From the Editor: Share the Risk, If You Dare

Can the act of quantifying and promising results for customers, and taking a hit if they’re not met, actually improve one’s own performance?

By Agnes Shanley, Editor in Chief

The concept of “pay-for-performance” is becoming more common in many industries.  For years, several automation and IT vendors have structured contracts this way, promising specific results, and adjusting compensation if the targets aren’t met. Could such contracts become routine for drug manufacturers?

In the drug industry, the “pay for performance” spirit is already seen in contracts that tie insurer payments to patient outcomes. This approach is already well established in Europe. This Spring, Merck and Cigna brought it to the U.S., in an agreement covering diabetes treatments. In this case, though, Merck is turning the tables, offering larger discounts for better patient responses, to improve healthcare and preventive measures.

In manufacturing, pharma still has many issues to sort out where suppliers and quality are concerned. But, a day may soon come when manufacturers will be expected to spell out key performance metrics such as quality level and on-time delivery in their contracts with customers.

In contract manufacturing, we saw the much-publicized launch of the “Patheon Performance Guarantee” in June, a program which guarantees a specific level of performance for contract customers. (See article, p. TK.)

“Pay-for-performance” contracts for manufacturing would reward companies that track KPIs and do their Lean Six Sigma homework

What enabled this program to take shape at all was an intensive corporate Lean Six Sigma program, undertaken after some GMP compliance issues occurred at the company’s GMP facilities in Puerto Rico in 2006.

Patheon claims that its use of Toyota concepts and Six Sigma principles resulted in improvements—for instance, reducing granulation equipment set up times added 40% to its capacity, while cycle times fell from 30 days to 3 days, and Master Batch Record availability moved from 60% TO 95%.

“We have spent the past 18 months focused on measuring all aspects of our business with particular focus on delivery, efficiency and quality,” CEO Wes Wheeler said when the program was launched in  June. “We are now ready to stand by our performance with delivery guarantees.”

The CEO and presidents of European and North American operations all sign the guarantee, specifics of which are determined by each individual contract, but based on Patheon’s stated KPIs, its on-time delivery performance of 95% and its percentage of batches right the first time: 94.3%.

Also quantifying results is Patheon’s 4,6,8 program, which spells out the number of months required to move a  client’s new drug to clinic, to regulatory filing, or to the manufacturing plant. Can such programs improve financial results? No doubt they do, in the long term, but even in the short term, Patheon says it has improved profitability despite an economic down cycle and a hostile takeover attempt.

Making promises is nothing new. Drug companies already make promises to individual customers. But making blanket promises based on KPIs offers a level of transparency and openness that makes great public and customer relations.  It also increases the level of difficulty for any manufacturer, especially as drug manufacturing operations become more complex.

Could your organization do it? If you’re not sure, here are some of the benchmarking numbers to beat, from the University of St. Gallen’s most recent survey of pharmaceutical industry operational excellence. Those companies categorized as “industry leaders” showed the following performance:

Raw material turns                                    6
WIP turns                                                 15
Finished goods turns                                24
Service level                                             93
Lead time (from                                        54 days
raw material to
finished goods)
Rejected batches                                     0.28%
Complaint rates                                       0.68%
Cost of quality per employee                   8,109 Euros
QC and QC employees per employee     12%


Here’s looking forward to a day when performance becomes the best promotion, rather than vague and puffy statements on “our longstanding commitment to quality” and the like.

Editor’s Note: We have found that fewer of you are comfortable sharing detailed performance metrics outside of your organizations. For that reason, we are changing our Team of the Year program from a competition to an ongoing celebration of innovative operational excellence programs wherever they’re occurring. Please write in and share what you can. Positive examples can only lead to transparency and improvement.

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