Jim Miller
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A major shift is occurring in the way the biopharmaceutical industry sources goods and services. Price pressures at the retail
end of the value chain and a difficult fundraising environment are forcing biopharmaceutical companies to take greater control
of their costs. Purchased goods and services, including contract research and manufacturing services as well as raw materials
and laboratory supplies, are a major expense in most companies, so control of those purchasing decisions is coming in for
special scrutiny.
In the annual survey of sourcing practices we conduct in conjunction with BioPharm International and its sister publication Pharmaceutical Technology, we have been tracking the evolution of sourcing practices for several years. The insights we have gained from both buyers
and sellers of contract services indicate that major changes are under way.
Figure 1. Role of procurement and sourcing groups in decision-making
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A major component of this trend is the shift of decision-making power and influence from scientific and technical professionals
to sourcing professionals. Service providers are certainly experiencing the growing power of procurement operations: The number
of contractor respondents who report that sourcing and procurement groups currently control the decision nearly doubled in
2006, to 22% from 12% in 2005 (Fig. 1). The portion of contractor respondents that expect sourcing and procurement groups
to eventually control decision-making grew to 30% from 24%.
Procurement and sourcing groups are leading efforts to reduce the number of suppliers that their companies work with. Consolidating
the supplier base is a critical component of the cost-reduction strategy at most large and mid-size biopharmaceutical companies
and many small ones as well. Shrinking the supplier base enables companies to reduce vendor management and overhead costs,
negotiate better pricing based on the higher volume of purchases, and improve coordination and communication mechanisms.
Figure 2. Status of companies´ efforts to reduce the supplier base
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Our 2006 survey indicates that vendor consolidation efforts are well underway (Fig. 2). Among biopharmaceutical company respondents,
29% indicated that they have already begun reducing the number of suppliers they work with, and another 15% expect to begin
the process within the next year or so. Nearly half of those client-side respondents report that they are considering new
vendors only when they need specialized capabilities or services not currently available to them, and 13% said that they are
using only current or recent vendors.
Contractors are beginning to feel the impact of supply base consolidation efforts. Among contractor respondents, 20% say that
they are gaining business already, while 16% report that they are losing business as result of supplier consolidation programs.
Nearly half of respondents do not expect much impact on their revenues, which we think is a naïve position for them to take.
Service providers willing to be proactive and keep knocking on doors should do well, however, because plenty of opportunities
still remain. A quarter of respondents report that they are looking to expand their supplier base and are continually identifying
and testing new vendors.
SLOW EVOLUTION IN SOURCING FROM ASIA
We continue to track biopharmaceutical company interest in sourcing from low-cost countries (LCCs), especially contractors
in India and China. Our survey results show a slowly-but-steadily growing interest in sourcing from LCC suppliers, but the
pace is not yet alarming to Western service providers. LCC sourcing options are limited for biopharmaceutical companies with
large molecule candidates because the universe of biomanufacturers and other suppliers is still very small. On the other hand,
companies with small molecule candidates face an increasingly sophisticated set of options.
