Unlocking the Value of Supply Chain Collaboration

An increasing focus on contract manufacturing can be expected to drive the need for more advanced cooperation models

By Knut Alicke, Denis Fedoryaev and Patrick Oster, McKinsey & Company

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Supply chain collaboration is underleveraged in the pharma industry. Although other sectors, such as consumer and retail, have put more focus on managing their supply chain, most of Pharma’s collaboration efforts still center on the commercial side. However, as the results of a recent joint ECR/McKinsey collaboration survey indicate, in the near future industry executives anticipate an increasing focus on supply chain collaboration in such areas as demand planning and fulfillment or supply chain flows and processes. Given the dynamics of client discussions in health care, we expect this shift to take place in pharma as well.

Today, less than half of the value chain in pharma is externalized, which is considerably lower than in the automotive or aerospace industries where it reaches 70 to 80 percent. An increasing focus on contract manufacturing, however, can be expected to drive the need for more advanced cooperation models. This trend will be further accentuated by regulatory actions, such as the May 2013 U.S. FDA guidance for the pharma industry on quality practices in contract manufacturing arrangements.

The consumer and retail, automotive, and high-tech industries have already seen examples of successful collaboration efforts, albeit each of them in its own distinct focus area:

• Consumer and retail: large-scale supply chain information sharing.

• Automotive: multi-tier demand and supply transparency.

• High tech: integrated planning, electronics manufacturers have successfully implemented integrated planning — spanning the entire supply chain.

Many large pharma companies embarked on creating supplier network platforms in the area of supply chain information sharing, but both the depth of data exchange and the level of integration remain low. Better examples of supplier collaboration have been seen with contract manufacturing organizations (CMOs) established as pharmaceutical plant spin-offs. Demand-and-supply transparency is also weak within the sector. While principles underlying supply chain collaboration in other industries are applicable to pharma, additional constraints are imposed on the industry by the uniqueness of the pharma supply chain. These constraints are numerous and start with pharma’s stringent regulatory requirements that impose strict product availability requirements, long lead times associated with switching suppliers, and high complexity in change management because master data are extensive; they must be absolutely accurate at all times.

Most understand pharma supply chain networks are increasingly complex. Pharma’s specialized supplier base — focusing on concrete therapeutic areas as well as particular production steps, combined with a fragmented network of manufacturing plants for different purposes (e.g., formulation, bulk, primary packaging, secondary/tertiary packaging for market access) — fuels complexity.

SKU complexity is becoming more pronounced, with the average number of SKUs per packaging line increasing. Different technologies, dosage forms, packaging sizes, and numerous country-specific requirements are just a few parameters driving SKU complexity. The growing trend toward more personalized medicine has become a contributing factor as well.

As opposed to the consumer and retail or high-tech sectors, where manufacturers most often deliver to retail distribution centers, the immediate Pharma customers are predominantly wholesalers. These intermediaries effectively impose another layer of uncertainty on the supply chain, making demand forecasting and logistics optimization more challenging.

Long lead times in switching suppliers or strict product availability requirements, for example, are all the more reason to improve collaboration. The high product availability expectations that put increased pressure on the customer service levels would also be substantially improved via collaboration. In sum, we see no reason why supply chain collaboration in pharma could not be as successful as in other industries once prerequisites are in place.


The taxonomy of external-collaboration models for pharma companies encompasses the following three distinct options: supplier collaboration, customer collaboration and peer collaboration. Selection and management of suppliers can drive the performance of the entire supply chain down to end customers. As such, it should be a key topic for pharma external-supply departments, perhaps even in the context of a broader cross-functional supplier development program.

Depending on the market size, regulatory requirements and local-market specifics, the main “customers” of most pharmaceutical manufacturers are likely a wholesaler, a pharmacy, a retailer or a hospital, which can make supplier collaboration tough. Intermediate warehousing and distribution points within these networks could be managed via distributors or logistics services providers (LSPs).

Customer collaboration in pharma is virtually nonexistent. The willingness to collaborate was also dampened on the wholesaler end after industry players started switching to direct-delivery models on above-average wholesaler mark-up products, resulting in wholesalers losing business to LSPs or having to offer less profitable LSP services.

The primary example of peer collaboration is PharmLog in Germany, a joint venture set up by six major Pharma companies. Joint venture activities include a wide range of shared distribution and warehousing functions including order and stock control, receiving and storage, picking and packaging, batch control, repackaging, etc.

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