I had dinner recently with an old and very insightful Big Pharma colleague of mine and after speaking together, he revealed
an important concern. "Gregg, I'm worried," he said. "I think the complexities of our current global supply chain outweigh
our capability to control the network," he continued. He was talking about his company's third-party external supply network.
It's a scary thought, the idea of being too big and complex to adequately control an organization's supply chain. But as my
colleague and I discussed this in more detail, I definitely understood why he felt that way. For the past 20 years and especially
the past decade, the industry has watched the evolution into "gigantic pharmaceutical drug-makers," such as Johnson & Johnson,
Pfizer, Roche, Merck & Co, Novartis GlaxoSmithKline, and sanofi-aventis, all $40-billion-plus annual revenue behemoths.
These global giants are the results of mergers, acquisitions, and myriad comarketing, in-licensing, and other growth strategies
to make up for the disappointing failures of traditional R&D. The resulting manufacturing "mash-ups" have created third-party
external supply networks that are difficult to manage because of the number of CMOs involved, long-term contracts (some with
substandard organizations), contracts with no provisions for ongoing cost reductions, and other nuances that result in the
buying organization having a higher risk profile than desired.
Now, there is no doubt that making changes to the network can be difficult and expensive due to product registrations and
other regulatory hurdles on a country-by-country basis. But if a company is willing to play a longer game, with a forward
vision, it is possible for it to optimize its third-party external network to reduce all types of supply risk and ensure the
ability to manufacture products cost effectively.
There is a new methodology, called collaborative optimization, which I've become familiar with through my work as senior advisor
for A.T. Kearney Procurement and Analytic Solutions. The methodology has its roots in optimizing transportation logistics.
It's been successfully used in many direct and indirect categories of spend as diverse as packaging, chemicals, and temporary
labor and also to simultaneously optimize multiple categories of spend used in sequential manufacturing processes. It was
designed for complex categories of spend when the complexity comes from many specifications, many potential suppliers with
a multitude of capabilities, and regional or global manufacturing and distribution needs.
Collaborative optimization has three key components. First, it establishes deep analytics in the cost makeup of a product/service
through the creation of a detailed cost breakdown. Second, it gives suppliers the ability to quote in multiple ways, including
creatively (i.e., to quote on parts of the business that play to an individual supplier's strengths or to provide new ways
to meet requirements more cost efficiently). This function is called expressive bidding and makes ups the "guts" of a new
type of request for quotation that has an abundance of cost-rich information and cost-reduction ideas.
The real differentiator with collaborative optimization is the ability to use combinatorial optimization through an embedded
combinatorial analyzer that allows for scenario comparisons to be rapidly generated. These comparisons determine the most
desirable outcome based on what a corporation must have. This requirement might be the lowest total price or the best total
cost when certain constraints are added. This method overcomes many of the limitations in today's procurement approaches by
fostering creativity into the quotation process and handling large amounts of data in a fast and efficient way, thereby enabling
the buying entity to determine the best solution for its specific needs. What I like the best about collaborative optimization
is that it does not pit supplier against supplier the way traditional procurement practice often does. Instead, it identifies
the best way forward that is beneficial to buyers and suppliers.
So, how could this methodology be applied to a third-party external network? To start, a corporation would need to decide
it wants to fix the "mess" (a word used by the late, great systems thinker, Russell L. Ackoff, PhD, to describe most current
state situations). The company also would need to recognize that the fix might take 5 to 10 years to fully implement. For
a corporation that was willing to play the long game using collaborative optimization, the benefits would be substantial.
One benefit is that it allows a company to identify where new contract-manufacturing opportunities should be sourced. It also
allows a company to understand where existing contract manufacturing should be sourced and if there is a financial or risk-based
business case to support working through regulatory and contractual barriers. This method also ensures that the best CMO network
had been identified to reduce risk and provide real cost competitiveness.
When a company thinks about its the third-party external supply network, a crucial question to consider is whether the company
is using a CMO's total capabilities across its total product requirements on a global basis. From my experience, which includes
more than 30 years in procurement, the supply chain, and related operations, including 10 years as vice-president of procurement
of global systems and operations at GlaxoSmithKline, I'm fairly confident that the answer would be "no." And that reply is
really no fault of an individual or an organization. It goes back to what my colleague and I were discussing: the complexities
of what an organization is dealing with are greater than its ability to control unless there is a commitment to develop a
long-term vision and a willingness to use different approaches in managing a third-party external supply network. Collaborative
optimization offers the potential for annual incremental savings and potentially a lower overall risk profile.
The key factor for effective supplier management is that once a company has established what its end-state third-party external
network should look like and what suppliers should constitute that network, it is imperative that there is an ongoing collaborative
environment in place that ensures that future supply partners are always incented to improve and innovate. This evaluation
may make an organization take a hard look at the skills (or lack thereof) that it has in place to support third-party external
manufacturing. My guess is that there are some gaps in relationship management. Identifying and filling those gaps is a first
crucial step in improving supplier management.
Gregg Brandyberry is CEO of Wildfire Commerce, and senior advisor for A.T. Kearney Procurement and Analytic Solutions, tel. 215-327-5739, email@example.com