distribution, production planning, and overall daily operations of the business.
With the launch, Three Rivers expects to begin receiving orders from the three big drug wholesalers,McKesson, Cardinal Health, and Amerisource Bergen. Those orders, in turn, will be filled by its outsourced manufacturing operation. "We do EDI with the bigger wholesalers, transmitting both invoices and purchase orders," Sheehy says. Although Three Rivers has yet to take any real orders, the company has used its systems to ship samples during clinical trials.
At the same time, Three Rivers' ERP system will be Oracle Corp.'s ERP package, outsourced to Oracle. "We're a 100 percent hosted client,we have none of the software in-house," Sheehy says. Oracle hosts both the applications and the database. "We got to a Web-based URL to get our logon page, and that gives us 100 percent access to all our applications via the Internet."
The most important piece of ERP for Three Rivers, Sheehy says, is Oracle's order process management (OPM) application. "It tracks yields, monitors our consumption of materials, tracks materials shortages, and helps our planning for future raw materials requirements," she says. "We also use it to maintain lot traceability."
Sounds great, but why outsource ERP in the first place? In most cases, companies outsource major IT systems to cut costs and improve efficiency. For manufacturers, it means they need not maintain the cost of so many fixed assets in the form of computers, servers, software, and the like, as well as the people to operate and maintain them. Moreover, outsourcers often are geared up to provide a specific service,in this case manufacturing and information technology, respectively,that a fledgling pharmaceutical firm would be hard pressed financially to create and develop from scratch.
Outsourcing ERP means giving up a heap of control, as any CIO worth his or her salt will tell you. Most would agree, though, that there is a fine line between outsourcing and surrendering responsibility for key aspects of running the business. The solution to successful outsourcing, they say, is a tight relationship between the company and the service provider.
In the case of Three Rivers, which has outsourced all its manufacturing, the whole ball of wax with the successful operation of its ERP system,and the business itself,depends on tight integration with the outsourcer and with its customers. "You have to have the capability to do business electronically in order to operate in this industry," Sheehy adds. The Oracle order processing application tracks the filling of orders, assigns them lot numbers, ships the lot numbered-orders, and records the transactions to accounting and invoicing.
Oracle also helps, Sheehy says, when it comes to integrating with other systems in the company. "It has a lot of tools that allow you to integrate with any other system we have, including spreadsheet-based programs and other in-house software," she says. Three Rivers' sales staff, for instance, uses an Excel-based system to track accounts, but are able to "produce the reports and graphs and trend charts they need through Oracle," she says.
ERP Must Adapt
Perhaps most important from a management view, pharmaceutical manufacturers need to think of ERP as an adaptive, flexible system that can assist in accommodating industry and process changes such brought on by changing regulations, mergers, the addition of new trading partners, or the advent of new technologies.
"It is very important to have flexible software to embrace these new business rules quickly," says George Thompson, global director of life sciences at PeopleSoft Inc., another leading ERP software vendor based in Pleasanton, Calif. Adds Carol Ptak, PeopleSoft's global pharmaceutical industry executive, "The impact of biotechnology on pharmaceutical companies, the changes in business models in the future, and the idea of designer pharmaceuticals,drugs for small clinical segments of the population, all put a premium on agility. With our software, companies can make business changes and quickly revalidate their systems."
A case in point is the growth of radio frequency identification systems (RFID) and electronic product codes. In the near future, as drug companies begin to adopt these technologies to identify and track their products for quality assurance purposes, ERP systems will be required to negotiate yet another data integration hurdle. "Wal-Mart already will require its top 100 suppliers to use RFID systems in conjunction with their products by January 2005," Binder of SAP points out.
RFID, in fact, could be a runaway freight train headed straight for the pharmaceutical industry. The FDA's Counterfeit Drug Task Force issued a report in September that delineated the benefits of attaching electronic product code "license plates" on their products. Each code would contain a variety of data, including the manufacturer's name, a product description, and specific shipment and lot information. Much of the impetus for RFID in the drug industry is a move to thwart the growing threat of counterfeit, diluted, or falsely identified drugs that are sweeping consumer markets worldwide. Gearing up for RFID will mean integrating this new technology into ERP, soon.